If Chancellor wants to save money, he’ll have to look in his own backyard

Bureaucratic, process-obsessed and expensive government procurement exercises often fail before they even start, says Joe Hill

The Chancellor’s budget this month is as big as the stakes for the government. It’s a test of how they balance the competing goals of increasing growth, spending money on their priorities and reducing the cost of living – goals that, until now, they thought were in no tension.

One part of the economy, which deserves more attention than it probably gets, is in the Treasury’s backyard and crying out for reform – namely government procurement of goods and services.

The government spends £400 billion a year buying goods and services from the private sector. With less than one-sixth of the country’s total economy, it operates very differently to other markets, and has been hamstrung by bad policies and poor market design. If the Chancellor wants to increase growth and encourage savings, he must start at home, and transform the goods and services procurement market to make it one of the most dynamic and innovative parts of our economy.

Anyone who has ever sold anything to the public sector knows what a harrowing experience it can be. I have had the misfortune of seeing this process from both sides, and there is no better outcome when viewed from within the government. Procurement exercises that are bureaucratic, process-obsessed and expensive often fail before they even begin. Transactions that take days or weeks for the private sector can take months or even years for the public sector. In the most extreme conditions, large defense platforms like tanks and airplanes take an average of six years to complete – and that’s just to get the deal done, not build the device!

It doesn’t have to be like this. Our think tank has explored some of the biggest procurement failures to understand why they happened, and recommended a simplified procurement model that is easier for businesses to follow, and in turn will help governments get the most out of them.

Where should they start? What if we asked the question – why should we make decisions about which companies should build Small Modular Reactors, which are perhaps one of the most technically challenging products a government can afford and require the best engineers, based on which companies can offer the most jobs to currently unemployed people? Especially when it also costs taxpayers £22 million. And why is the government currently contracting out research into the Ministry of Defense’s nuclear deterrent based on which suppliers can demonstrate that they demonstrate “effective environmental management”?

What is the use of ‘social value’?

Both of these are examples of how mandatory ‘social value’ criteria used in procurement disrupt the process. By assigning more than 10 percent of the ‘score’ in the assessment to criteria unrelated to the core project, they divert the public sector’s attention from the core task at hand, namely getting the best product from the company at the best price.

Social value is particularly difficult for small businesses to prove, when larger organizations have entire teams ready to measure their carbon emissions and demonstrate their compliance to increasingly complex tenders. And the participation of small companies in public procurement is critical – only by new companies starting to sell to the government can they one day grow large enough to compete with the big companies that win all the biggest contracts.

But the government’s push to award more contracts to SMEs is misguided. The UK economy is unusual in terms of the number of people working in SMEs compared with similar countries, many of which are highly economically unproductive. And most SMEs are not the high-growth startups with the potential to become big competitors like the government wants to encourage – they are just small businesses operating in small markets.

However, new companies that have never worked with the public sector before are unlikely to do so unless it becomes easier. With procurement processes taking months and years, few founders and investors have an incentive to enter the market – they risk spending all their money while waiting for decisions from government departments.

The government needs to speed up contract awards, including by awarding more contracts directly to small companies. This means ignoring some of the lengthy competitive processes that are designed to make the procurement market more competitive, but actually have the opposite effect – not awarding prices to anyone but the biggest players – a recent study showed that about 20 percent of government contracts have only one or no companies bidding for them!

The government wants a more dynamic economy, easier for new companies to compete, and allows people to take greater risks. Given that Indonesia is the largest buyer in many sectors, the government must start by practicing what they preach, and opening up the procurement market to more competition by eliminating the bureaucracy and risk aversion that has been entrenched for decades.

Joe Hill is director of policy at Re:State