SME Policies in Procurement – Value for Money?

We are pleased to welcome this post from Caroline Nicholas, Senior Legal Officer, United Nations Office of Legal Affairs. Caroline draws from her co-authored Paper, "Small and Medium-Sized Enterprises Policies in Public Procurement: Time For A Rethink?" published by Journal of Public Procurement.

The 2014 EU Directive on Public Procurement seeks to support SMEs as part of encouraging the strategic use of public procurement. New provisions include: reducing bureaucracy (use of self-declarations in qualification and recommendations for an EU-wide procurement passport); capping any turnover requirement at twice the contract value; encouraging contracting authorities to divide procurement into lots (applying an "apply or explain" approach) and requiring more prompt payments.

To any reduction of unnecessary bureaucratic burdens, there will be loud cheers: they benefit SMEs above other businesses, as the burdens hit them the hardest. Will they work and attract SMEs to the procurement market? There are reasons to be sceptical: first, SMEs don’t participate in procurement for many other reasons that aren’t addressed in the new Directive - apparently better profit-making opportunities in the private sector, responding to demanding invitations to tender and complex contract requirements (including social clauses) to name but a few. Risk aversion, trust between SMEs and contracting authorities and a lack of understanding of how to apply pro-SME policies, have long been noted as significant barriers to SME participation in procurement. Individual procurement officials may be reluctant to move from tried-and-tested, “safe” specifications and suppliers, and may be pressurised to avoid political risk (contracting with “undesirable” suppliers). And policies are not entirely cost-free – learning and complying with new policies and regulation might discourage SMEs.

Secondly, some of the new provisions – such as dividing into lots and permitting limits on number of lots which any one supplier may win – may respond to an oft-cited concern about SMEs, but they may also increase contract prices and/or administrative costs. Risk aversion may therefore incentivise more “explanations” than “applications.” However, will we know what the additional costs may be? A 2006 estimate is that the annual total financial support for SMEs in the UK was equivalent to £7.9 billion per annum* – more than is spent on the police force or universities – though it is not clear how much of that was spent on supporting SMEs through procurement.

Data collection is weak in all procurement systems. What is clear is that almost every business is an SME (99.8 percent of the non-financial sector in the EU), and it is mainly small and micro enterprises that fail to win their fair share of procurement contracts (the European Commission estimates are 5 percent and 11 percent respectively, compared with 2 percent for medium-size enterprises). There appears to be little appetite to measure whether the policies are targeted at small and micro enterprises (available data generally contain very little breakdown between micro, small and medium-size enterprises), nor to evaluate whether they yield any real benefit.

Another goal of the 2014 Procurement Directive is to support innovation, but there appears to be no formal link between the new innovation partnerships and pro-SME policies. A good strategic target would be the small number of “gazelle” SMEs that have the most positive impact on innovation and the economy – and we might consider the costs to be justified, and be interested in the resulting economic benefits. However, we are unlikely to discover any of these elements. Unlike the rest of the procurement system, which requires transparency, objectivity, integrity and value for money, the strategic use of public procurement seems to be exempt from empirical analysis and may best be described as an example of “pro-growth policies clothed in politically encouraging language.”

* Freeman, A. (2013). “Challenging Myths about the Funding of Small Businesses..., Finance for Growth.” Demos Finance



The author is a lawyer with the International Trade Law Division of the United Nations Office of Legal Affairs (the Secretariat of UNCITRAL). The opinions in this paper are personal, and are not to be viewed as representing official views of the United Nations.

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