TUESDAY 30 JANUARY 2007

MR NICK GOULDING AND MS LESLIE KOSSOFF

  Q400  Chairman: You are expressing your personal views?

  Ms Kossoff: Yes, these are my personal and professional views.

  Q401  Chairman: That is very helpful. I was struck by the fact in your submission that very often you compare the actual percentage of government contracts won by SMEs, which you put at 22%, with SMEs as virtual businesses, which is 99.8%, it is very high. Is that really, do you think, the comparison that should be drawn? Many companies are too small to compete for the overwhelming bulk of public business and others are not in the markets that we tender for either—like hairdressing for example, there are whole market sectors which are unlikely to go out to competitive tender—so is that really the best comparison?

  Mr Goulding: I think there are two answers because there are two questions that you posed essentially there. The first one is, I suspect, a better comparison would be the proportion of private sector GDP accounted for by small and medium-sized enterprises: the Small Business Service figures for 2003-04 were that 49.6% of private sector GDP came from small and medium-sized enterprises and it has hovered around that level, around about 50%, for at least the last decade.

  Q402  Chairman: Is that 22% of contracts by value or volume? I cannot remember.

  Mr Goulding: I believe that is by value, but if I look over my shoulder I might get value. By value.

  Q403  Chairman: By value. Tha is 49% plays 22%, which is probably a better measure of the disparity.

  Mr Goulding: As regards the second aspect of your introduction there, I am not sure I accept the premise that lots of very small companies are not in a position to bid for them. There may be particular products that are less appropriate, but across the spectrum as a whole I think it is more the way in which public procurement is conducted that excludes them rather than inherently they are incapable of supplying to the public sector.

  Chairman: That is very helpful. We are moving to a series of questions from Judy Mallaber, where I think probably, unless I am wrong, Ms Kossoff will want to comment on but I could be wrong about that.

  Q404  Judy Mallaber: I think a major part of your written evidence was where you were arguing in favour of securing either an opt-out or a re-drafting of the WTO agreement on public procurement. I think your preference is to get a re-drafting in the first instance, would that be right?

  Ms Kossoff: No. So that you know, the FPB prefers the re-drafting as a starting point. As far as I am concerned, get out.

  Judy Mallaber: I am not quite sure where we go on asking you.

  Chairman: We might have time for both of you to answer all these questions!

  Q405  Judy Mallaber: Whichever you are doing, either of you, how important would that be, either the re-drafting or the getting out, in getting more small companies involved in public procurement? Is it absolutely critical?

  Ms Kossoff: I believe that it is absolutely critical based on the experience which we had in the United States and the fact that from the beginning of this particular agreement in the WTO the US opted out from the get-go because it does, in fact, put the kibosh on the ability of the government to be able to guarantee what is now 23% direct procurement and 40% subcontracted procurement to small businesses as defined in the United States, which is also a difference, but here, because you are party to the agreement, you cannot, in effect, positively discriminate on behalf of small businesses. Some of the issues that were brought up in the earlier session by the previous witnesses are exactly relevant to this, that you start adversely impacting the scalability of your small businesses, you are adversely impacting the ability of these companies to innovate and to be the economic engine as far as future work both internally and globally that we have seen happen and, basically, build the infrastructure to have happen in the States. My attitude towards that particular agreement is get out of it, and by the EU pulling out what will happen is seven of the ten largest economies will be gone which will be a perfect opportunity for a re-drafting which will make sense that will allow those percentages to be guaranteed, so I come at it backwards.

  Q406  Judy Mallaber: Can you explain, I do not quite understand this concept, which seems very important in your evidence, of "set-aside". Is that what you are talking about when you are saying to guarantee work for small companies? Can you maybe explain that a bit further, because that is clearly important in the US context and would also be important potentially if you went down the re-negotiating path? Maybe you could explain it a bit more?

  Mr Goulding: Chairman, if I might park set-aside for a second because a little bit of background might be helpful from that point of view, because set-aside is one aspect of a number that—

  Q407  Chairman: Just briefly because Mr Bone wants to ask about this later on.

  Mr Goulding: Just to add a little bit of clarification to where we stand, the AGP the agreement which really precludes these measures and from which the US has opted out in respect of the small business aspects of its procurement policy is one that we believe is capable of amendment to achieve the required effects, ie to permit the UK and other European governments to adapt their policy towards procurement in a manner which we believe would be beneficial. The reason that we would prefer an amendment to the AGP, which the negotiating process would allow for as we stand now, is because we believe that the straightforward opt-out is a relatively blunt instrument that would achieve the effects and would be preferable to no progress at all, but there are certain aspects of the US policy that we would regard as not desirable, such as the Buy American Act, and because of the opt-out they are able to go down that line. Were European countries to have a block opt-out and were to apply in a European context, shall we say, a "Buy French" policy, then that would not be so desirable. Actually that would probably be precluded by European rules as opposed to international rules at that stage.

  Q408  Rob Marris: But they have already got that rule in France.

