(13 years ago)
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Lord Sugar
My Lords, I am encouraged to see so many of your Lordships joining this debate. Government procurement is an important issue. After all, as taxpayers, it is our money that is being spent every day, and we have the right to ensure we are getting good value. Before I move on, I should like to state that, pursuant to the Code of Conduct, I have registered with the Table Office any relevant interests that may arise from those listed in my name in the House register of interests.
Government expenditure was in the region of £238 billion on procurement in the past year. I believe that this was spent on a whole range of items and services, from paper clips to guided missiles. In referring to getting good value for money, I shall break this down into three categories, the first and most obvious being that the best prices should be obtained for any product or service required by the Government. The second is value for the country and the third is value for SMEs.
Starting with real value for money, your Lordships will agree with me that the world has moved on a lot as far as internet connectivity is concerned. For that reason, there is simply no longer the need for local purchasing. Centralised purchasing should be implemented immediately. I regret to say that, from my experience in running so many businesses, when you place the task of procurement in the hands of unqualified people, it is similar in some cases to letting kids run riot in a sweet shop. The main issue, of course, is that it is not their money, and it is amazing how irresponsible some people can be when spending other people's money as opposed to their own. Obviously, that is stating the obvious.
In August 2010, Sir Philip Green was asked by the Prime Minister to carry out an efficiency review. He published his findings in October 2010. The report spoke of inefficiency and waste in government spending. One of its observations was that it was impossible for the Civil Service to operate efficiently with current processes in place. Expensive IT contracts were for too long with no flexibility; there was no motivation to save money or to treat cash as one’s own—the point that I have just made; there was no process for setting and challenging detailed departmental budgets; and, most importantly, there are inconsistent commercial skills across departments. The report gave factual examples of variations of up to 80 per cent across central departments in prices paid for the same product.
For a commercial person like me, these issues are very easy to resolve. What I am about to suggest will be controversial but very commercial. My assumption is based on the fact that a centralised group of real procurement professionals purchasing the same goods and services obtained in the past for £238 billion would be able to procure the exact same amount of goods for £200 billion. I am of course putting to one side the fact that maybe a lot of the stuff should never have been ordered in the first place, but that is another story.
It is here that a controversial issue arises. There is a need to recruit professionals from private industry and offer not just an exciting challenge. More importantly, they should be able to earn what they can earn in the commercial world as well as having bonus targets. These people would in turn have to employ others. This new group should then be responsible for training existing public sector staff to deal with business effectively to get the best possible value for money for the public purse. Hypothetically—I am just dreaming here—if this group of procurement experts costs £50 million a year, that sum pales into insignificance against my forecast saving of £38 billion given in the earlier example.
The reason why the issue is controversial is down to the following question: would the Government have the guts to do this, or would they be frightened off by headlines about the head honcho in charge of procurement earning X millions of pounds a year? One can see a certain national newspaper carrying the headline: “Fred Smith earns £X million a year, while Joe Bloggs in the north-east of England struggles”. Of course, that newspaper would not be interested in the £38 billion being saved because it does not make good headlines. So I ask the Government to consider the implementation of this idea, to rise above the inevitable external criticism and to do the sensible commercial thing.
My second point is value for the country. So many government contracts are awarded to foreign companies or companies that pay little or no tax in this country. Now, I know that we are all fully aware of the requirements under EU rules and regulations on procurement, but I am sure that your Lordships will not be surprised when I cite our cousins in France, who seem magically to manage to be very patriotic when it comes to dishing out orders from their Government.
There are examples of ECJ rulings that have allowed for European countries to widen the criteria for what they see as the “most economically advantageous tender”— more commonly known as MEAT—which should not be based on price alone. Both France and the Netherlands have used this for environmental and social benefits. In 2000, the French Republic was taken to court by the European Commission for failing to comply with European procurement legislation. The case referred to the construction and maintenance of school buildings.
The European Commission’s main objection was the use of an award criterion that required contractors to recruit local workers from a project specifically to combat unemployment. The ECJ defended the French and ruled that a contracting authority can use the fight against unemployment as an award criterion. Dare I say that this could have been used in the recent Bombardier case, thereby saving 1,400 jobs in Derby? Instead, the decision was made that the train carriages would be produced in Germany. This is where I think this Government could learn some serious lessons from our European counterparts. I am sorry, but if I was in charge of procurement I would have fought tooth and nail to keep that Bombardier deal in this country.
When it comes to government procurement of information technology products, many of us will have noticed that in many government offices, hospitals and other government-run establishments desks are littered with computer equipment made by a certain Japanese and German partnership. There is a funny story here. Some of your Lordships may recall a British computer company, ICL, which was Britain’s equivalent of IBM many years ago. That company was eventually sold to a Japanese company, which in turn associated itself with a famous German company. Many years ago the then Government rightly awarded a lot of their IT business to ICL, a British company. That made sense. However, your Lordships may be interested to hear that the Government are still entrenched in contracts dating back years, which originated with ICL but are now enjoyed by this foreign entity. It is what I call “grandfathered-in” contracts. There has been a total lack of flexibility in using and assessing other supply chains.
I apologise for raising the conflict of interest issue again but I do so merely to demonstrate what is going on. I have one of the few computer companies that still produce computers in this country. We supply certain government-run organisations and schools and employ about 200 people. We are typical of many other companies in this country in that regard. I would like to make it perfectly clear that I am not touting for business but merely using this example to show the scale of what I am talking about. If we were awarded a tenth of the computer and IT system services that the Government purchase in the course of a year I would have to employ at least 350 to 400 more people. I have made this point clear to those involved in procurement, but it seems that the penny has still not dropped. As I say, my example is most probably not unique. I am sure that the same point could be made by people in other industries.
I am certainly not advocating that the Government should pay more for British-assembled products. The process of winning government contracts still has very strict criteria on price, quality and delivery but the priorities are wrong. If my company employed another 300 to 400 people, thus removing from the Government the burden of having to look after some of those people through the unemployment benefits system, it would outweigh some of the minor additional costs that may have to be paid to smaller companies trying to compete with the giant foreign organisations that simply dump products in Britain.
My IT company is inundated with inquiries from young school leavers requesting work experience and wanting to get into the IT field. We simply cannot take them on as we have no work for them. Even if apprenticeship schemes or other allowances are available, there simply comes a point when the company has to face harsh commercial reality.
The Government must support British companies and find a way to make the procurement process work for the country, as the French and other European countries have done. The most economically advantageous deal may not always be about the cheapest price. There are wider social impacts to consider, and this is about what the Government should be doing to support jobs and our UK businesses.
The third and final element of value for money relates to SMEs—the small to medium-sized enterprises. I heard the Government say when they were elected that they were going to ensure that at least 25 per cent of contracts are awarded to SMEs. To date, I understand that figure is about 7 per cent. However, there seems to be another 25 per cent rule, which is that an SME cannot bid for a contract if its value is more than 25 per cent of its turnover. This seems crazy because the SME may be the market leader, yet the contract has to be placed with larger companies that do not have the same expertise.
The Government say that they are angry with the banks for not lending to SMEs. Well, they can encourage such lending by making sure that orders are given to SMEs to impress the banks into lending them money. When government contracts are handed out to large organisations, there should be clauses clearly stating that they must give a certain percentage of the contract out to British SME subcontractors.
I am sure the Minister will advise your Lordships’ House that many of the issues I have raised are already under control and that I should not despair. Indeed, I am aware that, coincidently, the right honourable gentleman the Minister for the Cabinet Office held an event on 21 November entitled, A New Way Forward. The agenda showed that the Government had acknowledged many of the things that I have raised today, particularly in respect of IT. As an example it stated that businesses should understand the Government’s intention to,
“move away from large projects that are slow to implement or pose a greater risk of failure and to end the oligopoly of large suppliers that monopolise its service provision”.
That is fighting talk and exactly what we would like to hear. I have had the good fortune to meet some senior civil servants from the Cabinet Office who have politely debated these issues with me, and I am somewhat impressed with the approach they have taken to date but, with the greatest respect, they may also be the first to acknowledge that these plans will not be achieved with those who are currently responsible for procurement. This Government need to engage serious professionals, centralise their procurement processes and get a genuinely better deal for SMEs in the UK.
I have opened up a whole host of topics to which I am sure your Lordships participating in this debate will add, and I await with interest the comments of the speakers who will follow. I beg to move.
Lord Lee of Trafford
My Lords, I congratulate the noble Lord, Lord Sugar, on securing this important debate. I also declare a number of shareholdings in defence companies that are listed in the Register of Lords’ Interests, because I shall talk about defence procurement.
The problems and complexities of defence procurement have been with us for many years. Twenty-five years ago, when I was a junior Defence Minister, we were spending £1 million an hour, every hour, on equipment for our Armed Forces. One of my officials at that stage told me that we could probably have built the whole of the then naval requirement in the Vickers yard at Barrow, and we did not need the half dozen other naval yards. We had a substantial problem of overcapacity.
As a Minister, I was subject to a substantial amount of lobbying in the Division Lobbies in the other place—not least by the noble Lord, Lord O’Neill, who is sitting in his place and from whom we will hear later. Fairly, he lobbied hard for orders for the Scottish yards. We started a NATO frigate programme that got nowhere. We ordered three new conventional submarines that were never used and were subsequently sold. We had major problems with the Nimrod software, and I remember calling in the head of Ferranti. The then Secretary of State, Michael Heseltine, now the noble Lord, Lord Heseltine, brought in Peter Levene, now the noble Lord, Lord Levene, at a salary unheard of in the 1980s of £100,000 a year to bring competition into defence spend and to move away from single sourcing. Incidentally, today 40 per cent of contracts are still placed on a non-competitive basis, amounting to about £9 billion a year.
In 1997, the NAO reported that the 25 largest defence equipment projects under way at that time were £3 billion over budget and, on average, entered service three years late. By 2009—12 years later—the situation had got worse. Bernard Gray, in his report commissioned by a Labour Government, concluded that the MoD was running a “substantially overheated” equipment programme, with,
“too many types of equipment being ordered for too large a range of tasks at too high a specification”.
On 9 July that year in your Lordships’ House I said that,
“in the private sector, if one trades when one knows that one’s operation is insolvent, that is a criminal offence. At the present time, the Ministry of Defence, frankly, is bust. There is a yawning gap between resources and commitments”.
The noble Lord, Lord Drayson, replied:
“My Lords, I am afraid that I do not recognise at all the characterisation that the noble Lord has just set out”.—[Official Report, 9/7/09; col. 760.]
I think it is accepted that when the coalition Government came to power there was an unfunded liability over the next 10 years of about £38 billion. The noble Lord, Lord Davies, who will speak a little later, may well comment on that. I am not endeavouring to make any party-political points, because the problems of defence spend and procurement transcend party politics. I think it is accepted that we have had too much gold-plating, too much specification-changing, too many personnel changes in contract responsibilities and too little co-operation with our European allies on procurement issues. The EDA—the European Defence Agency—estimated that there were 16 separate procurement programmes for armoured vehicles alone. Only days ago, the NAO’s Major Projects Report concluded that we were overrunning by £6 billion on 15 major projects over the past three years, including a £1 billion cost increase on the Astute submarine programme. Of course, we know that £3.4 billion was spent on cancelling Nimrod maritime patrol aircraft.
We also learnt very recently that the MoD had spent something like £550 million on consultancy fees, with one firm, AlixPartners, apparently charging at the rate of £4,000 per consultant per day. In broad-brush terms, industry negotiators have run rings around the MoD over the years. I have tabled a Written Question, which is awaiting answer, asking the MoD to list the six highest salaries that it pays to civilians. My guess is that these will be relatively modest, given the size of the MoD budget. My question is: should we offer really competitive salaries to recruit the best—a point made by the noble Lord, Lord Sugar—and perhaps not need to spend anything like so much on consultancies?
