Government Contracts

Tuesday 3rd December 2013 Westminster Hall

[Mr Gary Streeter (in the Chair)]

We now move on to our next debate. Our participants are here, so anyone wanting a second go on the previous debate will not get it. It is an important debate on managing Government contracts—I shall speak slowly so that the Minister has a chance to get to his position. It is a delight to call Meg Hillier.

15:54

[Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)]

As ever, it is a pleasure to serve under your chairmanship, Mr Streeter. Before I start, I need to declare an interest: my husband is a non-executive director of a social enterprise that runs some Government contracts. However, the focus of my concern is small and medium-sized enterprises, and I am delighted to have secured this debate on their behalf.

My interest in the issue stems from my work as a member of the Public Accounts Committee and from my many conversations with businesses in my constituency and elsewhere. The Minister will be aware of the Committee’s work and particularly our hearings on 20 and 25 November. I do not intend to cover the same ground in this debate, as he will have the pleasure of reading the Committee’s report shortly.

I want to focus mostly on how Government contracts work for small and medium-sized businesses. As our hearings demonstrated, there are a few large companies that have a grip on the delivery of public sector contracts. Whether they run prisons, maintenance, security or hospital services, relatively few prime contractors are in the market for business that both recent Governments have embraced, worth billions of pounds a year. Government talk the talk about supporting small businesses, but unless they are willing to lead from the front, the promises, frankly, ring hollow.

As the MP for Shoreditch—often called “tech city”—I do not need to be convinced that small and medium-sized enterprises are the engine room of UK plc’s future growth. It is not only me who is saying that; the Chancellor of the Exchequer declared that tech city

“will be the technology centre of Europe”.

There is no shortage of private investors either who are prepared to bet their money on these businesses.

However, those innovative businesses face different hurdles when it comes to Government contracts. The hurdles set by civil servants, most of whom, as I am sure the Minister will acknowledge, have never run a business, big or small—that is not intended as a criticism; it is just a fact—are so cumbersome that most small businesses cannot comply with them. The automatic setting in Government is to be as risk averse as possible, and that sets in train in contracting a vicious and uncompetitive circle that is well-nigh impossible for new businesses to break into. Of course, I share a desire, as I am sure the Government do, to make sure that the taxpayer is not taking on undue risk, but balance is needed.

Some of the innovative tech businesses in Shoreditch, such as the recent arrival, Affinitext, which is offering transformational software for smart document reading, can offer solutions that will save the taxpayer money. Many work in ways that the Government could learn from, but businesses that do not meet the Government’s pre-determined model of contracting are shut out.

There are spin-off benefits, too, for the wider economy that the Government should be aware of. Research shows that every £1 of business with an SME generates 63p to the local economy, whereas with large businesses—those employing more than 250 people—only 40p is generated in the local economy. Both are worth aiming for, but for a Government who say they support business, the question is whether they only support big business.

We need to see a step change in how Government work with smaller businesses. Specifically, we need shorter procurement processes—again, that is the risk aversion coming in to play—and a serious step change in how contracts are drawn up. When a contract includes 150 key performance indicators, as we heard at the PAC the other week, it suggests a serious lack of critical focus. There also needs to be a sensible approach to how Government Departments and businesses can meet outside formal contract negotiations and learn what each has to offer. I think the Minister would have some very exciting meetings in Shoreditch if he were able to visit.

I will highlight one example. Tribesports, which is a Shoreditch-based business—based in the Cremer business centre, just off Kingsland road—provides a social platform for sports enthusiasts. Priya Shah, who is responsible for business development, told me that trying to get through to health providers to suggest alternatives to paper leaflets as a way of spreading health messages, in a world of smart phones, was challenging. She said that it was

“impossible to get through to the right contact at the NHS. This”—

she was referring to providing health advice—

“requires a modern approach, with everyone spending more and more time on computers and phones, not reading leaflets.”

She is only one example.

