Written submission from the Federation of Small Businesses (LPG 30)

Introduction

The Federation of Small Businesses (FSB) is the UK's largest campaigning pressure group promoting and protecting the interests of the self-employed and owners of small firms. Formed in 1974, it now has nearly 200,000 members across 33 regions and 194 branches.

The FSB believes that procurement is about more than just the process of purchasing goods and services. We believe that it can be used to further a range of social and economic objectives, and with budgets under pressure, it is more important than ever to make the most of what can be achieved through intelligent use of the procurement spending that is available. The FSB’s main focus in this regard has been on trying to realise the significant potential for local authorities to drive growth and job creation in local economies by increasing the proportion of their spend with small local firms. Because small local businesses tend to employ and purchase locally, procurement spending with them by local authorities has a greater impact on the local economy. This is why the FSB has published two reports on how small firms can help local authorities to make the most of their procurement spending.

FSB Research

During the spring of 2013 the FSB conducted two research exercises into the area of local government procurement, and published the main findings in its report Local Procurement: making the most of small business, one year on. This report looks at progress since the original research which was published in the FSB’s 2012 report, Local Procurement: making the most of small business. 

The first research exercise, undertaken in April and May 2013 in partnership with the Centre for Local Economic Strategies and the Local Government Association, was a survey of local authority Heads of Procurement, and received 177 complete responses. This is a robust response rate of 41 per cent.

The survey sought information on local authority procurement spending, and their procurement practices regarding SMEs.

Why spending with small firms makes sense

When the spend data from the responding authorities’ combined spend on goods and services of £28.1bn was analysed, a number of interesting conclusions emerged. 

Local authority spending has a significant impact on local economies: Responding authorities collectively spent over £8.7 billion on procuring goods and services with local firms, generating nearly £4.5 billion of additional benefit for local economies; this is an additional 51p for every £1 spent, giving a total benefit to the local economy of £1.51 per pound spent.

Local authority spending has a greater impact on local economies when money is spent with small firms: When the effects of local spend are broken down and analysed, every £1 spent by a participating local authority with local SMEs generated an additional 63p of benefit for their local economy, compared to just 40p generated by large local firms.

The £4.1billion participating authorities spent with local SME firms generated £2.6 billion of additional economic benefit for local economies whereas the greater sum of £4.6 billion spent with large local firms generated only £1.86 billion for local economies. This means that small local firms generated over £746 million more benefit for local economies than large firms through their re-spend and through the re-spend of their suppliers. This is despite receiving over £524 million less than large local firms.

This in turn suggests that small local firms generated over 58 per cent more economic benefit for local economies over two rounds of re-spending than large local firms did.

The potential impact of increasing the proportion of spend with small firms

The economic benefits of Local authority spending could be increased without spending more, by increasing proportion of spend with small local firms.

The survey found that, on average, local authorities responding to the survey spent 31 per cent of their total procurement spend within their own boundary, and that 47 per cent of the total spend was with SMEs.

If local authorities increased the proportion of spend with local firms by five per cent, and with SMEs by three per cent this would increase investment in local SMEs by over £964.6 million.

If local authorities increased spend with local firms by five per cent, and with SMEs by three per cent this would also increase the wider benefit brought to the local economy of large and SME firm re-spending from over £4.46 billion to over £5.25 billion; an increase of over £788 million without increasing the overall collective spend of £28.1 billion.

Survey of local authority procurement practices

As well as collecting spend data, the survey of Local Authorities also looked at procurement practices with a view to understanding their impact on SMEs.

The overall results were encouraging with much good practice in the sector aimed at increasing SME access to public sector contract opportunities. The survey found that 91 percent of responding authorities had initiatives in place to support SMEs in tendering, and that 75 percent had introduced new initiatives in the last twelve months.

Further encouragement was found in rates of progress in the high priority areas of below EU threshold tendering, and contract aggregation.

The survey found that, for authorities where findings can be directly compared, the proportion of authorities adopting different processes for below EU threshold tenders has increased from 74 per cent to 83 per cent. The proportion for all respondents was 85 per cent. This suggests that significant progress has been made by the sector, and the FSB would like to see further rapid progress towards all authorities adopting simplified processes below EU thresholds.

