Procurement: response to Heseltine recommendations. Introduction

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1 Procurement: response to Heseltine recommendations Introduction 1.1 This report has been prepared in response to the recommendations in No Stone Unturned that relate to public procurement. The response is cross- sector and includes input from LEP local authorities, academia and business. 1.2 The report will provide information on existing procurement activity taking place in the GBS LEP area, highlighting some areas of best practice. It will also indicate areas where public authorities could be further incentivised to procure novel products and services and support economic development in new ways. 1.3 All procurement has the potential to create economic effects. For the purposes of this report, two types of public procurement have been identified: 1) limited (e.g. purchase of paper) and 2) strategic (that which has the potential to stimulate economic benefits in the local economy by encouraging innovation). It is this latter area on which we focus here as this is the area that has the potential to generate economic growth. This is not to say that limited procurement does not create economic effects. It does, particularly where collective purchasing or framework agreements aggregate demand for sectors or regions and influence the relationship between large volumes public authorities and supply markets. Background 1.4 The Greater Birmingham and Solihull LEP authorities have a considerable level of purchasing power. The total for the whole LEP area is broken down by authority in the table below. LEP authority Total budget Procurement budget Birmingham City Council 3.5bn 979.7m Solihull Metropolitan Borough Council 450m 148m Bromsgrove District Council 47.9m 18m Redditch Borough Council 78.7m 24m Wyre Forest District Council 63.2m 14.5m Tamworth District Council n/a 20m Lichfield District Council 62m 18m East Staffordshire Borough Council 59.6m 24.2m Total spend m 1.5 The structure and procurement arrangements vary across the LEP local authorities. Some of the authorities, such as Birmingham and Solihull, have a permanent and centralised procurement function; Wyre Forest, Bromsgrove and Redditch share some services and procurement expertise; whilst in East Staffordshire, the Borough Council s Programmes and Transformation Team deliver a number of central services, including procurement. Each comes with its own benefits and challenges, for example within Birmingham there is a risk that procurement is complex and inaccessible and in the smaller district councils there is not the level of purchasing power/ resource to engage in procurement of innovation or R&D that might be construed as high risk

2 1.6 The public authorities that constitute the LEP all have procurement strategies, but many of them operate procurement as a shared service with neighbouring authorities, either for strategic procurement or for all forms of procurement activity. Examples include the Coventry, Solihull and Warwickshire sub- region and Wyre Forest, which has a Shared Service Agreement with Redditch Borough Council to provide Procurement Advice 2 days a week. Depending on the size of the procurement service, and associated procurement activity, contract management either takes place in- house or is managed by external consultants. 1.7 Recommendation: The GBS LEP Heads of Procurement do not currently meet as a group. In order to take forward a procurement strategy for the GBS LEP, and to maximise the potential of strategic procurement events, we would seek to bring them together. Cross- authority procurement has precedence in the West Midlands through the Buy for Good partnership and through the Improvement and Efficiency West Midlands (IEWM), formally the West Midlands Regional Improvement and Efficiency Partnership (RIEP). There is also sub- regional activity taking place, as described in Recommendation: The single pot would act as a significant driver to ensure that procurement across the LEP would operate as a coordinated single function (as regards to strategic procurement). The LEP Heads of procurement group would be tasked with delivery of projects through the strategic deployment of public procurement. 1.9 Recommendation: The LEP Board should appoint a representative to champion public procurement. This representative would need to join the meetings of the Heads of Procurement Recommendation: Collaborative procurement should be encouraged and facilitated where possible in order to maximise the impact of procurement events and reduce the risk of investing in innovation for buying and supplying organisations. This could be through joint procurement or leader- led procurement but these models need to be incentivised and smaller local authorities may require additional support to take part. Bids for funds through the proposed future joint funding pot could include requirements that incentivise joint procurement of innovation. Buy for Good is a not for profit Community Examples of best practice: climate change, innovation Interest Company that and sustainable economies provides best in class procurement solutions, 1.11 Birmingham City Council, in partnership with the which deliver economic, University of Birmingham, has developed a number of social and projects and initiatives that demonstrate best practice in environmental value in terms of public procurement of innovation. These are the following ways: focused on the areas of sustainability and climate change Ensuring value at present, but methodologies and lessons learned could for money via be more widely applied. collaborative 1.12 Climate purchasing; change and sustainability are, by their nature, clearly tied up with procurement Supporting of innovative the solutions; climate reduction targets set by local local economy; Creating jobs and training opportunities for local communities;

