Government Contracts (SMEs)

David Simpson Excerpts

Wednesday 28th January 2015 Westminster Hall

[Dr McCrea]

I agree with my hon. Friend. That will certainly be part of the effort that I am endeavouring, through the debate, to achieve.

The Government plan for growth published alongside the Budget in March 2011 highlighted a number of policies stated to be of particular benefit to SMEs, including such measures as making it easier for them to access public sector procurement by eliminating the prequalification questionnaire for contracts worth less than £100,000, advertising procurement opportunities on Contracts Finder and setting an aspirational target that a quarter of Government contracts should be awarded to SMEs.

[David Simpson (Upper Bann) (DUP)]

My hon. Friend is certainly in the flow today, so it is hard to intervene. As well as action on procurement, does he agree that over the past number of years the Government also promised to speed up payment terms for small companies? A lot of what has been done, however, has been paying lip service. Northern Ireland has improved, but a lot of work remains to be done. Cash flow is vital to small companies if they go for Government contracts.

[Dr McCrea]

I absolutely agree with my hon. Friend and will also deal with that as we continue with the debate.

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[Dr McCrea]

I wholeheartedly agree with the hon. Gentleman. The lack of an up-to-date and modern broadband connection makes it very difficult to get into Government contracts.

To promote the further growth of SMEs, following on from the recommendation in Lord Young’s report, a new scheme was designed to make it simpler for small firms to win public sector contracts, which are estimated to be worth £230 billion a year. In addition, there was a commitment to tackle the late payment of small firms to ensure that those small businesses supplying the public sector and its supply chain were paid at the same time as the large contractors.

In May 2013, Lord Young published “Growing Your Business”, a report on growing micro-businesses following on from his report on entrepreneurship and start-ups published in May 2012. The 2013 report makes a number of policy recommendations for businesses employing fewer than 25 people, including the establishment of a small business charter and, crucially, a

“new ‘single market’ commitment to ensure a simple and consistent approach is taken across public sector procurement.”

In 2012-13, the public sector spent £230 billion on procurement of goods and services, including capital assets, accounting for 34% of total managed expenditure. Of that £230 billion, approximately £38 billion was capital procurement, the rest being current. Of the current procurement, approximately £40 billion is by central Government, £84 billion by local government, £50 billion by the national health service and £13 billion by the devolved Administrations.

Hon. Members will note the public interest in several recent awards of major procurement contracts, which have attracted scrutiny and even criticism from some hon. Members. In the light of the recent difficulties, the Government set themselves a target of procuring 25% of goods and services by value from SMEs by 2015, with the flattering words that such businesses are

“a crucial engine for growth”

as they account for 99.9% of UK businesses.

Research by the FSB reveals that every £1 a public body spends with a small business generates 63p of additional benefit to the economy, compared with 40p of additional benefit when spent with a large business. Although there is much ongoing debate about the advantages and disadvantages of EU membership and whether the UK should remain within its bureaucratic quagmire, the position remains that the Government not only can but should do more to support SMEs in accessing public procurement in compliance with EU diktat.

[David Simpson]

Does my hon. Friend accept that, although there is a problem with procurement, in some small companies there is a lack of understanding of the procurement process? There needs to be a robust educational process, perhaps through councils, under which small, young micro-companies learn exactly what it is all about.

[Dr McCrea]

I thank my hon. Friend for making that point. However, to give an illustration from my own constituency experience, I often find that a small business not only finds it difficult with all the filling in of forms, but is blocked from getting into contracts. That is the issue that I want to get to the heart of, but I must first lay the foundations.

A core principle of the EU is to establish a single market that encourages trade and maximises value for the taxpayer in public procurement, obtaining the latter through increased competition by allowing companies from other EU nations to bid for contracts. As SMEs are crucial to the UK’s economic recovery, what have the Government done to encourage and assist them in accessing EU markets and public procurement in other EU member states?