Overall, contract management has become unnecessarily complicated. The advent of G-Cloud is a help—I was pleased to welcome an official from G-Cloud to Shoreditch not that long ago—although local businesses in Shoreditch tell me that it is still cumbersome. For many—this is about the language sometimes spoken between Government and businesses—the very word “Government” in front of a contract suggests a minefield that is hard to navigate compared with other sectors, and indeed, other countries with which they do business. That is the challenge. Sometimes, it is just a different language that is being spoken, but the Cabinet Office and the Minister are now supposed to be capturing and sharing knowledge and best practice within projects, across projects in a Department and across Departments.

The Minister has a difficult task. Whitehall is strewn with the failed legacies of Cabinet Office Ministers who have promised various versions of joined-up government or Prime Minister enforcer roles—call them what you will—but who have not been there long enough to see off the interests of the large Whitehall spending Departments. I am pleased that the Minister for the Cabinet Office and Paymaster General has been in post for a long time. That is an improvement. However, we know that, in Whitehall and Cabinet, the bigger the budget of the Department, the more clout the Department has. Initiatives such as the commissioning academy and the Major Projects Authority are welcome, but improving contract management and procurement skills just is not enough. Too often we hear of hurdles set by risk-averse civil servants. What about better use of technological solutions to monitor compliance?

Just one example of how the Government could learn from the private sector—another one—is suggested by Affinitext, which I have mentioned. Graham Thomson, managing director of Affinitext, says:

“Electronic, tablet friendly versions of contracts should incorporate an agreed rights and obligations matrix, so as to ensure that each party performs their obligations in accordance with the contract, using ‘Just-in-Time’ task reminders.”

That is pretty simple stuff in their world, but Whitehall does not yet seem ready to embrace it.

The Public Accounts Committee got a thumbs-up from the big private sector companies when we called for more transparency, which is another issue for some of these smaller companies. In Shoreditch, that is the way business is done. It seems that in many respects Whitehall and Ministers are nervous about losing control of “the message” by encouraging that. I speak as a former Minister with some knowledge of the pressure on Ministers. However, as Graham Thomson says,

“‘Commercial sensitivity’ issues, if raised in that regard, are definitely more Civil Servant driven than private sector driven. In any event, they are manageable.”

All the businesses that we have spoken to on the PAC and that I have spoken to in Shoreditch are far less concerned about commercial sensitivity than Government are.

I have some specific questions for the Minister. The first is about the length of procurement processes. Why are Government procurement processes so long compared with those of other countries? One supplier—I would happily talk to the Minister privately about this individual, although I do not think that it is appropriate to name them in this debate—tells me that in the US, Canada, Sweden and New Zealand, procurement of the same product has typically taken seven to 12 weeks compared with two and a half years for a Ministry of Justice contract that is still not concluded. Many other people have highlighted long, drawn-out or delayed contracts as a major risk.

What is being done to improve how contracts are drawn up? Many small businesses, including Fixflo, which has an online platform for housing maintenance, and another company, which won a Government health contract, have highlighted the complexity of contracts and the frequent changes by commissioners as off-putting.

Why are Government still demanding that intellectual property be handed over to Government? Does the Cabinet Office have any guidance for Departments about that? Has it seriously addressed the issue? It can be a deal-breaker for emerging tech businesses, whose capital is often their IP.

What are the Government doing to break down Government contracts into smaller contracts? I know that there are some attempts to do that, but as one company said,

“Instead of tending towards single suppliers of IT services, an integrated solution which incorporates smaller companies would help to support the IT sector and innovation. Encouragement should be achieved through a credit in the tender scoring process.”

I hope that the Minister will consider that suggestion.

[Mr Iain McKenzie (Inverclyde) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Streeter. I congratulate my hon. Friend on securing this important debate. She touches on a number of issues. The one that I will ask her to comment on is not contract management, but contract monitoring. Does she believe that frequent contract monitoring is necessary to prove, first and foremost, best value for the Government?

[Meg Hillier]

My hon. Friend raises an important point. Contract monitoring is often more of a box-ticking exercise. When there are 150 key performance indicators, it is difficult to know whether someone is watching the overall performance of the contract, and sometimes the contracts are drawn up in such a complicated way that it is very difficult to shift meaningfully. In the building world, for example, there are attempts by housing associations and contractors to partner, so that they work together to acknowledge where there might need to be a change for more improvement. I hope that the Minister would acknowledge that there needs to be great improvement. The Major Projects Authority is doing some good work in that area, but it deals with the major projects. Many Government contracts are much smaller than that, which is one of the big challenges. Building a warship is one thing; letting a small IT contract is another.

