TUESDAY 30 JANUARY 2007

MR NICK GOULDING AND MS LESLIE KOSSOFF

  Q420  Chairman: We are going to Brussels next week to explore this issue, among others, so your evidence is very timely. You have a lot of emphasis in your submission on public procurement being too risk averse, but it is taxpayers' money, do people not have to be quite cautious?

  Mr Goulding: I think it depends on the outcome you want to achieve. I would say that the outcome as a taxpayer is that you want to achieve the best value for money and being risk averse does not produce the best value for money. In fact, if you look at the private sector where you are trying to optimise a return for your shareholders, or if it is your own company to yourself, it is not an approach you would take. Generally speaking, I would say if it is not the approach you would take if it was your own money it is probably wrong. In fact, one of the things I would say about the public sector is that because it is not your own money you get less effective expenditure.

  Q421  Chairman: I cannot remember what you said in your evidence in detail, but the requirement for three years of audited accounts, does that apply to all public sector procurement?

  Mr Goulding: There is some variation in that because, of course, the public sector is so vast and there are so many iterations of it, so understanding the precise requirements in every aspect you would require an encyclopaedic knowledge, which is part of the problem itself. I think what we were illustrating there is that blanket approaches can have unintended effects and that there will be circumstances where requiring financial information from companies is entirely appropriate and, indeed, in the private sector if you were engaging with a supplier you would want to have that knowledge yourself. Even in a company the size of the Forum of Private Business, which turns over £2.5 million, in certain circumstances we would ask for that information from a supplier, but where the nature of the supply meant that it was prudent to so ask. There are a wide range of purchases that we undertake that we would not and in the same way it can be inappropriate. It is all to do with the amount of cost which is incurred by the potential supplier in making that supply, or at least tendering for that supply, which is disproportionate in the public sector.

  Q422  Chairman: What I am very anxious our Report should do is identify specific ways in which Government can improve its public procurement to assist your member companies and other small and medium-sized businesses to win more government business among other things. This is an interesting example. There has got to be some way in which the procurer in the public sector can be assured of the financial reliability of the supplier from which he is buying. You are saying there should be a menu of options depending on the nature of the contract, rather than a one-size-fits-all policy, is that right?

  Mr Goulding: Yes, which is the case in the private sector which, generally speaking, I would say does its purchasing rather better. I do not know if Leslie wants to comment.

  Ms Kossoff: Yes, I do want to comment on this because in government procurement in the United States we do not have a one-size-fits-all structure for this because we understand, particularly when it comes to defence contracting and when we are looking at new technologies, particularly black box technologies, what we are most concerned about is getting that innovation in and having the access to these new products. What the Small Business Administration came up with a number of years ago was an entity called a certificate of competence and there is a complete analysis that is done of small businesses to determine on a variety of different criteria whether or not they will be able to in fact fulfil whatever the contract calls for and this is for both new and existing technologies. There is a tendency here to do a lot of one-size-fits-all whereas we have much more, I do not want to call it a sliding scale, choice built in that is designed so that we understand that not everybody will fit into the one cookie cutter model and so what we need to do is to make sure that we still win and give those companies the opportunity to grow at the same time. An entity already exists in the form of the certificate of competence that the SBA has, those data are available and you can download what that consists of and it is a standardised assessment.

  Q423  Chairman: Small businesses in the States like it?

  Ms Kossoff: Yes, they do because it opens doors for them. So much of what we have in the United States are the spin-off businesses, even small businesses spinning off of other small businesses where someone comes up with a new technology or a new innovative process of building an existing technology, wants to take their act on the road and, of course, that is going to be of real value to the government as well as others. The government's attitude towards procurement and particularly new product development, innovation and all of the rest is that it is well worth the investment on the part of the government to help these small businesses to develop their technologies to get their businesses up and going so that, in fact, on the black box side of it where that does exist it is owned absolutely by the United States Government and then shared with whichever partners, but it also opens the door for the non-black box version of those technologies to be made available on a commercial basis and then you have suddenly got expansion and there we are back into the scalability.