The survey also found that 86 per cent of local authorities regularly or occasionally break contracts into lots. Again this is an area where there is much good practice in the sector but where there is also the opportunity to go further. Those that already break contracts in to lots should look to do so wherever they can and those that rarely or never break contracts into lots should review their procurement strategies in light of the benefits of procuring with local SMEs.

The most significant area for improvement was in the area of payment practices. While 95 per cent of local authorities responding have in place policies for the payment of suppliers and 68 per cent of local authorities seek to pay suppliers in less than 28 days,   just 39 per cent seek to pass on their payment terms to their main contractors.

Most local authorities are capable of at least achieving if not improving on a 28 day payment period, and Torridge District Council uses an electronic procurement system that enables over 96 per cent of commercial invoices to be settled within fourteen days of receipt, and many within ten days.

However, the most significant payment issue emerging from the survey was that of too few local authorities requiring main contractors to pass on the procurers’ prompt payment policies to their supply chains. Failure to pass on prompt payment policies can lead to main contractors benefiting from swift payment, but the benefits not being felt in their supply chain which is often comprised of smaller local businesses. This is due to the frequent use of 60, 90 and 120 day payment policies by many tier one contractors. This can be particularly problematic for small firms which tend to be more vulnerable to cash flow crises than larger firms.

This issue can be addressed swiftly and effectively through use of explicit contract clauses requiring suppliers to pass the council’s payment terms on through their supply chains. Wakefield Council has demonstrated how this can be done, and the relevant clause from their Terms and Conditions for Supply of Services appears in the FSBs report Local Procurement: making the most of small business, one year on as an easily accessible example. This is as close to a “quick win” as is likely in the field of public procurement and the FSB would strongly encourage all local authorities not already requiring the passing on of payment terms to revise their terms and conditions accordingly as a matter of urgency. 

Survey of FSB members

The second research exercise undertaken for publication in Local Procurement: making the most of small business, one year on was conducted by Research by Design with FSB members in March 2013.

It found that, while seventy-eight per cent of small firms responding had not bid or worked on any public sector contracts. There seem to be many reasons for this, the two main ones being lack of awareness of any appropriate contracts or suitable opportunities, and the time and expense of the process. These two reasons accounted for 51 per cent of responses.

Of those that had bid, more than half (55%) were successful in winning at least one contract and nearly a third (30%) had won multiple contracts. This may suggest a dichotomy between those small firms with the capability required to win public sector contracts, and those without, with the former able to access multiple contracts once the basic capacity to win one bid has been achieved. This can be seen as evidence of the importance of capacity building as part of supply chain engagement programmes run by local authorities.

As such the FSB believes that local authorities seeking to access the local economic benefits of procuring with SMEs should focus on capacity building engagement events with SMEs, as well as continuing the progress already made on process simplification and the breaking down of contracts into lots.

Conclusion

In conclusion, local authorities can use procurement spending to support their local economy, and can increase the economic impact of this spending without having to spend more, by looking to spend a greater proportion of the limited funds they do have with small local firms. The FSB’s research demonstrated that small local firms produced 58% more economic benefit for local economies than spending with large local firms did, and that local SMEs generated 63p of economic benefit for their local economy compared to just 40p generated by large local firms. 

In terms of practical steps to achieving increased spend the FSB would strongly encourage local authorities to engage with it at local level and to make the most of the guidance provided by the Local Government Association. Within this, the FSB would like to see authorities prioritising engagement and capacity building programmes aimed at fostering strong, mutually beneficial working relationships with small and micro businesses. This will improve economic impact, and provide procurers with greater market choice. Local authorities are further urged to use simplified processes below EU thresholds, break large contracts into smaller lots wherever possible, and to pass their payment terms on to the supply chains of tier one contractors through contractual clauses. .

Questions and answers

The remainder of this submission addresses most but not all of the questions posed in the committee’s call for evidence to this inquiry.

To what extent is local government procurement organised to deliver value for money and social, economic and environmental objectives, including stimulating the local economy?

The Public Services (Social Value) Act 20123 (SVA) requires certain public authorities at the pre- procurement phase of procuring services to consider how what is being procured might improve the economic, social and environmental well-being of an area, and how the authority might secure that improvement in the procurement process itself. This came into force in January 2013 and the FSB’s research found that 65 per cent of local authorities in England and Wales have changed their processes and practice around procurement as a result of the SVA.

