TUESDAY 30 JANUARY 2007

MR NICK GOULDING AND MS LESLIE KOSSOFF

  Q440  Mr Bone: The Government would argue, Chairman, "If we have got a large contract, if we unbundle it so that smaller companies can compete for it, there are lots more contracts and poor old civil servants are going to have to work a lot harder to manage seven or eight or even more contracts rather than one and that will cost more money to the taxpayer".

  Mr Goulding: There is an old saying, and I think that many of these things are proved by the truth of history, of being penny-wise and pound-foolish and that is where that ends up. Yes, it may be more complicated for the civil servants dealing with it because at a top level in the Civil Service you can then tidy things up into tidy little blocks and you can see the attraction of that. Again, if you go back to the last evidence session when we were told of the effect that a single person in a particular country can achieve in terms of effective output I would say precisely the same thing applies with public procurement. If you cut the numbers down to more manageable chunks and you have a wider range of people or businesses that are in a position to bid, I would say it might look less tidy if you are producing a macro answer at national level but that the end effect will be more beneficial ultimately to the taxpayer.

  Q441  Mr Bone: Earlier on you were talking about set-asides, which worried me for a moment, I thought we were in agricultural territory, the EU, and that made a shudder go down my spine. It sounded like a very good idea in the context of business. Instead of the rhetoric you would get contracts awarded to smaller companies because they would have to do it. Could you give me an example of how it might work.

  Mr Goulding: We are not suggesting that a specified percentage should be set-aside and automatically awarded to small firms who would not ordinarily win that contract: we are not suggesting that the contract should go to anyone else other than the best business in terms of being able to meet that particular contract. What we are suggesting is that in particular defined circumstances the presence of a dominant supplier can preclude a range of competition and in order to get the best supplier in place to meet that particular contract that in defined circumstances it will be better to set-aside that contract or that class of contracts so that only smaller firms can bid for them precisely because they would not enter that competition if dominant suppliers were present in that marketplace and that because you are precluding them you are therefore likely to get less effective purchasing. It is in very specific circumstances to meet what we would describe as market failure in terms of the competitive environment.

  Q442  Mr Bone: Can I give you an example and see if I have got this right. Say with the annunciators in the Palace of Westminster I do not know at all about the actual companies, there might be a dominant supplier, a large company, but there might be a series of small companies that also do the same sort of thing you would say that might be a case where it would be set-aside only for smaller companies?

  Mr Goulding: Yes.

  Q443  Mr Bone: You would go down to that detail within a contract?

  Mr Goulding: Yes.

  Chairman: Interesting.

  Q444  Rob Marris: Should there be better guidance earlier on in the process from the government on its procurement processes so that SMEs have greater information about the way in which the system works?

  Ms Kossoff: The answer to that is yes. Going back to the testimony that was given in the earlier session on UKTI, again I have to specify a difference between the way the United States and this country seem to work. When we saw the real growth of small businesses being able to contract successfully with the government a lot of the reason that happened was because the government invested in ensuring that the buyers in all of the procurement areas, the prime contractors who were going to be taking on the big gigs anyway, and the subcontractors who would undoubtedly be involved working either directly or through the prime contractors, were all being trained in best practices, including how to identify where the contracts are and how do you figure out whether you are the right company to go after it. There was so much front-end training that was done to ensure that the smaller businesses would be able to move into that system very easily. You have pieces in this country, and I do not want to sound like I am being anti you guys because I am seriously not, but you have various pieces already in place and with some of the pieces it is really just a matter of formalising them and expanding what is already here. Some of it is new pieces that need to be put in. It is a cooperative system so that not only the large companies that would be subcontracting to the small but also for the small companies you are setting up the system so it is built to win. I have to say one other thing in answer to a question earlier. Part of the response that I would add is if you unbundle the contracts it is much easier to get at what it is you were calling out. Very often it is the bundling that makes it impossible for the small guys to get in.

  Q445  Rob Marris: Is part of what you are putting forward the package that you would see operating in the USA with training for prospective suppliers, because otherwise is there not a risk that if the government is putting out more knowledge the big suppliers often will have greater access to that knowledge because they have got a bigger department doing that kind of stuff?