  Q424  Mr Weir: I am probably being a bit dense here, but can you tell us what you mean by "black box"?

  Ms Kossoff: I learned that expression when I was working for Hughes Aircraft and we were doing our first technology transfer project with British Aerospace and our engineers did not want to share certain technologies with your engineers, even though the contract called for it, so there was this wonderful little category called "black box" that were the protected technologies and there was all sorts of negotiation that went on about how much information could we share and what was it safe to let loose. It is those technologies that are considered and they are absolutely Defense Department oriented that are considered to be so proprietary and you have to protect them so much that they are at the highest levels of secrecy. So that is black box.

  Chairman: In fact, it is now Mike Weir's turn to ask the questions.

  Q425  Mr Weir: We often hear that the bureaucracy involved in submitting an application for a government contract is considered to be a major obstacle by SMEs; the Government always claims that it is reducing the burden of bureaucracy. Can you give us specific examples of existing bureaucracy that could be eliminated?

  Mr Goulding: I think the example of providing accounts is one, but it is the sum of the parts rather than any one bit that really adds up and it is also the repetitive nature of having to comply, and comply in slightly different ways, when you are bidding for different contracts. One way in which it could be radically reduced is the certification process that was outlined from the United States where if you certify yourself once, you have then certified yourself for public sector contracts. There have been various efforts to achieve that sort of effect within the United Kingdom at times over the last 20 years, but they tended to founder as fashions changed, different bits were added on, they are no longer still there or it is not transferable from one public sector purchasing to another public sector purchasing. If I was to put my finger on one thing I would say it was the transferability of such assurance so that having demonstrated yourself as a suitable company for supplying to the public sector that you could take that particular tick in the box and proceed to other public sector contracts.

  Q426  Mr Weir: I understand what you are saying, it makes some sense, but because you have been judged as suitable for one particular public sector contract, if you are applying for a public sector contract in a different part of the public sector it does not necessarily mean that you would be as suitable for that sector, does it?

  Mr Goulding: This is why small firms do not apply because if you have large costs involved in making an individual tender, which is the effect of these requirements, if you do not win that particular contract, and your capacity to bid for public sector contracts is limited so you cannot spread the cost over a large number of bids, it is not worth you starting in the first place. If you are a major company and you are putting in tens or hundreds of tenders depending on the nature of your contract, you can accept the fact that you are going to make X% of them because the cost of not getting the other public sector contracts is essentially spread across those that you do get, so the public sector is paying.

  Q427  Mr Weir: I understand, but what I am getting at is in the certificate you are talking about, are there specific things, it could be company A is able to perform X, Y and Z, that take these parts out of a tender process? Is that what you are getting at?

  Mr Goulding: There are quite a lot of such requirements that are included in things such as environmental compliance, in terms of equality and inclusion and so on, so different public sector authorities put different requirements from that sort of point of view. In fact, at the moment it looks as if further such requirements are going to be forthcoming. I had a discussion with the Chairman of the Equal Opportunities Commission who is considering, or is being required to consider, additional such measures right now.

  Q428  Mr Weir: I want to get this right because I am getting a bit confused about this. Are you saying there are certain things that can be certified once-and-for-all? Presumably, there would have to be some sort of monitoring over a period to make sure you are still complying but that would be taken out of the tender process to simplify the tender process that has to be gone through for government contracts. Am I picking this up correctly?

  Ms Kossoff: I would like to come at it from a slightly different angle and I think I may be coming at your answer. This is the US system: when you become, in effect, an approved or preferred supplier, and you have established yourself based on whether it is a certificate of competency or going through some other form of assessment, you are on the list. Then when you are putting in a tender for a contract, you are up against everybody else that is coming after that contract and your ability to perform to that contract, your viability, whether your bid is considered competitive, the background that you have, the quality of your services, all of that is being determined by the procuring body and so there is, in effect, a first level that gets you in the door and that is that certificate of competence which gets you in as an accepted supplier. Whether you win contracts from that point forward depends on how well your organisation performs and all the standard criteria that would be considered when a bid is being considered.