Crucially, all of this—what my hon. Friend talked about and what I have talked about—cannot just be left to Departments. We know that procurement managers come in various forms. Some are not very expert. I remember as a Minister saying to one official who had led two projects that came in ahead of time and under budget and that delivered very successfully, “What’s your next one?” The reply was, “Well, I have to move in order to get my next promotion.” I know that there have been some attempts to put project managers in place in Departments, but I would be interested to hear whether the Minister has an update on that.

Procurement managers can often prefer the simplicity of a single supplier, as it can be more complicated to manage several contracts. The Cabinet Office recently—yesterday, I think—advertised its event management contract, welcoming multiple small bidders. I hope that that will be better than other Government bids and that the Cabinet Office will live up to its promise. I am quoting from the Minister’s own website, which says:

“We are committed to ensuring that small organisations and businesses can compete fairly with bigger companies for our contracts.”

I see him nodding. I hope that businesses in Shoreditch take that seriously and that he delivers.

When contracts are broken up, smaller IT companies are often required to partner with bigger players to meet the risk threshold. That can be a big issue for a supplier’s IP and it adds complexity. For businesses in Shoreditch and particularly the tech businesses, it is a deal-breaker.

I want to raise one specific issue in relation to local government procurement; I am not sure how this applies to national Government. Now that councils often join forces to procure for longer contracts—perhaps across more than one local authority area—those now count as large contracts, and it is often the case that small businesses do not meet the requirement that the value of the contract be not more than 25% of their annual income. That is an example of a hidden barrier that could be avoided if the threshold were for the annual value of the contract, rather than the whole contract over the longer period. I am not sure whether the Cabinet Office is aware of that. I hope that the Minister is. Does it apply to central Government too, and can the Cabinet Office do anything to tackle it?

It is fair to say that there has been some progress by both recent Governments in paying contractors much faster, but late payment can be a big issue for smaller companies if they are a subcontractor down the line. Has the Minister any plans to make it mandatory for large contractors to pay their subcontractors within 30 days of receipt of payment from Government? If the Government are paying on time, there should be no excuse for that payment not being sent down the line to the smaller contractors on time as well. I hope that the Minister can answer that point.

During the Olympics, there were some very interesting issues going on with contracts from the public sector. There were scams whereby bidders included local businesses in a bid and then stood them down once they had won. I do not know whether the Government are aware of that and what they are planning to do to ensure that it does not happen in future. It had a big impact on local supply chains and, crucially, on small and medium-sized businesses’ confidence. There is such cynicism out there. If the Minister were able to come to Shoreditch, he would hear this. There is a desire to take these contracts on. People realise the prize that they bring, but there is cynicism about whether they will ever have the chance to compete on a level playing field.

That happened during the Olympics. We picked up on it too late, because clearly there was a very tight deadline for delivery of the Olympics, but I believe that contracts need to be better audited after they are awarded. We must ensure that promises of local employment and contracting with certain subcontractors and promises on pay rates, training provision and so on are delivered on. Only a post-audit will deliver that.

I have touched on financial hurdles, but there are others that I have heard about repeatedly from solvent and successful businesses. When smaller businesses join forces to bid for a contract—often in a creative partnership and sometimes delivering very good solutions or potentially doing so—they require three years of audited accounts, which they cannot provide because they have never worked together before. Even when they are able to get around that by providing projected accounts, they need to spend up to £6,000 on accountancy fees to do that. It is right that due diligence takes place, but could that hurdle be introduced later in the bidding, when a consortium knows that it is in the running? The up-front costs can easily put off SMEs, whereas big companies can afford them much more easily.

One company, which had won a health contract, told me:

“Financial guarantees were required which were impossible for SMEs to reach. For one application we were required to put up a bond of £10m which removed small companies immediately from competition, as for a company with a £3m market cap nobody will be willing to put up the risk for such a bond. This means that small companies are effectively denied the chance of competing in the bid, and stops them…making the jump from small to medium sized companies.”

