Gavin Rice is the Head of Work & Welfare policy at the Centre for Social Justice think tank and is leading its levelling up work. He is a former Special Adviser.
Whenever government contracts are making headlines, controversy is usually around the corner.
The word “procurement”, usually a term sufficiently dull to make eyes glaze over, has fresh connotations in the Covid era: of backroom negotiations, of test-and-trace systems that don’t work, of the Prime Minister texting James Dyson, of the £41 billion spent on Covid-related deals.
Much of this was actually very well spent, including on the life-saving vaccine programme. Some of it was not.
It may surprise you to learn that these are all very small figures in the world of government contracting. In fact, in normal times the Government spends £290 billion every single year on procurement – one third of all spending. That’s more than twice the total annual NHS budget, more than five times the total defence budget, and more than is spent each year on the whole welfare system.
What is this money spent on? Most of it is boring, but vital. It includes building schools and hospitals, running prisons, cleaning and maintaining public buildings, constructing and maintaining roads and rail rolling stock, running social care facilities, providing catering and other services for public institutions, and supplying our emergency services with vital equipment.
Incredibly, the way in which this money was spent was, until Brexit, determined almost entirely by EU law. These rules are hugely complex, and throughout the EU lawyers are paid handsomely to find ways of dodging them.
But in essence, their purpose is to ensure contracts are awarded to the most competitive – read “cheapest” – bidder. If a tenderer thinks they have lost out, they can sue the relevant public authority under European law, or make a complaint all the way up to the European Commission.
The rules had some catastrophic consequences. In 2011 a £1.5 billion public contract for City Thameslink was awarded to Siemens rather than the Bombardier site in Derby. Professor Karel Williams told the Transport Committee that the fallout from this was entirely foreseeable, including £100 million loss to the wider economy, £20 million lost tax revenue for HMRC and around 500 job losses.
Companies offering workers more than the minimum wage often found themselves frozen out of tenders for being too expensive, and regions especially exposed to job losses could be badly affected if a major local employer lost a contract. £18 billion annually was awarded to overseas suppliers, according to market research firm Tussell. Attempts to build in a wider understanding of the social value of contracts through the 2015 Social Value Act had limited effect.
Thankfully, leaving the European legal regime means we are now free of these rules, and the UK can redesign its own system from scratch (subject, of course, to the much less restrictive WTO rules). The Cabinet Office published a Green Paper, Transforming Public Procurement, in December 2020, and the government is currently responding to its consultation.
In a new report the Centre for Social Justice calls on the Government to establish as a national priority injecting much needed investment into our most deprived and struggling communities. Authorities responsible for awarding contracts should do so on the basis of a levelling up test: public bodies should be responsible for showing they have prioritised the award of contracts to tenderers operating in regions with the most economic need unless there is a good reason not to do so.
We also have a golden opportunity to devolve and diffuse this enormous spending power. Local authorities should be able to apply to the Cabinet Office for the right to award a central government contract locally where feasible. Councils should prioritise awarding their own contracts locally to keep revenues from leaving the area.
Through all this, job creation should be prioritised. The principle of “value for money” – a lynchpin of the old EU rules – should be expanded radically to include the costs to the welfare state of increased unemployment if a particular decision results in severe job losses in a particular community.
Economists have described Britain as one of the most regionally unequal countries in the industrialised world, and by every metric this has been getting worse for at least 20 years. After delivering Brexit, the Government has rightly identified tackling these vast disparities as its number one priority.
The biggest challenge with this worthy cause is the lack of direct levers – the state cannot click its fingers and change regional economic conditions overnight. But the Government has one such (enormous) lever at its direct disposal: the hundreds of billions it spends itself.
It should use this money to further the domestic policy objective of tackling deep regional inequality, as so many other developed economies do around the world. Far from being protectionist, this approach simply entails the state acting as a responsible purchaser (like you or I). And it isn’t new money – no fresh tax hikes are required. This is money the state already spends.
Britain’s newfound legal freedoms from Brexit can be used to deliver for those regions who voted for it, and to use taxpayers’ money more effectively through the principle of public money for public good. To use the Government’s own language, we should take back control of public contracts to level up the country.