Promoting local SME participation in public procurement

Promoting local SME participation in public procurement

Promoting local small- and medium-enterprise (SME) participation in public procurement markets should be crucial in any government’s support for local economic development.

I will never forget the experience of working in Glasgow many years ago in housing estates that contained extremely high levels of multigenerational unemployment. I remember meeting men and women who sat idling in public parks watching outside contractors come into the community every morning to perform work they could do. These contractors were performing maintenance work on behalf of the local governments. But despite having the skills, most locals lacked the capacity to create local businesses that could compete with larger, better-organised external contractors. While there was work in these communities, it was performed by outsiders. While there were maintained gardens and facilities, no local wages were paid, and the spiral of disadvantage turned a little more.

Growing evidence shows governments can promote SME participation and local economic growth more effectively through public procurement. This post examines some of the most critical and relevant challenges.

Value for money through procurement

The primary objective of public procurement is to deliver “goods and services necessary to accomplish government mission in a timely, economical and efficient manner.”

Public procurement is about identifying what is needed; determining who the best person or organisation is to supply this need; and ensuring this is delivered to the right place, at the right time, for the best price, and that all this is done fairly and openly.

Taxpayers want to know that the government is spending their taxes efficiently and economically and achieving value for money to deliver sustainable economic, social and environmental benefits.

Other procurement objectives

The public procurement system also provides a stable source of market demand. This demand can be used to stimulate additional benefits. Promoting local SME participation in public procurement markets is a secondary objective that governments can adopt.

Governments use procurement as a policy lever to go beyond the primary procurement objective and achieve these secondary policy objectives. Other possible secondary policy objectives include sustainable green growth, innovation, standards for responsible business conduct, and broader industrial policy objectives.

The OECD Recommendation of the Council on Public Procurement highlights the strategic role of public procurement in achieving efficiencies and economic gains. It recommends that any use of the public procurement system to pursue secondary policy objectives should be balanced against the primary procurement objective.

Integrating procurement objectives

Secondary procurement objectives should be integrated into procurement planning, baseline analysis, risk assessment, and outcome targets.  In addition, governments need to incorporate impact assessments to measure the effectiveness of procurement in achieving secondary policy objectives.

There are tensions with governments between a need for procurement agencies to demonstrate greater efficiency in public procurement with the desire to promote local businesses. Often, the primary objective prevails.  Smaller firms are crowded out of procurement markets.

Government procurement agencies and officials should overtly balance the primary and secondary procurement objectives through careful targeting and regular reporting.

The objectives of local SME participation

SME participation in public procurement markets can achieve policy outcomes among firms and across the economy.

At the firm level, a strong body of international evidence shows how public procurement systems can stimulate local SME participation and economic growth.

Studies show that winning even a short-term government contract can induce long-term changes in the firm’s growth, especially among small, young and financially constrained firms. Employment, private revenue and value-addition significantly increase as contracted firms build their reputation in private markets, learn by doing and overcome constraints.

Increasing access to public procurement markets builds a firm’s dynamic capability. It improves how they deploy internal resources and their capabilities to gain a competitive advantage.

Public procurement markets allow firms to acquire the knowledge required to improve business performance and innovation.

At the economy level, increasing SME participation in public procurement markets generates local economic benefits through higher levels of private investment in the local economy. As firms improve their dynamic capacities, they grow their workforce, invest in technology and become more competitive.

Because of their significant purchasing power, governments can stimulate the demand for innovation when setting technical standards for procuring goods or by creating market signals that influence the diffusion of innovation.

Generic versus SME-specific public procurement reforms

The participation of local SMEs in public procurement markets is often hampered by procurement systems that are difficult to navigate and burdensome to comply with when attempting to submit a tender.

Large firms have more resources to apply to the tendering process (e.g., more skilled staff).

Smaller firms must consider whether it is worth investing considerable time and effort in bidding for government contracts.

Reforming the procurement system by making it simpler and easier to comply with can help all current and prospective suppliers. Often described as “levelling the playing field, ” these reforms make public procurement processes easier for all enterprises, regardless of size.

While SMEs are particularly disadvantaged by an overly bureaucratic system, they are not the only beneficiaries of a more user-friendly approach. For example, in 2014, the European Commission issued a new procurement directive that included renewed efforts to improve the opportunities for SMEs to participate in public tenders with EU Member States. The directive encouraged the contracting authorities to break contracts into lots and introduced a turnover cap to facilitate SME participation. Contracting authorities were no longer allowed to set company turnover requirements. While the directive was considered to favour SMEs, analysis has shown that the division into lots makes procurement more complex for contracting authorities and can increase costs. Moreover, the division does not give preference to SMEs since larger firms can still tender and continue to apply their considerable advantages. Similarly, efforts to reduce the administrative burden and compliance costs on SMEs apply to all businesses and do not provide a significant advantage to smaller firms. Reducing red tape helps level the playing field for SMEs without disadvantaging large companies, except through increased competition.

While generic reforms are a positive step, success in achieving a higher level of SME participation in public procurement markets requires more. I have gone into more detail on these issues here.

In some cases, governments need to explicitly favour SMEs to improve the overall quality of procurement processes and SME participation rates. In other cases, demand-side procurement interventions need to be complemented by supply-side programs to build the capacity and capability of local SMEs to take advantage of increased market opportunities.

Local SME participation in public procurement

Local SME participation in public procurement benefits the local economy and firms. Governments and other public procurement agencies must balance these sometimes competing procurement objectives through clearly defined targets and regular public reporting.