CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 893 ii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Public Administration Committee

Procurement

Tuesday 5 February 2013

jim Bligh, kevin craven and stephen ratcliffe

peter holbrook, mike cherry and james allen

Evidence heard in Public Questions 47 - 162

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings.

Oral Evidence

Taken before the Public Administration Committee

on Tuesday 5 February 2013

Members present:

Mr Bernard Jenkin (Chair)

Alun Cairns

Paul Flynn

Kelvin Hopkins

Mr Steve Reed

Lindsay Roy

________________

Examination of Witnesses

Witnesses: Jim Bligh, Head of Public Services, CBI, Kevin Craven, Chair of the CBI Procurement Panel, and Stephen Ratcliffe, Director, UK Contractors Group, gave evidence.

Q47 Chair: May I welcome you to this session on procurement? Could I invite each of you to identify yourselves for the record?

Jim Bligh: I am Jim Bligh, Head of Public Services Reform at the CBI.

Kevin Craven: Good morning. Kevin Craven, CEO Balfour Beatty Services and Chairman of the procurement subcommittee of the CBI PSSB.

Stephen Ratcliffe: Good morning. I am Stephen Ratcliffe, Director of the UK Contractors Group. We represent 32 major construction companies.

Q48 Chair: Do I take it that you are primarily representing larger companies rather than small companies?

Stephen Ratcliffe: I would say so, except that within construction a lot of work is subcontracted, so many of the jobs that my members are working on will have a massive amount of SMEs on site. In fact for every £1 we subcontract, 64 pence ends up with an SME, so we do have a lot of SMEs in our supply chain.

Q49 Chair: But your membership tends to be the larger companies.

Stephen Ratcliffe: Yes, from about £300 million turnover.

Q50 Chair: It is the same obviously for the CBI.

Jim Bligh: The CBI represents 240,000 businesses of all sizes and sectors. My primary relationships are with the larger providers of public services, but we do cover businesses across the piece.

Q51 Chair: Thank you for that. Starting from the top, do you think the Government has broadly adopted the right approach to improving contracting and procurement?

Kevin Craven: It is quite clear that the Government is moving in the right direction. There is no doubt that some of the initiatives that have been taken are the right ones. I guess our concern would be about how effective they are. Therefore, it is broadly moving in the right way, but there is still some way to go.

Q52 Chair: Can you identify which things you are most pleased about and which things you are most worried about?

Stephen Ratcliffe: Perhaps I could say something on construction. The appointment of a Chief Construction Adviser by BIS has been a good thing. That is a private-sector businessman who has come into Government to chair the Construction Client Board, which is a group of Government Departments-the major spenders-plus local authorities. Joining up some of the procurement strategy has been a good thing. The publication of a construction pipeline showing infrastructure spending over the next three to five years has been good. These are all good things.

BIS and the Treasury have also published a construction strategy; the key aim in this Parliament is to reduce procurement costs by 20%, and they are some way towards doing that. That is a good thing too. However, echoing what Kevin has just said, quite a lot of this is now just policy. There is quite a lot of delivery still to get through, and the next 18 months is going to be quite crucial in terms of whether the Government can actually deliver on the good policy initiatives they have taken.

Jim Bligh: I would echo what the other two have said. We have seen some developments, particularly in terms of policy, that have been welcomed by businesses. We have also seen some improvements on the skills side with the commissioning academies and the Lean training programme, and we have seen greater visibility of projects coming up through better use of pipelines. That is all really positive stuff, but we still want to see a leaner, quicker process with outcomefocussed commissioning led by staff with improved commercial nous and business acumen. That still has some way to go in this Parliament.

Q53 Chair: It is both the process of procurement that you want speeded up as well as the process of reform, because you think the process of reform is a bit slow as well.

Kevin Craven: Yes, I think the technical process of procurement is improving in terms of that. There are actually figures to show that the speed of procurements has improved. Having said that, I think greater attention to both quality and the preparation for those procurements would be helpful. For example, the preengagement with industry around the solutioning of the service or commodity that the Government wants to buy would be helpful in terms of shaping and shortening the time to procure those things.

Q54 Chair: Can you give us an example to help us understand what you mean by that?

Kevin Craven: Typically, there are two things before you procure anything. There are the requirements that come from the Department that wants to procure, and that is in and of itself quite a difficult thing, because getting agreement amongst the Departments about what they want to do is difficult. That is why we welcome the move towards outcomesbased procurement, whereby it is easier to describe what you want to achieve rather than the methods by which you want to achieve it. That is part one. Part two is about then engaging with the wider industry around how you might procure that or what the solutions to your problem might be.

Q55 Chair: So for example it is like saying, "I want to detain 350 convicted criminals and rehabilitate them," rather than saying, "I want to build a prison."

Kevin Craven: Yes, exactly that. The rehabilitation programme and the early engagement around that is a very good example of that. Generally the Ministry of Justice is seen as doing good work in the procurement area.

Q56 Paul Flynn: Regarding the relationship between contractors and Government, Civil Service and Ministers, do you think it would be sensible to develop a closer relationship or is the relationship too close at the moment? You are looking blank on this. Can I give you an example of the megadisasters that we have in procurement? Nuclear power stations and aircraft carriers are fine examples. We are building two aircraft carriers. We probably don’t need two; we probably need one; we will have no aircraft to go on them. Some of the people who made those decisions were Ministers who are working for some of the contractors now, believe it or not, and some of them are admirals or generals who are also working for those contractors.

There is a period-we call it the revolving door-in which people have a short-term interest in taking decisions but often possibly have a long-term interest in their retirement job. Most people, when they leave their jobs at 60, have 20 years left. Do you think this is an element in the disastrous decisions that have been taken and the contracts that have been entered into? The people who actually took the decision might well have a vested interest deep in the recesses of their mind that there will be a hacienda in Spain for them when they retire or they will be over the hills and far away.

There are 3,500 former military people working for defence industries at the moment, according to The Sunday Times. One of them described what a great marketing opportunity he would have at the Armistice Day ceremony, when he is standing and waiting for the Queen to turn up with nothing else to do but chat to someone in settling a contract. There is this spirit, which I am afraid has spread to not just politicians and Ministers but to the senior Civil Service, who are again retiring very early and going off to another job. Is this an element in the wild and irrational decisions that are taken that waste billions? It is rather a long question, I am afraid. I am giving evidence to you, rather than the other way round. I am sorry.

Chair: I am glad you said that.

Paul Flynn: There was no immediate response. I was taking advantage of the silence.

Chair: Is this a concern to you at the CBI and the Contractors Group? Is this a matter of concern?

Kevin Craven: Without wishing to defend inappropriate relationships, which are absolutely something that we would frown upon completely, I think there are a couple of things. It is quite often difficult, and most particularly for SMEs, I should add, in terms of trying to understand how the Government procures and the immense complexity involved in procuring things. Having people who understand the system is useful in that regard. Having said that, clearly that understanding and that usefulness resulting in inappropriate rewards is not something that can be condoned. In terms of whether I think it impacts negatively on the Government’s ability to procure well, frankly I doubt it. There are much greater issues around understanding the complexities of the systems and elements that they are trying to procure. My short answer is: I don’t think so.

Paul Flynn: I have been here for 25 years and every Government that I have served under would have probably gone bankrupt many times over on their procurement decisions if they were businesses. There is no pressure there though-they cannot go bankrupt so they just go on adding costs. The whole of the defence industry has been a continuing disaster. Nothing has ever been built on time and very few things, if anything, have been built on budget. Normally things are produced for about four times the cost of what they are on the open market. There must be something endemically wrong with the system of doing it-something we are not doing.

We have just had the news this morning: one of the aircraft carriers is coming along; there was going to be the jumpjet to go on it, and then this wonderful Tory Government came in with brand new ideas and changed that. Now I gather they have done an aboutturn and changed it back to the jumpjet at a cost of uncounted millions of pounds. Again, if they were a private firm, the Conservative Government would today be bankrupt, and they should be explaining why they have taken that decision and then reversed it, which will cost the country a huge amount of money. Nobody seems to take the blame.

Q57 Chair: Why do you think the Government behaves in this way and how can contractors and providers help the Government to stop making these kinds of mistakes?

