Procurement Bill [HL]

Lord Mendelsohn Excerpts

Committee stage
Wednesday 26th October 2022 Grand Committee

[Baroness McIntosh of Pickering (Con)]

My Lords, Amendments 370ZA and 370ZB are tabled my name and I thank the noble Baroness, Lady Hayman of Ullock, and the noble Lord, Lord Coaker, for their support which is much appreciated.

The thinking behind these amendments relates to the plight of the wholesale sector, which supplies food and drink to critical public service infrastructure on which we all depend, including schools, hospitals and care homes. According to the briefing I have received from the Federation of Wholesale Distributors, wholesalers are struggling to fulfil these contracts due to unfavourable contractual terms, which are resulting in these businesses making significant losses. That does not bode well for the future viability of the sector. They are facing rising costs and food inflation, which we know has hit 15.1% as of August 2022— this week it looked as though it could be higher still. It leaves the wholesalers unable to negotiate any price increases; or the smaller price increases they have negotiated on certain contracts have been well below inflation. This is an unsustainable circumstance going forward.

Given the situation where price reviews occur only every six months or, in some cases, only once a year, this gives wholesalers very little room for manoeuvre to negotiate price increases. This means that wholesalers are not making a profit on the product and service they provide to their customers. This is affecting the quality of the products they are able to serve to children and the most vulnerable, and the viability of providing catering services in the long term. They would argue that the quality of catering services is of paramount importance, as we have seen with Jamie Oliver’s campaign in hospitals and during the pandemic.

I support the fact that the Government’s food strategy is seeking to drive up standards of public sector food by requiring caterers to use more organic and locally sourced foods. This is not sustainable, however, without funding that matches inflation—it is just not viable going forward. In the federation’s view, small and medium-sized enterprises will be the most affected of all businesses. Without quarterly price reviews, the trend will continue towards market consolidation and homogenisation, driving standardisation not the localisation of publicly produced foods.

I expressed my disappointment previously that the public procurement contracts we signed up to under the European Union conditions have been replaced by the GPA; this is something we need to look at on an ongoing basis. Of course, it is right that the Procurement Bill aims effectively to open up public procurement to new entrants such as small businesses and social enterprises, so that they can compete for and win more public contracts. It is just the case that SMEs are more acutely affected by price increases. They are smaller in scale, less resilient and need to pass the increases on in real time. They do not have the capacity to absorb those increases and, as such, are more vulnerable to these pressures if price increases are not passed on. We can therefore envisage a situation where SMEs are either closing down or being sold to larger national conglomerates. If these conditions continue, the sector believes that this will undo competition and the diverse market that brings a number of benefits to the public sector.

To ensure that the targets in the Procurement Bill are met, to encourage more SMEs to supply contracts and to ensure the continued supply of public sector food—which I think the Committee would sign up to—I ask my noble friend the Minister to consider publishing guidance to instate quarterly price reviews to allow contract price increases more regularly than once a year or every six months, and only if a certain threshold is met—for example, inflation over 5%. This is what I have set out in Amendment 370ZA to Clause 69 and in Amendment 370B to Schedule 8, regarding a review when inflation is 5% or more.

The quarterly price reviews would allow contract price increases more regularly, as I have stated, than either once a year or once every six months, if the threshold is met. I propose that that threshold should be over 5%. I remind the Committee that we have seen record increases in the price of staple goods such as milk, dairy, bread and even pasta, and some of the cheaper products that these public sector wholesalers would seek to provide in the context of the contracts we are discussing this afternoon.

I put on record that public sector caterers are struggling to meet the food standards, being forced to reduce portion sizes and using less UK-grown and produced product, which is against both my better judgment and the Government’s aims. I would like to see the quality of the food used to service public sector contracts improve, under the amendments I have spoken to. Without these amendments, standards will continue to decline to mitigate the rising costs if the Government do not step in to support the industry. A number of wholesalers rely on profitable contracts subsidising loss-making contracts at the moment. However, with the ever-decreasing level of profitable contracts, the balance is tipping towards overall loss-making, which is unsustainable in the long term.

Other advantages of these amendments are that they would enable meeting the government targets which would otherwise not be met in the current climate, and would enable those in this sector to bid for more contracts, which would impact the supply of food and drink to public service infrastructure. Some 95% of wholesalers have said that the current climate and rising costs mean they are unlikely to bid for new contracts, especially ones with unfavourable terms, such as the long pricing review.

I ask my noble friend to respond to these issues to help SMEs and secure more bids for future contracts, in particular by a three-monthly review and a 5% review of inflation. The level of food inflation is pushing up the level of inflation across the piece. We are woefully short on food self-sufficiency, particularly fruit and vegetables. I hold the Minister’s feet to the fire, because we heard from her colleague the Minister for Agriculture in this place, my noble friend Lord Benyon, that the Government are seeking to do something to help produce more fruit and vegetables locally, even to increase production such that we can export. Nowhere is that more important than in the delivery of public sector contracts.

