20 December 2018
Hector Denfield and Natasha Barlow look at the government’s recent announcement on using “social value” contracts to revolutionise government procurement.
The total collapse of Carillion in January 2018 and the share price collapse of Capita, Interserve and Mitie have forced the government to review current procurement policy. The aim is to avoid any further disasters and to maximise the potential power of public procurement to drive social good. On 19 November 2018, a statement by the Minister for the Cabinet Office, David Lidington, declared that from summer 2019, the government will have to take social and economic benefits into account in certain key areas when procuring public services, including:
There is already legislation in this area in the form of the Public Services (Social Value) Act 2012, which requires public bodies in England and Wales, including councils, to consider in the pre-procurement process how they might improve the “economic, social and environmental wellbeing” of their area with this contract. This suggests an approach that prioritises value for money rather than the lowest cost. However, the act is very brief and has no definition or guidance on what is covered by economic, social and environmental wellbeing, nor ways in which this can be measured. Our clients include councils all over the country and in practice we see a great deal of variation in the way this duty is approached.
In terms of helping access for small businesses, there are known issues with large companies dominating government contracts. The government estimates that currently only around a quarter of government outsourcing expenditure goes to small and medium size enterprises (SMEs), including where large companies buy from SMEs. The think-tank Reform considers that this is due to the onerous tendering process, which often spans many months and can require hundreds of documents and meetings. This represents a significant barrier to entry for many SMEs. Some authorities also suffer a tunnel-vision which prioritises cost over all other factors. Large companies with razor thin margins will score highly in competitions under these conditions. This undervalues the benefits of SMEs, who are often more rooted in their local community and can offer value in terms of community benefits that larger companies often cannot.
Carillion did not collapse overnight. There were clear signs that it was struggling, with three profit warnings in five months. This was exacerbated by the government’s focus on cost over quality, which incentivises companies to tender unsustainable prices to win the contract, then seek uplifts during the lifetime of the contract to make it profitable. When Carillion finally failed, the government chose not to bail the company out so that taxpayers were ostensibly not paying for the mistakes of a private company. Despite this, the government and a large number of councils around the UK faced huge financial costs for finding replacement providers for all of Carillion’s various services at short notice.
The failure of Carillion has negatively impacted public perception of government procurement. Given how much money is spent on outsourcing to private companies (approximately £250 billion per year), it is welcome that the government is preparing to strengthen the rules around using public contracts as a force for good. David Lidington stated that “[p]ublic services should be delivered with values at their heart … it is right that we use government’s purchasing power to benefit society”.
The government is emphasising the importance of “living wills”, which have been put forward as best practice to provide key information and a contingency plan in the event that a company fails. This would make the transfer of services to a new supplier easier to manage following an event such as the liquidation of Carillion. Capita, Serco and Sopra Steria have volunteered to lead the way in these plans. The government is also proposing to run pilot schemes when outsourcing a service for the first time in order to collect data and learn from mistakes early on, which should improve the long-term value for money of the service.
It remains to be seen how exactly the government proposes to improve access to SMEs, to improve access to businesses run by under-represented groups, to increase representation of disabled people, and to reduce environmental impact. However this is tackled, this will hopefully lead to a shift in focus from lowest cost to best social value, helping to ensure that the public services market is more diverse, more resilient, and drives increased social benefits for everyone to enjoy.
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.
© Copyright 2019 Sharpe Pritchard