Review on the Role of SMEs in Public Procurement - Call for Evidence
Comments from ACCA
August 2008
Executive Summary
ACCA is pleased to submit its comments to the Glover Committee's call for evidence on the role of Small and Medium-sized Enterprises (SMEs) in public procurement. A s more than half of ACCA's membership work in or service SMEs (Small and Medium-sized Enterprises), we have a special interest in issues affecting the growth and business efficiency of this sector.
The UK public procurement market is worth at least £160bn per year and offers a stable counterpart to the volatile private sector procurement markets. As such, public procurement can provide many small businesses with a new, challenging market for their products and services as well as a reliable revenue source. SMEs, on the other hand, can offer the public sector access to higher quality, substantial lifetime cost savings and superior service.
We welcome this consultation as a crucial step towards ensuring that both parties can make the most of these opportunities. SMEs win about 16% of central government and 59% of local authority contracts by value, or over 27% across government. Where they are held back from further participation, this is usually not for lack of government guidance or high-level strategic initiatives, but due to poor implementation on the part of procurement authorities.
It is our belief that SME access to public procurement should be encouraged not by suspending the forces of competition but by improving procurement processes, nurturing value chain partnerships, improving the capabilities of public procurement authorities, and sharpening the public sector's focus on getting value for money. We agree that managing this change can be facilitated by targets, but only if these are specific, measurable, attainable, relevant and timely. The Committee needs to set a more ambitious target and ensure that it meets all of these criteria.
Specific Comments
SME access to public procurement - State of play
It must be acknowledged that the UK demonstrates a great deal of good practice in facilitating SME access to the public procurement market. The recent guidelines published by the European Commission (EC) highlight a strong record in e-procurement, guidance to public authorities and public procurement training for SMEs.1 Still, according to the latest figures available, the UK lags behind the rest of the EU in SME access to public procurement. 2
The government's latest estimate is that 16% of central government and 59% of local authority contracts by value were won by SMEs - an average of over 27% across government. SMEs' share of local government procurement has remained more or less constant for the past few years, whereas for central government their share is steadily falling. 3 The evidence suggests that new, small and micro businesses are underrepresented, relative to their share of total turnover in the relevant industries 4, while medium-sized enterprises are slightly over-represented, winning a share in the UK that is close to the average won across the EU. 5
SMEs are not kept out of the public procurement market for lack of guidance or high-level, strategic initiatives. It is rather the practice of public procurement that is biased in favour of larger organisations. UK SMEs describe the process of bidding for public sector work as fraught with red tape and shrouded in obscurity, indeed very often futile. 6 The Office of Fair Trading's (OFT) latest study of competition in public procurement confirms that restricted communication of contract opportunities, excessive information requirements and overly narrow pre-qualification criteria can distort competition in favour of large suppliers. 7
Improving SMEs' access to tender information
Admittedly, the UK is well ahead of other EU countries in making information about public contracts accessible to business. It is very positive that lower value contracts are publicised through Supply2.gov.uk 
and Olympic contracts through CompeteFor . The government's decision to offer free trial access to the former resource is encouraging, though SMEs should never have had to pay for the chance to become government suppliers in the first place.
Good practice notwithstanding, the lack of information is still one of the leading reasons for SMEs (especially in the manufacturing industries) not engaging with the public procurement market. In part, this is because government resources, through which such information is provided, remain an unpopular source of information and advice compared, for instance, to accountants or lawyers. 8 Additionally, the smaller a business is, the more likely it is to rely on the industry and professional press, rather than government resources, for information. 9 To improve awareness of public procurement opportunities and guidance, the government cannot ignore how SMEs access information. It should seek to address entrepreneurs and their advisers through their professional networks, and use these to signpost to its own integrated e-procurement portals.
It should also be borne in mind that information on current opportunities and tendering procedures is not the only type of information SMEs need. Advance notice of upcoming contracts is crucial for SMEs as it allows for the formation of supplier partnerships. Additionally, comprehensive feedback on pre-qualification information and full tenders can help SMEs improve the quality of their bids and the suitability of their products and services. Crucially, it would also help restore SMEs' faith in the transparency of public procurement.
