The government should use its significant procurement spend to bring about a fairer economy and give more opportunities to SME firms, especially when appointing external suppliers, says a new report by Demos.

With current spend on external suppliers at £284bn, procurement is the UK government’s largest expenditure, equal to 13.4% of the UK’s GDP. Influencing how this money is spent represents a significant opportunity for government to shape the nature of business and the wider economy, says the report, which looks at how central government could use public procurement more strategically to bring about a fairer economy and more efficient, effective government.

In their report, Value Added: how better government procurement can build a fairer Britain, Demos argue that the government could more effectively ‘procure for good’ or ‘buy economic change’ by more deeply embedding social value into the procurement process for the provision of goods, works and services. This can be used to encourage suppliers to undertake activities such as employing people on a real living wage, reducing carbon emissions, using more inclusive recruitment strategies, and offering training opportunities. There are encouraging early signs of these considerations being taken into account during procurement rounds, says the report.

The report also finds that social value procurement and current EU legislation, designed to promote competition and transparency, could help tackle aggressive tax avoidance as 25 of the government’s 34 Strategic Suppliers (73.5%) are part of a corporate group including one or more subsidiaries in 14 tax havens (not including US mainland, EU or Single Market jurisdictions), according to public records.

Despite government efforts to improve matters, UK public sector markets are still relatively uncompetitive and increasingly reliant on larger suppliers and as a result, more should be done to increase competition and level the playing field for small and medium-sized enterprises (SMEs) and voluntary, community and social enterprise organisations (VCSEs) in public sector markets, says the report.

To deepen and embed social value in public procurement and improve transparency and a more level bidding playing field, the report makes ten recommendations.

1. Government should establish priority social value standards for departments in order to pursue select, strategic cross-government objectives, for example related to carbon emissions and fair tax practice.
2. Central government departments should include social value bare minimum standards that are pass or fail in the pre-qualification criteria.
3. The three central government departments with the highest procurement spend (Department of Health and Social Care, Ministry of Defence and Department for Transport) should create an SME advisory panel to help departments make it easier for SMEs to bid and win contracts with them. 
4. Social value minimum standards for public procurement should include criteria relating to a bidder’s exchequer contribution. For example, bidders could be expected to meet a certain Effective Tax Rate to pre-qualify for that procurement round.
5. The government should take advantage of existing provisions in EU competition law to ensure that companies do not gain an unfair advantage over their competitors by using international tax arrangements. 
6. The government should take advantage of anti-corruption provisions to exclude from any public contract a supplier whose ultimate beneficial ownership is secret above the value of 5%, in order to ensure that no conflict of interest is entailed.
7. Central government should move to an Open Data Model for spending data. This should include Open Data standards covering every government contract and award notice and a clear, transparent register of public sector procurement authorities.
8. To incentivise buy-in from companies for the Open Data Model, the extra administrative burdens of transparency should be written into the costs of the contract by default.
9. The National Audit Office should conduct an annual report on central government procurement transparency, presented to parliament. This should include a ‘league table’ ranking of departments, with the bottom three departments having to make an oral statement to the House.
10. The requirements of the Freedom of Information Act (FOIA) should be extended to public sector contractors, through an amendment to the FOIA stipulating that all information held in connection with the performance or future performance of the contract should be considered under the domain of the FOIA.

Commenting on the report, ACE chief executive Hannah Vickers said: “It’s good to see procurement being looked at in this way. ACE’s Future of Consultancy report is advocating a ‘five capital’ model which sets out a more sustainable framework for ‘value’ which we are advocating clients use when they come to market so they determine what they value and develop their commercial models and pick suppliers on that. 

“It’s far more robust than current ‘quality criteria’ which only really demonstrates how well companies can answer questions. I would suggest that measures under financial capital around tax take and human capital around UK jobs would be the sorts of measures which would mitigate the risks the Demos report highlights. 

“The system announced last week by the Construction Leadership Council and the Chartered Institute for Housing offers a vehicle to implement this approach on government projects and they are going to use our ‘five capital’ framework. ACE will also be doing what we can to influence clients directly. The next step is for our sustainability group to determine the types of metrics under each of the categories, which we hope to publish something on early in the new year.”

Mark Robinson, chief executive of public sector procurement specialists the Scape Group, welcomed the report and called for a new UK procurement model that delivers maximum value for the economy and local communities alike.

“Price and quality have long dominated the UK’s procurement processes, but social value practices should also be embedded within decision-making, ensuring that projects leave a legacy within communities,” he said.

“It is concerning to see how many contracts are being awarded to suppliers that are operating in tax havens. As budgets become tighter, this creates an unlevel playing field and reduces tax receipts for government. It is time to take a best practice approach and create a new UK procurement model that delivers maximum value for the economy as well as local communities. This presents a very real opportunity to allow procurement to act as an incredible force for change, making better and smarter public sector procurement a top priority for policy makers,” said Robinson.

Click here to download the Demos report.