Procure and simple: the Policy Director’s cut
Directory of Strategy
Imagine that there was a secret part of the economy that didn’t work like the rest of it.
That new products often took years to purchase, and were routinely delivered late and over-budget. That it had a few big buyers, who only bought things in a way which complied with complex laws and rules dictated by one organisation. That the biggest incumbents in the sector were decades old, with only a couple of the largest firms being founded since the 1990s. But that it also preferred the firms it bought from to be small and penalised them the moment they employed more people than the limit for an SME.
That sellers and buyers in the market had to follow strict rules about how they interacted, and often wouldn’t meet at all in the process. That none of the buyers asked for references from previous clients – including when those clients were other parts of their own organisation. And that along with delivering the product they had been contracted to, all suppliers were also expected to deliver unrelated social benefits, like training people in inclusion and diversity, or measuring their emissions targets.
Then imagine I told you that this market was real, and although you didn’t know it, you were one of the biggest buyers in it. Every month a chunk of your salary is used to buy things from this market, for you, and it is often wasted.
You might be surprised, but you wouldn’t be alone. Because this is the public procurement market, which spends £400 billion a year of all taxpayers’ money, making up roughly one sixth of the whole economy, and roughly a third of public spending.
On Monday we published Procure and simple, the latest paper in our ‘Re:Imagining Whitehall’ series, looking at how to overhaul public procurement to get better value for money.
Here are three of the top takeaways:
- Awarding more contracts for innovation directly.
The Watchkeeper WK450 drone programme was started in 2000, to build a similar capability for the Ministry of Defence (MoD) to that of the Israeli Hermes 450 UAV. The procurement was concluded in 2005, with a target date of 2010 for being fully operational. They were eventually introduced in 2018 at full operational capability. As of 2020, only 13 of the 45 planned aircraft were in a condition to fly.
Back in 2000, the Government could have decided to buy the Hermes 450 instead of commissioning its own version. But it didn’t and opted to try to redesign something similar from the start, through competitive contract to find a new supplier.
But there’s a strong bias in government procurement legislation against directly awarding contracts to suppliers. And while there are exemptions in the law which let contracting authorities do it, these are under-used. Legally, wide competition of contracts is a condition of our trade deals with the EU and WTO, to avoid governments only giving contracts to companies within their borders. But more than just the legal minimum, procurement orthodoxy has long held that competition will create competitive markets, which will help reduce cost.
The trouble is that it hasn’t done that. Procurement markets are highly uncompetitive – roughly 20% of contracts have either one bidder, or no bidders at all. Because if you demand companies compete through lengthy, bureaucratic processes which last months or years, many more entrepreneurial companies can’t participate at all – consolidating contracts with bigger companies who have the deep pockets to work at risk through long bids.
And competitive processes inevitably mean designing to a government spec, rather than trying to test and buy an existing solution offered by a provider – which in the case of the Hermes 450, would give a more suitable airframe which is already field tested.
To create more competition in procurement markets in the long run, we recommend the Government sets a target for awarding 5 per cent of contract value through new ‘smart awards’ - directly awarded contracts which limit the downside risk of getting bad value for money, and let government buy more off-the-shelf solutions from suppliers.
- Directing contracts to startups and scaleups, not SMEs
Government procurement has long been based around pushing a proportion of contracts to SMEs. Politicians like to talk up the role of small business in the economy, and Britain as a hotbed of startups and innovation. So why do so many startups still find it hard to get into the procurement business?
For one thing, SMEs aren’t startups, they’re mostly just small businesses which are likely to stay relatively small, and don’t have the kind of high growth potential that characterises a startup. Indeed, economists often point out that Britain is unusual for its large share of SMEs in the economy, when SMEs are relatively unproductive compared to larger businesses.
So why should procurement policy favour them? The case for involving smaller businesses in procurement markets is that we want to create competitive markets in the long run, so you want to crowd in the kind of entrepreneurial, smaller firms that one day could be big firms and competing with the current ‘primes’.
We recommend ditching the preference (and targets) for spending with SMEs, and instead set targets which aim money at startups and scaleups - ‘new’ smaller firms, which haven’t been around long enough to pass the test of whether they can grow, and could use a foot on the ladder from government contracts.
- Ending the use of social value in procurement
Upwards of 10 per cent of the ‘marks’ in a procurement exercise are awarded for a category called ‘social value’, which asks government employers to make commitments to investing in community projects, training British workers, measuring their carbon emissions, and employing disadvantaged groups. All laudable goals.
But often this results in projects getting distracted from their core goals (as we argued in Everythingism), and businesses will price these additional objectives into their costs to government – often to deliver social programmes which it would be more efficient if government delivered themselves. Social value is particularly hard for smaller firms to demonstrate and prove, adding yet another advantage to the big incumbents who employ whole teams to service these social value requirements.
The Government should end, or severely limit, the use of social value in public procurement to make sure it isn’t pricing competition out of procurement markets.