I am encouraged by the number of new initiatives to improve defence acquisitions that are currently under way, including: the establishment of a new major projects review board; a review of single-source contracts by the noble Lord, Lord Currie; a new material strategy, including options for the future of defence equipment and support organisation under Bernard Gray; and reviewing and renegotiating up to 500 contracts with a value of £8 billion. That is all very laudable; let us hope that significant improvements are achieved.
On jobs and employment, defence spend sustains something like 300,000 jobs. Leaving aside for another day the whole question of R&D spin-off and the operation of SMEs—I think that my noble friend Lord Palmer will refer to SMEs a little later—at present there is a presumption that there should be off-the-shelf purchasing wherever possible. At a time of considerable economic difficulty in this country with high unemployment, we have to be very careful to balance value-for-money purchases with jobs at home. Indeed, that has always been the case.
In conclusion, I would like two things to happen: first, greater industry consolidation across the defence sector, particularly in Europe, because only then will we begin to see a real rationalisation of defence equipment and procurement among our European allies and ourselves; and, secondly, if possible, cross-party agreement to the spending of a specific percentage of GDP on defence, coupled with a Treasury commitment to a guaranteed 10-year funding programme, as there is in Australia, thus giving a firm base on which long-term procurement commitments can be entered into.
Lord Bhattacharyya
My Lords, I thank my noble friend Lord Sugar for securing this debate. I am pleased to declare my interest as chairman of Warwick Manufacturing Group at the University of Warwick.
The Government are Britain's biggest customer. As we have heard, the Government spent almost £240 billion last year. State procurement decides the fate of many of the private sector firms that Britain urgently needs to expand. Britain, having a small internal market, in global terms, must export to survive. That can be difficult for firms in specialised markets with low UK volumes. Procurement can be the scaffolding on which such firms build as they grow. Today, Britain has one of the lowest business investment rates in research and development in the developed world. So our main challenge is for procurement to support innovation, research, and product development.
Encouraging innovation through procurement has long been an issue for policy-makers, going all the way back to Harold Wilson's Ministry of Technology. Many noble Lords will recall those debates and will know that policy delivery has rarely matched the rhetoric. That is because our focus has too often been on government processes and structures and not on encouraging business to innovate. We need a procurement system that encourages commercial innovation, which means designing in risk, experimentation and failure.
The Government are bad at taking risks. That has created a plethora of partnerships, pathfinders, pilots, and bureaucracies, all designed to stop failure. Yet, in seeking to avoid risk, we end up accepting second or third best, or even avoiding innovation completely. The chance to use procurement to grow then gets lost in the thicket of excuses: state aid, European rules, the need for tendering and all the rest. What gets forgotten is that we must make British business competitive before tenders are bid for. Then, no matter what value rules apply, UK firms will have a good chance. Business needs volume to invest in the R&D that will make them competitive. This is especially important if the Government pursue a decentralised procurement strategy, where there is a danger that fragmentation leads to business refusal to invest. This makes support for procurement innovation essential if firms are to develop the products that appeal to government customers, both domestically and in export markets.
Britain has a strong science base to support such innovation. We lack consistent funding in the gap between blue-sky research and commercial exploitation. This exploratory development phase is a weakness for British business. Procurement policy could transform this. In America, this is achieved through a programme called Small Business Innovation Research. SBIR takes 2.5 per cent of all federal research spending, and directs it to support business innovation in key government procurement areas. It makes straightforward grants for both exploratory and commercialised projects. It is low bureaucracy and innovation-focused. This programme works. It has seen the emergence of successful US companies like Qualcomm and iRobot. In the UK, we have a similar programme, the Small Business Research Initiative, but it is tiny compared to America's. We should take this programme and use it to transform our approach to innovation in procurement. We could tax a small proportion of all UK procurement budgets to support an innovation fund. This would mean that procurement projects had British innovation designed in, whatever the scale of the procurement. If directly top-slicing procurement budgets and reallocating funds to research cannot be made to work, reducing emphasis on the R&D tax credit in favour of encouraging innovation by small businesses may be an alternative, because very few small businesses get any R&D tax credit.
Once we have secured a funding stream for innovation, we should worry less about structures and focus more on letting businesses lead. Intermediary institutions are vital to business R&D, whether they are university- based, commercial providers or Fraunhofer-type institutes; but too often we have seen government create technology programmes that have little appeal for business. Government should decide what procurement innovation paths they want to support, from health to aerospace; deliver research capacities in these areas; and then let businesses innovate without interference.
To achieve this structural shift, we should expand the Technology and Innovation Centres programme to provide a lead for innovation in every key government procurement area. The primary role of the TICs would be to distribute resources to business-focused intermediary research bodies in order to develop laboratories and research facilities in areas of procurement innovation.
To ensure that the TICs are commercially oriented, the aim should be to move them to the private sector as they mature. They should look to make a return on their capital investment by taking a slice of the research income that their partners generate, enabling them eventually to seek commercial funding. That way, those running TICs will have incentives to favour research groups with a track record of helping businesses successfully innovate in procurement areas.
On the business side of the equation, the SBRI should offer research support to businesses which seek to develop solutions to our long-term procurement challenges. Those businesses should be free to choose where to invest their grants—with profit-making, public or charitable bodies—so long as they work with a procurement TIC partner. Some research projects will prosper, others will fail. The key is that businesses will be free to choose partners who fit their needs and can help them find solutions. Procurement should be an investment in our national future. If we focus on innovation, it will be.
Lord St John of Bletso
My Lords, this is an opportune time for a debate on this issue. It comes just three days after the speech by the Cabinet Office Minister, Francis Maude, on proposals to radically overhaul and improve public procurement. It also comes at a time when all government departments are under pressure to cut costs and when small and medium-sized enterprises are in desperate need of better access to bid for government business, which will call for less red tape.
I am grateful to the noble Lord, Lord Sugar, for giving us the opportunity to debate this important issue. No one in your Lordships' House is better qualified, given his vast commercial experience. I also thank the House of Lords Library for the excellent briefing pack on this debate. As a member of the House of Lords Information Committee, I hope that many Members who recently joined your Lordships' House will avail themselves of the tremendous support provided for these topical debates by the Library.
My interest in the subject of this debate goes back to the Gershon review of 2004, which both set and achieved an ambitious target of efficiency gains across government departments and the wider public sector. Procurement was clearly the largest area in which gains were made. Just as important, the review focused on increasing productive time. Undoubtedly, huge savings in costs and efficiencies followed from the review; but there is a lot more to be done, which is where I will address my few comments.
Every year since then—this is my other reason for speaking in the debate—I have hosted a series of lunches and dinners with members of the purchasing departments of public and private sector organisations in order to exchange knowledge, experience and success stories, and also to learn from errors. That is why this issue is very important. The noble Lord, Lord Sugar, made the point about having effective and strong procurement managers. Clearly, in the past, procurement managers in the public sector have been severely impeded by bureaucracy and red tape emanating not just within the United Kingdom but also from Brussels.
My other interest in this debate has been my desire to promote greater access for SMEs to compete for government contracts and services—by which I mean enabling them not just to be cheaper but to act more expeditiously. With the revolution over the past 10 years in online business this process can and should be a lot more efficient in both cost and time. As the noble Lord, Lord Sugar, mentioned, procurement accounts for £238 billion, or almost 35 per cent, of public sector expenditure. With the budget deficit, efficient and better procurement is essential, not a luxury.
Sir Philip Green's efficiency review of public spending emphasised credit ratings, buying power and the need to leverage spend as well as to mandate centralised procurement for common categories. Very importantly, he also highlighted the need to produce and use accurate data and to simplify and minimise demand and specifications. Although there are clear advantages to centralised purchasing and bulk buying, which allow prices to be driven down and minimise waste and administration costs, there also are dangers which the noble Lord, Lord Sugar, did not outline. I shall raise two very small dangers. First, I believe that innovation might be stifled—by which I mean that if all decisions are made centrally there will be very little room for new initiatives and alternative plans and products. Secondly, differences in local needs might be ignored. There is always a danger that a “one size fits all” attitude could become a matter of “one size does not fit anybody”.
Many SMEs still find the whole process of public procurement too onerous and decide to opt out. My question is: what can the bigger suppliers do to encourage SMEs to get involved through innovative partnering agreements? One of the key objectives must be to procure for an outcome with some flexibility. Procuring for the outcome rather than for the particular product allows suppliers the space to come up with new methods and equipment to solve a particular problem. To enable that, the Government need to put in place financial mechanisms that can cope with payment by results.
We also need to look at cross-departmental incentives. Many outcomes can benefit more than one government department; for example, getting people back to work eases the strain on the health service and others, not just the Department for Work and Pensions. Yet how does one incentivise one department to invest money in a project that will benefit others? Time restricts me from elaborating on this proposal, but what is needed is a budget and payment system that can manage this cross-section benefit.
My time is rapidly running out. While there has been a lot of debate about the benefits of PFIs, I believe that public/private partnerships have an extremely important role to play, with the private sector carrying some of the financial risks of new projects. This is strengthened by payment-by-outcome approaches, but several problems need to be addressed.
I believe that there are huge opportunities but equally huge challenges. Better information is essential. How do you incentivise different departments? The scale and complexity of the public sector is such that there is clearly not a common solution to procurement strategies. Technologies can and should make a huge difference to procurement. I believe that more dialogue between public and private procurement managers could be part of the paradigm shift required in the public sector. A professor at Henley Business School aptly summarised the situation when he said:
“No other aspect of government could release so much money, so readily and with such little political disagreement or social detriment ... Public procurement, with a few notable exceptions, is massively under-led, misunderstood, and under-focused”.
This transformation of procurement as a discipline is long overdue.
Lord Puttnam
My Lords, I, too, thank the noble Lord, Lord Sugar, for making this important debate possible. He managed to set out the principal issues in an honest and typically pugnacious way. The thrust of his speech that particularly impressed me was his insistence that we stop pretending that we are goody two-shoes and start to play the procurement game in the way that it is successfully practised in France, Germany, the Netherlands, Canada and, by the most sophisticated and unyielding protectionist of them all, the United States.
He also made what I believe to be a crucial point in stressing that the most economically advantageous deal may not always be the cheapest price and that there are wider social impacts to consider. To put it another way, I suggest that the overriding aim of successful procurement should always be driving costs down while driving value up. It is this concept of where true value lies that turns procurement from a job or a task into an art, or certainly a craft—one that is able to look right across the value chain and understand the full implications of its remit.
Perhaps I may put a little flesh on that assertion by offering your Lordships an example of what I mean from not all that many years ago. Here, like the noble Lord, Lord Sugar, I must declare an interest, but it is one of those interests that in my judgment adds rather than detracts from the experience that I bring to this House. I am very proud to be the senior non-executive director of Promethean, a British company, founded in Blackburn, and one of the two global leaders in interactive classroom technology.
About eight years ago the then Government sensibly took the view that advances in education were very likely to be technology-driven and that a window of opportunity existed for the UK to become a world leader in the provision of educational hardware and software. Significant government resources were found and a serious procurement programme, amounting to well over £500 million, was put in place. As usual, no particular favours were shown to UK suppliers, that being the ideological stance of the then Labour Government. I should stress that the commitment to procurement from global markets was at that time both fashionable and ideologically driven—wrongheaded in my view but, to its credit, entirely genuine.
