Government Procurement Policy

Lord Bhattacharyya Excerpts

Thursday 24th November 2011 Lords Chamber

[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.

India

Lord Bhattacharyya Excerpts

Tuesday 18th October 2011 Lords Chamber

[Lord Bhattacharyya]

My Lords, I thank my noble friend Lord Parekh for securing this debate, and I declare my interest as chairman of Warwick Manufacturing Group at the University of Warwick.

In this debate, it is worth recalling the long history of Indian innovation. Some noble Lords may have visited the Qutb Minar in Delhi and seen the Iron Pillar which stands there unrusted since its forging a millennium and a half ago. For an engineer, the knowledge that Indian metallurgists were able to produce rust-proof iron is an inspiration still worth studying today. If the West had had such technology then, the history of the world might have been quite different. This reminds me of an important truth: only innovation and partnership can drive global progress.

As time is short, I shall focus on the economic aspects of the relationship between India and the UK. Britain used to have a dominant position in Indian trade, but we now account for less than 1.5 per cent of Indian imports. India’s desire for economic independence and Britain’s post-war atrophy both contributed to decades of decline in our partnership. India was not an easy place to do business—but while Japan helped build the Maruti and more, Britain still stood for the Morris Ambassador.

Since the early 1990s, when the then Foreign Secretary liberalised India’s economy from the finance ministry, India has enjoyed huge growth, topping 8 per cent a year. Indian GDP has more than trebled in that time and per capita GDP has grown by over a thousand dollars. So it is no surprise that everyone is trying to woo India. This weekend I was in Mumbai, as I am once or twice a month, and the number of businesses and delegations there to drum up trade is astonishing.

The noble Lord, Lord Heseltine, anticipated this growth in 1993, setting up the Indo British Partnership. He was the first to consider India as equal, with the equally charismatic Richard Needham as Minister of State, with whom I had the pleasure of serving as a founding board member. The Indo British Partnership was a business-led initiative. Our partners were not the Government but the Confederation of Indian Industry. This gave British business a real profile for the first time, and our exports to India surged by 10 per cent a year in the 1990s, increasing to 14 per cent since the millennium. Yet this did not prevent our share of Indian imports falling from 6 per cent to a mere quarter of that. The perception was that Britain was more interested in Europe and the Atlantic alliance. What is more, the language we used was often counterproductive. Britain should not appear to be lecturing to India with haughty superiority—and it is still there. I hope the new Government will avoid such pitfalls. The early visit to India by David Cameron was recognised as a very good start.

I have persuaded a number of Indian businesses to invest in Britain, so may I offer a little advice on building such partnerships? First, we must understand how important Indo-British relations are to us. Take one example—a company which I brought to this country—Tata’s. Tata Group employs over 45,000 workers directly in Britain and supports a further 100,000 indirectly. The UK Tata Group spent over £700 million on R&D last year—this year it will probably be more than £1 billion. Yet a failure to see how we gain from these investments still affects British decisions. During the financial tsunami, loan insurance was requested by Tata but it was turned away, being an Indian company. People remember such slights.

Next, we must ask what we can offer our partner. Our science base, high-tech workforce, infrastructure and access to Europe complement our cultural strengths. I have escorted many Indian business leaders around factories in Britain and seen them become enthused by our technology and our workers. We have many hidden gems. But we make it difficult to invest in them by putting up needless barriers. Of course we need strong Immigration Rules, but we should show flexibility for those who have a lot to contribute.

India knows what this takes. In fast growing sectors of the Indian economy, like pharmaceuticals and biotech—today the biggest investment worldwide in India is in the pharmaceuticals and biotech industry—the world’s biggest companies are moving to India, bringing top people, even though India has many graduates. Indeed, 700,000 science and engineering students graduate each year in India. These numbers mean we must never think of India as just a home for low-cost outsourcing.

But quality counts more than quantity. In a knowledge-based economy, there is a global drive toward higher skills to meet shared challenges. India’s technologists are at the cutting edge of that charge. I came from an Indian university—the first Indian university of technology—and 95 per cent of my classmates went to America, because it was easy. When I go and see American companies and American universities, they are full of Indian students doing their masters and doctorates, and doing research. Leading US universities and technology businesses such as Google and Microsoft are being led by graduates of Indian universities like my alma mater, IIT Kharagpur.

