Wednesday, February 29, 2012


Across the European Union, small to medium sized enterprises (SMEs) account for 99 per cent of all businesses, make up two thirds of private sector jobs and are responsible for more than half of the value added that is created by the business sector.

However, one of the concerns of the sector, and its representatives, is that SMEs are still not getting full access to the EU public procurement market, which is estimated to be worth around one-sixth of total European GDP. Indeed, it is worth far more than any direct grant or government scheme that is aimed at supporting business.

The good news is that the European Commission recently published draft directives that are aimed at modernising public procurement in the EU. However, the bad news is that large firms, whilst capturing only 40 per cent of all public contracts, continue to get two thirds of the overall value of contracts across Europe.

And the smaller the business, the lower the chances of getting public contracts. In fact, SMEs only won 30 per cent of all contracts above 5 million euros and microbusinesses, which employ less than ten people and were recently a subject of a review by the Business Minister, only gained 6 per cent of the total market of contracts in terms of value.

This suggests that rather than issuing one large tender which seems to benefit larger companies, public authorities should promote the practice of breaking down tenders into smaller lots, which would increase the probability of SMEs becoming successful.

Hopefully, the debate over new possible procurement legislation will force the issue and start breaking down the cultural myopia within the public sector and the adherence, by many public servants, to the old adage that ‘No-one ever got fired for buying IBM”.

Another potential development that the European Commission could promote is the imposition of targets for spending public budgets with local small firms, as is the case in the USA where the Office of Government Contracting (GC) works to create an environment for maximum participation by small businesses in federal government contract awards.

With the US government spending billions of dollars in purchasing goods and services from private firms every year, targets have been set for every government department as to the proportion of expenditure that will go to SMEs. This is negotiated annually with every agency with an overall small business target for public procurement of 23 per cent.

 More importantly, legislation in the USA ensures that the public sector must conduct a variety of procurements that are reserved exclusively for SMEs. For example, the Small Business Reserve Programme requires state agencies to reserve 10 percent of their contracting dollars for bids solely by small businesses, which will then be able to bid for public contracts without competing with larger, more established firms.

And even if large firms are successful, there are rules which ensure that the winning businesses have to undertake ‘best effort’ to make use of small firms as subcontractors if an opportunity exists under the contract.

Whether such devices would work in getting government agencies in Europe to spend more money with local SMEs is open to debate but it is a debate that has to take place if the power of the public sector is to be used to benefit those small businesses that make up the vast majority of the economy. This is particularly the case in the UK where small firms have failed to get a fair chance to compete for the £236 billion per annum that is spent on public procurement. Even in Wales, where instruments such as “Community Benefits” requires public sector suppliers to map out how they will deliver benefits for the community they are working in, recent research showed that only 39 per cent of the contracts were spent on Welsh SMEs.

To date, it can be argued that there seems to be no coherent strategy on how to best utilise public funding to help grow the business sector and create jobs and wealth across local communities. However, with the Chancellor looking to set a budget for growth to get the UK out of its current economic doldrums, there is a golden opportunity to undertake a major reform of how the public sector spends its money, not only for best value and innovation to make public spending more efficient, but as an effective tool to support the economy.