Procurement: Re-shaping the Landscape

Good morning. Thank you for that introduction, and thank you for inviting me to be here with you this morning.

I should say that this time last week I was not expecting to be speaking to you as the Shadow Business Secretary. Last Friday I took over from my good friend, John Denham, who is one of the most thoughtful and best respected Members of Parliament. You will know John for many reasons not least because he resigned – along with Robin Cook – from the previous Labour government over the Iraq War.

I have big shoes to fill but I am blessed with having a predecessor who bequeathed to me a very good inherence and strong solid foundations on which to build and set out the Labour argument for the future direction for the UK economy.

Government spends almost £240bn of taxpayers money each year. What government buys, how it buys and who it buys from can make a massive difference to the shape and nature of our economy. If government chooses the big or the small, the insurgent or more established players, the risky new or the safely conventional – these have an affect. Whether government buys from those who train and those who pay fair wages, those who – with every pound they make – make the UK economy stronger and fairer, it matters.

And, yes, getting value for money is important but it would be a fallacy to mistake cost alone for value. We need a more thoughtful approach to procurement.

If you help us get our approach to procurement right, you help us use one of the main levers government has to shape the economy more effectively: to strengthen key sectors, to support innovators, to encourage better business practices, to train the next generation. In short – to build the economy we need.

That is what this is about and you are the experts. You help us get it right.

There are many important but technical issues about procurement that, no doubt, dominate far too many of your working hours. There will be time for those discussions in the future. But for now, our Policy Review process – the biggest overhaul of our policies carried since Tony Blair became leader of our party – is forcing us to take a step back and think about our overall approach.

Before talking about where our thinking is going on procurement, I should put it in the context of the overall Review, and the challenges facing our economy today.

Let me be clear. The task facing us economically is great. We face huge challenges. We need action and leadership to get the economy going again and laying the foundations for the future. This is must be the priority but it is where we have differences with the government. If you indulge me, I will just say a few things about this because it is important to be open and frank.

]With no growth in our economy since last autumn and unemployment rising again, with families feeling the squeeze, it’s clear that Britain now faces a real jobs and growth crisis. Yesterday we learnt unemployment has surged to 2.57 million – the highest rate in over 17 years.

Tax rises and spending cuts that go too far and too fast have crushed confidence and choked off the British recovery well before the Eurozone crisis. Choking off growth, makes it harder, not easier, to reduce the deficit.

We’ve set out a clear five-point plan for growth now – to create jobs, help struggling families and support small businesses. Tax breaks for small businesses taking on extra workers, a temporary VAT cut giving families a boost of around £450; and tax on bank bonuses to fund 100,000 jobs for young people.

It is the action we need to get the economy going and a credible plan for growth which the government is failing to deliver.

The immediate challenges are intense, but the challenges for our economy are not only short term. As a nation, we face a big choice – to carry on as before, or to set a different course for our economy and our society.

The global recession exposed deep seated problems in our economy where growth had become unbalanced: too narrowly based on a few sectors and regions, and therefore vulnerable to global shocks.
The ‘squeezed middle’ have seen wages stagnate since 2003, well before the recession hit.

There are skills gaps while simultaneously we fail to make the most of the skills of a full half of the workforce.

We face competitive challenges from traditional rivals and rise of the BRICs.

To pay our way in the future, to build an economy that works, we need private sector growth – more people starting businesses, growing businesses, succeeding in business.

To set this new direction, government cannot just stand at the sidelines.

Government must use every tool purposively and consistently to shape and support this business environment – from competition policy to taxation, and from regulation and to, yes, procurement.

It means developing institutions for collaboration and support, making sure the right finance is there, the research base, the skills base and the other elements that support innovation and growth. It means investing in infrastructure, offering certainty in the policy environment, giving businesses the confidence to invest.

It is active government shaping markets, growing key sectors of the economy, and supporting the growth of more companies which build value over time, invest long term, innovate, offer good jobs, pay fair wages, and train.

Governments cannot tell individual companies what strategy to pursue but neither should governments be indifferent to the choices they make.

There are many businesses already pursuing these strategies – it can make good business sense. But the policy environment doesn’t always mean that this is the case.

The challenge for policy makers is this: how to create the framework so that that which is good business –socially valuable, sustainable – is also that which is most profitable. Good business always being good business.

And this brings us back to procurement – getting it right so it can shape that environment. Enabling procurement to play a critical role in the economy we need for the future.
In government we took steps to improve the way services are procured.

In 2006 for example we launched the Supply2gov portal to make it easier for SMEs to access government contracts

In 2008 we commissioned a report on using public sector procurement to encourage SME growth. In the Pre-Budget Report we committed to:

• advertise Government contracts worth more than £20,000 in a single free online portal;

• introduce measures to reduce bureaucracy and make opportunities more transparent for small businesses;

• standardise the qualification criteria and encourage innovation by specifying outcomes rather than prescribing solutions;

• to help SMEs get a fair deal when they are sub-contractors.

