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.