Kevin Craven: It does go back exactly to that point about the requirements. Do we need one aircraft carrier or do we need two? If you hedge your bets and say, "We might need one or two, depending on how much they cost-and by the way we might need a Harrier jumpjet or we might need an American jumpjet," you end up with a requirement that the private sector finds it very difficult to respond to and fulfil. Changing the goalposts during procurement is guaranteed to create greater difficulties and poor value for money. I do not think any of us are particularly expert on the defence industry though.

Stephen Ratcliffe: Picking up the point, in construction there have been a couple of cases in the last two years. The Building Schools for the Future programme was one where contractors had invested a massive amount of cost in a pipeline that was suddenly pulled. There was another case a year or so before that in terms of local education colleges, where companies had massive bidding teams and massive amounts of resources set to build a pipeline that the Government had announced, and then they suddenly pulled it. That is enormously expensive for businesses: people were made redundant and costs had to be absorbed elsewhere.

The key things we have been asking all public sector clients is: "What is your forward pipeline? Let’s have it as long as possible." Again, if someone suddenly wants to build something very quickly-"We’ve just got a bit of money; we’re flush at the end of the financial year. Could we just pop up a school?" or something like that-that is hugely inefficient. We need to know the investment pipeline, be able to plan for it and the whole supply chain needs to be involved at a very early stage. That is how you are going to get these efficiencies. Within the public sector, there are bad clients and there are some very good clients. I would cite the Highways Agency as being a very good client, in the sense that we do have a pretty clear view as to what that pipeline is and are working with very early engagement on some of these projects.

Q58 Paul Flynn: The Government has a strategy for supporting economic growth for very clear reasons. Do they implement this through public procurement, in your view?

Jim Bligh: There is an overall need, whilst planning an industrial strategy for various different sectors, to think about the role that procurement plays. Public procurement is worth significant sums of money to the businesses involved and to the public purse. Sometimes I worry that the full growth implications of decisions are not taken into account. With better premarket engagement and with more effective procurement led by people with the right level of skills and the right knowledge of the markets they are working with, with decent relationships with suppliers based on a longterm partnership model, I think this can lead to better outcomes for procurement and thinking more clearly with the long-term economy in mind.

Q59 Paul Flynn: Because of the pressures on politicians, civil servants, admirals and all the rest, do you think there is something to be said for putting these decisions at arm’s length from politicians who are susceptible to being persuaded by today’s headline in the Daily Trash newspaper?

Stephen Ratcliffe: It would be good to have a national infrastructure plan that had allparty support rather than have it politicised. Construction is a sector that can really generate growth. For every £1 invested in construction, the economic output is £2.84, so it has one of the highest multipliers of any industry. It does not always feel that joinedup. Government could join up a number of procurement programmes and actually begin to stimulate growth. Although we hear about HS2 and some fairly longterm projects, it would be good to find some projects that could be got together very quickly, such as refurbishment of schools or social housing, that would actually have a growth impact on a particular area or locality. Again, one does not feel that that is always very joinedup.

Q60 Paul Flynn: "Joinedup" is a big Blairite word, and we are now into "holistic", "multilayered" and "multifunctioned". We are good at jargon. We generally change the jargon: we want "comprehensive" or "strategic" approaches, but nothing much changes: we still take disastrous decisions and lose billions. Can you think of any radical approach that might change this? Today’s decisions are very much at the front of our minds, but there are others, and we are not immune to it. In France yesterday they added €2 billion to a disastrous project that they have at Flamanville. It does seem to be a nature of Governments who go charging ahead and spending wildly and irresponsibly.

Kevin Craven: The point that Stephen makes around shortterm horizons is a very valid one in many areas. There are probably a number of areas where procurement lifetimes and asset lifetimes stretch across many Parliaments. Difficult though it may be to achieve, having some agreement around those sorts of areas would be very helpful, because planning and then delivering the plan is the best way to get the most efficient procurement exercise. I do think the local government area has seen some improvement in recent years in some ways. Partially, that is because of the imperative. Having your grant cut by 25-odd per cent is challenging, and people have had had to respond to that challenge, and they have done so.

Q61 Chair: Have you ever been involved in a Government procurement project that has gone badly wrong from the Government’s point of view?

Kevin Craven: No. On a personal note, I have been involved in projects that have not gone as well as I would have liked.

Q62 Chair: Okay, that will do. You do not need to name them. When it goes wrong or starts to go wrong, how easy is it to have a conversation with the Government about what is going wrong? Do you find that that is where it goes on going wrong? I bet most people in a failing project know it is failing.

Kevin Craven: They generally do.

Chair: They just don’t know how to talk about it.

Kevin Craven: Yes. Where it works very well is where you have senior commitment to the project.

Q63 Chair: What happens if there is no senior commitment? What do you do?

Kevin Craven: It goes horribly wrong.

Q64 Chair: Do you just carry on milking the project for your own profits? I am sure that is not the case, but that is the impression that a lot of people get.

Kevin Craven: Most suppliers would prefer what we would call an intelligent client. Otherwise most projects would require too much attention and too much time.

Q65 Chair: What is the key ingredient the Government needs to inject in order to pick up from the contractor that it is going wrong?

Kevin Craven: Senior oversight.

Chair: And presumably consistent oversight.

Kevin Craven: And consistent oversight. Good contract management is essential for any contract, including for the supply side.

Q66 Lindsay Roy: Good morning, gentlemen. You have mentioned an outcomefocus; you have mentioned joinedup working, more effective planning and an "intelligent client", which I thought was a wonderful term. What else can Government do to make it easier to do business with contractors?

Kevin Craven: Certainly from my perspective, the single most effective thing is that preprocurement engagement. Understanding the intent, the outcome intended, and then having the ability to help shape what that solution is will always, in my opinion, arrive at a better position. You do not need that when you are buying a commodity, for example, but when it is something complex you need to have a common understanding and a common alignment of what you are trying to achieve.

Q67 Lindsay Roy: So you think there should be a comprehensive professional dialogue.

Kevin Craven: Indeed. The other thing I would probably note is that the ban on professional advisers was an obvious step that helped reduce the costs of running the Government. On the other hand, when we for example do not have either the capacity or the capability, we will go and get professional advisers to help us overcome that. In terms of some of the complexity that you are trying to procure, I would advise that some limited and intelligent use of advisers would be helpful.

Jim Bligh: I completely support what Kevin has said, but I would stress as well that there is a piece about speeding up the procurement process more generally. Our process is 50% longer than France or Germany’s. Generally procurements take far more time and this cannot be a sustainable situation. Taking out some of the requirements on businesses who are committing to procurement processes would be very helpful. Sometimes you do not need to ask for the information that officials ask for. You need to assess the information and ask for the right information, but not ask for thousands of pieces of information that are not necessary to making the right decision. It is very often just used to provide cover: "We’ve asked for the information and you’ve provided it. Therefore, everything is fine." That is not necessarily the right approach to getting the best information that is most relevant.

Q68 Lindsay Roy: Would you say there is overcomplexity?

Jim Bligh: Yes, I think that is right.

Stephen Ratcliffe: In construction most companies are asked to prequalify for a project, and the myriad prequalification systems and forms sent out by both central and local government is a nightmare. When you think that most of the work is then being subcontracted to a construction supply chain, all those questions have to filter down to that supply chain. One could easily cut out a massive amount of cost by simply having some standard form of prequalification. There is something called PAS 91, which is a standard that the Government is now suggesting everybody should use. It is not being used by everyone, and certainly a very quick win for Government in terms of reducing cost would be to have a more standard, and less tickbox, form of prequalification. It should be a much more meaningful qualification rather than just ticking a whole load of boxes.

The Government has made a good start by publishing a construction pipeline, but it only covers the current Comprehensive Spending Review round and construction tends to be much longer term in its planning. The single most important thing for us in terms of improvement would be to have a 20year infrastructure plan-the clear investment pipeline. That is the way we can plan and get efficiencies.

Q69 Chair: The Government says it has an infrastructure plan.

Stephen Ratcliffe: It has an infrastructure plan, but it actually only runs for three or four years. The pipeline goes to the end of the current Spending Review. It does not go beyond that, and one of the points we are making to the Chancellor in our budget submission that we are writing at the moment is that that plan needs to be much longer term.