Making the tendering process more efficient
The OGC's standard pre-qualification questionnaire (PQQ) is a useful tool and should apply to larger contracts where possible. It can, however, still be improved:
- It is regrettable that the PQQ requests, among other information, what the OGC admits are 'basic company details' that 'can be accessed online and without charge'. Since OGC guidance also suggests that buyers verify this information separately, suppliers do not need to report it in the first place.
- OGC guidance could very likely bias the pre-qualification process by stipulating that officials evaluate hard-to-score PQQ items (such as financials) as absolute measures of risk. Instead, guidance should focus on assessing the adequacy of resources relative to the size of contracts.
- The existing assessment guidance regards the business itself, rather than its owners, directors, staff and partnerships, as incorporating all relevant resources, capabilities and experience. In order to assist newly formed specialist SMEs, pre-qualification should allow for expertise and references to be carried over from the work of key staff and business partners.
- Pre-qualification should control for the current or planned use of employees, as opposed to the company's own directors or others with a direct stake in the enterprise. If no employees are involved, the absence of explicit employment policies should not be taken to indicate a possible risk -it merely reflects the nature of the business. 10
Unnecessary repetition is as much of a problem as superfluous information requirements. This is why widening the use of e-procurement and integrating e-procurement facilities is crucial to reducing the administrative burden. The core principles, however, underlying Supply2.gov.uk are sound and could be extended to larger contracts: a service matching opportunities with potential suppliers or partners across the value chain; pre-qualification through an updated online business profile; and integrated guidance and information services.
Nurturing value chain partnerships
The size of projects as such does not deter SMEs from bidding for public contracts. 11 Rather, it would appear that public bodies, made more risk-averse by past poor decisions, react to the size of contracts by creating obstacles for SMEs. 12 Exclusion through framework contracts and preferred supplier lists is the most common obstacle faced by micro suppliers, and the second most common among SMEs of all sizes. 13In fact, m any framework agreements are renewed so infrequently that entire areas of work can effectively be closed to SMEs for years.
An extreme example of this is the Department of Health (including the NHS), which accounts for a fifth of all public procurement. Small suppliers' share of health procurement (currently at a government-wide average of 27%) has fluctuated between 15% and 41% in 5 years, and suppliers tend to be older and more established businesses. 14 This suggests that it is procurement practices, especially the use of frameworks, discontinued procurements and an undue emphasis on price, that limit the potential of SME suppliers to bid. 15
In light of this, the government's efforts to encourage supply-chain partnerships through its online procurement portals are particularly welcome. Public authorities should reward the formation of partnerships by judging bids on the basis of suppliers' pooled rather than individual competencies, and keeping both awarding criteria and financial guarantee requirements proportionate to each supplier's share of the overall task. Authorities should also take advantage of their right, as highlighted by the OGC, to consider options outside an existing framework agreement when these can deliver innovative products and services. 16
The EC's review of best practice also suggests that specialist aspects of a given project, which do not yield substantial economies of scale, can be spun out into distinct tenders whose winners will be expected to work in partnership with the core project contractor. To make optimal use of such specialists, contract s pecifications should focus on outcomes to be delivered, rather than prescribe the precise means of their delivery. Such practices can, in the long run, save the public sector substantial amounts while promoting innovation and building SMEs' experience of the value chains of large organisations. 17
Combating late payment
To increase SMEs' access to public procurement is to also increase their exposure to public bodies' and prime contractors' payment behaviour. The government's own research highlights the threat posed to small business by late payment, linking it directly to the incidence of insolvency. More importantly, it has found no overall improvement in the rate of payment in the last 10 years of relative prosperity. 18 There is no reason to expect that the UK 's payment culture will improve spontaneously amidst the coming economic slowdown.
Thus while improving SME access to public contracts is desirable, it could fail to spur growth in the sector unless measures are also taken to tackle late payment among public authorities and prime contractors. In this light, the government's recent decision to withdraw support from the Better Payment Practice Group is disappointing. The Group's lack of recent activity is not evidence that late payment is any less of a problem; only that a different approach is needed that better targets the commercial as well as cultural roots of the problem. Late payment is clearly a failure of the market that has adverse effects on SMEs, and thus the case for government intervention, in the form of continued ownership of the Better Payment Practice Code, is very strong. 19 Adherence to the Code's principles should be expected of all organisations involved in government procurement, whether public or private, and SME suppliers should be offered ways of gauging the prompt payment credentials of buyers and prime contractors.
