SMEs (Public Sector Procurement)

Iain McKenzie Excerpts

Tuesday 11th June 2013 Westminster Hall

[Huw Irranca-Davies (Ogmore) (Lab)]

I admire your confidence, Mr Hollobone; I have been known to wax eloquent for days, but on this occasion I will be happy to allow others to contribute as well.

This is a welcome opportunity to debate an important subject. There is cross-party interest in ensuring that procurement works far better for small and medium-sized enterprises than it has done in the past. The Government here are doing work on that, and I will refer to some of the innovative and pioneering work of the Welsh Government. I also want to deal with some of the myths about why we cannot do more—not least, those about the European Union.

I know that props are not allowed in this or any other parliamentary Chamber, but I have in front of me an exposé from Farmers Weekly, which ran a good campaign called “Get Better, Get British”. We know that over many years, if not decades, British farmers have been asked, often quite rightly, to invest heavily in the highest standards of animal welfare, environmental measures and so on, but doing that brings costs. In the UK, we now have British buying standards, and the question is this: how do we translate those standards in food produce into being represented by SMEs that can supply to local government, the NHS, the Ministry of Defence and others? That does not seem to be happening.

If I may, I will briefly plug the Farmers Weekly “Get Better, Get British” campaign, which identified that one in 10 NHS hospital trusts sources 50% or less of its food from Britain. The campaign also points out that the cost of feeding a patient varies between £14.40 and £2.11 per day across trusts. Most people would think, “We can see how you could use good ingredients and get good nutritional standards by spending £14.40, sourcing, where the standards are appropriate, locally and regionally from British farmers.”

However, hospital spending on food goes down to as low as £2.11 per day. Most people would struggle to explain not simply the divergence in the figures but how the nutrient value can be achieved with that little money, and how there can be procurement for SMEs within the locality and the region. The NHS trusts at the lower end of the spend range would be performing a magic trick if they were pulling that off.

In addition, according to the campaign, 93% of NHS trusts do not carry out any traceability checks on their food. We know that, despite what I said earlier about British standards within food—the British buying standards and so on, of which the Government are a keen proponent—the standards do not apply to hospitals and NHS trusts. Hospital food does not have to meet British farm-assured standards, for example, that are signalled by the Red Tractor logo that everyone knows and in which many trust. That is a practical illustration of the job of work that has to be done. I am focusing on food in this debate, but we could go right across the spectrum—many producer organisations are SMEs. SMEs are where the bulk of our employment, innovation and entrepreneurship is, and they need a fair opportunity to get into procurement.

Often, the argument has been that we cannot specify British products—or products from Cornwall, Devon, Wales or wherever—because we have to play by the EU and World Trade Organisation rules, but a lot of Welsh Government work over a number of years has shown clearly that that argument is unjustified.

Excellent work is being done by not only the Welsh Government but leading-edge people in Bangor university. Dermot Cahill leads on a procurement project at Bangor, which considers the legality of the issues and the technical implementation of more innovative approaches. He will point clearly to the fact that EU law is far more flexible than it is often given credit for. Something like 80% of procurement contracts fall outside EU legislation anyway, as far as their size and shape is concerned, so the excuse that we are bound by EU regulations when tendering contracts does not seem to apply to eight out of 10 of those contracts.

The Public Services (Social Value) Act 2012 is often held up as a reason why we have difficulty in applying local and regional procurement, particularly with SMEs, but although neither the Act nor EU law is pertinent here—perhaps the Minister can confirm that—the latter is often directly blamed.

The McClelland review in Wales produced a groundbreaking report. It found, on the basis of the best available legal advice and technical interpretations, that there was no evidence that EU law obligations were inhibiting procurement reform. We must remember, of course, that EU law itself promotes transparency, and that is something that is lacking at the moment. I do not say that to criticise the Government but to highlight the point that we have come to: despite everything I have just said, all of which is legally grounded within the McClelland report and the work of legal experts in academia in Wales and elsewhere, the UK is the highest user, at 55%, of the restricted procedure.

We know from experience that many other EU countries use an open procedure, which makes procurement opportunities far more visible to SMEs and allows them much more participation within tendering competitions and bids.

[Mr Iain McKenzie (Inverclyde) (Lab)]

Does my hon. Friend feel, as I do, that the McClelland report, which has also been used in Scotland, shone a light on procurement practices that were very much set in the past and brought procurement up to date sooner rather than later?