[Mr McKenzie]

I thank my hon. Friend for giving way once more and for making very powerful points on the procurement aspect. Has she, like me, experienced the reluctance of small and medium-sized businesses in relation to eProcurement—their fear of using that tool to submit tenders online?

[Meg Hillier]

Earlier, I mentioned G-Cloud. That is an important innovation, but there needs to be greater confidence building and greater awareness.

I am not sure whether the Minister has come across this, but there were times when I was a Minister when I would ask whether anyone had spoken to someone and I would gather that there had been a big consultation, but later on, when I met some of the people who had been at that, whether from the business sector or elsewhere—I dealt with procurement in the Home Office for three years—I discovered that being in a meeting was all that happened. Someone sat in a meeting; they did not actually engage. I think there needs to be really good, positive engagement with businesses, which are keen and willing and have a lot to offer.

I extend an invitation to the Minister or his senior officials to come to meet Shoreditch businesses and hear from them directly about the barriers that they face. If he does so, he will also learn about a number of innovative, user-friendly and cost-effective ways for the Government to deliver smarter services. I hope that he will take that opportunity and spend a thrilling morning meeting some of the best brains in the country.

We know that civil servants’ careers are not enhanced by taking risks, so the safe, risk-averse approach is well embedded in Whitehall. The Cabinet Office is charged with changing that landscape and opening up Government to the small business sector. It is certainly talking the talk, but whether the large-spending Departments will deliver is another matter. I look forward very much to the Minister’s response. Shoreditch is listening, and I will be holding him to his words and his Government’s promise of more business for the small business.

16:10

[The Minister of State, Cabinet Office (Mr Nick Hurd)]

It is a great pleasure to serve under your chairmanship, Mr Streeter—I think for the first time—and to respond to an important debate. I congratulate the hon. Member for Hackney South and Shoreditch (Meg Hillier) on securing the debate, and on presenting it in such a clear and compelling way, rooted in her experience as a former Minister responsible for procurement in the Home Office and a member of the Public Accounts Committee. I am reassured by her telling me that my reading of the upcoming report will be a pleasure. That will be a first, and I await it with bated breath.

The issue that the hon. Lady has raised is enormously important, and I want to persuade her that the Government, and the Cabinet Office in particular, are absolutely committed to trying to open up more space for small and medium-sized enterprises to come in and offer the value and the innovation that she has talked about. I do not want to appear at all complacent, because although we think we have made some good progress, we know that we are nowhere near where we want to be, considering the scale of the opportunity.

The matter is extremely important, not least given the state of the public finances and the situation that we inherited. It is important to recognise where we started. As I think the hon. Lady recognised, what we might call the outsourced public service market was entirely dominated by large private sector organisations, and small companies had little room to come in and improve the situation. I recognise a lot of her analysis about how off-putting and complex the whole concept of bidding for Government contracts is for those running a small business, which I have done myself. It is hard enough work as it is without having to wander through a swamp of bureaucracy and difficulties.

We inherited that situation, which was compounded by the fact that Government did not know how much they spent with major suppliers. I am glad that the hon. Lady referred to the fact that the Minister for the Cabinet Office and Paymaster General has been in post since the start of the process, because that has made a great deal of difference. We are trying to drive a culture change across the system, and he has been extraordinarily persistent in trying to achieve that. The results of the work of the Efficiency and Reform Group, which we created, have been dramatic. We saved the taxpayer £10 billion last year alone compared with 2010, of which £3.8 billion came from commercial areas and £800 million from better engaging with strategic suppliers. There was no rocket science involved; the Government simply woke up to the fact that we sit on top of a powerful buying machine, which makes it possible to secure much better terms. We can leverage our scale to get better value and resolve performance disputes more quickly.

[Mr McKenzie]

The Minister speaks of the culture change that he is trying to establish. Will he comment on the McClelland report and how it has been embraced by other parts of the country?

