Government Procurement Policy

Lord Kestenbaum Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Kestenbaum]

My Lords, I too congratulate my noble friend Lord Sugar on calling urgent attention to this matter. At a moment of deep anxiety for the British economy, this debate could not be more timely. The first thing we should do today is lay to rest the myth which says that you only have a pro-business environment if the Government leave the stage. As many noble Lords have said, let us just consider the United States. Many of the high-tech entrepreneurs who I have been involved with in this country have taken their inspiration from Silicon Valley. The conventional wisdom is that that is a place where government do best when they are invisible, and yet the opposite is the case. Procurement has been the major factor in the growth and development of Silicon Valley. Military spending funded the generation of microwave technology companies that were a mainstay of the region before the semiconductor industry arrived. It is no exaggeration to say that whether it is the GPS navigation system we all use or internet protocols the public procurement of technology has been the basis of the most transformational global innovations of recent decades.

The first point I wish to stress is just how underexploited the procurement lever is here in Britain when it comes to driving innovation. It is a huge worry, because particularly now the Government are telling us all the time of the need to drive economic growth while at the same time curbing public spending, and yet the buying power is just not maximised. Let us consider the opportunities. As the blight of worklessness increases, we know broadly where the new jobs will be. All the evidence shows, again and again, that innovative, high-growth firms will produce the jobs of the future. NESTA’s recently cited research into high growth shows that just 7 per cent of businesses in the UK have been responsible for half the jobs in the past decade, and the characteristics of these job-creating businesses are those which are most likely to innovate.

In my own experience recently, first as CEO of NESTA and now as chief executive of Lord Rothschild’s family investment interests, my colleagues and I have been privileged to back some of these great young tech entrepreneurs. Through doing that we learnt what these growing small businesses value above all. Capital is important to them, but above all, these young companies value customers; customers are the key. These companies thrive on customers because they are the lifeblood of the most promising parts of our economy, who in turn will be the lifeblood of our recovery. But too many of them will remain small, without customers, at a time when banks have no interest in this risky end of the market and when venture capital houses are on the prowl for the next high-profile buyout. But it is the most significant customer of all, the Government, who are more likely to make a tech business viable than anyone else.

By way of example, while head of NESTA, I was delighted to learn that one of our investments, a UK tech start-up, was bidding for a government contract for its experimental silicon chip. Imagine my surprise when I found out that the Government in question were not ours but the Government of France. Our company proceeded to tell me how other Governments, of France, Japan and other countries, were so much better sources of these kinds of contracts and that French and Japanese competitors usually benefited from them. After all, they had early customers at an early stage.

As noble friends have suggested, we have made modest steps in transforming government budgets from blank cheques to intelligent, demanding customers. Yes, the SBRI does attempt to open up public procurement of R&D to a wider audience of small businesses. Yet with all the progress made, let us be honest: it is on a tiny scale, a mere pinprick at a time when new customers are life and death to the 99 per cent of firms in the UK that employ fewer than 50 people. Surely it must be time to build these programmes up to a real, meaningful scale that would have great and lasting impact. As the noble Lord, Lord Puttnam, said, the TSB, whose board I have the privilege of sitting on, suggested recently how small tech companies might step up to the task of solving major national challenges if significant procurement budgets were diverted differently.

I have focused my remarks on procurement as the single most significant lever that any Government have to drive innovation and thereby create growth. But permit me one final wider observation. It continues to prove exceedingly difficult for small businesses to win these R&D contracts. That is not, as my noble friend Lord Sugar has correctly observed, because the budgets are not available. It is because too often, government departments are consistently unwilling to accept the risks of financing early-stage technology development, mostly because they do not understand the risks. Surely government departments must start to frame their procurement needs as genuine commercial challenges for small businesses to solve, rather than as bureaucratic hoops to jump through.

Here is the rub: no amount of small programmes, often timid in scale and often initiated with great fanfare and then quietly closed 18 months later, will succeed without genuine, consistent and ambitious leadership from the very top—from ministerial level. That will produce an aggressive, ambitious national programme which runs through government that does nothing other than force a procurement revolution. Yes, we should create incentives, as my noble friend Lord Sugar has suggested—real incentives for those who take risks and get it right

This is a revolution and this procurement revolution needs to be driven, cajoled, inspired and incentivised. It is no exaggeration at this time to say that in large measure, our economic growth will depend on it.