[Huw Irranca-Davies]

I agree with my hon. Friend. We seem to have a legacy of mythology about why we cannot do things with procurement for SMEs, and those myths are used as the excuse not to do anything.

We first need to shatter some of the myths, and then say to those who work in procurement departments, “There is no excuse. We will encourage, support, offer guidance and put in place, when necessary, light-touch regulatory approaches, but you need to get on and design procurement contracts in a way that will encourage the highest level of competition—not simply between four or five big companies—and put the information out there that there is a competition going on.”

Far too often, procurement contracts are simply not well publicised and promoted, so it is no surprise that local food producers, haulage companies, building contractors and so on have no idea that procurement is going on. How will they get the business if there is no proper promotion?

My hon. Friend the Member for Inverclyde (Mr McKenzie) is absolutely right. Through the McClelland report and its application in different devolved jurisdictions, we are seeing a different way forward. First, we need absolutely to shatter the mythology, and then to say, “Let’s all work together to devise a way in which we can open the market up”. By so doing, we are not creating unfair competition; we are increasing competition. We are not levelling the field to promote just local farmers or food producers; we are saying, “You should be aware of the tendering processes coming up in your local school, the fire service and so on, and we will design the contracts in a way that allows you to go for them, just as anyone else can.” We first need to open the door, to allow them to do just that.

I do not claim to be an expert in the field, but strong consensus is now building in the devolved Administrations and elsewhere about the way forward. Some of that relates to inadequate feedback, or its complete absence, from public procurers to those who want to bid. SMEs might bid for something and not be successful, and that is the end of it—they are not told where they have gone wrong, what their weaknesses are and how they might improve.

It is no surprise, given the cost and resource intensity of putting some bids together, that many SMEs say, “Well, that was a waste of our time. We don’t know where we went wrong. We aren’t going to do that again.” Big corporations, whether in the food sector or elsewhere, have units and departments specifically to do procurement and they can take off the shelf the computer model of their recent bids and put in a lot of effort. An SME might be a local haulage company with 20 people working for it, of which one, in addition to their other jobs, is told, “Have a try for this one. We’ve finally heard about a contract coming up, so have a go for it.” However, they hear nothing back, so they receive no guidance. That is simply wrong.

Many tender documents for procurement are inadequate: some are too large or too extensive, to the point that it is no wonder that SMEs do not apply—they identify that the profit margin could be the same as the cost of devising the bid. Why would they bother to go for it?

The issue is often to do with the fact that some of the bonds or liabilities required are absolutely beyond the reach of SMEs. It is fair enough if there is a reason for having large financial guarantees, but some contracts are relatively small and the procurement could easily be intelligently devised so that hurdles—liabilities and bonds—were far lower. That would encourage more SMEs to apply. It is not rocket science, but it does require procurement officers and departments at all levels—central Government, local government and all agencies—to have the necessary will and capabilities, which I shall touch on in a moment.

Inappropriate use of frameworks can amount to market exclusion. Frameworks—long-enduring ones with four-year-long contract applications, for instance—are sometimes there for a good purpose, but once they are won the process is over. Long frameworks are normally linked to large, onerous contract documents of immense detail and complexity, and they are sometimes not the right way forward, particularly if we want to encourage more SMEs to take part in the bidding process.

There is a flip side: the more we go for frameworks, the more we are likely to minimise the number of those wanting to tender and possibly to encourage cartel operation. If there are only four, five or six large players in any particular sector that can bid through a framework document over several years, with all the complexity involved, that is likely to lead to their taking the opportunity for cartel behaviour. I have to stress that I will not, under parliamentary privilege, lay any direct accusations before the House. [Interruption.] Not today.

How do we get through some of these things? I will use the example of the Welsh Government. There are good local examples of local authorities, such as Camden and others, doing really innovative work on procurement by applying ideas about increasing transparency and extending the offer to more SMEs, but the example of the Welsh Government is instructive and, as a Welsh MP, I know it well. I am not saying that the Minister must do what the Welsh Government say and follow their example—although sometimes that is not a bad thing—but simply that they are carving out a method that is in its early days, but is legally and technically sound and already seems to be having significant effects in opening the market to SMEs in procurement at all levels in Wales.