EU procurement rules include transparency, fairness and non-discrimination. They apply to SMEs accessing public procurement in other EU member states, but do nothing to tackle those issues within the United Kingdom, as such rules do not apply. It remains an anomaly of the single market rules that, although under EU law one member state is not allowed to discriminate against an SME from another member state as part of public procurement of goods and services, subject to certain criteria, member states are entitled to act in a discriminatory fashion towards their own nationals.

It is admirable that the coalition Government have engaged with SMEs as one of their two main priorities concerning public procurement and that they intend to achieve that aim by making the procurement process

“much simpler, more open and less bureaucratic—so all businesses, no matter what their size, have a chance of success”.

However, the realisation of that priority, by opening doors for SMEs and providing them with the tools to apply, will make the real difference to our businesses and propel this country’s economic recovery forward.

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[Dr McCrea]

I am happy to agree with my hon. Friend on that point and am delighted that he has a genuine interest in that environmental issue. I am sure that will be noted carefully.

The old proverb says, “Give a man a fish and you feed him for a day. Teach him to fish and you feed him for life.” Although Stephen Allott, the Government’s appointed SME champion, argues that the

“big change is that procurement reform under Labour was a nice thing to have, whereas today saving money is central”,

the Government need to realise that people’s livelihoods are at stake. Owners of SMEs have often bravely given up a comfortable lifestyle and made significant investment to start up businesses from scratch. They are not mere pawns on a Government chessboard to be played when election time comes around. Much more needs to be done to upskill SMEs in the public procurement process. If a supplier has not bid before and is not very skilled at completing the tender, although it might be the best supplier, it will not win the contract. That was the point raised by my hon. Friend the Member for Upper Bann (David Simpson) a few moments ago.

Interestingly, Mr Allott has stated that the difficulty in fast-tracking the SME agenda arises because of staff cutbacks in the public sector, and notably cuts to the number of individuals in procurement. Such streamlining has led to greater aggravation. It may on occasion save the taxpayer money, but it does nothing to support SMEs. Mr Allott has gone further, stating that the pressures now borne by remaining procurement staff have led many to

“stick with the suppliers they know rather than spend time researching potential partners or having speculative meetings with untried suppliers”—

so it is not what you know but who you know. That leaves SMEs isolated while large companies continue to court those with influence.

On indirect contracts, how will the Government ensure there is a “David and Goliath” approach to prevent prime contractors from driving down prices and creaming off the best work for themselves, leaving slender pickings for their smaller partners? What will the Government’s SMEs champion be doing to help SMEs to get the best possible deal when working with large companies?

[David Simpson]

On the “David and Goliath” issue, when many large companies receive Government contracts, SMEs turn out to be subcontractors and are pressurised harder on pricing, so their job becomes even more difficult.

[Dr McCrea]

I accept what my hon. Friend says.

I turn now to what the UK Government could learn from the devolved Administrations. According to FSB research, in 2013, authorities in Northern Ireland spent on average 80% of their total procurement spending with SMEs. Details of all current Northern Ireland public sector tender opportunities are available on one centralised web portal. In addition, a number of events have been organised to encourage economic co-operation and trade, enabling local businesses to meet a wide range of public sector buyers, including buyers from central Government Departments, councils, universities and other public bodies.

In 2009, the Assembly’s Committee for Finance and Personnel conducted an inquiry into public procurement and practices in Northern Ireland. As a result of that inquiry, the Committee made 52 recommendations to the Department of Finance and Personnel in a report published in February 2010, including all the recommendations put forward by the FSB. That shows that key stakeholders such as the FSB are listened to in Northern Ireland.

According to the Cabinet Office papers “Direct and Indirect Spend with SMEs” and “Making Government business more accessible to SMEs”, the total proportion of procurement spend with SMEs by central Government Departments has increased year on year. However, that analysis fails to include public bodies outside central Government. Hon. Members need to note that there are 22 non-ministerial departments, 346 agencies and other public bodies, 70 high-profile groups and 12 public corporations that, in total, have considerable spending power.