Q70 Chair: It depends on things like resolving HS2 and airport capacity. It depends on very big things that are just not resolved, are they?

Stephen Ratcliffe: There are an awful lot of smaller projects in those that could easily be resolved.

Q71 Lindsay Roy: Stephen, you have mentioned procurement pipelines twice. How helpful have they been?

Stephen Ratcliffe: They are helpful. It is good start, but when I look at the pipelines in Australia and Canada, they are much more granular; they have a lot more information in them. One of the good things about it at the moment is we can crosscheck which Departments are actually performing and which are not. The pipeline was published about two years ago. It is very clear that in some Departments there has been a massive amount of slippage. Defence infrastructure is one where I would say there has been a lot of slippage. On the education front, it has been very hard to see where things are going. In other Departments-I have already cited the Highways Agency and I would also say the Ministry of Justice-it is a good pipeline; we are pretty clear as to what the forward line of investment is, and that makes it much easier to deliver efficiencies from the supply side.

Q72 Lindsay Roy: Have you highlighted these models of good practice to the Cabinet Office and to Government?

Stephen Ratcliffe: Indeed.

Q73 Lindsay Roy: What kind of response have you had?

Stephen Ratcliffe: A good response. The response is always positive. The issue, though, is we are now down to delivery. There is a construction strategy, which both the Cabinet Office and BIS have put together. The new Chief Construction Adviser is responsible for delivering that strategy. At the moment they are trialling a number of different ways of procuring construction projects with a more integrated supply chain, which is going to have massive cost savings. We want those pilots to happen really quickly, and if those forms of procurement work better, we need to see them translated across Whitehall. There is an awful lot of good work being done. It is probably going to be three years yet before we see if it has had a really positive outcome.

Q74 Lindsay Roy: So essentially: more focused and less bureaucracy.

Stephen Ratcliffe: Yes.

Lindsay Roy: Thank you. That covers all the points I wanted to make.

Q75 Mr Reed: I want to ask you quite broad questions, if I can, just so we can give you the opportunity to share your experience with us. This first one you have touched on, but I think we can draw more out of you. What skills do you think the Civil Service needs to improve the way it runs procurement?

Jim Bligh: We need to think about the business and commercial skills the Civil Service currently has in terms of interaction with and understanding of the businesses and the markets with which they are dealing, and understanding what different mechanisms can be used to achieve the outcomes that they want to achieve in the first place. There are the political decisions taken to set up a new project or open up a new market to competition. Then there are the practical decisions, which are then open to some of the officials. In the relationship between businesses and those officials, we are seeing a lack of understanding of exactly what it takes to deliver certain outcomes: how much time it might take, how much money it might cost and the types of people that have to be involved in the process overall. A greater awareness of those things comes partially through secondments, partially through working with the businesses and partially through premarket engagement. That should significantly improve the process.

As I said at the outset, the Government has gone some way to improving skills in the Civil Service. Commissioning academies are something I would like to draw attention to. They have real potential to equip civil servants with the right type of mindset as well as the right skill set to approach commissioning in a more efficient and effective way. One of the benefits here is that they encourage people to build innovation into contracts and into the outcomes that they are seeking by thinking slightly outside of the process and thinking more widely about what needs to be done. More of that kind of initiative and less of the prescription from the very top would be very helpful, but overall it is an issue of developing greater commercial nous and understanding.

Kevin Craven: In terms of doing that, the nonexecutive type roles that have been introduced have been generally very successful. Certainly, I would encourage more of that in terms of providing some different perspectives than perhaps exist in terms of career civil servants.

Stephen Ratcliffe: It is worth saying that there is quite a bit of commercial nous in Whitehall. I see it certainly in terms of some of the clients we deal with. In trying to put together a PFI contract, there is a massive amount of commercial nous on both sides. One of my worries is, with this decision to be more localised in terms of spending and to decentralise, that some of that nous is being diluted. PFI hospitals are certainly a good example. Some of the earlier schemes were just dreadful in terms of the outcome for everybody, but over a period of a decade or so, everybody got better and there was centralised procurement happening on that. Lessons were being learnt from project to project to project, and that was building up to a commercial experience. There is a danger of some of that being lost if more and more is going to be decentralised. I am pleased that in the statement on PF2 there is still going to be more central procurement; certainly on schools there will be some degree of centralisation. If some of that is lost, we are going to dilute and evaporate some of that commercial nous that has been built up over the last decade or so.

Q76 Mr Reed: Am I hearing some contradictions in what you are all saying? On the one hand you are saying that we need less prescription, but, on the other, more centralisation. Can those two things be done together?

Stephen Ratcliffe: No, I don’t think there is a contradiction. Certainly, in terms of schools and in terms of hospitals, it is very much outcome based. Certainly, local decisionmakers can decide what outcome they want; there is no problem with that. It is then a question of having a professional procurement team that can enable them to get the best deal for that outcome. I don’t think there is necessarily a contradiction there.

Q77 Mr Reed: Does everyone agree with that?

Jim Bligh: Yes, I do.

Kevin Craven: Yes, I don’t think overcentralisation of procurement is helpful. There do need to be some local resources that are capable of doing local procurement. On the other hand, the higher levels of complexity in the bigger projects will require support.

Q78 Mr Reed: So the cutoff is based on what-complexity and size? Scale?

Kevin Craven: Yes, broadly.

Q79 Mr Reed: Another issue that the Cabinet Office has been trying to pursue is how we speed up procurement. What are the main causes of delay in your view?

Kevin Craven: I have heard it said quite frequently. Partially, one is the commercial skills we have mentioned in terms of managing complex processes. Secondly, there is a tendency to perhaps try to manage too many suppliers in the process. For example, if you have 10 suppliers in a process, you downselect to six and then you might downselect to three for a final offer or something like that. I have seen people taking four or five bidders through to a final offer. Just the ability to evaluate those bids and the time taken to do any kind of intelligent dialogue with that number of bidders will inevitably stretch the process time. Some rigour around that would be helpful in terms of choosing two preferred bidders or two final, shortlisted bidders and having an intelligent conversation with them to drive the best deal for everyone.

Jim Bligh: Sometimes I think there is an element of policy being designed without the implementation being designed as well. You will go through the policy-making process, and then you are trying to fit a round peg into a triangular hole. It does not necessarily work, so thinking about how you would implement at the same time as developing policy makes a lot more sense. It would speed the whole process up if they can happen at a similar timescale.

Stephen Ratcliffe: There was an issue a few years ago in terms of affordability. You would have a local health authority trying to put a hospital to market that they could not quite afford, and they would think, "If we have quite a few bidders in the race, the competitive market will get us the price we want." That often used to hold up projects, because that was rather naïve and did not work. The fact that Government now has pretty clear gateways before these projects are put to market is a good thing.

Q80 Mr Reed: I have heard you as well calling for more commercial nous and acumen on the part of the Civil Service. That is sometimes hard to achieve, given the nature of the organisation. It does not necessarily attract people with that skill set. How do we learn from the private sector or bring that kind of skill set into the procurement process of the Civil Service?

Kevin Craven: There are a couple of initiatives that have been trialled. One was around secondments of external resources into the Departments, which has been done on a fairly small scale and I think has been broadly successful and welcomed. The other is around the private sector supporting some of the training initiatives. For the Lean programme, for example, our members have provided procurement professionals to the panels that help in some of the training sessions. Those types of things are to be welcomed in terms of that interchange of ideas and understanding.

Q81 Mr Reed: So that happens and you would just like to see more of it.

Kevin Craven: More of it, absolutely.

Q82 Mr Reed: Are there any other views on that?

Kevin Craven: It is an unpopular view, but procurement professionals in the private sector will be earning very large salaries because they save you a huge amount of money. It is difficult in the Civil Service, given the cap set on salaries, to achieve the same level of individual with the experience. You might get a bright individual earlier on in their career, but you will not get a senior person at the top of their game.

Q83 Mr Reed: Do you think the Civil Service should be looking to outsource more of that kind of work, in that case, to make available to itself people with that skill set at the top of their game?