[Mr Hurd]

We are trying to embrace a culture change. There was a culture of buying big and buying badly in a very risk-averse way, and we are trying to improve that—to touch on a point alluded to by the hon. Member for Hackney South and Shoreditch—not least by instilling much greater commercial capability and confidence in the system. A saving of £10 billion in one year is an important improvement, which is equivalent to about £600 per UK household. That is real money, which has real-world impact. Within that, we have been working hard to improve the procurement processes that the hon. Lady quite rightly criticised. We need to make it easier and cheaper for firms, particularly smaller ones, to bid for work.

In the context of my main responsibilities as Minister for Civil Society, I might add that we are particularly keen that charities and social enterprises feel they have more space and a level playing field on which to compete. The hon. Lady mentioned the length of procurement times, and we have cut the length of the average procurement by 40%, which makes the UK faster, we think, than any of our European neighbours. I am always delighted to hear about specific cases where the procurement process has been too long and too clunky, but we have taken a big step in the right direction.

Part of the process is improving our commercial capability and confidence at the heart of the civil service, so 1,800 officials have already been trained in procurement and 150 leaders have been through the Major Projects Leadership Academy in Oxford. We need to go much further, as I have said, and get smarter at managing performance. For the first time, the Government have allowed past performance to be taken into account when bids for new work are evaluated. It is astonishing that that has not happened before. Suppliers can now be rated high risk when there are material performance concerns, and we have introduced a new approach for managing gross misconduct. Our long-term goal remains the creation of a vibrant, competitive marketplace. Where bad practice is uncovered, we will crack down on it robustly. We intend to continue to build on the progress of the past three years, focusing on commercial capability and promoting transparency.

I turn to the meat of the hon. Lady’s contribution on behalf of businesses in her constituency. We are absolutely determined to wrestle with some of the challenges, problems and barriers to which she alluded, to make it easier for small businesses to come in, compete and give those spending taxpayers’ money more choice and more access to the innovation that we desperately need. She talked about procurement time, and, as I have said, we have reduced the average turnaround time from advert to contract award by more than 40% to 100 working days. That is better than France and better than Germany. Within that, small procurements can be much quicker, and we are keen to continue to improve. Some progress has, therefore, been made in that area.

The hon. Lady talked about contract complexity, which I definitely recognise as a problem; the contract with some 150 key performance indicators that she mentioned is simply extraordinary. Our next step to try to simplify the system and introduce more consistency is to release a model contract for services, which sets out best-practice contracting approaches and includes a streamlined performance management regime.

The hon. Lady asked about intellectual property, which is of particular interest to technology companies in her constituency, and whether the Government still demanded that intellectual property be handed over to them. Our approach is to make that decision on a case-by-case basis. In the new model service contract, ownership of previously existing intellectual property rights will stay with the author. If the Government pay for new IPR to be created, however, in some circumstances it will be appropriate to retain ownership.

[Meg Hillier]

I am heartened by what the Minister has said. It would be helpful if people knew the position at the beginning of the process, because such hurdles are often added during the bid, which sends a very negative message around the small business community.

[Mr Hurd]

I take that point on board, and I give the hon. Lady an undertaking to feed it into the system as we look at the model contract and the best-practice contracting approaches. She spoke passionately about the need to open up more opportunities for SMEs, and I assure her that we are committed to doing so. She challenged me to get beyond mere words, and those are not just words; we can now talk about numbers. Since 2010, overall spend from Government with SMEs has increased by £1.5 billion, which is serious money. We are not concerned simply about the relentless pursuit of value for money for the taxpayer. Given the recent economic circumstances and the search for growth, it is in the interests of the taxpayer and the country that we support growth where it can be generated. As we all know, SMEs are the engine of growth in the economy, so the agenda is extremely important. As she knows, the Government set out an aspiration that 25% of Government spending should go to SMEs. Although the data are not perfect—I would not claim they were—we think about 19% of Government spending is directly and indirectly with SMEs. That is progress.