3 authorities and the very fact of climate change itself, mean that we cannot continue to buy what we have always bought. By buying what we have always bought, we will get the outcomes we have always got. Public procurement is an essential part of driving a successful market in climate change mitigation and adaptation solutions given the capacity of public authorities to demonstrate the effectiveness of technologies, enabling their diffusion into the private sector, and because societal demand for these technologies is currently scattered and inarticulate In reflection of this, research conducted in 2011 showed that Birmingham has a burgeoning low carbon technology sector, including over 200 firms in manufacturing businesses, service providers, leading edge university research and recent inward investors, with particular strengths in areas such as low carbon and electric vehicles, fuel cells, biofuels, decentralised energy and low carbon buildings 1. Employment in this sector increased by 27% between 2005 and The Birmingham City Council target to reduce the city s carbon emissions by 60% by is driving a number of initiatives to accelerate the development of the local low carbon sector, including in areas such as district energy, electric vehicles and housing retrofit. Birmingham Energy 1.14 Birmingham City Council is also involved in public Savers (BES) has procurement of innovation projects funded through the established the European Commission Competitiveness and Innovation Birmingham Green Programme (CIP) and also through Framework Deal programme to Programme 7: enable up to 60,000 the Smart Procurement European Alliance households and (SPEA) led by Barcelona (see box below); businesses to install ICLEI s Public Procurement of Innovation packages of energy Platform, which is feeding into European saving technologies, Commission strategic thinking on e.g. insulation, at no supporting public procurement of upfront innovation cost; with and providing an opportunity to develop practical tools for public repayments procurers; made and over time TRANS- FORM, from a European- wide initiative to explore collaborative reduced procurement energy of low- carbon transport solutions. bills. The 1.15 It programme is important is that these projects are communicated widely in order to ensure that they creating are able local to jobs inform strategy and best practice beyond the project team; the projects are important in delivering new solutions to service areas but also need to and investment by be capturing inclusive of procurement functions to effect change in current practice. opportunities in the regional supply chain. Birmingham City Council has used a competitive dialogue process to award a framework contract which could be worth up to 1.5billion in total and contain 1 Profile of contractual Birmingham s Low Carbon Sector. Consulting Inplace, URSUS Consulting, Birmingham City Council and commitments Business Birmingham, to From a 1990 baseline deliver local economic outcomes including targets of 360 jobs and 16,000 training weeks. Birmingham is the - 3 -

4 Smart Procurement European Alliance The main aim of the Smart Procurement European Alliance (SPEA) is to implement a public procurement of innovative solutions in the area of energy efficiency in municipal buildings in the partner cities Barcelona (lead partner), Eindhoven and Birmingham. The expected impacts are to: increase the demand for innovation in this area; improve quality/efficiency of public services; and provide opportunities for SMEs to get involved in public procurement as direct beneficiary/client of a purchasing authority. The project will run over 4 years (starting from September 2012) with the ultimate aim of undertaking a joint procurement between the three partners. The progress and success of this project, as well as the 14 others that received funding at the same time, will inform Horizon In addition to these transnational projects, Birmingham City Council is a signatory of the Corporate Leaders Group Procurement Compacts (supported by BIS) on biogas and transport 3. These compacts are enabling us, as one of a group of organisations (from both the public and private sectors), to signal to the market our needs as buyers and the conditions under which we might buy a particular innovative solution or technology. The Compacts demonstrate that procuring innovation is not wholly a public sector concern (e.g. private companies operate fleets as well as the public sector) and therefore there may be occasions where collaboration is important in stimulating the market. The potential for local economic growth is also significant; transport is a strategic asset for the regional economy, constituting 216 firms in the transport technology sector, 12,700 people employed and a 45% business birth rate between 2005 and 2010 in Birmingham alone Time- limited projects and initiatives are important in delivering on Birmingham s strategic objectives. However, there is also one example of the longer- term approach we wish to take towards public procurement of innovative solutions and R&D. This is the Climate- KIC Innovative Public Procurement Network 4, which is due to begin activity in 2013 and will operate transnationally, with a thematic focus on climate change adaptation and mitigation products and services but will develop practical know- how and expertise in co- procurement methodologies at scale. 3 Down to Zero, 2012, Platforms/The- Prince- of- Wales- Corporate- Leaders- Group- on- Climate- Change/UK- Procurement.aspx 4 Reference to the Climate KIC s Climate Market Accelerator work can be found here: kic.org/entrepreneurs/business- support/climate- market- accelerator/ - 4 -