We could seek to join these leaders in their current challenges and thus share in their future successes. In other words, we must welcome India here as well as sell Britain there. The coalition clearly wants to do business with India. It has made a strong start after about 12 years of neglect. I only hope it ensures that India wants to do business with us.

Social Enterprise

Lord Bhattacharyya Excerpts

Thursday 6th October 2011 Lords Chamber

[Lord Bhattacharyya]

My Lords, we are all indebted to the noble Baroness, Lady Andrews, for giving the House an opportunity to debate the Government’s plans to support social enterprise.

Social enterprise is a very broad topic. As time is limited, I will focus on one issue that is essential to achieving the Government’s ambition: the need for social innovation to drive the strength of social enterprise. Social innovation is a vital yet often neglected component of any social enterprise. It is the development of new technical, product or process solutions to pressing social issues. At the root of any successful social enterprise, you will find social innovation.

The most famous social enterprise in the world is the Grameen Bank, with its hugely innovative approach to microfinance, but even Grameen faced challenges when expanding its innovation to different environments such as cities. As microfinance expanded, banks struggled to maintain the bonds of trust that sustained the early lending programmes. Indeed, Mohammed Yunus, who was given a Nobel Prize, has criticised the impact some microlenders have had on the urban poor. Yet those people still desperately need capital to improve their lives. Therefore, there is the demand for more regulation but that would not stave off the predatory lenders. This is a challenge only further innovation can answer. You have to find new ways if the old ones are not working. In Britain, there is a tendency to focus on identifying new funding methods, not developing the social innovations which will attract funding. Both are vital.

Take the case of social impact bonds, which Professor Paul Corrigan has recently argued should be expanded into the NHS. In a recent paper he showed that innovative methods of managing patients with diabetes or severe asthma can reduce costs and A&E admissions. He powerfully argues that bonds can help deliver these changes if the innovation is credible and sustainable. Whether it is developing a better inhaler for severe asthmatics or helping diabetics manage their blood sugar without hospital visits, any attempt to fund social enterprises through mechanisms like bonds will require proven improvements. Bond investors will not be convinced by hopeful assertions. They want hard evidence. This requires investment in the discipline of scientific evaluation.

This can lead to a Catch-22 familiar to all entrepreneurs: developing an idea into a working product requires funding, yet funders require evidence the product works. As a result, we find many social enterprises travel more in hope than expectation of outside investment. Without support for social innovation, we risk creating wonderful social market models, then finding that no one is in a position to take advantage of them. The Government are taking some welcome steps. The Innovation in Giving Fund is most welcome, as is the Social Action Fund to support structural innovation, and the Big Society Bank.

However, I am concerned that the initial big society capital proposal suggests that the only innovation the Big Society Bank will be mandated to support is financial innovation. If the last few years have taught us anything, surely it is that financial innovation alone is not a good basis for long-term growth. We should make it a priority to support social enterprises that wish to pursue social innovations. Without support, they will find it difficult to compete with private businesses that can fund research and evaluate new products with superior cash flow.

If we do not help social enterprises innovate, we risk regularly repeating the recent failure of NHS Surrey to award its community services contract to a social enterprise, as investors or commissioners will worry about the stability of social business models and the quality of social products. The Americans are ahead of us here, with their recently announced Social Innovation Fund. This brings together state, private sector and philanthropic funding to encourage R&D and to rapidly expand innovation in the undercapitalised social enterprise sector. We should pursue a similar initiative in the UK.

The NHS Social Enterprise Investment Fund might offer a model to expand further; for example, the fund is helping Bromley Healthcare develop ideas like virtual wards to reduce expensive A&E admissions. Beyond the NHS, the UK does not yet do enough to support social innovation, but the capability exists. NESTA, the Young Foundation and the Skoll Foundation are all interested in supporting what you might call social R&D. It is four years since the Young Foundation’s report on social innovation was produced and a clear lead from the centre is still needed. Therefore, perhaps I may ask the Minister what plans the Government have to extend the important area of support for social innovators. We could look at how social innovation could help social entrepreneurs to develop products with a clear impact in areas such as accident reduction, child safety or offender management. We are rightly setting up mechanisms that make social enterprise attractive to investors. We must also help social enterprise to develop attractive innovation for investors. We need social innovation to make social enterprise work.