In October 2012, when Lord Heseltine published his independent review on increasing UK growth, “No Stone Unturned”, he recommended that the Government

“should place a general duty on all public bodies”—

not just those in central Government—

“setting out the procurement standards to which they should adhere, by providing a pan-government procurement strategy, legislating if necessary.”

When the Government published a consultation on a range of measures to simplify and standardise public sector procurement in “Making public sector procurement more accessible to SMEs” and “Small Business: GREAT Ambition”, in September and December 2013 respectively, they said that they would legislate and make changes across the wider public sector. However, it is regrettable that none of those changes included placing a duty on all public bodies, not just those in central Government, to set out

“the procurement standards to which they should adhere, by providing a pan-government procurement strategy”,

as Lord Heseltine recommended, because that has not happened.

I have tried to explain my general feeling about SMEs and Government contracts to set the scene for the debate, which I was urged to secure because of an experience in my constituency. That experience has not just troubled me; it has really got to me. A local person has put all their money into trying to be innovative and to create something good as a British enterprise, but that seems to have been stamped on and put into the ground.

That small, innovative British SME in my constituency has been failed by the Government and a public body for which it is accountable—the Highways Agency. That failure has affected not just the company, but the work force on the strategic road network, the taxpayer and the British motorist. This case study illustrates: the extent of the barriers erected to prevent market entry; the power of the small number of big companies that dominate the road maintenance market on the strategic road network; the disregard for safety and efficiency exhibited by the Highways Agency; and the seeming impotence of Departments to ensure that British SMEs are treated fairly and given appropriate opportunities, in this instance to introduce new products designed specifically to improve safety for the work force and the motorist, and to secure much better value for money for the public purse.

It is clear from the evidence that the safety of the work force is not given the priority that is required. On 8 January 2015, the Highways Agency was censured for the death of a traffic officer in September 2012 and, recently, another road traffic worker was killed on the strategic road network. It is also clear that the automation of traffic management processes could be made much more efficient through the use of an automated system of cone laying and retrieval.

Between 2002 and 2006, the SME that I am speaking about focused on ensuring its compliance with all UK industry standards, which involved complex interactions with several public bodies including the Highways Agency, the Health and Safety Executive, the Department for Transport and the Transport Research Laboratory. By 2006, its manufactured system had been thoroughly tested and trialled across the UK, and it was fully compliant and market-ready. The Highways Agency funded all of the trialling, which signalled its interest in this innovative automated product.

In August 2006, the product was launched with a DFT press release and a statement from Dr Ladyman, the then Minister. He commented:

“In 2005, five road workers were killed in the course of their work on England’s motorways and major roads, making the motorway one of the most dangerous working environments in Britain…This new machine will help to give extra protection to workers and the public on our busiest roads, and help the Highways Agency to use lanes more efficiently during roadwork programmes…Road workers risk death and injury from traffic accidents every day, while making sure our roads are safe and well maintained”.

At that point, given such a press release, one would have expected that the product was well placed for adoption throughout the strategic road network.

The Highways Agency introduced the company to one of its major contractors in 2006. In the company’s view, their negotiations were not conducted in good faith. It transpired that the major contractor wished to purchase only one or two systems, because what it really wanted was the transfer of all intellectual property and manufacturing rights to itself, although what was proposed would have involved a loss for this small business.

As the months followed, it appeared that the role of the Highways Agency was to exert pressure on the company to accept the contractor’s offer at the contractor’s price, even if that involved a loss. The Highways Agency used its influence to support the major contractor, but not to support the SME, the theme behind Dr Ladyman’s statement about how road workers

“risk death and injury from traffic accidents every day, while making sure our roads are safe and well maintained”,

nor achieving a good price.

During 2008, to facilitate Highways Agency contractors to trial the new technology locally, a vehicle, system and skilled traffic management crew were made available for the entire Highways Agency network, ready to mobilise at short notice. Direct involvement with the Highways Agency failed to attract any business from the contractors.