5 Climate KIC Procurement Network The European Institute of Technology currently funds 3 Knowledge Innovation Communities ; one of these has a focus on climate change (Climate KIC). The membership of the Climate KIC comprises business, research centres and, uniquely for the KICs, a Regional Innovation Community (RIC). Through the RIC, a procurement network is to be established, with initial focus on the cities of Birmingham, Frankfurt, Budapest, Bologna/ Modena, Wroclaw and Castellon. The Network Manager will be based at Birmingham City Council. The network will kick- off in 2013 and after 2 years is intended to be self- sustaining as a result of the work undertaken by the Network Manager to embed links to the end- buyers in the Climate KIC supply- side activity programmes; to develop a culture of peer learning and support among network members, to identify and spread best practice and to drive sustained change in individual public authorities through changing procurement practice, policy and sustainability strategies. The Network will deal with the following activities: The process of defining the needs and outcomes that purchases should contribute to. Pre- procurement market engagement. Deciding the route to market, e.g. design competition, pre- commercial procurement, forward commitment procurement etc. Creating specifications and using green procurement standards. Going out to market and undertaking the core procurement process. Contract and performance management. Procurement strategy The trial of this network will feed into the work suggested in No Stone Unturned at a national level through enabling insight into how a procurement network might operate and the challenges and opportunities it creates Recommendation: Given local expertise, and real- world trialling of collaborative public procurement, the LEP should work closely with the Whitehall team tasked with providing strategic advice on innovative public procurement In addition to the European- funded initiatives, there are also some examples of West Midlands- based projects and programmes that have been developed to change the way procurement operates for the benefit of local jobs and growth. One example is a project, Aim High, which has sought to develop innovative solutions for housing retrofit. The other is a longer- term approach to procurement contracts that stipulates the need for action on local jobs and skills. Birmingham City Council has used European Regional Development Funding to run a project called Aim High which is inviting businesses and organisations who have innovative, close- to- market The West Midlands Procurement Framework for Jobs and Skills (launched in March 2010) was developed to support public and voluntary sector to make supporting local access to jobs and