Kevin Craven: I think it is one of the issues that need to be dealt with. Even though I am generally in favour of outsourcing, there are some things you cannot outsource and you have to be careful what you do with that. Outsourcing procurement is a complex issue that we have tried ourselves and quite often not done particularly well at. There is no substitute for having the right resources inhouse, frankly.

Jim Bligh: Where you do outsource, you have to have a very close and firm grip on what is going on. That requires the right skills inhouse as well. Outsourcing is not something you can just do easily to move the issue away. You have to have the right skills back at home to be able to control what is going on as well.

Q84 Chair: The Government set up a Major Projects Leadership Academy in February 2012. Just a few days ago, at the end of last month, the Government set up a Commissioning Academy. Do we need a procurement skills academy?

Kevin Craven: Definitely.

Q85 Chair: Is that an offthecuff answer or is it something you have burned about for ages?

Kevin Craven: I apologise. It is an offthecuff answer but, broadly, training and development of your own people, if you cannot buy those skills in, is the only way to deal with it. It either has to be through advisers or developing your own skills, but it is a long burn.

Q86 Chair: Do contractors find that different Government Departments have very different levels of skills? Is the experience of contracting with one Department much more positive than the experience of contracting with another Department? Is it as obvious as that?

Kevin Craven: Yes.

Stephen Ratcliffe: Yes.

Q87 Chair: To that extent, should the Government operate much more as one customer?

Kevin Craven: There are steps towards acting as one customer. The introduction of the Crown Commercial Representatives has been welcomed broadly. In terms of the effectiveness of that, the general opinion of our members is that it depends substantially on the quality of those individuals, frankly. Broadly, any moves along those lines are again welcomed.

Stephen Ratcliffe: In construction, the establishment of the Construction Client Board, where all the main spending Departments are represented, will help to spread best practice. 10 years ago I held a dinner for the people in charge of construction procurement at Education and Health. We said to these two civil servants, "How often do you meet?" and they were embarrassed to say they had actually never met before. Yet they were broadly developing some quite similar sorts of projects. The fact that these people are now all meeting once a quarter, and are working together on and trialling novel and new forms of procurement, has to be a good thing and will help to spread that best practice to the notquitesogood clients from the better clients.

Q88 Chair: How much of the slowness of the decisionmaking process is just about the slowness of the way the Civil Service works?

Kevin Craven: It is generally the way it happens. I think empowerment of lower levels of the Civil Service is difficult. Therefore, any decision around the final procurement offer is escalated through multiple tiers until they can find someone who will make a decision on it. That makes it difficult to follow sometimes.

Q89 Paul Flynn: Can I ask one small question? Mr Ratcliffe, I believe you spoke in a warm way about PFI. The general decision on PFI now would be that it was immediately gratifying for politicians who were photographed outside the new goodies or new hospitals, but it meant borrowing money at a very dear rate that will have to be paid for over a very long period. Hence, we have Lewisham now but it was disaster ahead. Surely PFI is an example of politicians falling for something that was agreeable to them. When they are over the hills and far away, as far as the ones who decided on the PFI are concerned, the community has to pick up the very expensive tab for it.

Stephen Ratcliffe: It is a bit like buying a house. If you buy it on a mortgage, you are going to pay an awful lot more than if you pay cash.

Q90 Paul Flynn: But you don’t have a mortgage of 100 years and you don’t borrow the most expensive money on your house.

Stephen Ratcliffe: Nonetheless PFI did deliver a lot of new schools and a lot of new hospitals.

Paul Flynn: Which are closing down now-which are inefficient. Lewisham is an example.

Q91 Chair: And these were very expensive projects. The design, build and operate contracts were far higher in specification than in fact most of the public sector is usually prepared to afford.

Stephen Ratcliffe: And certainly for some of the Building Schools for the Future projects, picking up Kevin’s point, you had four or so contractors all designing schools really down to the nth degree for only one to win. The amount of wastage in that process was huge.

Q92 Chair: I was in a school the other day where they wanted to put up some shelves in the hall for the school trophies. They were told it would cost thousands of pounds because it had to go through a PFI process, and then the contractor said, "Well, you could just get freestanding shelves and install them yourself, but you can’t make any holes in the walls." This is absurd, isn’t it? How can we defend these contracts? They are indefensible.

Kevin Craven: I do not wish to defend the PFI contracts, but I think there is a balance. If you looked at the health estate, particularly, where you had hospitals that were built and simply not maintained, in extremis that might be drilling some holes in the wall multiple times over the life of the infrastructure. That is against a PFI where the asset will be handed back at the end of time in the correct condition. Clearly both ends of the spectrum are wrong; the problem is where we have arrived at in the middle of the spectrum is not clear to everyone yet. We are moving in the right direct, though, and PF2 is a step in the right direction.

Q93 Chair: Can I just make a general point? The Government spent about £230 billion a year on contracting and commissioning major projects. By any measure, a large amount of this money appears to be wasted. Do you disagree with that?

Stephen Ratcliffe: No.

Kevin Craven: No.

Q94 Chair: Are you angry about it?

Kevin Craven: We are angry about it.

Chair: You don’t seem very angry.

Kevin Craven: Both on a corporate and personal level, we would rather the taxpayer got good value for money. It is outrageous.

Q95 Chair: Do you think the Government is setting about achieving a step change in the quality of procurement. Do you think it is all going to be different in five years’ time?

Jim Bligh: We did a survey of our members, and they said it was eight out of 10 for policy and five out of 10 for delivery.

Q96 Chair: How different is it going to be in five years’ time?

Jim Bligh: We would hope they would do considerably more to make sure the right skills and the right processes are in place, but I think that is a matter of time.

Stephen Ratcliffe: The jury is out. All the building blocks are there; it is just now a question of getting on and delivering them. I cannot really answer where we are going to be in five years’ time for about another year probably, when we have seen some of these new forms trialled and we have seen how they go forward. Certainly, we are having better discussions with the Government now on these issues than we were five or 10 years ago.

Q97 Chair: Just paint us a picture. At the end of this Parliament, what is going to be different in your view that the Government will have achieved? Do you think they are not going to achieve it?

Kevin Craven: Certainly, particularly talking about the central Government Departments, you will see an improvement in terms of procurements of what we would call indirects-everything from utilities, to property services, to pens and papers and those sorts of things. You will see an improvement in the skills of some of the civil servants around the procurement of things. In terms of procurement of the underlying services that the Departments manage, which is the bulk of the £230 billion, I think there will still be a long way to go.

Q98 Alun Cairns: Can I pursue that, Mr Craven? Do you also see those improvements in the specialist areas as well when there are oneoff major procurement projects? We have talked about defence, but it could be any other area.

Kevin Craven: I do. Maybe I am just hopeful about these things, but broadly I think that the Olympics set a standard and a bar that people are eager to follow. Crossrail has set a bar as well in terms of how that has been managed. People acknowledge it could have been done better. There are opportunities and an understanding of how we as a country deliver these major projects that should improve the way we do them. Will they be perfect? Absolutely not. Will they be better? I think so. That is my opinion.

Q99 Chair: Finally, on EU procurement the Government is involved in negotiating the Commission’s review of EU procurement rules. We visited Brussels last week to get a full briefing on all that. The Commission started out determined to simplify their procurement rules. Are you involved in this? I think the CBI is certainly involved in this. How do you feel this review process is going?

Jim Bligh: We have been involved. We feel the Government has done a very good job of standing up for the interests of Britain here. They are fighting for exactly the right things in terms of simplification. We have to look at home, though, when we are looking at the impact of these directives. It is not the EU rules themselves that have caused the majority of the difficulties; it is goldplating of UK rules done in the UK.

I will give you an example: you have to provide three years’ worth of financial history if you are a UK business bidding for many different types of contract. European rules state that it is only one year that you need to provide. If you are a brand new company that has only been around for a year, you can do that, but of course you cannot do it for three years. That does provide barriers to entry. The Government needs to carry on the fight in Brussels, but then look back at home at what they do and do not need to do under the EU requirements.

Stephen Ratcliffe: I would support that. It takes approximately half as long to procure a hospital in Spain and Italy as it takes in the UK under the same EU procurement rules.