In respect of Promethean—and this was long before I joined the board—what was being offered was a very advanced piece of technology together with a pretty comprehensive training package, sufficient to allow the teacher to familiarise him or herself with the full educational potential of the product. As the government procurement process began to bite and the price was squeezed, something had to go. It could have been the R&D commitment to future innovation. Happily, the company decided to protect that. What went instead was the training package. And with what result? For the next few years, white boards, from a variety of manufacturers, were being purchased and shipped to schools, colleges and other institutions in which nobody had the skills to use them. I would guess that hundreds, maybe even a few thousand, found their way into cupboards or were simply never taken out of the wrapping paper for fear of embarrassing staff who were simply never offered the training, and the resulting confidence, adequately to use them.
Procurement in its crudest and most unimaginative form had done its job, but far from creating real value—certainly, value as any one of us would understand it—or helping to build a successful UK-based business, let alone improving the education of an entire cohort of children, it had managed, in effect, to defeat the entire purpose of the exercise. Happily, much of that damage has since been rectified by a generation of enthusiastic and digitally literate heads and teachers, but several vital years and myriad opportunities were lost through the practice of what the noble Lord, Lord Sugar, rightly describes as ill thought-through procurement policies.
I have a dream, and it is a dream that has recurred time and again since my arrival in your Lordships’ House some 14 years ago. That dream is to read a government response to a thoughtful, well argued and thoroughly constructive report by a committee of this House which is similarly thoughtful, similarly well argued and, most important of all, equally constructive. On this occasion the report in question is that of the Science and Technology Committee, entitled Public Procurement as a Tool to Stimulate Innovation.
As I see it, intelligent procurement is all about asking the right questions and understanding what might be the ultimate, long-term national objective. That will not necessarily be the same objective as that of the Treasury, which is invariably tied to a far more short-term view. The report of the committee to which I refer asks all the right questions in a polite and reasoned way. The Government’s response is equally polite, but by my reading falls well short of the degree of urgency and commitment that the committee seeks. The committee makes it clear that it intends to return to this subject next year. I seriously welcome that assurance. But when it does, and assuming that it is as disappointed with progress as I rather expect it to be, I hope that it will follow the example of the noble Lord, Lord Sugar, and be prepared seriously to take the gloves off.
The committee’s hand was strengthened earlier this week by Vince Cable’s welcome announcement of the appointment of Phil Smith, the chief executive of the technology company Cisco, as the new chair of the Government’s Technology Strategy Board. As the committee’s report makes clear, the TSB is ideally placed to influence and maybe even drive through many of its recommendations. In my judgment, the board could not have a better ally in whom to entrust the change of culture that both the committee and the noble Lord, Lord Sugar, are pressing for. I would suggest that this House should commit itself to offering Mr Smith every possible scrap of support in delivering the improvements in policy and practice that are being argued for in this extremely well-timed debate.
Perhaps I may finish with this observation. I find it very strange that for a debate on an economic subject which all but obsesses, and has obsessed over the years, the Conservatives in opposition and in government, they have not put forward a single spokesperson. I am sure that the noble Lord, Lord Wallace, will more than adequately reply for the coalition, but it seems odd that a subject of such enormous importance and which is so central to many elements of Conservative philosophy is not seen to be important enough for them to put up a speaker.
Lord Kestenbaum
My Lords, I too congratulate my noble friend Lord Sugar on calling urgent attention to this matter. At a moment of deep anxiety for the British economy, this debate could not be more timely. The first thing we should do today is lay to rest the myth which says that you only have a pro-business environment if the Government leave the stage. As many noble Lords have said, let us just consider the United States. Many of the high-tech entrepreneurs who I have been involved with in this country have taken their inspiration from Silicon Valley. The conventional wisdom is that that is a place where government do best when they are invisible, and yet the opposite is the case. Procurement has been the major factor in the growth and development of Silicon Valley. Military spending funded the generation of microwave technology companies that were a mainstay of the region before the semiconductor industry arrived. It is no exaggeration to say that whether it is the GPS navigation system we all use or internet protocols the public procurement of technology has been the basis of the most transformational global innovations of recent decades.
The first point I wish to stress is just how underexploited the procurement lever is here in Britain when it comes to driving innovation. It is a huge worry, because particularly now the Government are telling us all the time of the need to drive economic growth while at the same time curbing public spending, and yet the buying power is just not maximised. Let us consider the opportunities. As the blight of worklessness increases, we know broadly where the new jobs will be. All the evidence shows, again and again, that innovative, high-growth firms will produce the jobs of the future. NESTA’s recently cited research into high growth shows that just 7 per cent of businesses in the UK have been responsible for half the jobs in the past decade, and the characteristics of these job-creating businesses are those which are most likely to innovate.
In my own experience recently, first as CEO of NESTA and now as chief executive of Lord Rothschild’s family investment interests, my colleagues and I have been privileged to back some of these great young tech entrepreneurs. Through doing that we learnt what these growing small businesses value above all. Capital is important to them, but above all, these young companies value customers; customers are the key. These companies thrive on customers because they are the lifeblood of the most promising parts of our economy, who in turn will be the lifeblood of our recovery. But too many of them will remain small, without customers, at a time when banks have no interest in this risky end of the market and when venture capital houses are on the prowl for the next high-profile buyout. But it is the most significant customer of all, the Government, who are more likely to make a tech business viable than anyone else.
By way of example, while head of NESTA, I was delighted to learn that one of our investments, a UK tech start-up, was bidding for a government contract for its experimental silicon chip. Imagine my surprise when I found out that the Government in question were not ours but the Government of France. Our company proceeded to tell me how other Governments, of France, Japan and other countries, were so much better sources of these kinds of contracts and that French and Japanese competitors usually benefited from them. After all, they had early customers at an early stage.
As noble friends have suggested, we have made modest steps in transforming government budgets from blank cheques to intelligent, demanding customers. Yes, the SBRI does attempt to open up public procurement of R&D to a wider audience of small businesses. Yet with all the progress made, let us be honest: it is on a tiny scale, a mere pinprick at a time when new customers are life and death to the 99 per cent of firms in the UK that employ fewer than 50 people. Surely it must be time to build these programmes up to a real, meaningful scale that would have great and lasting impact. As the noble Lord, Lord Puttnam, said, the TSB, whose board I have the privilege of sitting on, suggested recently how small tech companies might step up to the task of solving major national challenges if significant procurement budgets were diverted differently.
I have focused my remarks on procurement as the single most significant lever that any Government have to drive innovation and thereby create growth. But permit me one final wider observation. It continues to prove exceedingly difficult for small businesses to win these R&D contracts. That is not, as my noble friend Lord Sugar has correctly observed, because the budgets are not available. It is because too often, government departments are consistently unwilling to accept the risks of financing early-stage technology development, mostly because they do not understand the risks. Surely government departments must start to frame their procurement needs as genuine commercial challenges for small businesses to solve, rather than as bureaucratic hoops to jump through.
Here is the rub: no amount of small programmes, often timid in scale and often initiated with great fanfare and then quietly closed 18 months later, will succeed without genuine, consistent and ambitious leadership from the very top—from ministerial level. That will produce an aggressive, ambitious national programme which runs through government that does nothing other than force a procurement revolution. Yes, we should create incentives, as my noble friend Lord Sugar has suggested—real incentives for those who take risks and get it right
This is a revolution and this procurement revolution needs to be driven, cajoled, inspired and incentivised. It is no exaggeration at this time to say that in large measure, our economic growth will depend on it.
Lord Palmer of Childs Hill
My Lords, I, too, compliment the noble Lord, Lord Sugar, on securing this debate on government procurement policy. The trouble may be that there are a number of policies, most of which are not delivering what is required at the right price. I have seen this in local government, in defence procurement and in procurement in the construction industry—the industry which is supposed to contribute to leading us out of the recession.
The Strategic Defence and Security Review was published a year ago and said that it would fundamentally re-examine how the MoD was structured and managed. Nowhere is this more needed than in its procurement policies and their implementation. The MoD, in deciding its procurement policies, must have a clearer idea of what wars and battles it could be required to fight. There are large items of equipment in various war theatres, and we always end up with the difficult decision about what to do with the equipment at the end of the engagement. As an example of how not to do things, the building of two aircraft carriers which, it appears, no one knows what to do with—we do not have aircraft that can use them—is a prize example of poor procurement policy. The Member of Parliament for the area embracing one of the dockyards said:
“To rip up these contracts worth millions at this stage would not only be financial madness, but political suicide and I hope the coalition government sees sense”.
He is right, but because the previous Government made unbreakable contracts for ships that no one really wants, they will be built. Is that procurement policy or procurement madness? Our home-based defence industry complains, through its trade association, that the MoD has yet to define its indigenous capability requirements, which leaves the acquisition process unguided on what should be procured onshore, and industry with little on which to base investment plans.
The UK's requirement is for a continuously available critical mass of core skills in disciplines such as systems engineering, plus design and development engineering, that can rapidly be placed on a war footing. Assured off-shore access—which my noble friend Lord Lee describes as “buying off the shelf”—alone may be inappropriate for a number of reasons. It invites, as the noble Lord, Lord Sugar, said in another context, home-based inertia. It leads to the fading of skills. It jeopardises the need to maintain a critical mass in the support environment, and it could be subject to political restraints, legal challenges in other countries or third-party regulatory regimes which, together, cannot guarantee the necessary level needed in a national emergency.
ADS, the defence trade organisation, maintains that the majority of equipment costs for the MoD are now incurred in maintaining and upgrading existing systems through life, rather than in the acquisition phase. This means that “Through Life Capability Management” implications must be taken into account during acquisition. So what is needed is an effort to predict what could be needed in 2012 and beyond to work with UK industry to promote a holistic approach to decision-making. Short-termism does not help the MoD, the defence industry or the country.
Good procurement is needed not only in defence. The current economic crisis has created what some see as an opportunity to transform how our public infrastructure is procured and delivered. Much attention has been given to the future of the economic recovery, starting with the construction industry. At least one of the UK's largest construction businesses has strong beliefs on how the construction industry can help the Government to achieve our objectives of reducing the fiscal deficit while maintaining a platform of economic growth by actually reducing—reducing—the costs of construction. The basis of how to achieve this result is in how public infrastructure assets are procured.
Where possible, our Government should group its infrastructure procurement into programmes by geography and type, so that cost-reduction targets can be set over periods of five years. The Government should select the successful bidder or bidding teams on their ability to deliver the acceptable cost and their ability to deliver the cost reductions over a defined period. Bidders would need to accept that projects would not proceed unless the acceptable cost and cost reductions were achieved. The construction industry believes that, in that way, public sector procurement costs will be significantly reduced. Small and medium-sized enterprises will benefit through the supply chain and, with programmes of work defined over a future period, there will be significant opportunities for training and apprenticeships.
A number of noble Lords have referred to small and medium-sized enterprises. Listening to what other noble Lords have said, I throw into this debate that, since January, the Treasury has awarded a total of 16 contracts and put notices on the contracts finder, where there is a total of just over £12 million—none of which has been awarded to small or medium-sized enterprises. The Department of Transport has advertised 122 contracts with a value of more than £135 million on the contracts finder website since May 2010. Of those contracts, only £125,000 went to small businesses: under 1 per cent. Other figures are equally damning.
I never say that a project, be it in defence or construction, should take place purely to make employment, such as with useless aircraft carriers. However, where a contractor agrees to carry out the work and to employ local labour, it must surely weigh heavily in a successful bid. With such improvements in procurement processes, there could be guarantees in the use of SMEs, local employment and apprenticeships. If someone finds a way to do something cheaper and give better quality and value, be they SMEs or large enterprises, then they will prosper and increase market share—until, of course, their competitors catch up, seeing what they need to do in order to compete.