However, anecdotal evidence suggests that, while local authorities are comfortable with supporting environmental issues and apprenticeships though procurement, they may be less confident on what is permissible in support of local businesses. As such procurement teams uncertain of what can and cannot be done to support small local businesses through procurement should seek advice and guidance, particularly from the Local Government Association.

To what extent are local authorities able to develop long-term relationships with contractors?

Local authorities face a considerable challenge when developing long term relationships with contractors as a productive and effective supplier engagement strategy can all too easily stagnate and become inefficient as incumbent suppliers may become complacent in the absence of competition. This can happen when the local authority is too short of resources or too risk averse to undertake a full procurement process and select a new supplier. In these circumstances large well known firms may be regarded as the safe option and the best choice may be foregone as a result.

This problem is prevalent with the use of long term framework agreements which typically have very limited numbers of suppliers and often last for five years or more. These agreements significantly reduce competition pressure on framework contractors for the duration of the contract. The same problem can be present on a smaller scale in simplified below EU threshold processes requiring a certain number of quotes to be sought, if quotes are always sought from the same small number of firms.

Do authorities take sufficient advantage of collaborative and joint procurement opportunities, including those available from central government?

It is not clear whether this refers to joint procurement exercises or collaboration amongst the suppliers.

In the former, the aggregation of contracts eliminates any possibility of SME’s participating and therefore eliminates competition. This can result in prices rising rather than falling. The NHS has been regularly cited as an example of this practice over several years.

The FSB is aware of one single supplier National Framework which has actually increased prices for Local Authorities who previously, and very successfully, purchased from small, local, suppliers.

With regard to collaboration amongst suppliers anecdotal evidence suggests that, while collaborative bidding is theoretically encouraged, many problems occur in practice. For example under EU procurement legislation, it is the joint turnover of all of the members of a consortium that is considered when evaluating financial stability but this is rarely the case in sub-threshold contracts. In one buildings maintenance tender issued in the last three years the authority actively promoted consortium bidding but subsequently insisted that each consortium member had to individually meet a 20% turnover rule. Another example is where a local authority insists that the consortium has a legal entity, typically by forming a limited company. For relatively low value contracts below £50,000 this is impractical.

How can local authorities access the skills, expertise and capabilities to implement effective procurement strategies, including value for money and social and economic objectives?

The Local Government Association has extensive guidance for the sector, and any local authority looking to support their local economy by increasing their spend with small local firms need only contact their local branch of the FSB. Section 3 of the FSB’s report Local Procurement: making the most of small business, one year on contains recommendations for local authorities, best practice case studies, specimen contract terms, and a best practice model gap analysis tool. The FSB is positively engaged with local authorities across the UK, helping them to make the most of what the small businesses have to offer both economically and as providers of goods and services.

More specifically, does local government have sufficient understanding of its procurement expenditure and the markets for goods and services to deliver quality procurement strategies—locally and regionally. If not, how can deficiencies be addressed?

Recording of spend by local authorities is variable but improving. For authorities where findings can be directly compared, the proportion of those recording spend with local suppliers has increased from 68 per cent to 74 per cent, and the recording spend with SMEs has increased from 56 per cent to 60 per cent. This suggests that progress has been made but that there is still significant room for improvement.

Anecdotal evidence suggests that a local authority’s understanding of their procurement expenditure may be significantly reduced where the procurement function has been outsourced. Experience at one authority suggest that Council employees including departmental heads have little or no control over procurement as the whole process is in the hands of their outsourced service provider. The same Authority has a policy of not publicising any contracts below £100,000 therefore eliminating any possibility of working with small and micro firms. This dramatically reduces competition.

Although there is a requirement for local authorities to publish details of their spend for every project over £500, the majority of this work is undertaken by specialised spend analysis sub-contractors. Most local authorities do not appear to have time to evaluate the results of that basic analysis.

To what extent is risk in local government procurement and contracting understood and managed and contracting strategies adopted, which are tailored to product and supplier market places?

There are some examples of very good practice. Hampshire County Council has developed a simplified prequalification questionnaire (PQQ) that meets their objectives yet considers the risk involved in each procurement exercise. For example financial strength in suppliers is evaluated against the size and duration of the project and is not purely a mathematical algorithm. This PQQ has now been successfully rolled out across most local authorities in Hampshire.

Equally there are myriad examples of bad practice such as requiring up to £5 million of public liability insurance for a very low risk supply contract for £1500 of office stationary.

September 2013