I really regret that we are going backwards, having left the European Union, and are relying on more imported and more expensive food. We should be sourcing more food, whether it is meat, bread or dairy—milk and butter—as all these staples have been hugely impacted by inflation. I urge my noble friend to look favourably on these two amendments.

[Lord Mendelsohn (Lab)]

My Lords, this is my first opportunity to welcome the Minister back to her place and to say what a pleasure it is to see her here. We who have experienced time with her have always been impressed by her courtesy and the seriousness with which she takes these deliberations. I am returning to a theme we first discussed during the Small Business, Enterprise and Employment Bill in 2014. As they say, some songs are so good, they may be old but are worth repeating. I hope she will forgive me for coming back to some of the issues we had then, of which, during her time on the Back Benches, she has been a doughty supporter. I am conscious that there is an awful lot to respond to in this group of varying themes. I look forward to seeing her do so with aplomb.

When I saw the amendments tabled here, I had a moment of undiluted joy when I noticed that Amendment 356A in my name suddenly had the addition of “g” before it. I initially thought that, in the chaos of the last few months, I had been called into government service unbeknown to me and without the benefit of a phone call. Having realised that that was probably not the case, I then thought that I had won the lottery—that, for once, one of my amendments was so good that the Government had finally adopted it and were prepared to champion it. Of course, it is a printing error.

I return to some of the things we talked about before, such as how we can align this Bill with the Prompt Payment Code and the Late Payment of Commercial Debts Regulations, for example. Genuine progress has been made in trying to deal with the curse of late payments, which affects small, medium and even large businesses, to try to improve their payment terms and to make sure that the Government play their part where they can, both as an agency of regulation and a procurer.

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[Baroness Neville-Rolfe (Con)]

I was trying to make sure that the noble Lord knew that I had listened to his point. There is a point about what is covered by the Bill and what is not, so perhaps I will reflect a little further on how we achieve the best outcome in the sort of circumstances he describes.

Moving on, I thank the noble Lord, Lord Mendelsohn, for his kind words. I look back with great pleasure on the work we did together on those Bills. I very much agree with the noble Baroness, Lady Hayman of Ullock, that he has made a huge contribution in this area. To some extent, his dogged determination has been rewarded with this Bill, which, I think, as I said right at the beginning, makes something of a breakthrough. That is why I am glad now to be the Minister and to make sure that that breakthrough is reflected in a larger share of procurement for SMEs, with payment being more consistently speedy. It is clear that, in a lot of areas, payment is quite good.

The noble Lords, Lord Aberdare and Lord Mendelsohn, have tabled Amendments 353B, 370A and 430A. They would create a process for resolving payment disputes that would mandate escalation to the Small Business Commissioner, who we remember so well, for arbitration and resolution. Going back, I think that the noble Lord, Lord Mendelsohn, wanted me to be the commissioner, but it never happened. The amendments would also require the automatic payment of late payment interest in the event of a contracting authority being found to be in violation of the payment provisions of this Bill.

I believe that this Bill represents a big step forward in tackling late payment, as I have said. However, I believe that these amendments could introduce unwelcome complexity into the system for government suppliers and remove the parties’ ability to be flexible in matters of dispute resolution by tailoring dispute resolution and escalation procedures to particular contracts. There are now—this is an important point—a range of existing mechanisms in place to deal with late payment. Suppliers, including those in public sector supply chains, can raise payment delays with the Public Procurement Review Service, which the noble Lord, Lord Aberdare, kindly drew to our attention and which will work to unblock any overdue payments. It is a well-established service. It has been successful in releasing more than £9 million of late payments to date and has grown in confidence since we passed the Small Business, Enterprise and Employment Act 2015. I assure noble Lords that the PPRS will continue to carry out this function under the new regime to unlock contract-specific instances of late payment.

[Lord Mendelsohn (Lab)]

I have just two things to say very briefly. First, I did say that I thought the noble Baroness would be a brilliant Small Business Commissioner, but I think that she is a brilliant Minister.

I did not put the Public Procurement Review Service in my speech because I have issues with it. It has unlocked £9.4 million. When I first read its work in 2020, it said £8 million. I thought that meant £8 million in that year, but £9.4 million is the entire sum that it has unlocked since it was set up in the Small Business, Enterprise and Employment Act 2015. Last year, its achievement was £1.4 million. It has dealt with 400 cases and has, it says, been 100% successful. However, it is also reported elsewhere that it has dealt with more than 1,900 cases, most of which involved suppliers that gave up on it during the course of its process. Let me retell the numbers: 23,000 invoices in one local authority alone. The Minister can tell me that 400 cases over an eight-year performance is good, but I am not so sure. I appreciate that there is a vehicle—again, I am not picky about which one it is—but one cannot say that that performance is making any meaningful impact. That is why I would be grateful if the Minister could look at that in more detail.

