Public Procurement and the Civil Society Strategy

Lord Maude of Horsham Excerpts

Thursday 23rd May 2019 Lords Chamber

[Lord Maude of Horsham (Con)]

My Lords, I draw attention to my entry in the register of interests, and I congratulate my noble friend on securing this important debate. Public procurement is rarely a subject that sets the pulse racing but it is important, accounting for, as we have heard, just about a third of public spending, and the way in which it is done and the success of how it is done make a huge difference to what the public get from the money that we in government spend on their behalf. If the value for money, the quality or the timeliness of delivery are wrong, people in real life suffer as a result.

My noble friend Lord Young knows a great deal about public procurement from the supplier or vendor side; I know quite a bit about it from the client side. I had responsibility in the coalition Government for public procurement and spent a lot of time dealing with the issues around it. I pay tribute to the noble Lord, Lord Wallace of Saltaire, who for virtually all that time was the House of Lords Whip assisting us in the Cabinet Office on these subjects, and who gave enormous support to the reforms that we were seeking to push through.

We found at the outset that public procurement was working in a rather bizarre way. Practices had been put in place, often attributed to the requirements of EU procurement rules but which in fact were being massively gold-plated, both through our regulations but much more through established practices, which almost deliberately seemed to exclude smaller businesses, social enterprises and civil society organisations from bidding for and winning public contracts. We therefore wanted to change that. We found that public procurement, especially in central government but much more widely in the public sector, was driven by a group of people I came to know as “procurocrats”—people for whom process was king and who had far too little commercial awareness. There are three parts of any procurement process: pre-tender market engagement, a formal tender process, and contract management. Overwhelmingly, the time and energy were spent on the middle part of that, which should really be the shortest and kept to a minimum. Typically, public procurement processes in this country took twice as long as they did in Germany, for example, which was quite unnecessary. Procurocrats used to say to me, “But, Minister, we’re not allowed to exercise judgment”, which puzzled me a little, because I thought that was what all of us in the public service were paid to do.

In the way public procurement operated, the sense was that the only thing that mattered was an arithmetic comparison of bids against a hugely detailed specification, which was drawn up to the most intensely detailed and quite unnecessary level of specification, really to replicate what was already being done and then to see whether it could be done more cheaply. That is not a good way to operate. The right way to do it commercially is to spend quality time before you draw up the specification talking to the market to see what is available, and then draw up the specification in response to what the possibilities are. That is how you harvest the gains from innovation and dynamism in the marketplace. We came to know that as injecting commercial DNA into the procurement process. Very few procurement services around the world are good at this, and we needed to make a lot of progress in the UK. We therefore crunched down the formal tender process as much as we could, managing to get it from being twice as long as it typically took in Germany to half that time, and we found that there were ways of doing it much more quickly. We then recruited people into the government service who could bring commercial nous and capability to the pre-tender process and strengthen the contract management. That was typically rather weak and delegated to junior people as a kind of boring process, but it was incredibly important.

We therefore removed the hurdles which had typically excluded smaller and more socially driven entities—civil society organisations—from bidding. There had been immensely complicated prequalification questionnaires. I once discovered one which was 70 pages long for a contract which was worth £80,000. That was ludicrous and meant that only big organisations could bid because they were set up to process prequalification questionnaires. There were performance bonds where bidders were required to put up money in advance before they were allowed to bid. There was a requirement to present three years of audited accounts, which meant that any new business coming on to the market with a new product, service or approach was almost automatically excluded from taking part. There was a requirement to show that you had insurance in place to cover the cost of the delivery of the service at the time when the company was bidding, which again excluded smaller organisations even from getting through the starting gate, let alone having a chance of winning the race. I mention also turnover thresholds.

All this created a huge bias in favour of the big outsource vendors because they looked like they were safe and reliable. I specifically exclude the one that was led by my noble friend at the time, but what actually happened was that their core competence became winning contracts—doing public procurement, not doing the work. Too many of them lost their ability to provide innovative solutions to public needs but they became excellent at winning contracts. If they were public companies, too often they were telling the financial markets that the key thing was top-line growth, so winning more and more contracts was essential to their stock market ratings. It became clear, as time went on, that too often they were tending to bid rather low in effect to buy the contract, but then they expected to make their money through changes to the specification. Those were all too common and we were hearing reports from some vendors that they expected an internal rate of return of 40% on changes to the contract. That is insane but it was because the pre-tender market engagement process had not been done in a sufficiently commercial manner.