6 Relationship with national centre for innovative public sector procurement 1.21 We would welcome a dedicated national centre ( single source of expertise ) to develop work on innovative procurement. This centre should engage with cities and LEPs to understand sub- national priorities and activities; existing networks, such as Core Cities, might be able to provide this function The national centre must also act in a proactive way, engaging in foresighting work and mapping strategic procurement events. This strategic work could link to the Technology Strategy Board, and align with funding opportunities and the SBRI programme. Birmingham City Council is in discussions with the Technology Strategy Board about running the first local authority SBRI in the UK; match funding continues to be a hurdle to overcome. Alternatively, infrastructure and funding could be put in place to localise the TSB function to stimulate procurement of innovation and R&D From a local authority or LEP perspective, one of the key aims of public procurement of innovation inevitably is to grow the local economy, through new business, entrepreneurship and creation of jobs. Any national foresighting activity should therefore ensure that local innovation is not stifled in the process Recommendation: The national centre for innovative public procurement must work closely with the LEPs and the TSB to identify procurement activities that are potentially of national importance for stimulating economic growth. These procurement activities should then form the basis of a programme that would combine the capabilities of the TSB with the LEPs. This would reduce the risks associated with innovative public procurement The drive for public procurement of innovation may not come from procurers themselves, but from other parts of local authorities delivering services who may identify the need for new solutions, either through service delivery or commissioning exercises. In addition to providing a centre of expertise on procurement techniques that can encourage innovation and economic stimulus, local procurers need to be linked to sources of expertise on the technical solution. Public authorities have many skilled people working within them, but they may not have the knowledge of near to market technology or trends in research and development that might provide a solution. How do you know if you need to buy innovation or R&D; how should the tender be prepared; and, who assesses the responses to this tender? 1.26 Recommendation: The national centre could act as an intelligent broker in this instance, as could the Technology Strategy Board. A wider use of procurement techniques that encourage innovation, such as outcome based procurement and functional specifications, in which requirements are set in terms of outcomes or performance measures rather than inputs or descriptions of the technology or service required means that firms may have more opportunity to suggest innovative solutions to tenders. However, this will be matched by a requirement to support local authorities to assess the new technologies that are being suggested

7 1.27 The national centre would also have a role in ensuring appropriate UK, European and global standards were met in innovative solutions procured locally. This would ensure that any technology developed and implemented locally would have wider economic benefit for the local businesses through opening up European and global markets Research has concluded that open standards, formulated in terms of performance or functionality, give procurers more confidence in the performance and safety of innovative products; help to disseminate innovative products and services; and stimulate enterprises to invest in R&D. However, workshops with procurers in several countries found that public procurers had limited knowledge of standards, used them rarely and did not associate them with innovation. Barriers to using standards included the absence of national support for standards as an innovation instrument; lack of mandate for public procurers to be directly interested in promoting societal objectives such as enhancing innovation; a focus on costs and perceived risks of legal proceedings or accusations of corruption Recommendation: UK local authorities are often engaged in long- term PFI contracts (25 years is not unusual). The central team in Whitehall needs to work to enhance the flexibility of these contracts, as without this it is easy to get locked into using old technologies and there is a reduced ability to meet social and economic needs. Therefore, support for local authorities to use technology upgrading clauses, local jobs and skills clauses should be within the remit of the national centre. Further, collaborative procurement becomes challenging without this flexibility as contracts in neighbouring authorities are operating at different timescales. Supplier firms with 25 year relationships with public authorities become key strategic partners and play a significant role in encouraging innovation and local economic outcomes through their own economic activities and relationships, for example their use of sub- contractors. Any future LEP- led activity to encourage innovation and economic development should allow consideration of the contribution of these firms to the prosperity of the functional economic market area Recommendation: The limited procurement capacity of some LEP authorities to engage in innovative public procurement, and the need to bring the LEP authorities together to explore collaborative strategic procurement, has been discussed above (1.7). The national centre has a role in identifying districts and public authorities where there is not the capacity, resource or budget to deliver on public procurement of innovation and assist them in combining resources with authorities that have Recommendation: The national centre could run a series of demonstrator projects (e.g. a TSB competition). The demonstrator would define a societal challenge that has potential for growth, define what that potential is and then authorities could bid to work with TSB on addressing the challenge through public procurement activity. This could be incentivised through part of the innovation costs being met by the TSB With the experience outlined above, and close ties to Europe on the issue of public procurement of innovation and R&D, the GBS LEP would like to discuss further the 5 Apostol, R. (2010) Formal European standards in public procurement: a strategic tool to support innovation. 19 Public Procurement Law Review,