  Q429  Mr Weir: I understand that, that was what I was trying to get to. Would there not have to be monitoring procedures to ensure that a company still maintains that original certificate of compliance and would that not lead to additional burdens on the company?

  Ms Kossoff: No. In fact, one of the really interesting things about the process, and this is true, is if you design a process well it is always front-end loaded, so that you are doing all of your analysis ahead of time and then the monitoring of it is really nominal and so, yes, there is that front-end bureaucracy where the analysis of the assessment is required, but from that point forward keep in mind that for every single contract that is being performed there are data that are being generated and performance indicators that are being monitored on a regular basis. We do not have in the States any more cost-plus contracts and not only for the government, so now that we do not have those, we have contracts where if you are not performing to the way that you called out and promised in effect in your bid you are being dinged for it, you are having to pay for it, you are being fined. So that process you are talking about is actually built in to the system as part of the monitoring of any given contract and if you are not performing, you are out, you are no longer an acceptable provider.

  Q430  Mr Weir: How would such a system comply with European Union rules on the tendering of contracts? As I understand it, most public procurement has to be tendered out throughout the European Union now. Would that system have to be accepted throughout the European Union? Would it cause a difficulty if it was accepted in the UK and not elsewhere?

  Ms Kossoff: I am going to hand that over because I have a completely different attitude towards all of that.

  Mr Goulding: There is potential for problems here, particularly if you have an approach that might be compliant now but then other rules change so you have a problem keeping up. I think, in a sense, what the exchange now illustrates is part of the problem with trying to resolve it and, as I said, there have been previous attempts to achieve such effects in the United Kingdom and they generally foundered because having got something in, it then has not been stuck with because other things have changed, new things are added on elsewhere, all because it is trying to be so all-encompassing that it becomes impossible for people to get in in the first place so they do not bother. In making my initial answer, what I was trying to do was to illustrate a concept rather than to suggest a precise solution and, in fact, that is precisely why we come round to these targets for SME procurement levels because if at a national level we try to second-guess exactly how each individual element of the public sector can deliver the beneficial effect which we believe wider inclusion of SMEs would have on public procurement, then by trying to get one size that fits all across the whole piece we will end up with something that does not deliver anything. At a local level with individual authorities it may be that having some sort of certification produces a beneficial effect, and I think it can help, but not if we try to answer every problem for every aspect, so it may be different in military defence than it is in South Bedfordshire District Council and sorts of SMEs that are likely to be bidding in those different contexts will be different, and because small firms cover such a multitude of sins if we try and treat everyone exactly the same way we will end up answering no-one's problems. This comes back to why the Forum of Private Business' position is having an indicative target, say 23% as in the United States, for public procurement acts as a vehicle for driving different parts of the public sector to try to meet that challenge and the way in which they answer it may differ.

  Chairman: You have anticipated the next line of questioning from Mike Weir. I want to ask Rob Marris to put one supplementary on a European question to you.

  Q431  Rob Marris: I think the European Union threshold now is around 93,000 or 94,000 and then it has got to be advertised in the Official Journal and all that stuff. Do you think that threshold should be changed and, if so, up or down?

  Mr Goulding: I am not sure I have a view on the threshold en bloc. What we do know is publication in the OJ is not a good way of opening up procurement for small firms. I would rather come at that the other way round, which is while not venturing an opinion on the precise level of contract required for inclusion in the OJ, I would say that individual procuring authorities need to think, "What is the impact of the way I do my procurement in terms of that small business procurement, ie inclusion of small businesses and their ability to bid for the sorts of contracts I am putting out, and if the level of contract I am awarding is one that is in practice precluding small firms then I am doing something wrong".

