Public Procurement as a Tool to Stimulate Innovation: Science and Technology Report

Lord Willis of Knaresborough Excerpts

Tuesday 13th September 2011 Grand Committee

[Lord Willis of Knaresborough]

My Lords, I am a member of the Science and Technology Select Committee. I pay tribute to the leadership of the noble Lord, Lord Krebs, which has produced an absolutely excellent report.

There is an inescapable logic that, with public sector spending of more than £236 billion a year on goods and services, the Government have a unique opportunity to use their procurement to drive innovation, cut costs, improve services and develop new technologies, which will in turn generate economic growth. The power of state procurement has long been recognised across the globe. Entrepreneurs, merchants, industrialists and venture capitalists have sought government contracts as a fail-safe way of sustaining their own economic performance, as well as enhancing the quality of services or goods offered to the public. However, the perception for generations, rightly or wrongly, has been that centralised public sector procurement led to overpricing and a lack of quality, imagination and innovation. This in part fuelled the privatisation and decentralisation of public sector suppliers by the Conservative Government in particular and, indeed, the previous Labour Government.

Despite these changes, inefficiencies and lack of innovation in UK public sector procurement are well documented, with the MoD a prime culprit, followed closely by big-spending departments such as health and transport. What is more, the process favours large organisations that can afford to understand and comply with the often highly bureaucratic and overly expensive procurement processes and compliance procedures. Large suppliers in turn often hold undue power over procurers. The current state of the economy should not only drive innovation in procurement but offer huge incentives to private sector companies, not simply to bid for new contracts but to bring new ideas, technologies and systems to the attention of public sector procurement officers. Our report saw some evidence of openness to allowing SMEs to bring new ideas to departments, particularly in the MoD and the Department of Health. However, we saw precious little evidence that this was part of a wide-scale procurement culture.

The debate about procurement driving innovation is hardly new. As the noble Lord, Lord Krebs, said, the previous Government regularly returned to the theme of The Race to the Top. The innovation White Papers were major pieces of work. Shortly before the previous election, a very readable pamphlet about driving innovation through public procurement was produced by the noble Lord, Lord Drayson, then the Minister for Science, and Ian Pearson, the Economic Secretary to the Treasury. If you read the introduction to that pamphlet, the words are exactly the same as those used by civil servants in response to the committee’s report.

Following all that work by the previous Government to try to link innovation and procurement, it is hugely disappointing that our report should have reflected that but, sadly, simply reflected opportunities lost. As Colin Cram, the managing director of Marc1 Ltd, a witness to our inquiry, said, the response is weak and effectively confirms that there is no coherent use of public procurement as a tool to stimulate innovation, either in central government or the wider public sector, nor any intention to do so. That is a damning indictment of where we are. Indeed, even Iain Gray, the chief executive of the TSB, admitted to the committee that the use of government procurement to stimulate innovation was a “patchy picture” and, considering the sums involved,

“there is a lot more that could be done”.

Our conclusion that the fault lay entirely at the door of government was, for me, summed up by the decision to abandon the departmental innovation procurement plans put in at the end of the last Parliament. The IPPs were abandoned not because they were not valuable but because they were variable in quality, with some relatively strong but others rather weak. So why, I ask, were the strong performers, such as the MoD and the Department of Health, not used as the standard to drive up the quality rather than abandon any sort of performance measure? The answer appears to be that no one in government, then or now, is a driving this agenda. That is exactly why the Select Committee proposed that a Minister should have responsibility for linking procurement and innovation agendas and that each department should have a Minister in charge of the overall policy. Our recommendation was dismissed, largely because the innovation is seen by many in government merely as a tool to drive down cost and create efficiencies to address budget reductions. It is about incremental change and it is about avoiding risk.

There is nothing wrong with risk avoidance, as our report states, but the sad thing is that innovation is not seen as a tool to do things radically differently, to introduce quantum change, to drive new technologies, and to create new markets and, hence, new income streams. In fact, innovation that strays beyond cost-cutting and efficiency is seen as risky. However, sadly, without taking risks, innovation simply cannot flourish.

When Sir Martin Sweeting decided to abandon the orthodox wisdom about satellite technologies, he did not simply look to lower costs; he revolutionised the concept of large expensive-to-launch satellites by building small satellites and delivering them in clusters on the back of someone else’s rocket. Surrey Satellite Technology is now the world’s largest producer of small satellite technology with a global order book, although sadly no longer in UK ownership.