  Ms Kossoff: Absolutely. That is one of the things I did not put into my written evidence. The Small Business Administration is a stand-alone entity that reports directly to the President of the United States. When you take a look at the structure here, and most particularly your SBS that has just become smaller and has gotten buried even more into the Department of Trade and Industry, this is very worrisome to me. As was talked about in the earlier session, if you are not putting money towards it, nobody is going to pay attention to it. In a case like this, what we did from the beginning in the United States, in effect, and still do, is have systems specifically for small business owners at any point in their development. There are a lot of small businesses that have existed for years that have never bothered to go into government contracting but then decide they want in and the information and courses are available through the Small Business Administration specifically for them. Again, because the system is what it is, they also create partnerships with the large guys as well as the small guys so that they can create economies of scale, there is a lot of financial backing, help with loans and the rest. It is a really comprehensive system.

  Q446  Rob Marris: I understand what you were talking about on certification, of course that already goes on to some extent and certainly does at local government level.

  Ms Kossoff: Yes.

  Q447  Rob Marris: I understand the concept of set-aside. What evidence is there, whether from the States or anywhere else, that this works rather than potentially lumbering governments with a bias towards purchasing from SMEs who are not as efficient and supply goods and services at greater prices than would be available from larger companies? What evidence is there it works? It all sounds very lovely and cuddly, but where is the evidence?

  Mr Goulding: If you look at the United States, there is some fairly clear evidence. It is not how the United States is doing right now, I have to say. One of the things I should say is that big business does not have the taxpayers' interests at heart.

  Q448  Rob Marris: Nor does small business.

  Mr Goulding: Indeed, no businesses do, but big businesses are in a position to influence their marketplaces to achieve that effect whereas small businesses are not because small businesses almost inevitably are in an intensity of competition in whichever marketplace they are in, so although they might like to structure the marketplace in their own interests they cannot, frankly, whereas that is not true of big businesses. If you look at the United States and you look at the effect of the various instruments that were applied from the 1950s through to the 1980s you can see a significant uplift in the level of procurement that was done from small firms and with quite a lot of evidence that this positively benefited the public purse with significant savings for the United States Administration as a result of broadening that out. If you then switch through from the 1990s, when I think it would be fair to say that big business became more dominant in its influence on the US legislative and administrative machinery and there were a number of changes through the 1990s which further worsened the environment for small firms, whereas by the early to mid-1980s something in excess of 30% of public procurement was being achieved by small and medium-sized companies, by the year 2004 that had shrunk back to something more like 22 or 23%. You can see that in terms of the public instruments that were applied, when those that were more sympathetic to small firms were more proactively being applied in the 1950s. Through to the 1980s you could see the uplift in SME percentages but once you reversed and stepped away from that and started applying public sector instruments that were more favourable to large firms you could see the shrinking and, indeed, as I said, there is evidence in terms of the benefit to the public sector certainly through into the 1980s of reduced costs and broader engagement with suppliers.

  Q449  Rob Marris: Have you sent us that evidence? Forgive my ignorance.

  Mr Goulding: I believe it is alluded to in my evidence. What we perhaps should do is come back and supply you with further references.

  Q450  Rob Marris: That would be helpful.

  Ms Kossoff: The National Federation of Independent Businesses in the United States has a research foundation which produces copious evidence on the subject and as well as providing references to that we can always put your secretariat in touch with the Small Business Research Foundation in Washington.

  Q451  Rob Marris: They have their bias as well. What about the government, whether the federal or the state governments in the USA, in terms of research they may have done?

  Mr Goulding: The Small Business Administration and the Office of the Advocate General both have research capacity which they have published and, indeed, you will find references to this in the State of Small Businesses report that is presented to the President each year and that can be tracked back over 30 years certainly.

  Rob Marris: Thank you.

  Q452  Mr Bone: This is something that I meant to say earlier on. It is a practical issue and I wonder what your views would be on it. At the moment a lot of these large companies win the government contracts and subcontract a lot of the work to SMEs. When I was doing that sort of thing when I ran an SME one of the problems was although the big contractor would be paid by the government it was getting money from the contractor to keep my cash flow going and, lo and behold, if the main contractor went bust you had lost everything.

  Ms Kossoff: Yes.

  Q453  Mr Bone: I am not sure if they do this in the States but if the money from the government was put into a central account and then, rather than the main contractor drawing off it, the subcontractor drew it off from a protected account, would that be of help to small companies?