In the Welsh Government’s policy statement on procurement in December, based on the McClelland review, they set out the principles against which the Welsh public sector—including the NHS, education, fire and rescue, local authorities and any bodies sponsored by the Welsh Government—should carry out procurement. It was made in recognition of the fact that the value of Welsh public sector procurement is approximately £4.3 billion a year, which is almost a third of the overall Welsh public sector budget. We can see what an impact it would have locally and regionally if we could encourage SMEs to take part, with a multiplier effect not only through the supply chain, but in the wider communities where the money goes.

Jane Hutt, the Minister responsible, said in the policy statement:

“We must use innovative, evidence based, approaches to procurement to support the design and delivery of efficient and effective public services”—

yes, let us make them efficient and effective, with value for money, and so on—

“and to optimise the added value that is delivered to the economy and communities of Wales.”

Why have we argued that we cannot say those things about procurement, when the Welsh Minister, with the support of the Counsel General for Wales in the Welsh Government, can make such a statement? That statement can be followed through in procurement practices at all levels, and we need not hide from it. We must be open, transparent and competitive with anybody who wants to bid in such processes, but we can gear our policies towards supporting our own communities.

On added value, the Minister said that the Welsh Government

“will utilise public procurement creatively as a strategic tool to deliver economic benefit to the people and communities of Wales through employment, training and supply-chain opportunities.”

That will be part and parcel of the procurement approach and design. As Jane Hutt said, it supports other strategies, such as tackling poverty in communities and economic regeneration.

On the back of the exhaustive work done by the Welsh Government, the statement makes it clear that not only are the approaches legally sound, but they are tried and tested, and proven to work. In the December policy statement, Jane Hutt said:

“There are no reasons or excuses why all organisations cannot fully adopt them and there must be no delay in so doing.”

Let me explain the principles of the Welsh public procurement policy that she is asking organisations to adopt. The first principle is strategic:

“Procurement should be recognised and managed as a strategic corporate function that organises and understands expenditure; influencing early planning and service design and involved in decision making to support delivery of overarching objectives.”

That will be set out as the strategy.

The next is professionally resourced procurement, which is that

“procurement expenditure should be subject to an appropriate level of professional involvement and influence”.

That relates to one of the big criticisms of procurement, which is absolutely true. Accountancy and many other disciplines are careers that people aim to go into and design themselves for: they want to do the levels of continuing professional development and to pick up chartered institute qualifications. There are good procurement officers, but all too often people fall into procurement inadvertently and get minimal resources to do it.

The issue of minimal resources is fascinating because, as the Minister will know, good analysis has been done of procurement departments by looking at the correlation between the number of people dedicated to procurement in a local authority, fire services and so on and the number of SMEs that are successful in bidding. There is a direct correlation between the number of people—not only the number, but their expertise—working on procurement in a local authority, a fire service or the NHS and the degree of success in getting bids to SMEs. Why? Because those people take more time and more care for detail intelligently to design procurement contracts so that they are suitable for SMEs to bid for, so that they are not onerous and do not include huge barriers of complexity, finance and bureaucracy, and so that the pre-qualifying operation does not look like a tender bid.

On professionally resourced procurement, the policy statement continues that it should adopt

“the initial benchmark of a minimum of one procurement professional per £10m of expenditure.”

The Welsh Government have actually set it down and said that because there is a direct correlation, they demand of all their organisations that they move towards adequate resourcing, because they know that it benefits SMEs.

On the economic, social and environmental impact, the Welsh Government will use sustainable risk assessment and take account of the long-term impact on the combination of benefits of sustainability and community. If I turn to community benefits, they specifically say that

“delivery of added value through Community Benefits policy must be an integral consideration in procurement.”

On open accessible competition, the Welsh Government say:

“Public bodies should adopt risk based proportionate approaches to procurement”.

That is the thrust of what I am saying today. We have got into a dilemma with large, off the shelf risk averse procurement contracts: either very few people are doing them or people are specifically rewarded for driving down costs on what they were awarded last year, instead of being rewarded for the wider social and community benefits that also flow from procurement bids. We are allowed to reward on that basis, so why are we not doing it more? We need open accessible competition and

“risk-based proportionate approaches to procurement to ensure that contract opportunities are open to all and smaller local suppliers.”

On a simplified standard process, the Welsh Government say:

“Procurement processes should be open and transparent and based on standard approaches and use of common systems that appropriately minimise complexity, costs, timescales and requirements for suppliers.”