We must tackle why it costs a business twice as much to win a UK government contract as it costs to win a French government contract. We must ask why we often take sensible European laws and apply them overliterally, making the tendering process far more complicated than it needs to be.
Lord Hunt of Chesterton
My Lords, I thank my noble friend Lord Sugar and the other speakers for their remarks about how government procurement needs to improve fast, first, to make government services more effective and, secondly, in order for the Government to support and stimulate UK industry, commerce, technology and medicine. It is important to note that procurement is the purchase not only of goods and services but increasingly of research, software and manpower. I declare an interest as a government scientific consultant and as director of a consulting company that is not growing, but that is deliberate. We are providing all sorts of information to companies that are growing. It is rather hard work, growing a company.
The key to the effective use of procurement to the development of industry, commerce and technology is for the Government to have long-term plans, as the noble Lord, Lord Palmer, has just pointed out, and to consider at the outset how they will be implemented in partnership between the private sector and relevant departments and agencies. In addition, the process of planning procurement should always think of the long-term export possibilities of the decisions, an aspect of policy that needs emphasising. Can the Minister give us some assurance that this aspect of procurement is now firmly on the government agenda? Furthermore, this should be part of the job description of departmental and agency managers. I used to be head of the Met Office. Of course, at no point in my job description was there anything to do with procurement efficiency or improving British industry, unlike that of my colleagues in other countries.
Procurement must also be at the highest standard internationally. Harold Wilson knew this when he initiated government programmes in the 1960s. He was perhaps the last technocrat in No. 10. He realised that it was absolutely vital to have advanced electronics. The transputer came from that. It was interesting to be on the House of Lords committee when we heard from, for example, the managing director of ARM—one of the most successful British software companies—that that came out of Harold Wilson’s programme on transputers.
Over the next decades, there will be huge investments, both in the UK and globally, in various areas, such as coastal defences, for which the Environment Agency is responsible, high-speed trains, carbon capture and storage, and innovative types of nuclear power. Will these investments lead to the greater competitiveness of UK companies? Only if the Government specify high standards and encourage innovative solutions.
The lack of funding for UK privatised and public laboratories—again, unlike what happens abroad—makes this more difficult. Already, other European and Asian countries in the areas that I just mentioned are raising the technical standards in these projects which the UK is not currently planning to follow. Therefore, these other countries will become more competitive in future. For example, the Netherlands is integrating coastal defences with coastal wind power. Norway’s work on carbon capture and storage has higher environmental standards than are planned for the UK. China has more than 600 engineers working on hybrid nuclear; we have a small company that is trying, with China, to begin in this area. In these areas, there will be world expertise in the UK, but it may not be used in the UK if we are not encouraging these advanced solutions.
The UK Government are still not publicising as vigorously as they might on their websites what they are sponsoring, particularly from contractors. In some cases, where there has been some advertising of advanced technology by the Cabinet Office, it is rather strange that the relevant UK companies have not been mentioned. Noble Lords may have heard the remark that I have mentioned before and which many companies in other countries have made that if any small company survives in the UK it must be jolly good.
I will just touch on the indirect aspects of government procurement, which has become increasingly important and has changed significantly since the 1960s. At that time, of course, Parliament regarded it as essential for all organisations in government to have their own very substantial research programmes. Parliament said that the electricity generating board should spend 10 per cent of its turnover on research—of course current electricity companies spend much less that that. I was privileged in the 1960s to work in the world-class Central Electricity Generating Board laboratories. Americans used to come and were amazed at the high-level research that was being conducted there. I was also, incidentally, branch secretary of the local trade union, the EPEA, which shows how these things go together.
The United Kingdom then looked like France, the United States and the Netherlands today, with their world-class government and industrial laboratories. What is to be done? The Government, instead of having their own laboratories, now have to rely on ad hoc advice from consultants and universities, neither of which have the experience of unbiased government experts. The Government need to have a very rigorous programme of using external advice to make their decisions. Of course, this should include international advice. For example, DfID, having eliminated its own natural resources lab—subsumed into the University of Greenwich—now funds much of its advice from centres in the United States or relies upon NGOs such as the ODI.
I hope that the Minister will explain how this procuring of expertise is managed so as to get the best advice about major procurement programmes and the business of government and regulations. One fears that a few big names are often used. I will give noble Lords a little story. When I was head of the Met Office, we asked a very large consultancy company—let us call it WP; you might imagine who that was—to advise the Met Office how to improve its financial controls, which it said would require the installation of a new system that would cost £1 million. On this basis, the Met Office then asked companies to say whether they would bid for this. The company said, “Oh no”, and that it would now cost £2 million. Fortunately, this was the 1990s and the Government had an excellent lab called DERA, the Defence Evaluation and Research Agency. We went down the road to them and we got the job done for half a million. Of course, DERA does not exist any more and doubtless you would have to go back to “WP” and get a very expensive answer.
I believe that we now need much more serious vigilance in real-time monitoring of such contracts, since we have moved to the present position.
Lord Broers
My Lords, I add my congratulations to the noble Lord, Lord Sugar, on obtaining this debate. It is an extraordinarily important topic today and I agree with all his specific suggestions. However, I wish to speak on the broader issue, as discussed by the noble Lord, Lord Palmer, of how we can, as a nation, ensure that we are in a better position to provide and maintain more of our own infrastructure. The noble Lord, Lord Sugar, mentioned Siemens supplying our rail rolling stock rather than Bombardier, which, while not a British company, at least manufactures in the UK. However, the problem is of course much wider than just railways. We are having to turn to overseas companies to supply most of our renewable energy sources and our new nuclear power stations as well, and, if we go ahead with it, our high-speed rail network too. This will further increase our current account deficit in manufactured goods and do nothing to alleviate our serious unemployment problem.
Many of our industrial companies cannot compete with overseas suppliers, despite the significant advantages of being local suppliers, because they have quite simply not kept up in research and development. At the same time as we have held, even advanced, our position in science, we have steadily slipped down the R&D tables in investment and achievement to seventh place. The noble Lord, Lord Bhattacharyya, has already mentioned this. There is nothing inherently lacking; several of our high-technology companies are thriving and well ahead of their competitors, but there are not enough of them and huge gaps are left in our ability to manufacture what we need, especially to meet our energy and transport needs.
To correct this failing, we must do more to ensure that our capabilities better match our needs, and government procurement can play an important role in doing this. Intelligent procurement combined with joined-up planning, as practised by several of our European and American competitors, would put us in a much stronger position. Joined-up planning is a long-term issue, as the noble Lord, Lord Hunt, has just said. Government should not only be thinking 10 and 20 years ahead in planning what infrastructure will be needed but making sure that we will have the industrial capacity to manufacture a significant fraction of it ourselves. I am not trying to suggest that we should do everything—we are a relatively small nation and that would not be sensible—but if we cannot supply a significant fraction of what we need, we are going to further aggravate our financial and employment problems.
The Chinese and Indian economies are growing and their trade balances are healthy because they have geared up to build their own power stations and transport systems. They do not have to get others to do everything for them. This also strengthens their ability to export, and thereby balance their need to import materials and essential commodities. In contrast, our own energy and transport policies seem to be developed without any effort to match them with our industrial capabilities. We do not seem adequately to involve industry in the planning process. By that, I do not mean having a few very senior executives acting as non-executive advisers—they are no doubt valuable, but at another level. What is needed is the involvement of the engineers who set and understand in detail the research and development operations of their companies and that can advise on what is and is not feasible. These experts also need to learn what the Government are planning so that they can comment on whether their companies are likely be in a position to supply it.
There are two ways in which we can do this. First, the TSB, which the noble Lords, Lord Puttnam and Lord Kestenbaum, mentioned, has responsibility for using taxpayers’ money to provide leadership in strategic research and development. It should be able to ensure that appropriate manufacturing capabilities will be available in the future. Its emphasis tends to be on good research to support the long-term development of emerging technologies rather than ensuring state-of-the-art capabilities in existing technologies, although it has the ability to do this as well. In fact, the TSB’s knowledge transfer networks provide an excellent mechanism for getting industrialists together with the Government to provide joined-up planning. I declare my interest here as unpaid chairman of the TSB’s Transport KTN. This evening, I am meeting senior members of the rail, automotive and marine industries to explore the possibilities of a technology innovation centre for transport.
Another mechanism that we have to ensure timely industrial planning is our network of chief scientific advisers. At present, they are seen mainly advising on science rather than engineering, but there is no reason why they should not play a larger role in joining industry with government. This issue was addressed by one of our recommendations in the Science and Technology Select Committee’s recent report, Public Procurement as a Tool to Stimulate Innovation, which says:
“We recommend that CSAs should have responsibility for encouraging engagement with industry (including both suppliers and potential suppliers) and academic communities with a view to promoting the procurement of innovative solutions … This role should be incorporated into departmental objectives”.
I see CSAs playing a more active role in ensuring that government policy in energy and transport is linked with future industrial capabilities.
If we go on planning our future infrastructure without regard to whether we can produce it ourselves, we are throwing away perhaps our best opportunity to solve our financial and employment problems. I ask the Minister to reassure us that the Government will use all the mechanisms available to them to restore our ability to have British workers build our future infrastructure.
Lord Anderson of Swansea
My Lords, my noble friend Lord Sugar made a typically robust and wise opening speech, drawing on his vast commercial experience, and what a reservoir of experience throughout the House has been revealed by this debate. My only interest to declare is that I am a Welsh Peer and I tend to look at elements of public procurement in terms of the fairness in the regional spread, including to my own nation. The aim of procurement generally of course is to obtain the best value for money. In the private sector, that is done in a fairly narrow way; in the public sector, the procurement has to meet a number of other objectives, including regional policy. This is one area that I wish to touch on in one narrow corner of the vineyard.
I draw your Lordships’ attention to one distinct area, the procurement for the 2012 London Olympics. I am grateful to the Financial Times Newcastle correspondent, Chris Tighe, for the figures that she gave me, which she reproduced in the Financial Times on 14 November. My conclusion, which I invite the Government to share, is that the figures that are available display a deep cause for concern, and a failure on the part of government since the initiation of the Olympics to ensure that the Olympic Delivery Authority spread the contracts widely throughout the country. It is now, of course, too late, because the greater part of the contracts have been allocated.
The amount spent by the ODA is substantial: so far it is about £6.5 billion. The total will be just over £7 billion, with a £2 billion contingency. Overwhelmingly that is taxpayers’ money, which could have been used for broader public purposes. Clearly, the Games authorities were aware of their public responsibilities. The noble Lord, Lord Coe, gave this pledge, in 2005, that the Games would,
“provide a unique opportunity for businesses across the UK”.
The chairman of the ODA, John Armitt, said in 2008,
“businesses from all over the UK are already winning ‘economic gold’ with millions of pounds worth of London 2012 work … We want to work with the best of UK plc to successfully deliver the games—the largest project this country has seen for generations”.
So the commitment is there from the leaders and the amount of public funds is substantial, but what is the result—the record? The ODA has agreed thus far 1,500 direct tier 1 contracts—that is, with main suppliers; it estimates that another 50,000 will have been or will be generated through the supply chain. The only contract figures available are therefore for tier 1. That has not been volunteered by the ODA with some excess of transparency but has been made clear by parliamentary Questions in another place. As a percentage of the total value, London has received 54 per cent of contract value; London, the south-east and the east of England together account for 83 per cent of contract value. Scotland has received 0.4 per cent, while Northern Ireland has received 0.28 per cent, the north-east 0.19 per cent and bottom of the table is Wales with 0.01 per cent. That means that less than 0.9 per cent of the total value is accounted for by expenditure in Scotland, Northern Ireland, the north-east and Wales.