8 possibility of hosting the national centre or working as a strategic partner with the national provider. Relationship with Europe 1.33 Public procurement of innovation is clearly a priority for the European Commission in strategic terms (through establishment of innovation partnerships as part of new procurement legislation) and also through funding (CIP and FP7 programmes have offered funding for PPI 6 and PCP 7 respectively). It is important that local authorities find means of engaging with this Project funding inevitably plays an important role for public authorities, particularly where novel approaches are being tested; it provides a buffer for the risk involved and also enables some learning from best practice/sharing of experiences. However, Framework Programme and CIP operate slowly and a project consortium built in response to a bid may not actually be able to begin the procurement of a solution until 2 or 3 years later (by the time the bid is approved, negotiated and the initial required background work is done by the project team). This may mean that by the time the purchase is made, the solution may already be on the market/ might no longer be innovative. Match funding, as always, remains challenging Structural Funds/ ERDF programmes may also provide some means of financing public procurement of innovation, but application of the rules around this funding does not seem to be consistent. Further, many funding organisations want to know exactly what the funding is going to be buying and, in the case of procurement of innovation or R&D, this may be unknown at the time of bidding. A bid by Birmingham City Council for ERDF to purchase electric minibuses was a casualty of this stipulation In order for public authorities and European institutions to maximise the potential of public procurement as a driver for innovation, communication upwards (including input to procurement funding priorities and strategy) from local authorities, through national bodies and into Europe is essential, as is cascading of information downwards. A continual dialogue needs to take place. Maximising work with organisations such as Eurocities is critical, as is working closely with MEPs Europe may also offer interesting models of public procurement arrangements, particularly around managing risk of procuring innovation. Agencies such as Tekes (Finalnd), Vinnova (Sweden) and PIANOo (the Netherlands) may provide further examples of how we might work better/ more efficienty in the UK. Public procurement of innovation and supporting local economies: challenges and opportunities 1.38 One obstacle comes from the organisation of both national and local government into a series of stand alone silos. This means that it is difficult to develop a common approach to procurement at the level of a city council or local authority and this 6 Public procurement of innovation is organised through DG Enterprise and Industry: procurement/index_en.htm 7 Pre- commercial procurement is organised through DG Information Society and Media (

9 difficulty is replicated throughout Whitehall as well as the European Commission. Overcoming this difficulty requires a strong steer on behalf of the national government that public procurement should be considered as a valuable tool to enhance local economic development. We would look to the national centre to play this kind of role. The capacity for individual public authorities to address these challenges should be considered. Local authorities with well- staffed centralised procurement teams have an advantage as they have the potential capacity to coordinate procurement processes and deploy strategic approaches and innovation tools. Local authorities with only two or three procurement staff have less potential to engage with this sort of activity. Therefore, smaller procurement teams could be supported to benefit from the activity of larger teams in their Functional Economic Market Area, e.g. joining as a partner in innovative projects A local authority procurement contract may stimulate innovation and employment in firms or markets that are outside the local authority s area of responsibility. This might undermine a local authority s enthusiasm to deploy procurement as a tool to stimulate innovation in another authority s area of responsibility. Nevertheless, it must be recognised that anything that encourages firm s operating in the UK to engage in innovation will have positive benefits for the country s economy and training, knowledge transfer and employment opportunities for local people can be used to achieve local up- skilling and diffusion benefits from an innovation for local supply chains Procuring innovation using pre- commercial procurement (PCP) or forward commitment procurement (FCP) is based on the premise of an unmet need. Organisations are adept at finding partial solutions or work arounds to these needs and therefore avoid procuring innovation. Procurers are naturally risk averse and unwilling to be first to bring to trial a new approach and the first rider principle applies Consideration should also be given to the timing of procurement interventions and the drivers for innovation. PCP and FCP are lengthy processes that will stimulate innovations that if successful are likely to be market ready within a few years. Methods such as outcome based procurement can access innovations that are closer to market and bring new products and services into use in shorter timescales. Both of these interventions catalyse the innovation ecosystem and can be used to continuously improve the portfolio of products and services available in public markets. FCP and PCP, and SBRI can tackle barriers to innovation by facilitating investment in start- up companies using a staged process that manages the risk for all parties involved. The new EU procurement instrument enables PCP to be continued into the procurement of the innovative products or services developed, which should encourage take- up of this route Many public authorities use collective or consortia purchasing systems, for example those run by the Government Procurement Service and NHS Supply Chain. The primary advantages of using these mechanisms are value for money, efficiency and access to a streamlined and tested purchasing mechanism. Innovation does not appear to be a primary driver in this market yet, however this should be addressed as these routes aggregate the demand of groups of public bodies and therefore have the potential to lower the risk associated with investing in innovation for both buyers and suppliers