Just before we left office in the 2010 Budget:

• we set central departmental targets to increase the proportion of central government procurement spend that goes to SMEs by 15 per cent throughout the supply chain;

• we required departments to publish contracting and sub-contracting opportunities through a free single portal; and,

• we worked with main contractors to open up supply chains to SMEs.

This government has sought to build on this:

• it wants 25% of government contracts to be delivered by SMEs;

• eliminate Pre-Qualification Questionnaires (PQQs) for all central government procurements under £100,000;

• it has sought to introduce a one stop shop that displays every central government tender opportunity; and,

• it wants to iron out wasteful practices and unnecessary complexity in procurement processes.

These I am sure will be welcomed but there have been contradictory signals too – government’s adviser Sir Philip Green suggesting ways government procurement would squeeze out SMEs and delay payments is an example.

In recent months we have seen the case of Bombardier – which brought into focus the failure of the government to recognise the significance of this procurement to our future competitive success – the consequences of which have placed the future of the train manufacturing industry in the UK in jeopardy.

We believe that it is essential that there is a UK based train building industry capable of designing, building and, of course, winning orders for those trains. We are urging the government to outline the strategy for ensuring that this can happen, including for the new Crossrail rolling stock.
We want to see UK rail manufacturing to be in a position to win these orders, not put at a disadvantage following the Thameslink decision.

The UK’s train industry cannot be allowed to disappear. The jobs that the industry provides are an important element of our future success, not only in the direct manufacture but the supply chains too.

This draws me to the fundamental question we need to consider – how we ensure procurement is an engine of growth; how to improve the processes but critically the ambition – what can procurement unlock
The government is unfortunately missing this opportunity in our view.

With £240bn to spend, the government is by far and away the UK’s biggest single consumer. Procurement can and should be a driver of growth, driving innovation, opening up markets, and creating new markets. Opening up to new businesses, new ways of doing things.

It means putting procurement centre stage that we know has not always happened, across government, local government and in the public sector.

We must ask how we can demand more of procurement.

How can this buyer power be leveraged to support the kind of economy we want to see? How can we make every single pound of spending create the most value to our economy and society?
I suggest three ways:

1. Building broader objectives into public procurement contracts

We did it with the Olympics – construction contracts included clauses requiring the training of apprentices, creating 350 new apprenticeships places. And we are calling on the government to embed this approach to drive more apprenticeship places. Haringey is doing it – through its procurement process it has opened up business to SMEs and creating new employment opportunities for many long term unemployed people, while saving £8m over 5 years.

EU law is often put up as an obstacle to so-call ‘social clauses’, not least because they can limit competition. But they don’t have to. So this is an area where we are keen to explore the full potential and to test the boundaries rigorously and robustly. You tell me…

2. Creating markets for innovative products and services

In government Labour created the Small Business Research Initiative, using procurement to create markets for innovative companies who often lack financial backing during exploratory development phases. But it remains very small – worth between £10 and £15m a year. By contrast, the US SBIR programme it is modelled on has now been running for almost 30 years and is worth $2.5bn a year. Properly scaled to the differences in the size of the economies would be a programme of around £240m in the UK.

There are many more examples of procurement encouraging innovation in services, particularly with the trends towards outcome commissioning, as well as integrated commissioning at local levels, but there remains plenty of scope of driving this forward further.

3. Strategic procurement – using procurement to build sectors of global strength or strategic significance

I talked about Bombardier. The UK is going to be buying a lot of new trains over the next decade. Network Rail estimates that between 12% and 25% of the current rolling stock on British railways will need to be replaced over the next ten years. Critically, there will also be the orders for the new Crossrail trains, the process for which is due to begin.

With the Bombardier factory in Derby now in jeopardy, there is a significant likelihood that UK taxpayer money will have to leave the UK to buy the trains we need. Government procurement that took a more strategic approach might try to address this problem now.

Labour’s Defence Industrial Strategy which gave certainty to the UK industry is being replaced by a commitment to buy off the shelf. There are arguments about whether this is really is cheaper – given the costs of adaptation, licensing and servicing. But there are certainly wider costs that are also relevant, including the loss of national capabilities which should also be taken into account.

So, there we have it. Three outline principles to begin aligning procurement policy with the broader aims of our business strategy and our ambitions for the UK economy:

• Taking a broad view of the value in a contract, giving advantage to companies who train or otherwise create additional social value

• Taking risks – creating markets for innovative products and services

• Being strategic – thinking about how government procurement might support or grow sectors of strategic importance or known future demand.

Clearly there are limits to all of these approaches, as well as some tensions between them. In some circumstances there may be a tension between the first objective of achieving broader benefits, and the second of encouraging plucky innovators. But both goals should have a significant place in an overall framework, allowing explicit choices to be made about the tradeoffs in particular situations.

We would need to get the framework right, and implementation. But for now, I look forward to hearing your comments – on the broad direction of the Policy Review, as well as on the outlines of the procurement framework, where your insight will be invaluable.