One thing that is specifically pushed is e-procurement. Rather than submitting 20 versions of highly complex, onerous, expensive documentation that has to go to different people for consideration, it is a lot easier for SMEs to do it in a simplified way, by e-procurement. The Welsh Government are pushing hard on that and will expect their agencies, providers and local authorities to move towards it at a rate of knots.

The Welsh Government talk about collaboration among SMEs, so that SMEs can come together locally and bid, and advise them how to do it. There are so many ways in which we can take these things forward, including the supplier qualification information database—SQuID—innovation. I will not go on and on.

The essence of my argument is that we can no longer hide behind the idea that because of EU rules or World Trade Organisation rules, we should not be devising intelligently appropriate procurement bid documentation that works for SMEs. I say that unashamedly because I am all in favour of open and transparent competition for anybody who wants to bid into the system, but the way we have traditionally done it has favoured very few small players. There is a real issue of investment, both financially and in guidance on the expertise of procurement departments. We should force the pace of change with local authorities, the NHS, fire services and Government agencies to go down that line to ensure that we deliver the maximum benefit for our local and regional SMEs.

What we are trying to do is level the playing field. It frustrates me, because I am tired of employers coming to me and saying, “Why is it that I always end up just picking up the crumbs from larger contracts? Even though I am a pretty reasonably sized medium-sized firm, I have not got the expertise or the time to bid for some of these massive contracts. The only ones bidding are the likes of Laing O’Rourke and Carillion. Why do I have to be a subcontractor for them?” Things are starting to change in Wales, and it is happening on a good sound legal basis. I am interested to hear what the UK Government are doing and what they are learning from Scotland and Wales and from places such as Camden local authority in London so that they can do more and do it more quickly. There is a way forward. Let us stop making excuses and drive ahead for the social, economic and community benefits of our own areas and of UK plc.

--- Later in debate ---

[Mr Iain McKenzie (Inverclyde) (Lab)]

It is indeed a pleasure, Mr Hollobone, to serve under your chairmanship today.

I start by congratulating my hon. Friend the Member for Ogmore (Huw Irranca-Davies) on securing this very important debate. He spoke on this subject with passion, enthusiasm and knowledge. I could not agree more with what he said, to the point that I fear I may just repeat his speech with a Scottish accent. Without doubt, the importance of small and medium-sized enterprises across the UK cannot be overstated. SMEs are the backbone of the British economy and we need to ensure that both central Government and local government do everything they can to help them through the procurement tendering process to secure contracts.

SMEs employ more than 14 million people and have a combined turnover of £1,500 billion, which accounts for some 47% of private sector employment and about 34% of turnover. Importantly for a local economy, 83p of every £1 spent with a local business will go back into that local economy.

Those are just some of the statistics about SMEs. They are vital to the economic well-being of Britain and vital to employment opportunities. They are the driving force of our economy and they deserve their fair share of public sector procurement. Small businesses are struggling to survive in these challenging economic times, so it is essential that they have every opportunity to win Government contracts or to become part of the supply chain to local and national Government.

Public procurement spend is significant even in these challenging times. Public sector bodies, including central Government, the armed forces and the NHS, spend around £220 billion a year on goods and services—everything from stationery and office furniture to medical equipment and catering services. Despite that, however, public procurement is an underused tool when it comes to keeping trade local. Nearly three quarters of SMEs rarely or never bid for government work, and more than three quarters of SMEs believe that there are barriers to awareness of government opportunities. Many say that lengthy and complex pre-qualification questionnaires disadvantage smaller businesses. The playing field has been stacked against SMEs trying to win public sector contracts. To many SMEs, public procurement seems to have been deliberately designed so that they do not succeed.

More than half of SMEs feel that the process of tendering for Government contracts requires more time and resources than their business can allow for. Some 50% of SMEs find it significantly more difficult to deliver to Government agencies than to the private sector, mainly because of the additional formalities required by public sector clients. SMEs say over and over again that the bureaucracy needs to be simplified to help them bid for public sector contracts and especially low-value contracts.

The majority of SMEs are relatively unaware of where to look for opportunities, and they believe it is too time-consuming to try to find out about them. In addition, they do not bid, because they feel they are unable to compete with larger suppliers. One in five SMEs believes it is unsuccessful in a bid because it is unable to offer better value for money than other suppliers.