Q100 Chair: What is the Government doing wrong? Is it overcautious legal advice?

Stephen Ratcliffe: I think it is overcautious legal advice and goldplating.

Q101 Chair: When you say goldplating, what do you mean by goldplating? Are the actual regulations as implemented in this country much too prescriptive?

Stephen Ratcliffe: Absolutely. If you just read the Department of Health’s rules on the competitive dialogue process, it is tortuous compared with the original directive. It is partly Whitehall lawyers trying to eliminate the risk of any infraction proceedings.

Q102 Chair: Could you furnish us with concrete examples of goldplating?

Stephen Ratcliffe: Yes, we could.

Q103 Chair: That would be very helpful for our report. Despite these quite draconian EU procurement rules-and there is every prospect they are going to get more and not less complicated because of the legislative process, as we heard last week-France manages to make sure that every train on the French railways is a French train; every ambulance, every dust cart and every police van is a Renault. Why are they not working? Why are these rules worth it at all if they just don’t work in other countries? Presumably they are meant to open up opportunities for your members that they clearly don’t enjoy in other countries.

Kevin Craven: It is difficult to comment on the general point, but certainly the experience is that other countries use the rules as guidelines rather than actual rules that need to be enforced rigorously.

Q104 Chair: If these procurement directives are meant to create a single market, they have not succeeded, have they?

Jim Bligh: It is not necessarily the procurement directive that is an issue here; it is the WTO rules that say that anybody signed up to its Government Procurement Agreement can have their companies bid for British contracts. For instance, Venezuelan companies can bid for UK contracts.

Q105 Chair: So we would have open markets anyway.

Jim Bligh: Yes.

Q106 Chair: Why do we need these procurement rules at all if they do not compel the other countries to open their markets? Why don’t we just say that we do not need these rules?

Stephen Ratcliffe: I would not agree that the rules are not working entirely. There are British construction companies building hospitals in Spain and Italy, and working in Germany. These are not closed markets to us.

Q107 Chair: But that is as much because of WTO rules as European rules.

Stephen Ratcliffe: It is just the business environment. There are certainly opportunities there.

Q108 Chair: How could we make the European rules work much more in our interests?

Kevin Craven: Certainly the burden of those rules is much more significant for SMEs than it is for major companies. We have the ability to manage whatever the business environment requires of us and that is helpful for us, but in terms of building the SME base, that is much more problematic.

Q109 Chair: So you support raising the thresholds in the directives.

Kevin Craven: I absolutely support that.

Q110 Paul Flynn: It is part of the Chairman’s theme. You might have noticed he is not entirely neutral on the subject of Europe, using words like "draconian".

Chair: Speak for yourself.

Paul Flynn: Is the impediment British bureaucracy rather than Euro-bureaucracy, and should we look to Europe to set us free?

Jim Bligh: There is an element of both.

Kevin Craven: I am not sure we could wholeheartedly agree with that.

Jim Bligh: There is an element of both EU rules and UK rules here, and I think the Government needs to look at both. They have turned their attention to the EU rules and that is great, but they need to turn their attention to the UK rules as well, and how they are implemented. There is definitely scope to comply.

Paul Flynn: Just resist the path that the Chairman is trying to drive you down.

Chair: Except, Mr Flynn, I am very grateful for your making my case.

Paul Flynn: I am always happy to give guidance to younger people.

Chair: Are there any other questions for our witnesses? Thank you very much indeed. It has been a very helpful session. If you could send us that further information about goldplating, that would be extremely helpful.

Examination of Witnesses

Witnesses: Mike Cherry, National Policy Chairman, Federation of Small Businesses, James Allen, Head of Public Services and Partnerships, National Council for Voluntary Organisations, and Peter Holbrook, Chief Executive, Social Enterprise UK, gave evidence.

Q111 Chair: Welcome to our second panel in this session on Government procurement. I wonder if you could identify each of yourselves for the record, please.

Peter Holbrook: My name is Peter Holbrook and I am Chief Executive of Social Enterprise UK.

James Allen: I am James Allen. I am the Head of Public Services and Partnerships at the National Council for Voluntary Organisations.

Mike Cherry: I am Mike Cherry, National Policy Chairman at the Federation of Small Businesses.

Q112 Chair: Thank you very much for joining us. We hear an awful lot from Government about trying to involve smaller businesses and voluntary organisations in the procurement process. How is the Government doing?

Mike Cherry: If I can lead off on that one, I think the Cabinet Office under Francis Maude has very clearly understood what we have been saying for some time now. We very much welcome that and, of course, we have been engaged quite heavily with them. The problem that we have is that a lot of the rest of the public sector has not got that message again or yet. Last year the federation circulated a survey to all local authorities to try to get a better understanding from our perspective as well as to help local authorities to understand the small-business perspective. We will be repeating it again this spring and we are looking forward to seeing if lessons have been learnt and better practice put into position. With regard to the other public sector organisations, there are still some issues that need to be addressed there, particularly around PQQs, unfair contract conditions and making sure that late payment is also addressed within contract terms.

James Allen: I agree with a lot of that. Our experience and the experience of our members is mixed. There are pockets of excellent practice, both centrally and locally, but probably not enough sharing of that good practice. There is probably not enough support either for those commissioning and procuring services to do things differently. Often what we see is a real interest in involving the voluntary sector and social enterprise, but a lack of the tools and cultural understanding to know how to do that. There are some issues with implementation as well, because it is not enough to say, "We want the voluntary sector to be involved in contracts; we want the voluntary sector to do more," but then to structure contracts in a way that means only the very largest organisations-in practice, only the private sector-are able to bid for those contracts.

Peter Holbrook: There have been some very positive developments under the current Government. The Cabinet Office runs something called the Mystery Shopper Scheme, which is an opportunity for people seeking to bid for work to flag up any overbureaucratic barriers to accessing and being considered for delivery of those contracts. The Contracts Finder service has helped create more access to and information about opportunities that do exist. The cutting of red tape has also been welcomed. However, at times there is almost a contradiction between Government ambition: the aggregation of contracts and upscaling of contracts precludes smaller organisations from bidding against an agenda of localism, whereby, increasingly, decisions are meant to be taken on a much more local level.

Q113 Chair: How should the Government address that?

Peter Holbrook: There are a number of tools in the Government’s arsenal, Mr Jenkin. The Social Value Act became live on 31 January. It seeks to ensure that full social value, alongside price and environmental benefits, is considered on all public service contracts. That can certainly be enhanced with statutory guidance and with much greater public awareness.

Q114 Alun Cairns: Thank you, Mr Holbrook. A moment ago you said that the Government has cut some red tape, which has helped. Can you give us an explicit example of that? Can you also tell us where other areas of red tape could be cut? Again, if you can give us explicit examples, that would be helpful.

Peter Holbrook: Across central Government, Mr Cairns, there is now a standardised PQQ process, which means that organisations know exactly what is required of them at the prequalifying stage. That has been helpful. It would be great if that could be expanded across local government also and, for example, the NHS as well. There has been some progress made and I think there have also been some improvements, such as the Mystery Shopper Scheme, which is there for the Cabinet Office to involve itself when overbureaucratic or poor processes are put into place across the public sector.

Q115 Paul Flynn: Is there as much life in the Big Society as there is in the remains of Richard III, which were identified yesterday?

Chair: This is one of his hobby horses, by the way.

Paul Flynn: Mr Holbrook, you have had a magnificent career working for these marvellous people-Oxfam, Greenpeace, Marks & Spencer, The Body Shop. What went wrong? You are working for the Big Society now. You did not actually mention it in your presentation. Where is the Big Society? Can we resuscitate a corpse?

Peter Holbrook: I am not a medical professional.

Q116 Paul Flynn: I did not think you were. There was a theory yesterday going around the tweets that, having identified Richard III and discovered he had a blow to his head and a curvature to the back, Atos had accepted him as being fit for work. That is not far from the truth in many of the cases. We do have a look at the Big Society, and this is mentioned as your career now, and we do notice that people do laugh behind their hands when you mention it. It is one of these wheezes that Prime Ministers have. There have been lots of them-the Cones Hotline and the Third Way and now it is the Big Society. Nobody else seems to believe in it, but it meant taking £3.5 billion from charities while giving them about £600 million.

