16 August 2023

How ‘social value’ has become a millstone for Britain’s small businesses


You probably haven’t heard of the Social Value Act of 2012, but this little known piece of legislation has had a remarkable impact on the way the British state does business.

As with many regulations, the intentions are virtuous enough, but the unintended consequences for public procurement are truly dire. As I point out in my most recent paper, ‘The Price of Everything, The Social Value of Nothing’, prioritising ‘social value’ means the state is simply not getting value for money for taxpayers.

So, what is social value, exactly? According to the Government, it is something which ‘delivers improved social welfare and wellbeing’ through procurement tenders. The Cabinet Office says adhering to this rather vague definition aligns the UK with the UN Sustainable Development Goals. 

The problem is that in order to achieve these lofty goals, every government tender includes a series of expensive and cumbersome requirements for SMEs, such as requiring employees to spend time volunteering, or taking on additional employment for the sake of the contract.

On the plus side, this does encourage apprenticeships. On the other hand, that suits the larger companies who take on almost three fifths of apprentices, but is much more burdensome for smaller firms. As with all such big picture regulations, it’s the big incumbents who tend to benefit at the expense of their less well-resourced challengers. As one procurement consultant put it, the Social Value Act is ‘utterly discriminatory and ridiculous’ with SMEs ‘always going up against the full corporate credentials’.

It’s not just the additional burdens on businesses, but the very methodology of the Act which is skewed. In order to gain a contract, the bidder must fill in lengthy paperwork about their compliance with the Act, measured arbitrarily by the procuring officer. This means that measuring social value is both strenuous and tenuous, as there are no real criteria for impact evaluation.

The Magenta Book produced by the Treasury offers little respite for bidders, who are left bemused by hundreds of pages of various theoretical evaluation methods. To make it easier for civil servants, the Government has shifted away from procuring the ‘most economically advantageous tender’, to just the ‘most advantageous tender’, thereby creating even more ambiguity for businesses.

These labyrinthine rules have spawned their own pet industry of ‘social value consultancies’, who offer hard-pressed companies pointers on how to deal with government procurement – all for a hefty fee, of course. There’s nothing inherently wrong with that, companies of all type spend money on regulatory compliance. But if we are really in the business of creating ‘world-class’ regulations, as politicians are often wont to say, we should be reducing costs for businesses wherever possible.

Despite claiming to be the party of small businesses, and entrepreneurs, the Conservatives have not only brought this legislation into force but are set to go even further in the forthcoming Procurement Bill. Too often it seems ministers and MPs aren’t really aware of what they are voting for at the time, then turn down later and complain that ‘something needs to be done!’ about these rules.

Given that we spend the thick end of £400bn a year on procurement, MPs really need to interrogate how useful a barometer social value really is – and how the state can do better by small businesses.

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Maxwell Marlow is Director of Research at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.