I can imagine the Government’s response. “Ah”, they will say, “you are deluding yourself. Look at the cascade down the supply chain; there will be many firms in the north-east, in Wales and Northern Ireland that benefit”. But there are no more robust figures available to support this assertion that there is a spread or cascade to the nations and regions of this country. It seems logical to conclude that the overall percentage of the subcontracts is broadly similar to that of the tier 1 contracts; how could it be otherwise? Only the first tier is within government control, and on the figures available they have surely massively failed on the broader public policy criteria and interests. It has hardly helped us in Wales to receive 0.01 per cent of the spend at a time of massive public expenditure cutbacks and high youth unemployment, when Wales has been largely neglected.
The Government may try to put a gloss on these figures and take refuge in anecdotal evidence and the cascade effect, but the figures that are available are clear and the overall conclusion must surely be that there is a major missed opportunity and it is now too late to redress it. How can I begin to persuade businessmen, unions and the public in Wales that the Government have ensured that they have a fair slice of the cake, particularly when National Lottery funds were diverted to the Olympics—funds that might otherwise have led to projects within Wales? So the result is totally contrary to the professed regional policies of the Government. Surely there is no way in which to hide the manifest failure, save by obfuscation, pious hopes and platitudes.
Lord Sutherland of Houndwood
My Lords, I thank the noble Lord, Lord Sugar, for a vigorous and, dare I say it, characteristically incisive introduction to this important debate. At the beginning, I want to declare an interest. I work with a Malaysian conglomerate, YTL, which is currently working with a vigorous, small young British company in IT, Frog, which is based in Halifax and is doing marvellous things in the provision of IT in the area of education. The other way round, interestingly, we are seeking to procure for that company as part of a broader deal an arrangement to provide IT services for all Malaysian schools. That would be a major thing for such a bright young company, and we wait to see the outcome. There is talent in this country, and that is a good example of how it can be harnessed to international sale of services as well as to the purchase of services locally.
In this debate, I want to offer noble Lords a case study of public sector procurement in which I had to carry out an investigation, and put it in the context of current government policy, which will inevitably lead to much greater need for procurement expertise in the public sector. Those two policies to which I referred, which are mirrored elsewhere, are in health, where many of the services that we now get directly through public sector activities will be procured from other sources. Equally, in education, academies and free schools will have increasing powers of purchase and procurement. I rather approve of this policy, but on the other hand it means that there will be a need to ensure that in the process of procurement in the system we are competent and fit for purpose.
The case study, which bears on both of those—and Ministers should beware and read this—relates to something that happened in July 2008 when an American company that provided a major examination portfolio for English schools’ SATs failed to meet the terms of its contract. Increasing panic spread through the various agencies involved. The fact that at least four different agencies were involved is one of the messages to come from this. The commissioning agency was the Quality Curriculum Authority; within that was a non-statutory subsidiary, the NEA, which ran that side of the business. There was also the statutory subsidiary in Ofqual, which was meant to be an independent regulator but was none the less within the major quango—and then there was the Department for Education, then titled the Department for Children, Schools and Families. Those four all had an interest in this procurement and its correct outcome. You can imagine the panic when it became clear that the delivery of the test results was going to be significantly late. Those are the results for those aged 11 for which parents, pupils, teachers and school league tables wait, and which pupils progressing to secondary school require as a clear picture, so they can take them and be assigned a proper educational syllabus in secondary school.
The panic was great, but what was the initial reaction? Of course, it was to procure someone to carry out an inquiry—procure with a small “p”. That was me. There were some comic elements to that small “p” procurement, but I will not spell them out today. The job, as I saw it initially, was to look at what had gone wrong with the process in the examining system and to rate answers to these questions. Was it efficient? Were the results that eventually came through safe? Finally, what do we have to do to make up for the shortfalls of the process in question?
However, it quickly became apparent that I had to push further back into the process of procurement. This major American company, which had been brought in to carry out that important element of the British examining and assessment system, failed. What was wrong with the procurement? Fundamentally, there was one very considerable thing wrong: by and large, with no disrespect, those responsible for the procurement were amateurs. They were on the quango board or were officials within the quango—officials with strong education experience and a degree of oversight from within the Department for Children, Schools and Families. With no disrespect, those amateurs were recruited because they had other admirable qualities, but in this area they did not have the necessary expertise.
The lessons from this were, first, that procurement in the public sector will increasingly be for services, not just for items such as missiles, schools, new hospitals and so on. Secondly, when amateurs go through a system of procurement they are either dreadfully incompetent and amateur, in which case they get tripped at the first hurdle, or they do what these groups did: they played it by the book, the whole book and, lastly, nothing but the book. All the ticks were in the boxes. I examined very thoroughly the process. It is laid out in my report that 11 stages of the process were all gone through formally and correctly. They got good due diligence on financial matters from one of the big four companies, which investigated the company in question—again, that ticked all the boxes.
Informally, however, what did they not do? As became apparent, and as the then shadow Secretary of State Michael Gove pointed out with some delight, they did not check the web or the press reports. They did not look at what was being said in the lively American press about this company. For example: “Mismanagement by ETS”—that was the company—
“led to over 4,000 teachers being wrongly failed. This led to a shortage of teachers”,
in the USA. It had to pay $11 million in compensation. There are plenty more quotes in the report if your Lordships really want them; that is just an example. Did no one within the QCA have sufficient international contact or nous to pick up the telephone and ask a colleague in the States, “What is this company like?”? The press reports were clear, yet these informal checks had not been made. It was played by the book, as they did on the European journal and the new system whereby competitive dialogue was introduced. All that was correctly done but it was a major failure in procurement.
Another major failure, I suggested, was that because there were four different elements involved, there was not adequate clarity of where the lines of responsibility ran. Yes, they lay with the board of the QCA but in its final minute, in which it approved this contract, it noted:
“The Chairman also suggested that the process be used as a case study to share best practice amongst other divisions”.
If only—that was what went wrong. There were not sufficient lines of communication and there was a degree of amateurism, although with strict propriety. Nothing untoward happened but it was not clear where the responsibilities lay. I rest my case.
Lord Davies of Stamford
My Lords, I fear I must start by refuting and rejecting, I hope definitively, two very unscrupulous pieces of propaganda. They are complete falsehoods in both cases but they get mentioned far too frequently. One of them was mentioned this morning by the noble Lord, Lord Lee. I am sorry about that, because he is a man whose judgment I greatly respect and who knows a lot about this subject. It is absolutely not true that we in the Labour Government left a legacy of a £38 billion deficit—a so-called black hole. It is complete rubbish. You can only get to that figure if you assume that over 10 years, we would not have increased defence expenditure even in nominal or cash terms.
In other words, for 10 years you would have had a real-terms reduction in defence, year-on-year. Obviously, we were not planning to do that; we were increasing defence expenditure at 1.5 per cent in real terms. Even the new coalition Government are not doing that. Disgracefully, they are freezing defence spending in cash terms at the moment while saying that in the latter half of this decade, from 2015, they will be increasing it by 1 per cent per annum. On nobody’s assumption would you get £38 billion. That is absolutely untrue and fanciful. It is a disgraceful figure.
The second thing that I want to nail is the suggestion that we did not do everything we could to equip our troops in Afghanistan properly. That is a particularly unscrupulous suggestion. As history shows, at the beginning of any campaign you do not have the right equipment because the enemy, the terrain and the tactics are new. It takes a bit of time to get your act together, but we did that. We were 100 per cent committed to doing the best for our Armed Forces there. Gordon Brown asked me to do that and supported me 100 per cent.
I had a meeting every month in my office on counter-IED. We looked at a whole range of detection techniques, electronic countermeasures and protection systems. I invested deliberately right across the board in any and all of them that had any chance whatever of success. I think that I ordered nine types of armoured vehicle in my time as Defence Procurement Minister, several of them specifically conceived for Afghanistan: Mastiff 2, Jackal 2, Ridgeback, Coyote, Wolfhound, Husky and Warthog. I saw them all working extremely well last weekend in Afghanistan. My first decision was to re-engine the Lynx helicopter so that it could fly 365 days a year; that was done within a few months. I ordered the Wildcat, which I see in the latest NAO report is 100 per cent on time. I ordered 22 Chinooks, and this Government have cancelled half of them. They blame us for not equipping the Armed Forces properly, which is a bit rich when they then cancel half of the Chinooks. That shows the kind of basis on which these untruths are, I am afraid, being promulgated.
I want to make four points—or five if I have time—drawing the attention of the House to some aspects of defence procurement which are insufficiently appreciated. The first concerns buying off the shelf. I had the discipline in my time, which I hope is continuing, that whenever we looked at early requirement we looked first to see whether we could buy it off the shelf. If we needed to develop it, we looked to see, secondly, whether we could collaborate with another country and, thirdly, whether we could incorporate characteristics to make it exportable to third markets. Indeed, on some occasions I cancelled developments in favour of off-the-shelf solutions—for example, I cancelled the future helicopter project and spent the money on the Chinooks.
In many cases, however, that is not the appropriate thing to do because, by definition, in buying off the shelf you are not buying tomorrow's technology and may not even be buying today's technology. You do not necessarily have complete control of the technology that you are buying. You will not necessarily get all the source codes and will not be able to integrate new sensors and weapon systems. You will not be able to modify the goods in the way that you hoped you might and you will not necessarily have the long-term support, so it is not always the right thing. We in this country must, absolutely fundamentally, always make sure that our fighting men and women have the best that money can buy, or that can be found. That means we have to fight a capital-intensive war, never a labour-intensive war, so we have to go for the best and that often means development.
My second point is that if you go for new development, it is absolutely impossible to know in advance how much it is going to cost. By definition, you are at the frontiers of science and technology and no one can tell you how long it will take and how difficult it will be to solve those problems. Clearly, you have to have a budget for disciplinary reasons. You could put in an enormous contingency provision but you can end up putting in so many of those that, if they had a chance of being sufficient, you would have half your defence budget consumed by those provisions. That would not be sensible. You just have to accept that in defence procurement you will have uncertainty about the costs of development programmes. The first of its class or type will be a prototype. It will not be called that because you cannot junk a £1 billion destroyer or a £100 million fighter aircraft; you have to use it. It becomes a serviceable system but, nevertheless, you are inevitably treating it as a prototype.
The third point, which emerges from that, is that in order to develop new projects and technologies you need to have a long-term relationship of confidence with an industrial partner. You need to be able to work on an open-book system, to have flexibility with them and to have complete commitment from them to make sure that the system or weapon works in practice, over the long haul. That means an industrial strategy. We had some very good relations with the industry in my time; I shall just cite BAE Systems, the Astute class submarine, complex weapons and our relations with MBDA, Talis and Finmeccanica, which were ideal. I am very sorry to see that the present Government do not seem to want to continue with the industrial strategy that we had, although they do not say what kind of industrial strategy they want. Incidentally, we are talking here about what is, next to the pharmaceuticals, the greatest and most internationally competitive aspect of British manufacturing industry.
Because of time I shall pass to my last point, which is an important one. I see from the NAO report that the Government are wasting half a billion pounds by extending the production schedule of the Astute class submarine. As everyone knows, we had to do the same with the aircraft carriers, although I have to say that as a result of my intervention the delay and the cost were much less than they would have been if we had adopted the original Defence Board advice. If you extend the production schedule, you extend the fixed costs for your suppliers for a long time, which is extremely expensive.
