UK public spending on large contracts dwarfs rest of Europe

21 August 2017

The UK spends almost double the rest of the EU combined on large procurement contracts and much less on smaller ones, according to a study.

The Taxpayers’ Alliance report Reforming Public Sector Procurement said that the UK had published 167 contract award notices on contracts worth €100m or more in 2015, despite ambitions to spend more with SMEs.

This compares to 29 in France, 25 in Italy and five in Germany in the same time period.

While the UK spent €74bn on procurement through contracts of €100m euros or above, France spent €7bn and Germany €1bn.

The percentage of contracts awarded worth less than €134,000 was 8.4% in 2015, the second-lowest percentage in the EU after Italy.

In Germany the figure was 23.8%, while in France it was 36.9% and in the Netherlands 27.3%.

“[The figures] suggest that the UK is in dire need to start partitioning contracts if it is serious about making it easier for SMEs to engage,” said the report.

The report said while the legal regime governing public procurement had improved since 2015 it would be essential to resist pressure to “buy British” post-Brexit.

This was because one of the biggest problems facing the market was a lack of a large pool of capable suppliers, and closing the market to European vendors would shrink this pool even further.

The report urged the government to strengthen its drive to expand e-procurement beyond ICT contracts and to aim to match the EU’s ambition to make it mandatory by 2018.

As digitising the process had shown itself to be by far the most effective way to make procurement more efficient, it should be the leading priority.

And the government should take steps to move towards agile procurement. This could include open-ended contracts that make room for adjustments should circumstances change, where appropriate, and which also emphasise skills and contract management.

“The sheer extent of the UK’s derivation from European averages is at the very least food for thought for UK procurement professionals and more research into the causes behind the patterns would be very useful,” said the report.

“The principle should be that the more flexibility and discretion is afforded to a contracting authority, the stronger the performance monitoring mechanisms incorporated into the contract,” said the report.

This could mean ensuring regular disclosure of performance data that could be compared against benchmarks. The data could then lead to rewards or sanctions.

However, while the report advocated involving more SMEs to reap the benefits from e-procurement, this should not be an end in itself.

“There will be numerous instances where increasing competition will not be possible,” said the report.

“The focus there should be on strengthening oversight on large suppliers through emphasis on regular reporting, benchmarking of performance and a strong incentive structure to act as a safeguard against lack of competition.”

One common criticism of the current system is that the procurement process is unnecessarily burdensome and bureaucratic, and puts off non-established providers from bidding.

As a result, large, established providers such as Serco, G4S and Capita are able to leverage economies of scale and incorporate entire departments dedicated to handling the tendering process.

“This means they can minimise the marginal cost of each individual bid and strengthen their competitiveness when compared to bids lodged by providers forced to pass on those costs to the tendering authority,” said the report.

This also allowed large suppliers to consolidate their grip on the market through techniques such as predatory pricing.

This might mean they could absorb losses made on unviable bids to undercut the competition and forced them out of the market, or they could aggressively pursue a strategy of expansion, acquiring every competitor.

However, the report also praised some of the government’s attempts to increase spending with SMEs.

The government exceeded a target of 25% of procurement spending to reach SMEs by 2015 by 2%, though 60% of total government spending with SMEs is classified as “indirect”. The latest target is that a third of spending should go to SMEs.

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