The UK has the same potential in areas of genomics, bioinformatics, stem cell technologies, energy, nanoscience and, as we have heard, graphene materials science. However, I have to say to my noble friend that the fault lay not with Manchester University and the scientists but entirely with the venture capitalists, who in this country seem to be incapable of picking up those ideas and running with them. You have to have two to tango. We saw exactly the same with plastic electronics, which were taken from Cambridge University and sold to Korea, Germany and the United States rather than developed here. We are not short of brilliant ideas but we need to turn more of those ideas into world-beating products.

Crucially, the same innovative process that created the iPod, the Dyson cleaner or the robotics used in satellites needs to be brought to the development of our infrastructure in transport, power generation and communications, and the Government are ideally placed to drive that process. Procurement without innovation should be a barrier to government contracts and not, as is so often the case, a safe option. Indeed, it is this attitude of risk aversion that has seen a huge drop-off in private sector interest in innovation, according, as we have heard, to recent surveys by Logica, the computer software company. Simply making it a condition of contract that innovation has to be shown to be present would make a huge difference to the way in which SMEs approached the whole business of getting procurement contracts. Indeed, as Birmingham Science City said to the committee,

“public sector procurement needs to be transformed so that the public sector encourages suppliers to think the unthinkable”.

Before the Minister jumps into the Thames in desperation this afternoon, I should say that there are some encouraging signs that indeed all is not quite lost. In fact, the Government's response to our report was more encouraging than the evidence they gave us. The TSB appears to be working well, the investment in new technology and innovation centres is hugely welcomed—as are the phones that are ringing in the Room at the moment—and the SBRI initiative has demonstrated real potential. However, these are extremely small initiatives that are dwarfed by what is happening in the US, Germany and France, not to mention China, India and Brazil. The SBRI, which is supposed to drive new departmental initiatives, has only really been taken up by the Department of Health and the MoD, and with a total spend of a mere £41 million represents 0.008 per cent of total public sector procurement—hardly the big idea that will change departmental procurement processes.

As for the much heralded technology and innovation centres, the TSB has a mere £200 million to establish them before they are expected to become self-sufficient. Only £20 million for each centre is hardly enough to burn huge lights in the sky. That is why a more imaginative use of the massive public sector procurement budget must be rethought. A 0.5 per cent innovation procurement levy would inject over £1 billion into the process without departments losing money, and would have the potential to draw private sector capital into the process without having to create new structures.

The Government, individual departments or NDPBs could use part of a procurement innovation levy to sponsor high-profile competitions to solve specific challenges relating to procurement or the delivery of new services—not a loss of money, just a refocusing of existing resources. The Longitude Act 1714 created a prize fund to solve the difficulty of plotting where ships were when at sea, so why not take that idea and use the TSB as a vehicle for sponsoring high-profile innovation, with prizes from a procurement levy?

Finally, the Government have rightly recognised that without a cadre of well qualified and appropriately trained procurement specialists the public sector cannot act as an intelligent customer. The capability programme set up by the Cabinet Office is welcome. The licence to operate, to source, to supply and to contract and manage are sound developments, but we must guard against window dressing that gives the appearance of activity.

The innovation launch pad is yet another good idea, but of the 300 suppliers who entered the first innovation launch pad initiative, we are down to a shortlist of some nine companies, and at the end no one is guaranteed a contract. Given the huge amount of work that goes into the process, I doubt whether many will ever return. The same criticism could be levelled at the advent of Crown representatives, which, again, is an excellent one-stop initiative aimed at bringing coherence to common procurement processes. However, given that these posts are in addition to all other duties, I fear that once again it will be the lower-level civil servants who will do the bulk of the work and who are notoriously risk averse.

Conspicuously absent from the Government's response is a key role for CSAs. Our report emphasised the importance of the CSA being part of the procurement process, particularly at an early stage where the assessment of innovative ideas or products and links with academia are absolutely essential. However, it is more important that the departmental chief scientific advisers should interface with the science, engineering and technology communities to encourage innovative ideas, such as graphene, that are coming through and that can be brought to people’s attention and used.

While CSAs continue to have a role, it is far from the prominent role that the Select Committee envisaged, and yet again sends out the signal that the end is in sight for departmental CSAs, as the Government sideline their important independent challenge function. Nowhere could this be more apparent than in the Minister's own department, which has no CSA at present and appears to have little urgency about replacing the excellent Professor Collins, who was ideally suited to the role the committee envisaged. A similar tale can be told across government, with vacancies in DCMS, the Cabinet Office, the Department for Transport and in key departments such as the Treasury, the Department for Education. “CSA” is little more than an add-on title to their current job descriptions. The committee will return to this issue in a forthcoming inquiry.

This has been a far more useful inquiry than I thought it would be when I was faced with the evidence. The Government have given a robust response and promised significant changes, and I am sure the Minister will deliver. As a Lib Dem, I am ever an optimist.