Chair: Mr Flynn, we are on procurement here.

Paul Flynn: This is what Mr Holbrook does, I understand. It is your job. How are we doing with the Big Society?

Peter Holbrook: There are a number of very positive developments, but against the backdrop of significant public sector cuts, there is a tendency for the aggregation and upscaling of contracts in the belief that that will create greater efficiency. Unfortunately, what that has is a perverse consequence that limits the opportunity for small providers-often those who have the opportunity to innovate or create alternatives and transform public services-to bid against that everincreased scale of contracts. That actually stifles competition; that stifles innovation and, whilst we need a much greater role for social enterprises, charities and small businesses in public services, it is increasingly difficult. Our evidence suggests that social enterprises are least confident about the future role they may have in delivering public services currently.

Q117 Paul Flynn: That is a lot of words, but the answer is: it is a foulup. It is not working.

Peter Holbrook: It is not for me to say or to give comment on Big Society. There are ambitions within Big Society that can be identified. Greater plurality in the provision of public services is something that, on the whole, the social enterprise community would welcome and champion. The reality and the financial pressures that lots of commissioners and procurement managers are under has meant that contracts, as a trend, have been upscaled, which limits the opportunity for those very organisations to play a full and effective role.

Q118 Chair: Can I bring us back to the Public Services (Social Value) Act 2012?

Peter Holbrook: Please do.

Chair: Does it ensure public bodies take into account the concept of social value? Is it working?

James Allen: It has only been live for four days, so I think it is genuinely too early to say whether that will make a difference. My view is that the Act in itself will not necessarily change very much. The fact is that it does give commissioners more of an opportunity-and there is a debate around how much of an obligation there is-to consider the wider social valueadd that contracts can bring and not just price. There is an opportunity for providers in the voluntary sector there to potentially win more contracts and to have a different sort of dialogue with commissioners as well.

It presents opportunities and it really is up to Government now to champion the Act, to throw its weight behind it and to be clear it is the expectation that commissioners will be using it. There is the potential for that to happen through, for example, the Commissioning Academy. Again, this has launched in the last week, so it would not be fair to say it is not having an impact yet-of course it is not. However, there are opportunities there, and there is a test for Government on how willing they are to actually champion that legislation and how willing they are to send a strong signal to both commissioners and procurement staff that they want things done differently.

Q119 Chair: Do you sense that public authorities, as they have been preparing for this Act, are actually planning to do something different? Are they planning to behave differently as a result of this Act?

James Allen: Some certainly are and we have seen some good examples of local authorities, in particular, planning for the Act and planning to do things differently. Whether or not that is a direct consequence of the Act or the fact that there are strategic, forwardlooking commissioners in the authority anyway of course I do not know. But it feels like there is the potential for it to make a difference, but it will of course take longer than a few days.

Q120 Chair: To what extent is this Act simply trying to compensate for other procurement rules that seem to preclude these considerations and make it more difficult? We have regulated procurement to such a degree that we have to introduce an Act to try to empower authorities to make more informed judgments about the decisions they are required to make by regulation. It is getting more and more complicated, isn’t it? Is this going to make it easier for public authorities to buy better stuff more quickly and more cheaply?

Mike Cherry: No, in our opinion it is not. We need them to look back to basics and support their local businesses, which actually support their local communities far more. On the evidence that there is, a very considerable amount of money that is spent locally remains locally, and therefore benefits the community and the businesses who support that community.

Q121 Chair: But the other procurement rules make it more difficult to have that dialogue.

Mike Cherry: They do. We have already heard that aggregation of contracts is a big concern of ours, because it goes right against the aspiration to put 25% or so of public sector contracts right down to small businesses and social enterprises. We have some conflicting arguments there about which benefits the country the best. From our point of view, it is small businesses that actually add the best value to public sector procurement, and we need to be moving completely away from the idea that price is the be all and end all, which we still see. Invariably when you have procurement officers-whether in the public sector or, indeed, in the private sector sometimes-concentrating purely on price, there is a knockon effect on another Department or another bit of the organisation further down the line, who has to pick up the pieces.

Q122 Chair: Analysis of the data suggests that geography is still the main limiting factor on procurement, particularly procurement at a local level by local authorities. Most procurement is done with companies within 50 or 100 miles of that locality.

Mike Cherry: This is an interesting statistic. We are still trying to find out, through our surveys I mentioned earlier, whether those local authorities who do not yet record it are likely to start recording it, thanks to our survey last year. We shall have better results on that later this year.

Chair: That will be very interesting.

Q123 Lindsay Roy: Mr Cherry, what progress has been made towards that 25% aspiration? Is this just something out of the ether?

Mike Cherry: It very much depends which Department you are talking to, whom you actually talk to and how the statistics themselves are interpreted. Overall you will probably hear central government say it is going up quite considerably. On other evidence, we will say that it has actually not moved at all and in fact could be going down.

Q124 Lindsay Roy: Have you been a catalyst then to share good practice as you have found it with the Cabinet Office?

Mike Cherry: I go back to our survey of last year. I think it has got local authorities thinking far more about how small businesses can benefit and give greater value to their procurement processes. What we do need to see is the health service, the MOD and other sectors, whether the police or the fire brigade, also looking at this and how small businesses can benefit them.

Q125 Lindsay Roy: Can you just summarise for us the main obstacles to SMEs winning Government contracts?

Mike Cherry: I mentioned PQQs earlier. There are eligibility criteria that are sometimes based on turnover. They could be based on standards; they are often based on insurance. We would like to be seeing far more evaluation on experience and ability.

Q126 Lindsay Roy: What has been the impact of the Cabinet Office initiatives for facilitating access for SMEs to Government contracts?

Mike Cherry: As I said at the outset, the Cabinet Office and central government certainly have the understanding there. That has been driven through where they can drive it through. What we are not seeing is that same driving force being put to other public sector bodies to make it happen where it needs to be happening for the benefit of small businesses and social enterprises.

Q127 Lindsay Roy: What has been different in the Cabinet Office?

Mike Cherry: They are able to instruct, shall I say, whereas other public sector bodies, I believe, are not able to instruct and can only offer guidance.

Q128 Lindsay Roy: Is there more commercial expertise?

Mike Cherry: I would not know about the commercial expertise within each Department.

Q129 Lindsay Roy: Has there been any additional professional training, for example? Are you aware of any initiatives?

Mike Cherry: That is not something we would necessarily be aware of.

Q130 Lindsay Roy: Have you asked?

Mike Cherry: Again, it is the results that we will be expecting to see, not how they actually do it internally.

Q131 Lindsay Roy: Presumably you have a vested interest in bringing about improvement in this area.

Mike Cherry: We do indeed, and therefore we highlight what the barriers are to our members actually being able to secure public sector contracts.

Q132 Lindsay Roy: And there should be a continuing dialogue, therefore, with the Cabinet Office.

Mike Cherry: Which there is.

Q133 Lindsay Roy: What has been the impact of the Crown Commercial Representative for SMEs?

Mike Cherry: We have had very good engagement with Stephen Allott and his staff on this one. We do have regular updates, and we understand from those that there has been a very considerable amount of progress made, which we welcome.

Q134 Lindsay Roy: You said there has been good progress and liaison. What have been the outcomes?

Mike Cherry: The outcomes would be specifically in his report and I do not have a copy with me today, but I can certainly pass that on to the Committee if that would be useful.

Lindsay Roy: That would be very helpful.

Q135 Mr Reed: Mr Allen, here is a line from your written evidence. You said: "Procurement practice, particularly of central Government, can show a lack of understanding of the voluntary sector." Could you talk us through that?

James Allen: Sure. There is a mixture of cultural and practical things that lie beneath that response. On the practical side, there are issues around contract size that we have touched on; there is frequently a lack of understanding about the level of risk that organisations in the voluntary sector can typically bear. There has been a lack of transition management in the movement towards payment by results; it has been a very big move from the sector away from grant funding towards contract funding and now towards payment by results within a short space of time and without much support either.

