What Reduced Central Government Spend with SMEs Means for Public Sector Tendering

Although overall supply chain spend with SMEs improved from £19.2 billion to £21 billion – which the Cabinet Office touted as ‘record-breaking’ – the overall proportion fell to 26.5% from 26.9%. SMEs are understandably disappointed that the central government have once again missed their targets. In 2015, the central government first outlined its objective of spending £1 of every £3 in procurement by 2020 – a target it has missed for every subsequent financial year.

Central government spend with SMEs – a persistent issue

Although the year-on-year decrease in spend is marginal, it is indicative of wider problems attracting SMEs as suppliers within public procurement supply chains. When the central government first set a target of 33% spending with SMEs by 2020, its proportion of total spend was 26% – translating to no significant increase over the past eight years.

The table below outlines the six central government departments with the highest procurement budgets, and their SME spend statistics for the 2021/22 financial year, as published by the Cabinet Office:

Despite acceptable figures for some departments such as the Home Office and Department for Transport in particular, the statistics can be deceiving. Central government bodies are increasingly relying on indirect supply chain spend to keep statistics SME spend afloat.

For example, although direct spend with SMEs fell from £10.2 billion to £9.8 billion, indirect spend rose from £9.1 billion to £11.2 billion. This suggests a reliance on larger suppliers subcontracting works and services out to smaller businesses, which is a less sure and stable source of revenue for SMEs.

Local government performance

Perhaps unsurprisingly, local government spending with SMEs has once again outpaced central government bodies. The Local Government Association (LGA) has long emphasised the importance of engaging with small- and medium-sized businesses, as evidenced by its prominence in the LGA’s 2022 Procurement Strategy.

Courtesy of Tussell, outlined below are five local authorities with some of the highest proportion of SME spend and their total contract spend for the 2022 calendar year:

As a whole, local councils and other devolved authorities spent £21.7 billion with small- and medium-sized businesses in 2022 – translating to 35% of overall spending. Furthermore, 46% of local councils’ procurement spend was paid directly to local businesses within their administrative boundaries.

Will the Procurement Bill impact spend with SMEs?

Lastly, the upcoming Procurement Bill, currently in final consideration of all amendments by members of the House of Commons, is expected to bring wide-ranging structural changes to public procurement practice. Aimed at streamlining the procurement process for all government bodies, central to the Bill’s objectives is ‘a duty on contracting authorities to have regard to the particular barriers facing SMEs […] and what can be done to overcome them.’

Those expecting a provision outlining a minimum requirement of spend with SMEs within the Procurement Bill are likely to be disappointed. Although a 2022 policy paper described methods for ‘[accelerating] spending with SMEs’, it would be very difficult to set a legal benchmark of spend with small- and medium-sized businesses, due to the government’s ‘fair and transparent’ legal framework which includes the Public Contract Regulations 2015.

Reports on the Bill’s progress should give encouragement for SMEs looking to become government suppliers. Provisions and amendments which are being considered include:

• Giving greater visibility to upcoming contracts through the use of Prior Information Notices and other mechanisms, ensuring small businesses can schedule adequate time preparing for and drafting tenders.
• Redesigning pre-market engagement events to ensure the government department is reaching a suitably wide range of suppliers.
• Creating a single site for all opportunities, minimising the need for accessing multiple portals to register interest and submit tenders.
• Considering reducing mandatory insurance thresholds required to bid for opportunities, including Professional Indemnity Insurance, Public Liability Insurance and Product Liability Insurance.

The above subjects have been debated in the House of Lords and the House of Commons, demonstrating the importance given to integrating and retaining SMEs into government supply chains. A June 2023 research briefing re-emphasised the importance of creating opportunities for innovation and supporting small and local companies as a result of the Procurement Bill’s changes – the effects, however, will remain to be seen.

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