  Chairman: We are running a bit short of time, we are falling into the trap of answering every question twice. Unless it is really important I think we would like to move back to Mike's questions.

  Q432  Mr Weir: We touched upon the question of targets for SMEs and I think it was in Ms Kossoff's submission that you suggested targets for small businesses, but the Small Business Service rejected such targets due to the difficulty of obtaining information on the size of competing companies and the wide differences in suitability of SMEs in different sectors. How would you respond to that observation?

  Ms Kossoff: If I understand all of the nuances of it correctly there are two aspects to it. First of all, the small businesses never have anywhere near as much information and access as the large companies do no matter what, so they are always working at something of a disadvantage.

  Q433  Mr Weir: The Small Business Service's point was how does government, who are doing the procuring, get the information on the size of the various competing companies.

  Ms Kossoff: Once again, it is through that process of the application to become an accepted provider that you are having to provide this information. Am I misunderstanding your question?

  Q434  Mr Weir: No, please continue.

  Ms Kossoff: Okay. So that you know, you are also moving into an arena that I have a particular issue with, which is the way that you define what an SME is. The fact that you have a number attached to it is just wrong, the way that you are doing that right now, and it is limiting competitive ability. I will go off of that for a moment.

  Q435  Mr Weir: We are just coming on to that. How do you propose changing the definition to a relative one? For example, how can you justify a system where a manufacturing firm, for example, could have thousands of employees and still be deemed a small business?

  Ms Kossoff: Because depending on the segment that they are competing in, that actually determines whether or not they are considered a small business. These classifications are fascinating to me because I am old enough that I started with a whole different classification system numerically and got it into the larger—

  Q436  Mr Weir: Do I understand you correctly that if a business works in, say, pharmaceuticals where there is GlaxoSmithKline and all the huge businesses, if they have thousands of employees but are relatively small in that sector they would be classed as a small business?

  Ms Kossoff: Yes, absolutely. In fact, one of the pharmaceutical companies for which I was an executive had over 2,000 employees and we were still considered a small business because of who we were competing against.

  Q437  Mr Weir: So it is sector related?

  Ms Kossoff: Absolutely yes.

  Q438  Chairman: There is some confusion in the evidence you are giving. Is that the Forum's view too?

  Mr Goulding: The Forum of Private Business would probably take a practical view of this, which is while we would accept the logic of the argument that it is a more intelligent way of doing it, and in the long run we would advocate such a move, in the short run we would not take the view that it is likely to be practical in terms of European policy to change definitions to be more flexible, shall we say, sector by sector. We would agree with them in the long run and in the more abstract, but in terms of the practicalities we would probably rather concentrate on how we deliver improved access to firms that qualify as SMEs under European policy now, but that is to be more practical about it.

  Chairman: Thank you, that is a very interesting exchange. We will reflect on that.

  Q439  Mr Bone: The Secretary of State last year stood up and said we are business friendly, we are very keen on business, particularly small and medium-sized businesses, we are going to get more business from the public sector to the small and medium-sized businesses. It was a wonderful sound bite but, on the other hand, Gershon is then telling him that he has got to centralise procurement to make economies of scale. How do those two divergent views come together? I fail to see the logic.

  Mr Goulding: The Forum of Private Business would probably differ with both of those points but, firstly, because we think that the sound bite did not translate into practical policy and, secondly, the view that you should centralise in order to reduce costs and get better effective public procurement we would disagree with as well. In fact, it is precisely putting the cart before the horse because if you have a less competitive environment for public purchasing, while in the short run in an individual case it may reduce the cost, in the longer run, and if you take a broader view of the public interest, a less competitive environment for the supply of goods and services to the public sector will almost certainly result in an increase in the costs and a reduction in the quality that the public sector receives. I believe it is a short-term view that does not produce a beneficial longer term effect.