That is a very stupid way of running a railway—no private business would do that. A private business would budget for and appraise investments on the basis of present-value comparisons. Present value would also enable you to seize current market opportunities. For example, I inherited a budget of well over £1 billion for six naval tankers. I discovered that I could buy them commercially on the market—the market being very depressed in 2008—for something like £50 million each, saving £500 million or £600 million. I could not do that because it would have meant bringing forward that expenditure into an earlier year. Equally, I could not lump all the systems for Astute boats 4, 5 and 6 together because that would have meant bringing those purchases forward, but seizing a market opportunity in that instance would have saved £300 million or £400 million a year.
We ought to have a present-value system of accounting. I made quite a lot of progress before the election in persuading the NAO of that, and some progress in persuading the Treasury. Obviously, under a present-value system, if you bring something forward it costs you more in the short term because you increase the present value, so using up more of your budget. The budget should be on a present-value basis and the Defence Procurement Minister should be able to bring things to operate within that strict net present-value budget, seizing market opportunities and ensuring that the taxpayers’ money is not spent wastefully, as too often it has been.
Lord Haskel
My Lords, in his characteristically robust speech, my noble friend Lord Sugar told us that the Government spend about £238 billion a year on procuring goods and services. In doing so, he and other noble Lords say that the Government should be active, supporting and helping our economy and helping to shape markets. I agree.
As the noble Lord, Lord Sutherland, said, an active Government must be a skilled purchaser as well as supporting innovation and good design, not a Government who look for the cheapest, most readily available, most risk-averse purchases—a very attractive option at this time of cuts. Being a purchaser that supports innovation and new design is right because in the long run that is better and cheaper, and we are in it for the long run.
The noble Lord, Lord St John of Bletso, reminded us that this week the Government announced that they wanted to speed up the procurement process. If the Minister wants a quick fix, he should speak to his noble friend, the noble Lord, Lord Feldman. Many years ago the noble Lord started the Better Made in Britain exhibitions, where large retailers and others exhibited imported goods and invited UK suppliers to come along and bid. He organised 25 of them and, yes, I went along and won some business. Government procurement always featured because it was one way that the Government had of showing British industry whose side they were on—basic, perhaps, but certainly quick, and they probably helped cut prices.
As other noble Lords have said, though, life is more complicated than that. The right way for the Government to get good value and create jobs and for the nation to benefit is to behave as an intelligent lead customer. My noble friends Lord Kestenbaum and Lord Davies explained how in business you should always look for a good lead customer—a firm that works with you and understands the market so that it can guide the specification and design, support the development and eventually test and validate the product. This is particularly important for early-stage companies that may have a good idea and something new, but lack a route to market.
That applies not only to innovation in technology; it applies equally to innovation in design. They must go hand in hand. Earlier this month, your Lordships debated the creative industries, speaking of their excellence and how they defined the UK in the eyes of the world. So why do they not play a much larger role in the procurement process? Presumably, imaginative, sensible and continual innovation in design is equally important to the public sector as to the private sector. Design is much more than an expensive additional process for making something look good; it drives fitness for purpose and raises the quality of use. Good design is not expensive. Raising design standards improves our quality of life, and who would say no to that?
What is required is a procurement process that not only acts as an intelligent lead customer but encourages the search for innovative design, all within European Union and World Trade Organisation rules. That can be done. My noble friends Lord Bhattacharyya and Lord Kestenbaum spoke of the Small Business Research Initiative Scheme, operated by the Technology Strategy Board. My noble friend Lord Bhattacharyya told us that the scheme was unashamedly copied from the hugely successful US scheme. SBRI was relaunched in April 2009. It operates under pre-commercial procurement rules. It does not involve state aid but delivers funded research and development contracts in the form of a challenge to find an answer to a need or issue in the public sector where the solution is either unknown or not good enough. The challenges can be for the product, for the knowledge gleaned from research or simply for a better or more economical design—procuring for the outcome, as the noble Lord, Lord St John, called it.
Since April 2009 there have been 78 competitions, generating some 640 contracts to a value of more than £43 million. Many of these contracts have gone to small or even micro companies. Some noble Lords have dismissed this as being tiny. It is not so tiny when you compare it with the recent government scheme to bolster exports by small and medium-sized enterprises, which had four takers, or the Business Growth Fund, which had one project.
Often the key to these new developments are new or improved materials. I declare an interest as honorary president of the Materials Knowledge Transfer Network. We encourage all our 4,500 industry members to bid for these and other public procurement challenges. This has resulted in the development of innovative glazing for windows and walls for public buildings that varies the transparency of the glazing automatically to control light and heat transfer. As a result, the UK has a strong position in architectural glass such as e-glazing.
There are many more examples of the way this system works. I join my noble friend Lord Puttnam in regretting that there are not more speakers on the Conservative Benchers who could tell us about it. My special interest is in technical textiles. Through the scheme, the antibacterial hospital gown for the NHS that controls the spread of MRSA has been developed, as has unobtrusive monitoring of health and drug delivery.
Current competitions include DEFRA looking for a small-scale anaerobic digester. Operation research and analysis to help the MoD make better decisions— I am sure that the noble Lords, Lord Lee and Lord Palmer, and my noble friend Lord Davies would all say amen to that. A competition that concluded recently was to deliver assisted living lifestyles at scale, the benefits of which we can all look forward to.
This system works. It benefits the private sector and public procurement. It enhances our quality of life. It is a matter of political will and personal determination to get it to work. Let us see the Government get on with it.
The Earl of Erroll
My Lords, as a taxpayer I have an interest in not seeing billions of pounds of our hard-earned money being siphoned off, primarily to the USA, in excess profit by prime contractors. I probably ought to declare an interest because I help one or two small companies, but none of them is bidding for large government contracts and I will not talk about any of them today. Flexeye, the risk intelligence company, may have some government contracts, but I shall not use any of its experiences when I mention some of the pitfalls a little later. I want to make that quite clear.
This is a time of great hope. As my noble friend Lord St John of Bletso said, Francis Maude made all the right noises and was full of good intentions in his speech last Monday across the road. The problem is that it is easy for things to die a death in the implementation. I am trying to think about how we get innovation into government contracts. Innovation tends to come from the less large companies. Unfortunately, SME has connotations of tiny companies, although at the top end and middle of the “M” they are quite capable of dealing with very large government contracts quite happily. However, they are being tarred with that brush as micro-businesses at the bottom.
How can we get such companies into government contracts? We might try to learn some lessons from the past. I found the PASC report from another place, which was issued on 28 July 2011, very interesting. I have not read the whole thing; it is enormous. However, I read some of the oral evidence from 15 June in volume 2, including that of Martin Rice from Erudine, which has since disappeared, very sadly. However, that is a typical example of a medium-sized company with some innovation.
There is also an interesting comment in the report, which I shall deal with quickly. The PASC noticed that most of the top procurement people in the Cabinet Office, who were running things such as the Office of Government Commerce—which became Buying Solutions and is now called the Government Procurement Service—came from Accenture. I thought about whether this was sinister and decided that it probably was not. The top consultancies attract the brightest people, who know what they are doing. Because the Government lacked the internal expertise to deal with these complicated, new and fast-moving things, they hired the best. However, the trouble is that these people come in inculcated with the belief that only larger organisations are capable of delivering government contracts. Unfortunately, in reality, high performance is not being delivered, which is a great shame.
How do we do something about it? I am told that Vince Cable called the usual suspects—all the prime contractors—into a room and told them to reduce their bills by X per cent. I do not know how much it was. They all went away feeling duly chastened, but do we really believe that they will not claw that money back over the next few years? It is bound to happen.
I look at some of the ways in which the rules make it impossible for the smaller company. A company that I know very well supplies interim managers at a strategic level—heads of HR, CIOs and so on—at around 35 per cent of the cost of the big companies. To do that you must be qualified under a particular framework agreement and the only one open to SMEs was in general management. Suddenly, at the end of 2010, it was cancelled and the company was told that it had to go through one of the prime contractors. Therefore, it went through the DWP’s CIPHER framework, which is run by Capita. The company was then advised that it had either to hand its people over to the incumbent prime contractor or to fire them. For it to be okay for its people, the company handed them over. That is not very good business.
When the DWP was looking at putting contracts out to tender in 2010, it broke its large contract for the rewrite of the system into four or five lots to make it smaller. Some innovative pilots were carried out by various people but these were ignored and, at the end of the day, the DWP handed the contract back to the main incumbent, with the little sop that one other company should handle the legacy system so that there were not too many complaints. Many smaller companies waste a lot of money—six-figure sums in some cases—on tendering. They came to me to talk about it. It is a terrible waste of time and money. This is the challenge. The average OJEU tender takes about 18 months, I am told.
However, there is hope for the future, which is what I prefer to think about. I disagree with the noble Lord, Lord Sugar, who introduced this excellent debate, in one area. I think we must have some local spending. Where you have a regeneration project in certain local authority areas, in some cases it is only local businesses that can supply stationery, services and all sorts of things like that. Years ago I tried to help local authorities with their procurement policies in relation to one company. I noticed that we could easily achieve huge savings through the central buying people. They had got lazy and were charging probably an extra 20 per cent in profit because they had to fund themselves. It was another layer of the procurement process and introduced greater inefficiency, so sometimes central buying does not work. We seem to alternate between central buying, which gets lazy, and repatriating procurement locally. When that becomes inefficient, procurement goes back to being done centrally. Government and everything else is a bit like that, I am afraid; we keep going through these big cycles.
Under this new scheme, 25 per cent of the contract value is supposed to go to SMEs. However, we will have to wait until next spring at the earliest to learn what the new frameworks will say. Knowing government slippage, I bet it will be the summer. How many companies will go bust between now and then while we churn away? What will these frameworks say? The devil is always in the detail. People could very easily be written out of the system. We must make sure that this new proposed dynamic e-marketplace for contracts worth less than £100,000 is open to anyone. We should not suddenly put in subtle things that somehow prevent SMEs qualifying.
I must finish in a second but there is another major point. Because government procurement always wants to compare like with like, it is not open to innovative ideas. It wants to have the tender absolutely locked down for comparison. If you propose an alternative, cleverer, innovative solution, which might be cheaper, you immediately disqualify yourself from the procurement and from the tender. That does not help. It was also commented that, in many cases, 20 per cent of the programme is used to deliver most of the project. It is all these “nice to haves” that cost the money and really inflate the cost. If we drop those, focus on what is really required and handle the exceptions manually, we will probably save huge amounts in some government systems. We must move to agile development methods in which we get feedback from the real world as things develop. We have to stop just developing up front. Flexibility and an ability to change are absolutely essential in this fast-paced modern world. However, it will be very difficult for the Government, who like to deliver certainty and predictability, to handle that.
Lord O'Neill of Clackmannan
My Lords, I thank my noble friend Lord Sugar for securing this debate and doing us the courtesy of indicating in advance what he would talk about. I will not follow him today; I should like to discuss some of the procurement issues surrounding the construction industry. It is an industry that accounts for some 8 per cent of our GDP and involves 230,000-plus companies, the overwhelming majority of them very small. Forty per cent of the industry’s budget is accounted for by government procurement, or certainly by public expenditure, be it through local authorities, health boards or central government itself. I declare my interest as chairman of the Strategic Forum for Construction, which seeks to advise the Government on certain aspects of the construction industry.
I realise that we are debating this subject some five days in advance of the autumn Statement. We have been advised in advance by Francis Maude that there will be a pipeline for construction projects so that the industry can prepare itself, either to bid or to do work, over the next three years. This is to be welcomed. One can only hope that the pipeline will be long and very wide. More often than not, it is to the construction industry that we look for economic stimulus and a pick-up in the economy. However, the other side of this coin is that the Government will be looking for a 20 per cent reduction in construction costs over the next three years. In the pit of a recession, the industry will have to get itself together in ways that will enable these savings to be made.