Buying Local
Local authority contracts, accounting for 27% of all public procurement, are a key market for SMEs. 20 The introduction in 2005 of the Small Business Friendly Concordat, which sets out what SMEs can expect when dealing with local authorities, has been a positive initiative, one that should be replicated in central government. Regrettably, only 165 local authorities out of 388 have signed up to the Concordat, despite a stated government goal for every local authority to have signed up to the Concordat by March 2006. 21 Promoting SME access to local government procurement will require a renewed emphasis on such arrangements.
The Government needs to explore in more detail the reasons for the significant contrast in SME access between local and central government procurement. It is very likely that the size and subject of local authority contracts, as well as local authorities' social agendas, create an easier market for SMEs to enter. But it may also be that procurement practices are partly responsible, in which case the identified best practice could be applied to central government.
Improving the capabilities of procurement authorities
The OGC's ongoing review of procurement capability has found consistent evidence of poor management information produced by procurement authorities, a dearth of contract management skills and resources as well as a lack of staff with advanced commercial awareness . It has also highlighted the public sector's mixed record in supplier relationship management. 22 It is our belief that, unless the government commits itself to implementing the recommendations of the OGC capability review, efforts to facilitate SME access to the public procurement market will be hampered.
The lack of robust information makes it nearly impossible to manage the performance of authorities with regard to improving SME access. It is disheartening, for instance, that the latest government information on access to public procurement is collated from data volunteered by procurement authorities and is based on no common methodology whatsoever. 23The lack of commercial awareness is potentially more harmful. 24 It can not only make officials unsympathetic to the circumstances of small business, but also serve to exaggerate the risk posed by SMEs and limit the government's options in leveraging partnerships of small and large (or many small) businesses.
Key to enabling better SME access to public procurement would be an emphasis on CPD that will convey an understanding of competition and how this is affected by different procurement practices; of contractors' value chains and how they are managed; and of SMEs and their particular needs.
Limiting 'agenda creep'.
Government uses the procurement market to pursue a staggering array of policy objectives through the working and employment practices of contractors. In this year alone, ministers have called for union membership, training, sustainability, equality, and uptake of apprenticeships to be considered as awarding criteria.
Most SMEs are committed to responsible business practice, and are open to suggestions and guidance on how to improve. 25 It is also understood that procurement authorities have an obligation to the public to pursue a social agenda as well as achieve value for money. On the other hand, onerous reporting requirements that bear little or no relation to a business' capacity to deliver can place SMEs at a distinct disadvantage. This is especially true if such requirements originate simultaneously from a wide range of government departments without any co-ordination or stock-taking of their cumulative effects. 26 It is therefore not surprising that the latest review of public procurement's effects on competition by the Office of Fair Trading (OFT) concluded that the pursuit of policy goals through procurement can distort competition in favour of larger suppliers. 27
We believe that, as the standard-setter for public procurement practice, the OGC should be ultimately responsible for incorporating the government's social agenda into public procurement, including the nomination of new pre-qualification and awarding criteria. Such policy-driven requirements should be assessed in order to determine their impact on competition and accompanied by appropriate OGC guidance for procurement authorities and suppliers. Both the OGC and the OFT already produce such outputs, suggesting that this type of work lies within their respective remits and capabilities. 28
Does a target for access to public procurement make sense?
We believe that a target for SME access to public procurement can only be relevant as a tool for performance-managing procurement authorities and assessing the government's procurement infrastructure. Ring-fencing a percentage of public procurement for awarding to SMEs would constitute a (possibly illegal) distortion of competition and would be impractical given the quality of information produced by public bodies. Unlike quotas, a target-as-performance-management-tool is welcome in principle. Such targets, however, need to be SMART 29:
- Specific: The type of transactions to which the proposed target will apply should be defined on three relevant dimensions: position in the value chain (prime contractor or sub-contractor), size of contract (above or below EU directive thresholds) and relevant authorities (central or local government).
