Supply Side
UK Prime Minister Wants To Help Small Firms Win Government Contracts

Last week, the UK Prime Minister Theresa May made a major speech to the Confederation of British Industry (CBI) on Monday morning. There will be a review into the Small Businesses Research Initiative (SBRI), with the aim of considering how procurement can be used to drive innovation in small businesses.

She suggested that the UK could follow the example of the US government in its use of strategic procurement to drive innovation in small businesses, that “spurs innovation in the public sector, and gives new firms a foot in the door”.  She also claimed that “many of the technologies in your smartphone, from touchscreens to voice recognition, were originally commissioned not by Apple or Microsoft, but by the US government.”

But of course we don’t know what this might actually mean in policy terms. One possibility is that the UK could follow the same approach that we see in the US, where a certain amount of government spend is “set-aside” for SMEs of various types (minority and veteran owned, for example).

That possibility has generated an excellent article from Albert Sanchez-Graells in his How To Crack A Nut” blog here. As he points out, a simple set-aside is fundamentally illegal under EU regulations.

However, there could be other policies designed to support technological innovation-driven small businesses, aimed to “give more innovators their first break” as May put it. Sanchez-Graells explains that this is an approach that “other political parties are seeking to explore in other EU countries. For example, in Spain, a proposal to introduce set-asides of 3% of public contracts for ‘legally certified innovative SMEs’ was floated recently (see criticism by Dr Pedro Telles and myself here). Thus, a certain trend seems to be emerging in the area of innovation oriented industrial policy, which seems to be the early 21st century hype”.

As you might tell from this, he is not sure specific policies aimed at SMEs and innovation are likely to work. Part of that is doubt around whether the US policies actually bring the benefits they are supposed to  – as he says:

“The system has clear explicit costs in terms of its administration and the litigation ensuing classifications of businesses as small or not (or innovative or not) in the first place. Additionally, and simply put, the main implicit cost of a small business set-aside programme, be it for innovative enterprises or of a general nature, is that it reduces competition for public contracts, and the reduction of competition resulting from this artificial division of the market comes at a cost in terms of potential higher contract prices as well as reduced incentives for innovation for non-small businesses [generally, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 60-77]. Thus, this is a very expensive system to run and, in a scenario of ever stronger competing pressures for public funds, legitimate questions can be raised about its desirability”.

We have certainly seen examples where legislation like this just drives “gaming” of the system rather than really helping the targeted suppliers. Sanchez-Graells suggests that more general actions to open up public procurement and simplify processes are more likely to benefit SMEs and innovative firms than these special measures, and will of course also benefit all suppliers and the economy generally. He also highlights the work of existing organisations who promote these issues – such as the work of the Procurement of Innovation Platform for instance.

We would agree with that, and would add one further thought. As we’ve said before, the move to more and more aggregation in public procurement and the sometimes unthinking use of larger “framework contracts” in recent years has been perhaps the biggest issue for smaller firms. Clearly, aggregation done well can have benefits, but it must be done carefully or SMEs will be disadvantaged. More consideration here would certainly benefit smaller firms.

It will take a little time to see if the new UK  Prime Minster was simply making “the right noises” to a business audience, or whether anything more substantial will follow. But it is well worth reading the Sanchez-Graells article, and following that with his article here where he puts forward some of his own more general ideas for re-imaging public procurement.