PROCUREMENT – from Complexities to Opportunity

1. PROCUREMENT – from Complexities to Opportunity Jim and Margaret Cuthbert www.jamcuthbert.co.uk

2. What this talk is about • Government procurement policy has a huge effect on the structure of industry and the economy: we illustrate this by three examples. • Government policy has had adverse effects from the point of view of achieving a balanced economy, particularly as regards SMEs. • We argue steps could be taken to improve the situation, within the constraints set by WTO and EU Directives.

3. Importance of Public Procurement in the Economy • there is currently £9 billion or so of public procurement annually in Scotland, and even after forthcoming cuts, there will still be many billions. • So it is vitally important to get maximum impact on the Scottish economy.

4. Example 1 : PFI • Large: £60 billion capital value in the UK by 2009 • Designed to be “off the books”: so non-separable projects, and intention to transfer risk to private sector. • Implication: large, complex projects • “Tender costs and complexity reduce competition”.

5. PFI continued: the effects • Study of 37 schools PFI projects in Scotland: 245 new schools, 45 refurbishments: £3 billion capital value. • Large: 5 largest contracts accounted for 107 schools. • Limited competition: 30 out of the 37 projects had 2 or fewer viable bids at final selection stage. • Of 24 firms involved in construction work, only 6 headquartered in Scotland. • Only 2 Scottish firms gained facilities contracts, covering 9 projects.

6. Example 2: Water • Large: £500 million per annum capital programme in Scotland. • Charges set on basis of “lowest reasonable overall cost of discharging Scottish Water’s obligations to its customers and environment”. • No duty placed on regulator to consider economic impact of procurement decisions. • Emphasis on cost reduction and increasing efficiency has led Scottish Water to out-house many specialist functions: employees dropped from 5,648 in 2001/02 to 3,737 in 2008/09.

7. Water continued: the effects • Development of partnership arrangements to deliver capital programme. • Current partners Thistle (Veolia, Jacobs Engineering, Laing O’Rourke) • Stand alone contractors now 18, of which 3 headquartered in Scotland.

8. Example 3: McClelland Review • Review of public procurement in Scotland in 2006. • Goal: to secure collaborative procurement arrangements which consistently deliver Best Value performance. • Result: centralised procurement organisations for central and local government: Procurement Scotland and Scotland Excel.

9. McClelland Review effects • Procurement Scotland for example general stationery contract, £10m per annum: Lyreco (French) office paper: £7m per annum: Lyreco • Scotland Excel for example waste containers: 14 recommended suppliers, 1 Scottish, 12 English, 1 Irish. early learning materials: 8 recommended: 1 Scottish, 6 English, 1 Irish.

10. What are the lessons? • It is clear that government procurement policy has a huge effect on local businesses and the structure of industry. • In the cases we have examined, the actions of government have not been favourable for Scottish suppliers and SMEs. • This is going to have adverse dynamic effects on the Scottish economy – on employment, business development, and on research and development: and the necessary critical mass in the construction industry may itself be severely damaged.

11. What we are not saying We are neither being protectionist nor anti-big business. Nor are we saying that value for money criteria are irrelevant. What we are saying A healthy economy needs an appropriate balance where SMEs have opportunities. And it is not just us saying this. E.g., Francis Maude “I would like to see more government business go to SMEs, not just in sub contracts where bigger companies will want their margins, but directly in contracts placed between departments and SMEs.”

12. What could be done: 1 Remember, any action has to be within the limits set by the EU procurement directive. But the people who drafted the directive were themselves conscious of SMEs: and as we will argue there is a lot that can be done entirely consistent with the directive.

13. What could be done: 2 • Unbundle contracts: this will require retaining and developing expertise in the public sector: for example, in design and project management. • Use the Scottish Enterprise network to help firms compete effectively: they have to identify why Scottish firms are unable to compete, and take effective action. • The public sector itself could help firms to form consortia for individual bids. This itself could be a role for the Futures Trust.

14. What could be done: 3 Exploit the provisions of the EU directive itself: in particular as regards, • Subcontracting: Article 60 of the directive means that the public sector can require the contractor to subcontract for a specified percentage of the job. • Research and development: Article 16 of the directive states that R&D services other than those where the benefits accrue exclusively to the contracting authority for its own use are exempt: so R&D contracts could be placed directly with firms/universities in Scotland if appropriate. • To exploit the latitude to define appropriate contract award criteria (see next slide).

15. EU Directive Article 53 “The criteria on which the contracting authorities shall base the award of public contracts shall be either: • when the award is made to the tender most economically advantageous from the point of view of the contracting authority, various criteria linked to the subject-matter of the public contract in question, for example, quality, price, technical merit, aesthetic and functional characteristics, environmental characteristics, running costs, cost-effectiveness, after-sales service and technical assistance, delivery date and delivery period or period of completion, or • the lowest price only.” There is clearly considerable latitude allowed in this article: and the “for example” clearly suggests other criteria could be specified. Interestingly, the “for example” was omitted from the Scottish version of the Directive.