During my years as a start-up founder, I had the dubious pleasure of navigating the spoken and unspoken procurement rules of Network Rail. To my dismay, I found that discretionary budgets didn’t sit with the operations managers who were the direct clients, nor with the Central Innovation team but under the auspices of the multi-million pound Framework Agreements, with any and all grants conditional on compliance with a Kafkaesque series of rules and regulations. Small players like us could bid, of course, but hardly had a chance against the large engineering consultancies, which had both the funds and expertise to navigate these absurd requirements. Our product was effectively shut out.
When done properly, government outsourcing of essential services to the private sector is one of the best ways to deliver better value for taxpayers. It uses the creative power of the market to drive up standards and cut costs. But as with anything else the state turns its hand to, procurement has become bogged down in pointless bureaucracy. Currently, the system only serves only a handful of mammoth firms who cash in on lucrative government contracts. This includes the infamous Fujitsu, which recently had its £67 million contract extended with HMRC and is reportedly currently bidding for a renewal worth £200m next year, despite its involvement in the Post Office scandal.
It’s no surprise then that business leaders with an active relationship with the public sector responding to the recent Business Confidence Survey, published by us at the Adam Smith Institute, flagged the state of procurement as a major issue. One engineering firm in particular highlighted how:
Red tape generated by supply chain supplier approval, especially for SMEs, has become a real burden – for example creating DEI and Net Zero policies that bear no relevance to our business consumes vast amounts of time to get on a supplier database.
The issue that this firm is raising isn’t novel – in fact, it can be traced back to the Social Value Act of 2012, the legislative equivalent to Frankenstein’s monster. The Act mandated that businesses bidding for contracts must conform to an (ever-expanding) list of social and environmental rules – whether or not they’re actually relevant to the job at hand.
This isn’t just virtue signalling. These legal powers have the potential to fundamentally distort the profit motive – the key driver of progress. If we force businesses to compete arduous ESG-friendly paperwork, rather than offering the best deal for consumers, we undermine most of the benefits offered by procurement. Our research revealed that these social value metrics disproportionately affect small businesses, funnelling contracts to corporate giants that have the resources to game the system. After all, how can small, resource-strained startups be expected to navigate this maze of complex legal requirements? The state is effectively regulating competition out of existence. When only large companies can secure these contracts, the Darwinian process that fosters innovation and raises standards is suppressed.
To make matters worse, procurement has become relentlessly centralised. In the past, government departments had flexibility in choosing their suppliers, encouraging competition and fresh ideas. But over time, procurement has been swallowed up by the relentlessly managerialist Crown Commercial Service (CCS). The CCS has now introduced a host of restrictive compliance rules which has only served to further lock small businesses out of the procurement process, causing monopolies to thrive and costs to soar.
What’s more, ensconced in the risk-free world of the public sector, many civil servants negotiating these deals have limited understanding of business. As a result, they have signed exploitative and expensive contracts that no one with a lick of business experiences would ever contemplate.
Far from ushering in a free-market revolution, procurement has become just another tool of state corporatism. One is reminded of the concluding passage of Animal Farm:
The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.
Procurement has turned into the problem it was designed to solve, morphing into a government-sanctioned monopolism indistinguishable from the state-run services it replaced.
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