It is fair to say that there has been much improvement in the construction industry of late. Therefore, in some respects, the challenge of cost savings of the kind that have been indicated will not be quite as difficult to achieve as some people might have thought in the past. However, it would be criminal if these savings were to be achieved by scrimping on materials or through unnecessarily and potentially dangerous speeding up of construction times, both of which, although understandable, are not defensible and very often have serious implications for the lifetime costs of a project, which are rarely given adequate consideration by those who procure on behalf of us, the people whom we entrust with that task.
I also hope that, in this pursuit of cost reduction, we will not see some delaying of payment processes, because, as I said at the beginning of my remarks, the overwhelming majority of firms in the construction industry employ fewer than 10 people. They live on order books which, in good times, can be 12 weeks and which, in times which are not bad, are about six. At the moment, some of them are surviving—those who do survive—on three-week programmes of work. These people depend on speedy payment. We had from the previous Government, and I think that it is the intention of this Government to sustain it, an undertaking that payments to firms through the public purse should be achieved within 30 days wherever possible. I would like to think that it would be incumbent on major contractors who are in receipt of these payments to pass them down the food chain to the smaller players. It would be helpful to hear such a reassurance today.
There is no silver bullet to achieving greater savings or efficiencies—today’s debate has indicated the shortcomings of so many aspects of this—but I would like to identify one source of what might be greater efficiency in procurement in the construction industry: building information modelling, or BIM in the shorthand of the industry. The construction industry has come rather late in the day to what engineers would have called CAD/CAM in the past—the digitalisation of construction plans and the involvement of everybody in seeing three-dimensional pictures of what a building is going to look like and what its specific requirements will be. Hitherto, this has been the preserve of architects and the engineers. It is fair to say that, in a number of instances, architects and engineers have started to embrace it. In 2010, a McGraw-Hill survey suggested that some 35 per cent of these people are now using BIM techniques, but only 23 per cent of contractors, of whom only 7 per cent are employing them on 30 per cent of their projects. So we are talking still about a relatively small area of the construction industry. However, if you go abroad, to the United States and to North America generally, you will find that this is more than the order of the day. A few months ago, I had the opportunity to visit Japan to look at how they were building their nuclear power stations. All of it was done using three-dimensional, and in some instances four-dimensional, screen work.
BIM would mean that all the cards were no longer in the hands of architects, designers and engineers. The work could be accessed by people further down the supply chain, who could point out that, if they did not build something in quite the way prescribed, they would be able to insert the boilers, the pipework or the wiring systems far more easily. And so you would not have what is known as “emerging work” coming up, the cost overruns or the delays. It would mean that you got it right first time, that you took the time to plan it in such a way that you would not be desperate to cut the first sod but rather to do the work in a rigorous way.
There is no end of academic papers being produced on this subject at the moment, but the interesting point is this: to do this will require the client in the first instance to be far more rigorous and precise in the detailing of the specifications which the contract will have to include. It will also put the architects, the designers and the engineers on their mettle to make sure that they do it. If we could get that, we could get the savings, we could get the extra work and we could get the stimulus that this country so desperately requires in its presently dire economic circumstances.
Lord Young of Norwood Green
My Lords, I, too, thank my noble friend Lord Sugar for creating this opportunity to debate a subject of vital importance, especially in today’s economic circumstances, against a background of government policies that are not delivering the growth that we need but delivering, unfortunately, the highest level of unemployment for 17 years. I congratulate my noble friend on his customary and characteristically robust analysis, and I look forward to the ministerial response to some of the points that he raised. I am not sure that centralised purchasing is the total answer, but there are certainly savings to be made—we saw that in the recent Green analysis. I am certain that my noble friend is right to call for a more holistic analysis that goes beyond the lowest price. He made a valid point also about the restrictions that still exist in relation to SMEs.
To pay our way in the future, we need to build an economy that works; we need private sector growth, more people starting businesses and growing businesses succeeding in business. But we need that to work with public investment and procurement. To set this new direction, government cannot just stand at the sidelines. Government must use every tool purposefully and consistently to shape and support this business environment, from competition policy to taxation, and from regulation to procurement. That means developing institutions for collaboration and support, making sure that the right finance is in place, as well as the research base, the skills base and the other elements that support innovation and growth. It means investing in infrastructure, offering certainty in the policy environment and giving businesses the confidence to invest. It is active government, shaping markets, growing key sectors of the economy and supporting the growth of more companies which build value over time, invest long term, innovate, offer good jobs, pay fair wages, and train.
Governments cannot tell individual companies what strategy to pursue—we know that that will not work—but nor should they be indifferent to the choices that they make. There are many businesses already pursuing these strategies—it can make good business sense—but the policy environment does not always mean that this is the case. The challenge for policy-makers is how to create the framework so that that which is good business—socially valuable, sustainable—is also that which is most profitable, good business always being good business. This brings me back to procurement: getting it right so it can shape that environment and enabling procurement to play a critical role in the economy that we need for the future.
In government, we took steps to improve the way in which services are procured. In 2006, for example, we launched the Supply2.gov portal to make it easier for SMEs to access government contracts. In 2008, we commissioned a report on using public sector procurement to encourage SME growth. In the Pre-Budget Report, we committed to advertise government contracts worth more than £20,000 via a single, free online portal; to introduce measures to reduce bureaucracy and make opportunities more transparent for small businesses; to standardise the qualification criteria and encourage innovation by specifying outcomes rather than prescribing solutions; and to help SMEs get a fair deal when they were subcontractors.
Just before we left office, we set in the 2010 Budget central departmental targets to increase the proportion of central government procurement spend that goes to SMEs by 15 per cent throughout the supply chain. I know that this Government have a deep-rooted aversion to targets, but as we have heard a number of noble Lords say in this debate, it is all very well saying that one is going to encourage SMEs, but the track record to date shows that there is a lot more progress to be made.
This Government have sought to build on that legacy: they want 25 per cent of government contracts to be delivered by SMEs and to eliminate pre-qualification questionnaires for all central government procurements under £100,000. They have sought to introduce a one-stop shop that displays every central government tender opportunity and they want to iron out wasteful practices and unnecessary complexity in procurement processes. These measures are welcome but there have been contradictory signals too. The Government’s own adviser, Sir Philip Green, suggesting ways that government procurement would squeeze out SMEs and delay payments is an example. In recent months we have seen the case of Bombardier, which brought into focus the failure of the Government to recognise the significance of this procurement to our future competitive success, the consequences of which have placed the future of the train manufacturing industry in the UK in jeopardy. We believe it is essential that there is a UK-based train-building industry capable of designing, building and, of course, winning orders for those trains. We are urging the Government to outline the strategy for ensuring that this can happen, including for the new Crossrail rolling stock. We want to see UK rail manufacturing in a position to win these orders, not put at a disadvantage following the Thameslink decision.
This draws me to the fundamental question we need to consider—how we ensure that procurement is an engine for growth and how we improve the processes but, critically, the ambition that procurement can unlock. The Government are unfortunately missing this opportunity in our view. With £240 billion to spend, the Government are by far and away the UK’s biggest single consumer. Procurement can and should be a driver of growth, driving innovation, opening up markets, creating new markets and opening up to new businesses and new ways of doing things. That means putting procurement centre stage. We know that that has not always happened across government, local government and in the public sector. We must ask how we can demand more of procurement. How can this buyer power be leveraged to support the kind of economy we want to see? How can we make every single pound of spending create the most value to our economy and society? I suggest that it can be done in the following ways. We should build broader objectives into public procurement contracts, as we did with the Olympics. Construction contracts included clauses requiring the training of apprentices, creating 350 new apprenticeship places. For the life of me I cannot understand why the Government will not act in this area. There is no legal prohibition against doing that. When we have more than a million unemployed young people, it seems to me that every apprenticeship place that we can create is vital. Haringey is doing this; through its procurement process it has opened up business to SMEs and created new employment opportunities for many long-term unemployed people, while saving £8 million over five years. EU law is often put up as an obstacle to so-called “social clauses”, not least because they can limit competition. However, they do not have to, as the noble Lord, Lord Sugar, and other noble Lords have said. This is an area where we need to explore the full potential and test the boundaries rigorously and robustly. Other countries manage to do it and we have heard references to French and Dutch examples.
We need to create markets for innovative products and services. My noble friend Lord Haskel referred to the importance of innovation in design. When in government, Labour created the Small Business Research Initiative, using procurement to create markets for innovative companies which often lack financial backing during exploratory development phases. However, it remains very small; it is worth between £10 million and £15 million a year. By contrast, the US SBIR programme, on which it is modelled, has now been running for almost 30 years and is worth $2.5 billion a year. Properly scaled, we should probably have a programme worth something like £240 million in the UK.
I have already talked about Bombardier so I will not develop that further. However, I was grateful to my noble friend Lord Davies for giving a more balanced assessment of where we are going on Labour’s defence industrial strategy. I know from my experience of being a member of the Armed Forces’ Pay Review Body for four years that our record in ensuring that the forces had the best possible equipment was well appreciated. Labour's defence industrial strategy, which gave certainty to the UK industry, is being replaced by a commitment to buy off the shelf. There are arguments about whether this really is cheaper given the costs of adaptation. My noble friend Lord Davies demonstrated the importance of having a very strategic analysis in the area of defence.
This has been a very wide-ranging, important and constructive debate. I cannot possibly hope to deal with all the points that were raised. My noble friend Lord Puttnam said that there were ways of driving costs down and value up and mentioned the Promethean experience and the interesting incorporation of Phil Smith of Cisco on to the Technology Strategy Board. I share his optimism on that front. My noble friend Lord Kestenbaum made the important point about the need for government investment in vital areas such as global positioning satellites or the development of the internet protocol. Without those seed-corn investments it is doubtful whether important progress would have been made in those areas.
Lord Young of Norwood Green
I see that time has caught up with me; the noble Baroness does not have to remind me of that. I look forward to the Minister’s response.
Lord Wallace of Saltaire
My Lords, this debate has ranged widely. I thank the noble Lord, Lord Sugar, for drawing the House’s attention to such an important issue. Procurement is central to the Government’s programme for reform and efficiency in public services and, as the Autumn Statement will make clear, to the growth agenda. I thank all noble Lords who have spoken in the debate and will do my best to address many of the points that have been raised.
In October 2010, in a debate on Sir Philip Green’s report, the noble Lord, Lord Sugar, argued that,
“it is time to centralise buying and to bring in some kind of head honcho from the private sector who knows what they are doing and pay them the right amount of money, which they would be paid in a large organisation”.—[Official Report, 14/10/10; col. 593.]
Our head honcho—the government chief procurement officer, as we prefer to call him—is John Collington. John is a highly respected procurement professional who joined the Civil Service five years ago after having spent 25 years in the private sector in a number of senior commercial and supply chain roles, operating on a global basis. He is well paid. He is not paid on the scale of the CEO of one of our major banks, but then the Government are not entirely happy with the scale on which our major banks are paying their current CEOs.
Since then the Government have embarked on a new procurement strategy to reform the way in which they buy those goods and services which they need to fulfil their responsibilities. The strategy focuses on having a centralised approach to the purchasing of common goods and services, appointing Crown representatives—of which there are now nine—to work with the Government’s largest suppliers, removing the red tape that stops SMEs competing for government contracts, improving our procurement technology and, above all, investing in our staff to improve our procurement capability. The noble Lord, Lord Kestenbaum, called for a procurement revolution. This is under way.