One member of the Federation of Small Businesses said:

“Local authorities are the bureaucratic mind at work, busily inventing disproportionately complicated procedures.”

Does that not sound familiar?

Could the Minister look at the following points—she will be glad to hear that the list is not overly lengthy—to improve SMEs’ prospects of securing Government contracts? First, could access to public contracts and pre-qualification questionnaires not be simplified? Secondly, could there not be education seminars on how to tender for contracts, especially through e-procurement? Thirdly, there could be much better access to information about public sector procurement opportunities for SMEs. More needs to be done to improve channels of information, so that small businesses know what contracts are up for tender.

Government buyers need to develop business associations with local SMEs and to set up standard contracts of terms and conditions before inviting companies to tender for released contracts. That will, of course, entail a separation of duties, in that those who source would not be those who evaluate tenders and place contracts. There also needs to be a focus on building an integrated supply chain, in which there are no weak links, and on applying green procurement to keep that supply chain as short and as local as possible.

Where possible, e-procurement should be used to enable SMEs quickly and economically to bid for contracts. The Government also need to target and improve contract monitoring for performance if business associations are to continue and to be justified. In addition, the Government must prove best value by having multiple bids that are evaluated against clear contract weighting.

What of the spend of local authorities? The procurement spend of many councils is significant, averaging £185 million for each local authority. Nationally, that is billions of pounds per year. On the basis of the rather limited figures available, however, less than 50% of that spend goes to SMEs. A significant proportion of councils do not record the size or location of the businesses they spend with, and that should be rectified.

Cost savings are overwhelmingly the biggest driver of procurement policy, outweighing other factors, such as the quality of goods and services, and economic development. That is understandable, given the constraints on local government, but it is, none the less, regrettable, because cost should not always be the most significant factor in awarding a contract, and savings can also be made through quality.

If you will allow me, Mr Hollobone, I will describe what has been taking shape in Scotland over the past couple of years. There has been a total redesigning of the procurement process, which has embraced private, cutting-edge procurement practices to bring about the maximum savings. I hope that will banish the days of off-the-shelf, catalogue procurement.

Some years ago, Scotland Excel was developed, bringing together the combined spend of the 32 local authorities in Scotland. More to the point, it updated and standardised procurement practices, which was necessary if local government was to deal with these challenging times and bring about the savings required in their spend. Many SMEs have been successful in gaining contracts through this collaborative buying consortium. Many other areas of the UK employ buying consortiums; they have had many successes, and they have many good practices they could and should share across the country.

[Jonathan Edwards (Carmarthen East and Dinefwr) (PC)]

I apologise to the hon. Member for Ogmore (Huw Irranca-Davies) for being rather late for the debate. The hon. Member for Inverclyde (Mr McKenzie) is making an important point. About 75% of procurement in Scotland is sourced in Scotland, but only about 50% of procurement in Wales is sourced in Wales. What are the major lessons Wales could learn from Scotland?

[Mr McKenzie]

They are working jointly, and the McClelland report has been shared by both Administrations. As I said, it shone a light on procurement practices in local and national Government and updated them, bringing in many good, cutting-edge practices. It is recognised that if we devolve procurement to a local level, the supply chain can be improved and can be kept as short as possible. I should also mention the green procurement card, which is used across Europe to justify a local spend.

Can SMEs do anything to improve their situation? Yes, they can. They can prepare before bidding for contracts. They should know their strengths and highlight them in any bid. They can become aware of appropriate opportunities and select the right ones. They can engage with their clients, discussing their requirements if they are unsure about them.

SMEs can also use their clients’ chosen method to deal with those clients. If that is online, they should learn how to load to the bid portal and about what limitations the portal has in terms of the size of the tender document and the time it takes to load. SMEs should not miss a bid by running over the deadline because their data was slow to upload.

SMEs should also fully meet their clients’ needs and know what matters most in their hierarchy of weighting. Finally, they should combine expertise with innovation, and explain themselves clearly if any new practices or processes are involved on their side of the supply chain.

We should always remember that awarding to local SMEs has many rewards: it builds local businesses, with many becoming subcontractors to the initial contract winner; it creates local employment opportunities and secures employment locally; and moneys spent locally tend to circulate locally, supporting other businesses and jobs. To conclude, SMEs are important, and they will always be important to our economy.