Making Markets Work: Public Procurement

Making Markets Work: Public Procurement

Marking Markets Work is a series exploring how the free market can operate more effectively to deliver benefits to ordinary working people. It affirms that the free market has been the best and most successful mechanism for generating prosperity and lifting people out of poverty, but recognises that in recent years a number of departures from the theoretical ideals of a competitive market have resulted in some discrepancies between headline economic figures and the welfare and wellbeing of ordinary citizens. The series considers how small interventions could address these distortions to improve both economic and social returns from the economy.

The government spends over £200bn a year on public procurement. Used effectively, this could be a great tool for supporting UK industry, research and development, jobs and depressed regional areas – and, indeed, many other successful industrial nations, such as the US, Japan and Korea, do use procurement in this way. Unfortunately, in the UK, we have not historically paid enough attention to the national interest,. This has led to too many contracts being handed to overseas bidders, with consequential impact on British jobs, factories and industrial capabilities.

Clearly, we need formal frameworks to decide what is bought. We don’t want the government just choosing arbitrarily who to buy from – that way lies cronyism, corruption and pork-barrel politics. Nor do we want the government to simply buy British at any cost: I am quite glad, for example, that we are able to buy computers from world-leading corporations and, in any case, such policies tend to be a recipe for fostering inefficient and failing corporations. We should, however, recognise there are significant advantages to the government supporting jobs in the UK and that this may, at times, be worth a premium.

Importantly, in procurement, the government is not compelled to simply select the lowest bidder. Typically points are awarded in a number of categories, which could include technical ability, speed of delivery, cost and other relevant factors. I simply propose that in all public procurement exercises over £250k(1), 20% of the points should be awarded for the extent to which awarding the contractor to supplier would support jobs. All other things being equal, this means that the government would pay up to 20% more for a supplier in which the whole contract was delivered via British jobs compared to one which would deliver the contract using no British jobs(2).

This approach recognises that supporting British jobs is well worth a small premium. Even in terms of basic taxes paid and reduction in benefits payment (for those unemployed), a 20% premium would more than pay for itself. When one adds in any multiplier effect on the economy, as well as the benefits of potentially supporting UK R&D, maintaining skills and building strategic capacity, all of which may pay significant longer-term benefits in terms of improved economic growth and exports, the additional money is likely to pay for itself many times over. At the same time, keeping the premium to 20% means that tax-payers are not writing a blank cheque, maintains a clear competitive pressure and ensures that public services can still obtain what they need from elsewhere, if the UK genuinely lacks the capability to deliver, or if the only UK option is prohibitively priced.

Awarding 20% of the points for each procurement for supporting British jobs would be a simple and effective way to support UK industry whilst maintaining a clear, transparent and robust procurement framework. It would more than pay for itself in the immediate term, as well as potentially resulting in longer-term dividends. And most importantly, it would make a real difference to the ordinary people who as a result would find rewarding, meaningful employment.

 

 

 

(1) This is a somewhat arbitrary number; I would be willing to consider arguments that it should be anywhere between £100k and £1m.

(2) To be clear, the measure would relate to the jobs supported, not to the nationality of the company. If Nissan were bidding for a contract where the products would be made in their factory in Sunderland, this would score highly. The number of jobs supported would also need to take into account all jobs, including HQ, IP-related and design-related jobs, not simply manufacturing, so the points would not be an all or nothing basis. And once accepted, the job commitment would be written into the contract, meaning there would be financial consequences if the commitment was breached.

4 thoughts on “Making Markets Work: Public Procurement

  1. From your intro: “Marking Markets Work is a series exploring how the free market can operate more effectively…”

    Doesn’t this suggestion run contrary to the free market?

    1. It’s a market based solution to a problem. Similar to carbon taxes and similar, it makes sure the decision is based on the full cost not just the ticket price.

      1. I’m not questioning that it’s a solution – but it’s a solution that relies on state intervention – making the free market less free. If a British supplier is allowed to be 20% less efficient, how much less efficient is the British state allowed to be? Is there an economic argument to nationalize industry so long as it is only (say) 50% less efficient?

        1. The ideal market hypothesis relies on assumptions that don’t always hold true in reality (for example many small firms with perfect information, none of which can impact prices). It’s generally accepted that some intervention may be needed to restore these conditions (e.g. competition law, correcting information asymmetries), so it’s not as simple as ‘no intervention’ = ‘best operating market’. In any case, the title of this series wouldn’t be ‘Making Markets Work’ if there wasn’t some ‘making’ involved!

          In any case, whilst I may believe in a smaller state than we currently have, I’m not an extreme libertarian – and the government choosing to buy a different product or service for itself seems fairly non-coercive and unobjectionable as state interventions go. Are you opposed to the solution yourself?

          I don’t quite understand why (based on the premises in the original post) one would want to allow the state to be 50% less efficient. The arguments regarding taxes and reduction in benefits are equally true for a state or private sector employer.

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