The hon. Lady talked about IT in particular. I know she has a specific constituency interest there. We are keen to break down Government contracts in IT into smaller sizes, which is essential if we are to capture the value that the SME community can bring. The massive differences in prices between the old suppliers producing old technology the old way and what can be done now through new technology are absolutely extraordinary. We are determined to break such contracts open. New presumptions are set against information and communications technology contracts worth more than £100 million and we have published an ICT strategy that explicitly supports smaller, more disaggregated approaches. We have also launched CloudStore. Some 58% of the first £54.5 million spent on CloudStore went to SMEs, which benefited from 66% of sales by number. Interestingly, the Foreign Office is a good example of success; rather than have a single ICT provider, it has split a single contract into three. G-Cloud has around 1,000 SMEs on it, which have won 66% of contract awards by number. We have also just announced the digital services framework, where SMEs constitute 84% of suppliers. I hope I can assure her that, in that space, there are not just words, but genuine achievements to point to in creating the frameworks and space for SMEs to come in and supply us with innovation and the potential to add huge amounts of value to the Government ICT spend.

The hon. Lady mentioned bad practice and sham practices in local government. The reach of central Government and the Cabinet Office in limiting local government has limits. We have, however, consulted on Lord Young’s recommendations on how we can extend some of what we have learnt in central Government and make it available for local authorities, so they can improve their procurement practice and, in particular, make it easier for SMEs to participate. We shall relentlessly bear down on the need for pre-qualification questionnaires below a certain threshold of contract. Contracts Finder has been enormously popular. It contains all opportunities worth more than £10,000. More that 19,000 contracts have been published online and 31% of contract awards have gone to SMEs. For the first time, we have published a contracts pipeline, with £169 billion-worth of contract opportunities.

We have set up a mystery shopper scheme to address bad practice and the need to blow a whistle on bad processes or notify us when things are not being done in the right way. The scheme allows suppliers to report poor procurement practice across the public sector. So far, more than 550 cases have been received, of which more than 100 have been successfully resolved in local government.

Payment terms are enormously important, because cash flow is everything when running a small business. The hon. Lady rightly asked about payment terms and whether the Cabinet Office plans to make it mandatory for large contractors to pay their subcontractors within 30 days of receipt for payment. Yes, is the answer. The Government pay all undisputed invoices within five days. We have mandated prime contractors to pay subcontractors within 30 days, through the inclusion of a contract condition in the contracts we write. The new model contract I mentioned will reinforce that, because it is enormously important. We recently consulted on Lord Young’s recommendation that those contract conditions be adopted across the whole of the public sector. There is a tremendous amount of ambition.

The hon. Lady talked about the need for post-contract audits and the need to improve the way we monitor performance. I and the Government acknowledge that. We want to do more post-contract audit, to focus on how the contract is performing, supported by much greater focus on building commercial capability and contract management in Whitehall. Too much of the capability, resource, process and thinking has been directed at the procurement process, and not at the broader commissioning process and the need to monitor and work with the supply chain after the contract is awarded, to ensure that what we bought is being delivered in the right ways.

The hon. Lady mentioned some barriers that her constituents and others face. She said that, where businesses join forces to bid for a contract, they are required to have three years of audited accounts, which they cannot provide. We are keen to remove as many barriers as possible, so that situation is suboptimal. That is why the Cabinet Office advises procurers not to request three years of audited accounts. We would be keen to review specific cases where such behaviour has occurred. The mystery shopper service is an opportunity for people, and small businesses in particular, to tell us the reality on the ground.

With that broad sweep, I hope that I have convinced the hon. Lady that our commitment to improve goes beyond words. She knows from her time in government and from the evidence she received on the Committee that such work is difficult. It is gritty. We are changing culture. We have to bring in new expertise and capability. We have to challenge the system that was frankly not very efficient at managing and spending public money. For reasons she will recognise, we are determined to secure much better value for the taxpayer, and that includes making it easier for SMEs in her constituency and others to come in and help us with the innovation, value for money and fresh approaches we desperately need.

[Meg Hillier]

I extended an invitation to the Minister, or his officials, to come to Shoreditch. I would be happy to host them on a useful working visit, if he is interested.

[Mr Hurd]

That is a delightful invitation. I can tell the hon. Lady on behalf of the Cabinet Office that we would be happy to accept.