10 Public procurement and SMEs 1.43 Public authorities can, more often than not, be impenetrable for small, innovative companies; this can make it difficult for smaller firms to identify and respond to tender opportunities. Birmingham City Council is engaging more openly with the supply market by using the Find it in Birmingham website and regular buyer- supplier events and briefings, including supported networking with large contractors who hold contracts with the City such as Balfour Beatty. However, the use of these approaches is piecemeal across the country In addition to opening current opportunities to the local market through well- advertised routes, providing advanced information on future contract opportunities is another way to support supply markets to make sustainable plans. The five year funding cycles proposed in the Heseltine Review could create more certainty for suppliers but should be accompanied by a requirement to publish spending and capital investment plans that identify procurement events and opportunities for local businesses to capture value from the goods, services and works that will be supplied There are other well- documented barriers that prevent small firms accessing opportunities to supply goods and services to the public sector, including those referenced in the Heseltine Report, which are being addressed by Lord Young. Public spending can provide a regular and reliable source of business for small local firms and removing these barriers (by simplifying pre- qualification information and being flexible about requirements such as the need to provide three years trading history) is essential for local economic development. Furthermore, patterns of public spending can also create barriers for small firms. For example, the need to address underspends in capital budgets before the end of the financial year to avoid penalties can create large high volume short term contracts for the period January to March that equate to a year s revenue for a small firm but are likely to be let to a larger firm who can meet the required volume of work in the short time available Public authorities often have no way of dealing with the instance where a firm approaches them with an innovative product outside of the context of a live competition, which is likely to reduce the rate of uptake of new technologies and solutions. Functional specifications enable small firms to suggest these technologies when the next suitable contract arises but in the meantime a route linking local public procurers and organisations like the Technology Strategy Board or other public authorities should be established so that these opportunities are not lost The business support workstream needs to identify SMEs who want to link with public procurement activity; we should not be creating new silos. The role of the single pot in public sector procurement of innovation 1.48 There are weaknesses in the current system of public procurement that the single pot could assist in addressing. In particular, the current system means that activities are siloed into key functional areas with budgets allocated nationally and locally (as well as any budgets from Europe) and this produces inefficiencies related to expenditure within a particular budget line because authorities don t tend to think

11 of a problem in its totality. The single pot could be an enabling device to align resources and capabilities to develop solutions to local difficulties that will enhance economic growth, well- being and prosperity (an enhanced Total Place approach). The single pot could enable public sector procurement to be aligned with economic development and enabled by research and innovation capabilities Procuring innovation needs to be incentivised, funding from the single pot could be made available to cover the additional complexity and risk of the procurement process. This funding can be quite small as a proportion of the total budget, e.g. 10%. The funding should be conditional on procurers using outcome based procurement using functional specifications and including innovation as a selection criterion with the Most Economically Advantageous Tender award route. Diverting a relatively small amount from product development into market pull techniques would provide greater return on investment in some areas (as the 10% is put with 90% core funding) Mutualisation presents opportunities for local service delivery but there is currently nothing available to local authorities and other public sector organisations to identify what we might do strategically to effect a transition and what role procurement might play in this. The single pot could be used to support social enterprises, the voluntary sector and charities to enable them to be market ready to deliver services The single pot provides a unique opportunity to align local resources and research and innovation capabilities to release innovation and economic growth driven by public sector procurement. There is also the opportunity to align business support with public sector procurement The single pot would act as a significant driver to ensure that procurement across the LEP would operate as a coordinated single function (as regards to strategic procurement). The LEP Heads of procurement group would be tasked with delivery of projects through the strategic deployment of public procurement