Following my intervention in 2009, the Transport Research Laboratory, acting on behalf of the Highways Agency, presented the company with a proposed new contract. A signature on the contract would have transferred all intellectual property and manufacturing rights from my constituents to the Highways Agency, acting on behalf of the Crown. As part of the proposed contract, the agency would have been free to appoint a third-party supplier to benefit from the rights, to the loss of the original SME. The SME was expected to support the potential new supplier.

The company refused to sign the contract, but was prepared to negotiate. That led to an extended trial in 2009-10, which was carried out by the TRL and the agency. The trial was deeply flawed because untrained workers were used on the live road network, which meant that only seriously understated benefits could be derived from the use of the new product. Once again, for the benefit of the industry and to test this new technology locally, a vehicle and system was made available for the entire Highways Agency network between March and September 2010. There was professional support from about 20 depots across England, but Highways Agency contractors were not interested.

In 2011, on the company’s behalf, I, again, engaged with the Department and its then Minister, the right hon. Member for Hemel Hempstead (Mike Penning). As a result, the Highways Agency conducted a cost-benefit analysis, which suggested that there would be huge additional costs and limited benefits, due to poor value for money and little safety benefit. Following a challenge of the work, the then Minister—I give him full credit—ordered an independent review, which was carried out by Jacobs, an international consultancy. It proved extremely difficult to secure proper data from the Highways Agency—I needed to table a series of questions, as a Member of Parliament—but eventually, in February 2012, the Jacobs report concluded definitively that the product could provide significant value for money, improved traffic flow and considerable safety benefits, which was the opposite of what civil servants said to the Minister. For example, when the then Minister asked how many stoppages there would be, the civil servants said that there would be 120,000 lane closures a year, but when I asked the question, as I did again and again, the answer that I received was 26,000. They were only out by about 4:1, so of course that really means little. The cost-benefit analysis was proved completely wrong.

The company wrote to the contractors and approached the SME champion at the Department for Transport. That engagement led to a report from the contractors that displayed a total lack of interest in a product that an independent and credible evaluation had declared could bring significant efficiency savings, value for money and safety benefits. The Highways Agency arranged a meeting between the company and the contractors, but appeared to be content that its contractors, using public resources, could turn their back on efficiencies, modernisation and safety. Then, of course, the Minister was moved from the Department, and the new Minister who took over did not seem to have the same interest.

The early contractual negotiations were not conducted in good faith. They were designed to ensure that a major contractor could benefit from the intellectual property rights and manufacturing potential of an SME-driven innovation. So much for getting SMEs into Government contracts.

It appears that after the refusal to sign the contract that was offered, the product was closed out of the market, even when it was ready to be used locally across the network. The independent report by Jacobs, which identified good value for money and safety benefits, was ignored by the contractors and also, largely, by the Highways Agency. The Department proved unwilling to challenge either the agency or the contractors with any degree of rigour, despite being the funder of the agency’s contracts. All the bodies involved did not address with sufficient vigour the safety benefits that the product would have brought. In addition, the Department and the agency refused access to the minutes of the Road Workers Safety Forum trials team because that might inhibit a free and frank exchange of views by contractors. The public interest did not appear to be paramount.

The experience of this company from 2006 to the present day has created the impression that a cartel of big contractors can ignore potential value for money, efficiency and safety considerations with impunity, and that that does not matter, as they will get their pay at the end of the day. They will be paid for what they put in, but the small company or micro-business can be trampled into the ground.

The system of accountability for the expenditure of public money appears to lack any effective scrutiny or teeth. There is a real issue about the safety dimension of this experience that does not appear to have been given serious attention by any of the major public or private players. The question at the heart of the matter is about the relationship between a public body and its private contractors. How far are decisions on road safety being determined by commercial concerns, and to what extent are the Government content to allow the self-regulation of safety standards for road workers and users?

This is an important issue and I will not let it go. I will continue to try to find out exactly how this happened. I do smell something wrong in this, as it seems that some persons within Departments are happy to play along with the big contractors.