  Mr Goulding: There are two different aspects, one of which is the rapidity of the payment and the other one of which is the security of the payment, ie does the debt go bad. There are two different points there. Certainly we have long argued, ( and have had success in one or two places but it seems to take one step forward and two steps back) where when central government and various other iterations of the public sector award contracts to prime contractors, particularly in those areas of supply where they know well there are going to be large numbers of subcontractors included, what we have long advocated is a system whereby by contract rather than by law the public sector should insist that the contracts that the prime contractor awards to their subcontractors should be at least as beneficial in terms of payment as those that are awarded to the prime contractor otherwise all the progress that has been made in terms of public sector payment practices does not trickle down and is captured by the prime contractor and that can, and should, be insisted upon. In fact, I believe that the National Audit Office should specifically report on whether or not such contractual obligations are imposed by contract on prime contractors. There is no reason why that could not be done expeditiously. Secondly, when it comes to the actual payment, particularly where we are talking about the insolvency of prime contractors and where they run into severe difficulties there were some very good examples in the context of the Millennium Dome, I have to say, that would have worked well here the contract with the prime contractors should empower the public authorities to set-aside elements of payment where it became clear that subcontractors were not being paid and empower the public authority to pay directly to subcontractors under defined circumstances. Again, that would be set by contract between the public sector authority and the prime contractor, so the prime contractor would know the circumstances under which subcontractors would be paid direct.

  Ms Kossoff: In specific answer to your question, in the US that is built into the systems. They had to shorten the payment cycle from the primes to the subs because of exactly that reason, the subs were going out of business, so starting in the 1980s it was taken down from a minimum 90 day payment cycle to 45 and a lot of the contracts actually call for 30 day payment.

  Q454  Chairman: I have two quick points I want to raise before we conclude this session. One is on payment terms. How much enthusiasm do your members have for contracting public contracts because what you say in your evidence to us is that: "Public authorities, like other dominant buyers, such as New Look and Matalan, have a poor track record on payment practice". You just said there had been improvements.

  Mr Goulding: I think a variable picture emerges. There are some elements of the public sector that have very good payment records; there are other elements of the public sector that have appalling payment records and that can fall within the same department, it is where averages can be very misleading.

  Q455  Chairman: There is no pattern to that?

  Ms Kossoff: There is some pattern. If you wanted me to single out some bits that are particularly bad, there are some big chunks of the NHS, particularly when it comes to construction within the NHS, where we have seen bad examples, and within local authorities some local authorities are much worse than others, individual agencies tend to be worse than central government departments. It is not universally so but, if I was going to paint a general picture, that is the picture that I would paint. I would also commend the Scottish Executive's annual survey of small businesses, I do not know if the Committee has had that in front of them, but that is available from the Scottish Executive. We can send the references through to you. In fact, one thing that the public sector could do is collect better statistics on the whole thing because these things tend to go through enthusiasms and more consistency and a longer term approach to collecting and publishing those statistics would be useful. As I have said, one of the things they do well in the States is you can go back 30 years and you have got comparable statistics so you know how things have changed whereas if you were to go through published research in this country it just changes with the wind so you just cannot compare properly what is happening now to what was happening ten years ago.

  Q456  Chairman: Your members are not put off in general from doing public sector business by payment terms but in specific cases they would be wary of dealing with certain organisations?

  Mr Goulding: That is true. They will also be prey to their own particular experience. I would say that payment terms are lower down the list of reasons for not supplying the public sector than other things.

  Q457  Chairman: One final question from me, and it may be you want to give a written note subsequently rather than an oral answer now. You talk in your evidence about the Official Journal not being the best way to advertise public sector contracts and you talk about a lack of knowledge among the smaller businesses about the contracts that are available sometimes, but I am not quite clear what proposals you have to make it easier for them to understand what contracts are on offer. If you want to answer that now by all means do so, otherwise I would welcome a note from you about the methods open to government.

  Mr Goulding: We will send a note but I think the short answer is it varies because individual sectors, individual public authorities and individual groups of small businesses, operate in different ways so one size does not fit all in terms of transparency.

  Q458  Chairman: We began with that and we have ended on that theme. Thank you very much for coming today. Thank you for your very good written evidence, which we really appreciate. If you feel on reflection the transcript of today's proceedings and your written evidence have left some holes you would like to plug, please feel free to give us anything more you would like. We are very grateful to you.

  Mr Goulding: Can I say one final thing. If in the future work of the Committee you want to get input from small businesses, given enough notice we do have a regular research programme and can put specific questions and, given notice, would be prepared to do so.

  Chairman: That is a very helpful thought. Thank you very much indeed, we are very grateful.