  Mr Goulding: There is a difference between the way in which things are applied and what then happens in practice. Although you might say, "Well, what is the difference?" the fact is that if theory is allowed to follow practice then it becomes even more deeply embedded.

  Q409  Judy Mallaber: As I understand your evidence, you are broadly supportive of the principle of the Directive, but you want to amend various items, is that right?

  Mr Goulding: We are not proposing any change to the Directive, the changes are strictly to the AGP. Just to be absolutely clear, we are not suggesting any change to the Directive, it is purely to the AGP.

  Q410  Judy Mallaber: I thought you were broadly supportive of the principle of what is in the AGP just not in terms of how it works?

  Mr Goulding: We believe that for some of the clauses of the AGP, and they are specified in the evidence, it is all a question of how you interpret them and that re-drafting would be necessary to apply the clarity that would enable a government with confidence to implement the measures which we are talking about because, as it is drafted at the moment, we believe that it is subject to interpretation that might preclude some of them.

  Q411  Judy Mallaber: How many of your recommendations for reforming public procurement do you think would be ruled out by the AGP, as it currently stands?

  Mr Goulding: It does depend on how you interpret the different clauses, but potentially the bulk of them because of various aspects of non-discrimination and how you might treat the difference between big firms and small firms. The substance of what we are suggesting is that presently the apparently level playing field in practice is biased against small firms and so unless you allow government to conduct a procurement process in a manner which allows the playing field to be set in a way that positively encourages SME engagement in public procurement, then you are not going to get an equitable result.

  Q412  Judy Mallaber: If we opted out of the agreement, what would be the implications? Would we start losing our ability to gain contracts? Would it be damaging?

  Mr Goulding: Of course, I think the principal impact would be internal rather than external. As has already been pointed out, very large parts of the world trade have already opted out. In fact, AGP only covers 5% of global public procurement, so it is a pretty small element of global public procurement and our opting out it would not be a complete opt-out, it would be an opt-out of certain aspects of it as is the case in the United States would send more of a message in terms of the need to change the rules as a whole than it would have a practical impact.

  Q413  Judy Mallaber: What is the attitude of other European countries on this at the moment? Are any others favouring an opt-out?

  Mr Goulding: They are split.

  Ms Kossoff: As I understand it there are currently 15 countries that are in support of an opt-out and in order to get and this comes from some of the FPD's research and Martin Smith in particular Peter Mandelson to speak specifically to an opt-out would require 17 countries. The UK is currently not one of the countries that has agreed to the opt-out.

  Q414  Judy Mallaber: I think we are a bit confused by what the current status is. Are they negotiating on revising the AGP at the moment? I have a date in this paper about having to put amendments in by March, but I am not clear whether there is currently a process where renegotiation is taking place or are we pushing to get a renegotiation?

  Mr Goulding: This is in the hands of the European Commission. The European Commission has a time period within which it could make proposals for amendments and that is the end of March deadline. At present the European Commission does not have the mandate from the Member States to put forward proposals and that is where the 15 Member States figure is significant.

  Q415  Judy Mallaber: You said the 15 Member States was for an opt-out. What numbers would go for a renegotiation?

  Mr Goulding: Because the precise position of Member States is not in the public domain, and this is hearsay evidence from what we are told by small business representatives in other Member States or we have done our arithmetic, it is difficult to be precise about it. However, you can see some measure of change in Mr Mandelson's public statements where if you were to have gone six months ago it would have been distinctively negative, more recently he has at least indicated that he would be prepared to consider such matters, which indicates to us that there is a change in the thinking there. We have also received information from French organisations who work closely with the French Government who would, generally speaking, be seen as the main impetus behind the European Commission taking action on this front and that is where the figures come from basically.

  Q416  Judy Mallaber: It is the French who are the keenest on saying that small businesses are disadvantaged at the moment?

  Ms Kossoff: The French are the ones who are leading the charge in moving towards whether it is the renegotiation or the opt-out. They are the ones that have been most active in getting the other countries involved in this.

  Q417  Judy Mallaber: Which other countries are particularly concerned?

  Ms Kossoff: I would have to defer to Nick on that.

  Mr Goulding: Because a lot of this is not a publicly stated position of the Government but it is in terms of the context of the European Commission it is a little difficult to be precise. If I was to paint a general picture, those countries which are more hostile to the European Commission adopting such a stance with the WTO would be—

  Q418  Judy Mallaber: Adopting such a stance of what? Of change?

  Mr Goulding: To the extent that there would be a change to the AGP, either an opt-out or a renegotiation, would typically speaking be the northern European countries, so it is the likes of Sweden, Finland, Ireland and the United Kingdom who would be opposing the Commission whereas Central and Eastern European countries, those mentioned in the last evidence session, Latvia, Lithuania and Estonia, would be in favour, France is in favour, Benelux countries would be in favour and Spain and Italy would be in favour.

  Q419  Judy Mallaber: At present UK ministers are not pushing for renegotiation of opt-out?

  Mr Goulding: That would be correct, yes.