There are some cultural issues as well around both procurement and commissioning. It is important for us to stress that we see procurement as part of the commissioning process and part of the commissioning cycle. Getting procurement right is not just the answer in itself. We need to get the commissioning right more broadly, but on those cultural issues there is often a lack of understanding about the motivations of the voluntary sector. Voluntary sector organisations and charities do not wish to win these contracts in order to make a profit; they want to be involved to improve the service. What voluntary sector organisations are often good at is in innovating in services as well. That lends itself far more towards an outcomesbased commissioning model than one very tightly defined on output. Those are the headlines that lie beneath our comment in the evidence.

Q136 Mr Reed: You talked about the sector seeing procurement as part of the commissioning process, so by inference does the Government not?

James Allen: Sometimes Government does and sometimes Government does not. What we see at local authority level is things work well when procurement officials are embedded within commissioning teams. They talk to each other, they talk to the market, they talk to users and they have an understanding of how you can use procurement as part of that process. Things work really badly when you have a procurement team at the darkened end of some distant corridor of the town hall and they do not engage with commissioners. Their only engagement with other teams seems to be with the legal team, who tell them that they cannot do things because it is too difficult. Therefore, sometimes it does work really well but often it does not. The other slightly worrying thing that we see both locally and centrally is the interchangeable use of the two terms: people think commissioning and procurement are basically the same thing, which they are not.

Q137 Mr Reed: Could you give us a definition of commissioning, then, as you understand it, just for the record?

James Allen: Sure. I would say commissioning is a far broader and more holistic process. It is helpful to see commissioning as a cycle that starts with a process of needs analysis, where you decide what the need is. You then might move to the procurement phase, where you are actually buying the service. You then should be constantly evaluating the quality of that service as well. Then when you reach the end of that cycle, you may just retender if you decide that is the decision. You may want broadly speaking to do the same thing but with a different provider, or it may be that you want a far more fundamental look at the way services work. For example, the way local social services work might require a far more fundamental shift than just retendering one part of that service to a different provider. Commissioning is a cycle and procurement is part of that cycle.

Q138 Mr Reed: Presumably from comments you and some others made earlier, in establishing or defining the outcomes you are looking at value more widely than cost all the way through.

James Allen: Indeed.

Q139 Mr Reed: Having made that clear, I would be particularly interested in whether Mr Holbrook agrees with that definition and that approach. Do you see the Government as recognising these obstacles and acting on them or not?

Peter Holbrook: I would agree with everything that James has said in terms of good practice versus bad practice and commissioning being the design of what is about to be purchased, and procurement being the purchasing process. Particularly at a local authority level, we are seeing the contraction of capacity for commissioning and procurement teams to actually understand the needs of the communities that they are commissioning and procuring on behalf of. That does create a real challenge, and I think there has also been a loss of historic knowledge and experience that is also threatening good commissioning and good procurement.

One of the big issues for all three of us is commissioning based on balance sheets, whereby there is this need to have very substantial balance sheets and to be very well capitalised in order to even be considered for delivery. I believe that has developed in order to try to manage risks, but that fundamentally demonstrates a misunderstanding of risk. We should be risk aware, not risk averse, and I think commissioning based on balance sheets has led to some quite perverse decisions being taken.

Q140 Mr Reed: You have said there that there is a loss of understanding of the community that commissioners are commissioning on behalf of. Are there ways that we should be more intimately involving users directly in the commissioning process? How might that work?

Peter Holbrook: There has been some very interesting work done around community budgeting, whereby in effect service users are part of the design of the services that they then receive. A very good example is commissioning adult social care. Something normally not considered within the contract specification is the consistency of the people delivering that adult social care. For an older person that is being bathed or changed, it is very important that they see the same face week in, week out, but that is something often absent from the contractual specifications. This means that costs can be driven down, but the service can be degraded and the service user may experience a service that does not maintain their dignity. Cocommissioning and codesigning services with service users is an area that has been explored by a variety of local authorities and by central government. The Department for Communities and Local Government is championing this, but it is not yet widely enough spread.

Q141 Chair: Moving on to EU procurement directives: Mr Cherry, the evidence that we have from the Market Research Society describes the procurement rules as overprescriptive and administratively burdensome, and says that civil servants tend to be too stringent in interpreting their requirements. Social Enterprise UK says that applying the full set of EU rules adds complexity and costs, which are both unnecessary and disadvantageous to small organisations. What is your view?

Mike Cherry: For a long time the federation has been very concerned where there has been goldplating back here in the UK of any EU directives generally, including procurement. When you look at the stringency of the requirements, we would have some very real concerns that here in the UK we tend to implement to the hilt, whereas our competitors across other parts of the EU do not necessarily do that. We do not have a level playing field as far as small businesses and others are concerned. That is where our biggest concerns lie. We tend to make ourselves uncompetitive when we are compared with France, Germany, Italy and our other main EU partners.

As far as red tape is concerned, as you are well aware, the federation has long had issues over red tape, whether it is here in the UK or coming across from the EU. Anything that can be done to think small first and to mitigate the impact through proper impact assessments would be welcome to make sure that small businesses are not as disadvantaged as they tend to be at the moment.

Q142 Chair: Are you making representations to the Commission and to MEPs about the revision of these directives? One of their concerns is to help smaller businesses. How effective do you think this is going to be?

Mike Cherry: We certainly do, and we do that both directly and through the European Small Business Alliance, which we are major partners of. They, through our EU team, work very forcefully on our behalf out in Brussels.

Q143 Chair: What are the top three things you are hoping that the new directives will adopt?

Mike Cherry: Think small first, proper impact assessments and microexemptions if absolutely necessary.

Q144 Chair: What do you mean by microexemptions?

Mike Cherry: Exemptions for micro-businesses.

Q145 Chair: Are you arguing for an increase in the thresholds of contract size that these directives should apply to?

Mike Cherry: I do not think we are arguing for an increase in the thresholds. What we are saying is that, where it is necessary, the undue requirements should be exempted from the needs of small businesses at the micro level.

Q146 Kelvin Hopkins: Just on that last point, raising thresholds very considerably would actually help small businesses, because you would not then be covered by the directives and you would not have so much of a difficulty. That is one thought. My other thought is one we raised in Brussels last week: that Germans tend to buy German, the French buy French, the Italians buy Italian, and we buy imports. Are you not concerned to make representations to Government and to public authorities to do a bit more to try to help our own companies, particularly in the small business sector.

Mike Cherry: That is a question that needs putting to Government. We do obviously make that representation, but it is then EU state aid that gets thrown back at us, so we have some real concerns where that is implemented. As I say, we understand that it is EU state aid that causes the issue there, rather than us doing anything untoward.

Q147 Kelvin Hopkins: On state aid, it seems that other countries in the European Union seem to get around those problems.

Mike Cherry: That was the point I tried to allude to earlier. We are not on a level playing field when implementation is concerned, because we implement to the hilt whereas other countries seem not to.

Q148 Kelvin Hopkins: There is not always a difference of view between you, but I noticed Mr Holbrook was nodding when we talked about raising thresholds. I just wondered if you had an extra comment.

Peter Holbrook: I saw Commissioner Barnier last week and we spoke about the possibility of increasing the threshold. Commissioner Barnier is the commissioner for the Single Market within the European Commission. We are certainly arguing, and I think he is very receptive to the principle of opening up contract opportunities for SMEs. One way to do that is to increase the threshold, so that is something that we are lobbying for. I also believe we are encouraging the EU to think about the principles we have referenced already in the Social Value Act. That is not necessarily to move towards protectionism, but certainly to look at whole value. In terms of reducing environmental impact by buying locally, you can do that and it does not fly in the face of European procurement legislation. If you were to determine that you could only buy locally, that would be seen to be against all the legislation the EU has around the Single Market operating freely and openly. By increasing the principle of social value, you can ensure that decisions do benefit local providers and local suppliers in a legitimate way.

Q149 Kelvin Hopkins: We seem to follow the religious beliefs in markets in the way the European Union wants, but other countries seem to get around them. They profess the beliefs, but do not practise them. It is not just a question of winning and losing contracts, but the costs involved in having to advertise across Europe for every contract. There must be some costs involved. If thresholds are raised, there will be a lot of contracts that then do not have to be advertised Europewide and do not have that bureaucracy with delays and so on. Wouldn’t that be helpful too?