These companies would then rely on weak contract management on the procurement side, and that is where the problems have since emerged. It is notable that some of the worst problems have been with what looked like some of the biggest and safest of the established outsource vendors. It did not need to be like that and we changed the way in which this worked to some effect.

A lot of social value was being lost because, certainly in central government, public procurement was not being run in a cross-government way. Things like facilities management—the running of buildings—would tend to be dealt with by a particular ministry on its own which would look to cover all its buildings across the whole country in one contract. Of course, that again would bias heavily in favour of the big national providers, whereas social value can be provided, particularly for activities like building management, where local suppliers are able to operate. It is much better to operate across government in the way we started to do, although we did not get anywhere near as far as we wanted. By doing so you can take a particular locality, look at all of the Government’s property within it, and then by multiplying up you get economies of scale without losing the local focus. Much more can be done.

We discovered that there was simply not enough capability within government so we set up the Commissioning Academy. It would be good to hear from my noble friend when he replies to the debate what progress has been made in developing the academy, which was available to the whole of the public sector. However, a lot of people tended to confuse procurement with commissioning. Commissioning is much wider and is particularly crucial in pre-tender market engagement. It was the noble Lord, Lord Adebowale, who opened my eyes most vividly to the whole essence of this activity and he deserves huge credit for the progress that has been made.

In the rest of my remarks I would like to talk about one programme which would have a huge effect if it were to be revived, regenerated and strongly driven again because some of the momentum has gone out of it in recent years. It is the programme for creating public service mutuals. Between 2010 and 2015 we promoted and supported the creation of more than 100 of them. I should say that it was very much about picking up an idea which had started to be developed by the previous Labour Government, but in their case it was limited to the National Health Service along with some restrictions that made it hard to give it scale and allow it to get traction. However, as I say, more than 100 public service mutuals were created, with tens of thousands of staff choosing to move out of the public sector to form themselves into entities that would continue to deliver the same service on a contractual rather than an in-house basis. We would negotiate contracts with the vendor, whether it was a government department, a council or part of the National Health Service. The largest number of mutuals were in the health and social care sectors. All those chose to be not-for-profit social enterprises, although they did not have to be. In some other cases they became mutual joint ventures while others opted to be simple commercial for-profit entities.

What they all had in common was that they generally reduced the cost and improved the quality of their services through massively increased workforce leadership and engagement. I found visiting these mutuals a most uplifting and inspiring experience. I always asked people whether they would go back and work for the council, the NHS or the ministry that they had spun out of. I never heard anyone reply by saying anything other than an immediate no. When I asked them why, the answer was always a variant on, “Because now we can do things. We can see what needs to be done. We do not have to submit a business case to some committee, which is like dropping a stone down into a deep well. We can see what needs to be done and we can just get on and do it”.

We concluded that a public service mutual brings together four very powerful elements: first, entrepreneurial leadership, of which there is much more in the public sector than we ever realised because such skills inside the sector tend to be used for circumnavigating bureaucratic obstructions; secondly, a liberated and empowered workforce; thirdly, commercial discipline and financial rigour because even the mutuals that became not-for-profit social enterprises would always talk about how they needed to be successful in business terms; and of course the fourth element was the public service ethos. Bringing those four elements together created a kind of alchemy that was very powerful indeed. I hope that the Government will put a much greater emphasis on this programme and revive it for the future. Particularly in the National Health Service, where there is such a need to drive improvements in productivity, there is no better way of doing that than through the promotion of public service mutuals. A great deal of social value is generated, particularly when they become able to operate in a more holistic way. Inclusion Healthcare started as a GP practice serving homeless people in Leicester. It spun itself out and became a very successful mutual and has grown through winning contracts to provide other services to the same group of people. The benefits both financially and in terms of the care that is being given to a demanding and very vulnerable group of people have been huge because the service can be configured around the needs of the individual rather than being delivered through numerous different agencies, which is far too often the case when we deliver public services.

I urge my noble friend on the Front Bench and the Government more generally to look at increasing the social value delivered through procurement, and to pay particular attention to the part that has been played and can be played again through an acceleration of the development of the public service mutual movement.