The scale of government procurement should be set out. Central government procures some £62 billion of supplies a year. The wider public sector, including local government, procures some £168 billion and the total public sector procurement, including that of arm’s-length bodies, is some £230 billion. Some of that is accounted for by commodities and some by services. Then there are the major long-term contracts for infrastructure construction, manufactured systems and trains, armoured vehicles and aircraft carriers. These do not, of course, require entirely the same approach. There are unavoidable tensions between central control and local diversity and—as the noble Lord, Lord Anderson, pointed out—between the squeeze on costs and the political requirement to achieve regional balance where that is possible. I should say that the Olympic Delivery Authority has done extremely well in delivering on time and within cost. I regret that the regional balance has not been as good as it should be but on other criteria it has been a remarkable success.
Much of the criticism in this debate has been about the practice of the previous Government regarding, for example, the ETS and the other enormous IT contracts, and the vast expenditure on consultants. The Government are setting out to be a lean Government in procurement. If I may say so, it is a lean Government in every single aspect through and through. As noble Lords will know, the Government Car Service has been considerably pruned. Ministers are now walking twice as much. I have not yet assessed how much weight they have lost but we are a leaner Government, I think, than our predecessor was in that respect.
Eighteen months ago the Government promised to drive out inefficiency and unjustifiable costs from all parts of central government, including procurement. As part of that drive, in just 10 months we have saved £3 billion from reduced discretionary spend and smarter procurement that has allowed departments to protect essential front-line services and jobs. This has included more than £870 million saved by cutting departmental spend on consultants; nearly £500 million saved by reducing spend on temporary agency staff; some £400 million saved by taking stronger control of our marketing spend; some £360 million saved by centralising spend on common goods and services; and £800 million saved from renegotiating deals with some of the largest suppliers to government. Last March, for example, we announced that nine different commodities would be jointly purchased by October: energy, office supplies, professional services, travel, fleet, telecoms, IT commodities, print, and advertising in the media. I am very happy, as a Yorkshire resident, to say that the domestic travel component was awarded to a small enterprise based in Bradford—so it is not merely a matter of large suppliers. A month later John Collington announced that, over the next four years, this new procurement model is estimated to cut 25 per cent from the £13 billion spend on common goods and services in central government.
This is a very good start, but we also need to do away with the unnecessary bureaucracy that adds wasteful time and costs to the procurement process. Following a lean review of the procurement process, we are adopting a new approach to sourcing that focuses on those practices that add value to the way that government procures goods and services.
Another major step forward has been the transformation of the Buying Solutions trading fund into the Government Procurement Service. This organisation is now established as the delivery arm of the centralised procurement strategy, delivering expert sourcing and category management for common goods and services. It is focused on delivering savings to the taxpayer and increasing the proportion of spend that is centralised. For major projects we have established the Major Projects Authority, which, with the pre-existing Major Projects Review Board, takes particular account of defence procurement, major infrastructure procurement and IT.
The noble Lord, Lord Davies of Stamford, made a characteristically robust speech. I look forward now to his speeches in the way that I used to look forward to those of the noble Lord, Lord Gilbert, who would always robustly tell us how well defence procurement had taken place while he was a Minister and how appallingly it had deteriorated since he left. The only problem, I say to the noble Lord, Lord Davies of Stamford, is that he left the MoD 10 years after the noble Lord, Lord Gilbert. Perhaps he should consult the noble Lord, Lord Gilbert, on how they could better reconcile their narrative next time round.
Over the past six months the Government Procurement Service has already made significant progress. It has developed centralised strategies for energy, office solutions, professional services covering consultancy, contingent labour, legal services, and so on. It has driven much-improved data and significantly increased the transparency of operations and performance through a procurement executive board. It has moved central government customers on to the first centrally let commercial arrangement—the government office supplies contract. The Government Procurement Service has established a process for using surplus income to fund Government Procurement Service and government procurement improvements, with four key investments made to date. The procurement service has managed procurements, extensions and renegotiations of contracts worth approximately £3.6 billion in annual value.
We are conscious that Britain does not compare well with Germany, France and the Netherlands in the relationship with suppliers. Perhaps I may quote the speech made by my colleague Francis Maude on Monday. He said that,
“the British public sector has taken a speed dating approach”
compared with those countries’ mutually beneficial long-term relationships. We are aware of that and looking at it, and we very much hope to improve the relationship. I say to the noble Lords, Lord Broers and Lord Hunt of Chesterton, that we are also well aware of the role that this long-term relationship can play in encouraging innovation and, in particular, new innovative companies.
The noble Lord, Lord Sugar, made a number of remarks about not sending contracts to foreign companies that pay little tax in this country. I say to him that it is not only foreign companies that, in some cases, do not pay very much tax in this country; some of our major domestic media companies do not either. One has to remember that Siemens employs a large number of people in manufacturing plants in this country, and therefore the question of what is and what is not a British company has become a little more complicated. We are also well aware of the French, German, Dutch and other examples. What the noble Lord, Lord Puttnam, called the procurement game is, therefore, something that we intend to learn.
Moreover, we are working not just with the biggest companies. In February this year, the Prime Minister outlined measures to open up the way that government does business in order to ensure that small and medium companies, charities and voluntary organisations are in the best possible position to bid for contracts. Since February we have delivered the following building blocks aimed at supporting SMEs. We have eliminated the use of pre-qualification questionnaires in 15 departments for procurements below the EU threshold of approximately £100,000. Evidence suggested that the length of those pre-qualification questionnaires was one of the biggest inhibitions to small companies in applying for government contracts. The two departments still using pre-qualification questionnaires are doing so only for security reasons. We are also now publishing all central government tenders and contracts through the Contracts Finder website. More than 2,000 tenders have been published, of which 50 per cent were flagged as suitable for SMEs, and more than 30 per cent of contracts listed were flagged as awarded to SMEs. We are also piloting a new e-sourcing solution, the Dynamic Marketplace. Nine departments have signed up and more than 500 suppliers have registered, providing themselves with free and easy access to opportunities below the EU threshold. We have even introduced a “mystery shopper” scheme to allow suppliers to report bad procurement practice by government purchasers. More than 100 cases so far have been received and dealt with under the scheme.
I say to the noble Lord, Lord Sugar, that there is no 25 per cent rule regarding the turnover of SMEs in bidding for public procurement contracts. Consideration is given purely to the financial viability of SMEs bidding for contracts, and we are aware of the need to encourage SMEs in all ways. In July 2011 we published the first SME progress report and departmental action plans outlining how departments are supporting SMEs. We ran an Innovation Launch Pad, which received 351 proposals from SMEs. Two of the best companies have since won new business with government, and we hope that others will do so as well. To help with suppliers’ cash flow—a point raised by the noble Lord, Lord O’Neill—the Government aim to pay 80 percent of undisputed invoices within five days. That is not on the same model as supermarkets. In all new contracts we require main contractors to pay their subcontractors —which are more often SMEs—promptly.
We have also taken steps to raise the competency and professionalism of public sector procurement staff. We are building a training programme that will increase the skills of the Government’s key procurement professionals in line with the use of lean techniques. This will become a prerequisite for procurers who lead on major procurements for government. We have also implemented a two-way commercial interchange pilot programme with industry to bring private sector expertise into government and interchange with our procurers who will benefit from experience of private sector best practices.
I therefore respectfully suggest that in the 13 months since the debate on the Green report, this Government have done far more to transform public procurement than the previous Administration managed to do in 13 years. However, we are not resting on our laurels. We recognise that there is still more to be done, and we have a clear programme to do it.
I turn to the question of EU rules, which clearly need to be substantially reformed. We welcome the European Commission’s intent to publish proposals to simplify the procurement directives by early 2012, and in our response to the Commission’s Green Paper on the modernisation of EU public procurement policy we have called for significant simplification to free up public procurement markets and enable a light-touch, modern regulatory framework. We have been in active dialogue with the Commission on these proposals. This is a once-in-a-decade opportunity to simplify the procedures, cut red tape, embed transparency, and increase cross-border competition to the benefit of citizens, business and public authorities across the European Union. As a priority, we must ensure that these reforms catalyse and drive growth.
Alongside this work, in July the Government stated that we would consider whether the UK was best applying the EU procurement rules and managing our procurements in order to meet our strategic needs, cost effectively, in the long term. We will be publishing more details as part of the growth review on 29 November.
Three days ago, at the Cabinet Office conference on 21 November, my honourable friend the Minister for the Cabinet Office unveiled a radical package of measures that will change how our Government buy from the private sector in a way that supports business and promotes growth. The Government will provide an open door for current and future suppliers to discuss forthcoming procurement opportunities, cutting the time taken in the procurement process. We will work with industry to identify and address any key capabilities needed to meet future demand. We have published a pipeline of £50 billion of potential business opportunities across government, giving an unprecedented view into the Government’s expected future requirements and helping business to build the confidence to invest long term in plant, machinery and people.
We aim to make it 40 per cent faster to do business with government—another issue which matters enormously to smaller companies. All but the most complex procurement processes will be completed within 120 working days from January, compared with the average of 200 days now. By engaging earlier and more openly with business and the wider supply chain, government will be able to reduce the time taken during the procurement process and provide the greater certainty and visibility of this forward pipeline to unlock investment. We will require all civil servants responsible for running major procurements to be trained in the Government’s new approach.
The noble Lord, Lord St John, talked about the advantages of payment by results and procuring for outcomes. As he will know, a number of experiments on this are going on in different sectors. It is something that we are well aware of. We intend to experiment with it further and we hope to benefit from it more in the future. As Francis Maude said on Monday, we will follow the example of our EU neighbours and, indeed, of best practice in the private sector by making it easier for our suppliers to do business with us.
The Government Procurement Service, now based within the Efficiency and Reform Group in the Cabinet Office, will continue to implement the category strategies and deliver centralised contracts in the core category areas. Only last week, we awarded the central government travel management services contract—that is, the domestic and international contract—which is projected to save the Government some £20 million, equating to a saving of approximately 30 per cent against the existing arrangement. I shall not mention which airline I flew with the last time I went on government business, but that is part of the saving.
The Government are committed to continuing the work that we have started, to promoting growth, to increasing savings and reducing bureaucracy, to making public procurement a slick and efficient process, and to making government a reasonable and straightforward customer for businesses to work with.
Lord Young of Norwood Green
The one question that the noble Lord has not addressed on which I should welcome some comment is why in public procurement contracts we do not stipulate, as the previous Government did, that it is a perfectly reasonable quid pro quo to indicate how many apprentices there are and what training they will be undertaking. I thought it disgraceful when I discovered a very large government contract with a company that did not have a single apprentice on its books. I would welcome the Minister’s response to that.
Lord Wallace of Saltaire
As the noble Lord will know, the number of apprentices has increased considerably in the past year, and this is something to which we are paying a great deal of attention. However, on his specific question, I shall investigate and write to him.
Lord Sugar
My Lords, I thank the noble Lords who have contributed to this debate, many of whom have endorsed some of my sentiments. The Minister is right in pointing out that the head honcho to whom I referred is John Collington. I referred to having met somebody in the past whose thoughts and plans I found quite interesting. When I mentioned recruiting someone from industry, I was thinking more of the former CEO of Tesco rather than someone who had worked for the Football Association, which is where Mr Collington came from.
The noble Lord, Lord Lee, made the very good point that some external commercial people run rings around those who are in charge of procurement in government departments. My noble friend Lord Puttnam referred to waste in procurement with items that never get used, and the noble Lord, Lord Sutherland, made an excellent point in concluding that the culprits were amateurs in the procurement department.
I hope that all the comments from noble Lords have not fallen on deaf ears. Once again, I thank everyone for participating.
Baroness Garden of Frognal
My Lords, I remind noble Lords that the next debate is timed. Back-Benchers have seven minutes, so when the Clock shows seven, their time will be up.