- Measurable: A target for SME participation in public procurement should be accompanied by an action plan for acquiring robust information on this, taking into account the findings of the OGC capability review.
- Attainable: A 30% target applied to the total value of government procurement would be insufficiently ambitious. The government estimates that 16% of central government and 59% of local authority contracts by value were won by SMEs - an average of over 27% across government. The EC also estimated in 2005 that SMEs win 31% of all contracts by value in the UK. 30 Based on our estimates of SME shares in relevant industries, SMEs could win 52% of all contracts by value if no barriers existed. 30
- Relevant: Targets for SME participation in public procurement would have to allow for SMEs' varying share of turnover, as well as the varying value of contracts, across sectors. This would allow the government to focus on those areas - health and social care, construction and office equipment being the most prominent - that constitute the largest potential markets for SMEs.
- Timely: The proposed 2008-2012 period appears to be highly suitable, as it allows for the awarding of all LOGOC and ODA contracts, the implementation of the OGC procurement capability review, as well as the next CSR.
Thus the Glover Committee needs to consider whether a higher target is suitable, and additionally how to create the conditions so that any progress against it can be properly evaluated. We will be happy to assist the Review in this task by discussing in greater depth any of the points raised in this response document.
Endnotes
3. BERR, 'Progress on improving access to public sector procurement.' 
4. Both BERR and the EC make use of turnover to gauge the representation of SMEs, on the assumption that, if no barriers existed, SMEs' share of public procurement would be equal to their overall market share in the relevant industries. ACCA's own estimates rely on the 3-digit SIC breakdown of BERR turnover data in order to better match the appropriate industry sectors against government purchasing categories.
5. GHK & Technopolis, 'Evaluation of SMEs' access to public procurement markets in the EU' November 2007. See the Annexe for estimates of medium-sized firms' shares of total turnover across sectors.
6. IFF Research, 'The Annual Survey of Small Businesses' Opinions 2006/07 (ASBS 2006/07)' BERR, February 2008 
The precise figures are available in the annex to the report
7. ● econ, 'Assessing the impact of public sector procurement on competition' OFT September 2004
8. IFF Research, 'The Annual Survey of Small Businesses' Opinions 2006/07 (ASBS 2006/07)' BERR, February 2008
The precise figures are available in the annex to the report
10. OGC, "Prequalification questionnaire for tender evaluation"
Evaluation guidance is available at OGC, "Prequalification questionnaire - Guidance for evaluation"
12. CBI, 'Innovation and public procurement' October 2006.
13. IFF Research, 'The Annual Survey of Small Businesses' Opinions 2006/07 (ASBS 2006/07)' BERR, February 2008
The precise figures are available in the annex to the report
14. BERR, 'Progress on improving access to public sector procurement.' March 2007 Update
18. CMRC, 'An investigation into payment trends and behaviour in the UK 1997-2007'. BERR, March 2008
19. A list of government bodies that have signed up to the Code can be found here
20. Sustainable Procurement Task Force, 'Procuring the Future' June 2006.
21. List of these authorities
An enlightening account of implementation is offered in AVE Partnership and London Boroughs of Camden, Croydon and Hounslow, 'Implementing the ODPM/ SBS SME Small Business Friendly Concordat' June 2006
22. OGC, 'Procurement capability review programme: Tranche two overview report,' June 2008
23. BERR, 'Progress on improving access to public sector procurement.' March 2007 Update
24. See for instance CBI, 'Innovation and public procurement' October 2006
26. An excellent overview of the multitude of agendas expressed through public procurement can be found at OGC, 'Public sector procurement and smaller suppliers.' September 2005
27. ● econ, 'Assessing the impact of public sector procurement on competition' OFT September 2004
28. For the OFT, see ● econ, 'Assessing the impact of public sector procurement on competition' OFT September 2004
For the OGC, see OGC, 'Buy and Make a Difference.' April 2008
More detailed guidance can be found in Office of Government Commerce, 'Social Issues in Purchasing.' February 2006
29. The OGC recommends that all performance management metrics should be SMART
31. This estimate reflects 2003/4 spending figures by priority sector from the Sustainable Procurement Task Force and 2006 sector turnover figures from BERR.