[Baroness Neville-Rolfe (Con)]

I will certainly look at the figures, which I am very interested in, but this Bill obviously represents something of a step change. The key thing is how we can make it work effectively. I also highlight that suppliers already have the ability to claim interest on late payment under the Late Payment of Commercial Debts (Interest) Act 1998, which has been referenced. A reference to it in our Bill therefore seems unnecessary.

The proposed amendment would also significantly alter the remit of the Small Business Commissioner. Under current legislation, a small business may complain only about a large business. As such, it would not be appropriate to reference the Small Business Commissioner in this context; it is a slightly different type of system.

The noble Lord, Lord Mendelsohn, has also tabled Amendment 356A, which would place a duty on contracting authorities to report payment performance under regulations made under Section 3 of the Small Business, Enterprise and Employment Act 2015. These regulations currently place a duty on the UK’s largest companies to report on a half-yearly basis on their payment practices, policies and performance. We are thinking about what we can do to open up more contractual opportunities to SMEs and will come back to that on Report. We recognise the need for alignment with the private sector so that we can have a bit more comparison of performance.

However, we do not, for example, want to constrain the Government in the future from pursuing the reporting of higher payment standards for the public sector should we wish to do that, nor can we add new requirements to the private sector without some form of consultation, especially at this difficult time. I am happy to look at the possibilities on publishing payment performance information for private companies alongside those in the public sector and at trying to make the results more easily comparable. It may take a little time, but I hope that noble Lords will find that assurance helpful. We will see what we can do.

Turning to Amendment 361A, tabled by the noble Lord, Lord Aberdare, this amendment would enable contracting authorities to pay subcontractors in their supply chain directly where a prime contractor does not pay within agreed terms. The contracting authority would then be able to reclaim the outstanding amounts from the prime contractor, either by discounting the sum owed or by reclaiming the money as a debt. This amendment would, of course, utilise public money as a method of resolving such disputes. Where insufficient money remained, this would introduce risk and liquidity pressure to public sector accounts, with financial implications that are extremely difficult to countenance, especially in current circumstances.

The noble Lord, Lord Aberdare, asked whether we could introduce the “step-in” right, as suggested by Amendment 361A, as a right rather than an obligation. This could lead to confusion for contracting authorities about when they should step in. It would also expose them to unnecessary challenge when they decided not to step in. However, suppliers in public sector supply chains can, as we have noted, use the Public Procurement Review Service to help unlock late payments where existing contractual routes fail. Further, there are some other mechanisms available, for example, project bank accounts, which may work in some cases and allow protected sums to be distributed to those in the supply chain.

Turning to contract modifications, my noble friend Lord Lansley has tabled Amendment 364 to substitute a 10% term threshold with a threshold of one-sixth of the contract term. Noble Lords will wish to note that the Bill does not say that contracting authorities cannot extend a contract’s duration by more than 10%. They can do so, but they must use other grounds within the contract modification rules. They are set out in Clause 69 and Schedule 8. These other grounds, in the majority of cases, will oblige them to publish a contract change notice, which will set out why they are making that modification.

We do not think that contracting authorities should be given greater leeway by increasing the 10% to one-sixth. Under the current regime, we have seen contracting authorities extend contracts by substantial periods time and time again without the public or the market being aware of the situation and therefore able to challenge it. We hope Clause 69(3)(a) will change that behaviour.

Amendment 370ZA, tabled by my noble friend Lady McIntosh, the noble Baroness, Lady Hayman, and the noble Lord, Lord Coaker, proposes that we insert a provision in the Bill that contract reviews should be held by both parties every three months. The Procurement Bill covers a huge variety of contracts—that is one of the challenges—and suppliers and contracting authorities are in frequent contact. A legal obligation that contract reviews must be held every three months is overly prescriptive. Contracts are kept under review by contracting authorities and suppliers as appropriate. One size does not fit all.

I see from Amendment 370B that the proposition that contract reviews should be held every three months has arisen from current concerns over inflation. Prices may be index-linked, and contracts may contain review clauses related to inflation. In those circumstances, modifications under the ground of Schedule 8(1) are already permitted.

My noble friend Lady McIntosh raised an important point relating to the context of rising food prices, caused, ultimately, by the situation in Ukraine. Complex public contracts, including large outsourcing contracts which cover food provision for public bodies, generally do account for inflation. Obviously, coming from a farming and retail background, I understand some of the issues that my noble friend described. I particularly agree about the importance of SMEs, as we all say again and again, and trying to get them a bigger share of procurement. However, her approach is too prescriptive and could lead to yet more inflation, and would put costs on the public sector at a particularly difficult time.