NAO “cannot be certain” government SME spend increased over last Parliament

Derek du Preez Profile picture for user ddpreez March 8, 2016
The National Audit Office has said it can’t be sure about how much government spend with SMEs has increased in recent years, bringing into question the Cabinet Office’s estimates.

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For a number of years now the Cabinet Office and the Crown Commercial Service have been working to promote the central government use of SME suppliers. And it’s hardly surprising given how many over-priced and failing contracts the government has found itself trying to get out of with some of the UK’s largest suppliers.

The idea is that SMEs can introduce a degree of agility and innovation into the government supply chain, which some of the larger suppliers struggle to deliver on.

Each year the government spends around £45 billion on goods and services and in 2010 it was announced that 25% of this spend should go to SMEs by 2015. This target has now been extended to 33% by 2020.

The National Audit Office has been looking at the government’s SME agenda and in a report released today has said that whilst many departments agree that smaller companies can provide a number of benefits to the public sector, this is not without its challenges and has questioned whether or not the higher 2020 target is achievable.

Equally, it has questioned whether or not the increases in SME spend touted by the Cabinet Office are accurate, following closer inspection of the data used.

The report states that in February 2015 the government reported that it had met its 2010 SME spending target a year early. The Cabinet Office said that 26% of government spending reached SMEs in 2013-14, surpassing its 2010 aspiration of 25%. The next year this figure rose to 27% of total procurement spending.

The Crown Commercial Service said that departments spent £4.9 billion directly with SMEs in 2014-15 and that a further £7.3 billion reached SMEs through supply chains.

However, the National Audit Office isn’t convinced these achievements are entirely accurate. It said:

However, we cannot be certain that the amount government spends with SMEs has increased over the last Parliament. The reported annual increases in spending with SMEs happened in parallel with the CCS’ work to improve government’s understanding of its spending with SMEs. As a result, we do not know how much of the reported increase is due to the changes in approach and how much is an actual increase in SME activity.

For indirect spending, the Cabinet Office has surveyed a larger group of providers each year since 2011-12 so annual figures are not comparable. The CCS’ methodology for direct spending has not changed since 2011-12, but we cannot be certain that numbers are directly comparable due to the structure of the underlying data.

So whilst there is unlikely any deliberate attempt from the Cabinet Office and CCS to misrepresent figures, it’s worth viewing the increases with a healthy dose of scepticism.

Future targets

Whilst the government has done well to keep increasing its spend targets (now aiming for 33% by 2020), and it has introduced new mechanisms to help achieve this (see here), the National Audit Office has said that increasing spend further will be challenging for a number of reasons.

Part of this is down to the fact that an increase will depend heavily on the Ministry of Defence, which is currently responsible for 44% of central government procurement. In 2014-15, 19% of the MoD’s procurement spend reached SMEs.

The MoD told the National Audit Office that it would be “challenging” to increase its SME spending further within the given timeframes as it has already committed large proportions of its annual spending and is unlikely to be letting further large contracts during the current parliament.

In addition, there are other government priorities that conflict with the SME agenda. For example, there are gaps in the government’s commercial capability, which is only likely to get worse given the cuts that have been enforced, and the government has not yet set out how it will manage many smaller contractors, rather than one large contractor.

Also, the government is increasingly merging the spending of different departments and using its collective buying power to simplify procurement and cut costs. This allows it to standardise products and services so providers compete on the basis of price rather than quality.

However, this can limit the opportunity for SMEs, which rely on specialist services to win business. The NAO notes that “the move towards greater price competition and standardisation changes the type of SME that is likely to win these contracts”.

As a result, the report states that most SMEs working on government contracts are part of the supply chain and that it is not clear that this will lead to increased competition and innovation. The NAO said:

These SMEs make up 60% of government’s annual £12 billion estimated spending with

SMEs. They work for larger prime contractors and may not compete directly for government contracts. In most areas, government has limited knowledge of these supply chains, as prime providers appoint, set contract terms for, and manage the supply chain directly.

These SMEs can bring other benefits and subcontractor roles can help them increase their capacity and experience, to be better able to compete for future work. However, the Cabinet Office has no way of knowing whether it is making progress towards its overall aim of increased competition and innovation.

Prime providers will also take a management fee, which either reduces the income received by subcontractors or increases the cost to government of delivering services.

A spokesperson for the Cabinet Office said that the government will continue to pursue its ambitious targets:

Small businesses are the lifeblood of the UK economy and this Government is determined to open up public sector procurement to businesses of all sizes. Only by doing this will we get the best value for taxpayer money. We welcome the NAO’s recognition of our efforts, including reaching 27% of spend going to SMEs last year, exceeding our target. But we know we can go even further, and that’s why we’ve set an even more ambitious target of spending £1 in every £3 with small businesses by 2020.

My take

There is no doubt that the government has made significant progress in recent years in opening up business to SMEs. Tools such as the G-Cloud and the Digital Marketplace have really given smaller companies access to a world of buyers that would have just been unimaginable six or seven years ago.

However, the comments in the report regarding future commercial capability in government, the impact of spending cuts and the reality that most spend to SMEs will go via a larger supplier, are all concerns that should be taken seriously.

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