Peter Holbrook: Yes.

Q150 Chair: When you met Monsieur Barnier, did you tell him that applying the full set of EU rules adds complexity and cost, and it is unnecessary and disadvantageous.

Peter Holbrook: I did, Mr Jenkin.

Q151 Chair: What did he say?

Peter Holbrook: He was very receptive to that point, and I believe that he is committed to creating an environment within the Single Market that enables SMEs to take a much more significant role.

Q152 Chair: What about mutuals? Did you discuss the question of mutuals and the special purpose vehicles that the Government is creating to spin out some Government activities? It is something the British Government is pressing for as an exemption.

Peter Holbrook: Indeed, and I think there is a growing interest across the European Union in alternative business models that appear to perform well through challenging economic times. We have seen within the UK a number of mutuals, co-operatives and social enterprises perform very successfully over the last three or four years. There is increasing recognition that plurality of different business forms will ultimately be very healthy not just in the UK but more broadly across the European Union too.

Q153 Chair: Mr Cherry, how much crossborder business do you think your members actually do?

Mike Cherry: According to our recent survey, around one‑fifth to one‑quarter of our members actually export. A vast majority of those export to the European Union.

Q154 Chair: We are talking about public procurement contracts.

Mike Cherry: We do not have the statistics available on public procurement contracts.

Q155 Chair: Have a guess. How many of your members actually get contracts from public authorities in other countries?

Mike Cherry: I imagine that is a very low figure.

Q156 Chair: Why don’t we just exempt all small businesses or all small contracts under a certain amount from these contracting rules? Would that be advantageous?

Mike Cherry: I don’t think it would. Where you have professional services involved, what we are seeing is opening up the market so that our members can actually offer those services in other countries is very important indeed.

Q157 Kelvin Hopkins: I have one more question following up on what you were saying, Chair. The fact that we have a trade deficit with the rest of the European Union amounting to almost £1 billion per week suggests that they have been much more successful in selling to us than we have to them. Perhaps the public procurement rules have been part of the problem.

Mike Cherry: You would have to ask respective Governments on their procurement issues around that particular statistic.

Q158 Alun Cairns: Mr Cherry, I want to ask you about the prime contracting model that the Government has become keen on over recent times, partly because of the reduced risk to the Government. Can you tell me about your interpretation of it and the risks you see for SMEs?

Mike Cherry: I am not fully conversant with the prime contracting model itself. If you would like to elaborate on that, I will certainly be able to answer some of the questions.

Q159 Alun Cairns: It is where the Government effectively contracts to one large provider, which then subcontracts to many other providers.

Mike Cherry: We would have some real concerns about that, because it does not lead to innovation; it does not lead to proper value; and it can ultimately lead obviously to a monopoly situation two or three years down the line. We would also have real concerns that that aspirational 25% would not be reached under those terms.

Q160 Alun Cairns: The Chartered Institute of Purchasing and Supply noted in their submission to the Committee that they felt, and I am paraphrasing poorly, that it was a pragmatic approach on behalf of the Government that would reduce the risks to Government and potentially lead to significant savings.

Mike Cherry: I think it is how you quantify those significant savings and whether they actually deliver value rather than cost.

Q161 Alun Cairns: Can I turn to Mr Allen and Mr Holbrook? In your written evidence you highlighted that the Work Programme is an example of the prime contracting model not working well. Do you want to elaborate a little bit on that?

Peter Holbrook: I believe one of the reasons the Government pursued this model was in an attempt to reduce the risk burden that Government traditionally carried. Our assessment is that, as the Government remains the accountable body, it ultimately will always bear ultimate responsibility in cases where organisations fail to deliver contracts or services, which then requires Government to intervene, as we have seen before. Therefore, I think we have to be cautious and recognise that there is a limit to the extent to which Government can actually transfer risk on to prime contractors. The Work Programme has not demonstrated efficacy in its ambition, and what we have seen is that the risk the prime contractors were intended to take is passed down the supply chain on to the smaller organisations, who are least well placed to take that risk, partly because they do not have the financial resilience that is often required on paymentbyresults contracts.

James Allen: I would agree with a lot of that. Just to start, we are not philosophically opposed to the use of the prime contracting model, but we do think there are significant implementation problems with it. The obvious attractions are not only reduced risk exposure for the commissioner, for Government, but also clarity as well. Clearly there is an attraction to working with a smaller number of large providers directly rather than directly managing hundreds of smaller ones.

We can see the attraction, but the Work Programme does throw up a number of issues. The first is that I do not think the evidence is really there yet that it will actually reduce risk to Government in the long term. Put simply, if the Work Programme does not work and ultimately unemployment numbers do not fall, then Government will still be exposed to financial risk as a result of that. There are issues around the passing down of risk within supply chains, as Peter has highlighted. We convene a group of around 160 subcontractors on the Work Programme, and very frequently this is an issue; they will say risk is simply being passed down the supply chain. You end up in the perverse situation where those least able to bear risk are actually the most exposed to it.

But it is not just an issue of financial risk. There is also the issue of how appropriate it is to have a distant, very large contractor responsible for an intervention with someone who might be quite vulnerable and quite far from the labour market. There are a number of issues around the treatment of particular groups within the Work Programme too, and the direct line of accountability is not always clear. When we have raised this issue with DWP, it feels like we enter a bit of a blame-game cycle: DWP will say it is the prime contractor’s responsibility; the prime contractor will blame the subcontractor; the subcontractor will blame the prime contractor; and so on. The accountability there is an issue.

There is an issue of accountability around taxpayers’ money as well. We have long said in the Work Programme that there should be far more data publicly available in an easily digestible format than there is. Having worked on this for quite some time, I am frankly often mystified as to what is going on within these supply chains. The performance data we see simply is not clear, and it is not easy to make a judgment between which prime contractors are doing very well and which ones are doing less well. It is also less clear what they are doing to make sure that their supply chains are fit to serve the full range of people that need it. There are a number of issues around the Work Programme, and it is very much our hope that its problems will not just be applied elsewhere.

Q162 Alun Cairns: Do you think that more conditions should be placed on the prime contractor to subcontract to SMEs and offer greater transparency? What other conditions should be there if you do think that is a way forward?

James Allen: I certainly think there is an issue around transparency. I think it is difficult to say we are going to use a prime contracting model and then we are going to very tightly mandate who you can subcontract to. If we are going to use prime contractors, we have to allow them to make decisions, but I think it is then important that they are accountable for those decisions and the decisions they make are clear.

There is a question about whether it is always appropriate to use the prime contracting model. For example, are there groups in an unemployment programme who would be better served by a different model? I do not think there is a clear answer to that, but it certainly needs to be examined more closely. One of the things that we are doing is to work with Serco, which as you know is a very large prime contractor, to develop some mutually agreed standards on how the primesub relationship should work. That will include a number of things around supply chain management, a number of things around the way risk is handled and also the level of support that we would expect prime contractors to give subcontractors. That is not only in risk sheltering but also practical things where appropriate, such as shared back office facilities. It will also include whether primes should be doing more to do what we all ask Government to do, which is to commission smaller organisations in a more proportionate way. If you are asking a relatively small organisation to conduct a relatively small number of interventions, you probably do not need to subject them to a huge internal procurement process within the supply chain.

Peter Holbrook: In the construction industry, openbook accounting is frequently used, so that the procurement side of things has a greater opportunity to genuinely share risk. I would encourage openbook accounting to be adopted across all public service contracts that are of a certain size, because that does actually enable the commissioner to explore with the contractor and create greater transparency, and to look at where success and failure is being generated.

Currently, I think there is a lack of clarity about who is succeeding and who is succeeding less well. Principles such as openbook accounting could help us go a long way. Increasingly, as we outsource more and more of our public services, we need to explore whether levers such as Freedom of Information should also be mandated to those companies that have those large contracts. It would need to be proportionate so it does not put an unfair burden on small providers. There is a range of levers that Government could apply to ensure the greater transparency that James has referenced.

Chair: Thank you very much indeed, if there are no further questions. You have been very helpful, and if there is any further information that occurs to you that you think we need to take account of, please do send it in to us. I am very grateful for your evidence this morning.

Prepared 27th February 2013