SCIENCE and TECHNOLOGY SELECT COMMITTEE Public Procurement As a Tool to Stimulate Innovation Oral and Written Evidence

SCIENCE AND TECHNOLOGY SELECT COMMITTEE Public Procurement as a Tool to Stimulate Innovation Oral and written evidence

Contents Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) ...... 2 Department for Business, Innovation and Skills – Supplementary written evidence ...... 16

Evidence Session No. 1. Heard in Public. Questions 1 - 27

TUESDAY 16 OCTOBER 2012

Members present

Lord Krebs (Chairman) Lord Broers Lord Dixon-Smith Baroness Hilton of Eggardon Lord Patel Baroness Perry of Southwark Earl of Selborne Baroness Sharp of Guildford Lord Wade of Chorlton Lord Willis of Knaresborough Lord Winston ______

Examination of Witnesses

Rt Hon David Willetts MP, Minister of State for Universities and Science, Department for Business, Innovation and Skills, Norman Baker MP, Parliamentary Under-Secretary of State, Department for Transport, and Rt Hon Francis Maude MP, Minister for the Cabinet Office

Q1 The Chairman: I would like to welcome and thank the Ministers for joining us for this evidence session. As usual, the meeting is being webcast, so Members should not make sotto voce side comments, and Members of the Committee should declare any interests that they have before they speak for the first time. Declared interests are available on the public information sheet. In a moment I will ask our witnesses to introduce themselves briefly for the record, but I just remind us that this is the follow-up session that we promised when we published our inquiry into public procurement as a tool to stimulate innovation in May 2011 and said we would come back to it 18 months later to find out what has happened. This is the session where we have a chance to do that, so we are very much looking forward to hearing about the developments from the Ministers, and I will, without further ado, invite them to introduce themselves, starting with Francis Maude. 2

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) Francis Maude MP: Thank you. I am Francis Maude. I am Minister for the Cabinet Office, with overall responsibility for public procurement. David Willetts MP: I am David Willetts, Minister for Universities and Science in BIS. Norman Baker MP: I am Norman Baker, Minister at the Department for Transport.

Q2 The Chairman: Thank you. Perhaps I could kick off, and I should declare, in case it comes up, that I am a member of the Committee on Climate Change, which among other things deals with the adaptation of infrastructure to future climates. I am particularly interested in understanding from you what steps have been taken by the Government to address one of the key points that came out of our report and was reflected in the Council for Science and Technology’s letter to the Prime Minister on 29 March—the culture of risk aversion in procurement within the Civil Service. I am also interested in understanding what mechanisms are in place for monitoring and measuring innovative procurement, particularly now that the innovation and procurement plans have been discontinued. Perhaps we could start off with those two points: risk aversion and monitoring and measurement. Maybe the Cabinet Office Minister would like to kick off. Francis Maude MP: Sure, absolutely. I think you rightly identify a problem, which is the caution that tends to exist in the way procurements have been done historically. It is the old adage, “No one ever got fired for hiring IBM”, which means that same approach still persists in too much of the public sector—the big, safe, established suppliers are the ones you should go for. In fact, in the current environment, where the public’s expectations of the quality of services are rising all the time, there is less money available and will continue to be less money available to buy these services that the public needs, so we need constantly to be looking for the new and challenging suppliers with innovative solutions. I have never seen the promotion of innovation as being somehow an add-on to procurement policy; it is essential to getting the best value and the best quality for the money that is available. But it is a behavioural thing and these cultural tendencies are deeply baked-in, but we are doing quite a lot to open up to new challenger suppliers. We discovered that typically contracts in Britain tend to be twice the size that they are in Germany and France, which tends to militate in favour of the bigger, established suppliers and against the interests of the smaller, newer challengers. There were practices such as the requirement that all suppliers should provide three years of audited accounts, which would have excluded, in the way procurements were being done, virtually the entirety of Silicon Valley and Tech City from supplying the UK Government and public sector, and we are trying to sweep these very cautious, reactionary restrictions away. We can do that inside central government. I would not guarantee that we have absolutely succeeded, because sometimes far-flung parts of government do not always respond to central policy as swiftly as I might like. We cannot make it happen across the wider public sector.

Q3 The Chairman: Turning to my point about monitoring and measuring, do you have any evidence that the culture is changing within the Civil Service, and that taking account of innovative solutions is now becoming embedded across departments? Can you point to anything that demonstrates that there has been a change such as you are describing? Francis Maude MP: No, not in an absolutely measurable way, because something being innovative is not valuable for its own sake. It is only valuable if it is new and better. To give you one example, the Government Digital Service recently retendered a hosting contract for 3

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) which the incumbent supplier—one of the well established oligopolies, as one might call it— was charging £4 million. The winning bidders were bidding only just over 1% of that cost, which feels fairly innovative. There are lots of different ways of doing this.

Q4 The Chairman: Perhaps I could ask Norman Baker in particular about the Department for Transport, which was the exemplar department that we referred to, although we are interested in innovation across government. We were particularly interested in the role of the departmental chief scientific adviser in early engagement with the scientific and research communities and those responsible for innovation in transport, and I wondered whether you had any further updates on that—how your new departmental CSA is in involved in procurement decisions. Norman Baker MP: Thank you very much, Chairman. We appointed Professor Smith, as you probably know, in January 2012, and he has led on a range of work to look at what might happen in the future—“horizon scanning” is, I think, the official term that we use for these matters—with a particular focus on the potential impact of future technologies on transport. That includes engaging with leading academics at professional institutions to gather knowledge and insights. In September, for example, there was a workshop jointly led by University College London and the DfT to look at the future role of data in improving transport for users. He has also commissioned a review of the technologies that could have an impact on transport demand and delivery in the next 10, 20 and 30 years, and there will be a technology round table later this year, which will obviously include senior DfT officials, board members, external academic and industry representatives and so on to see how new technology can help departmental and government objectives. It is also important to mention that we have also appointed a highly experienced procurement professional in Melinda Johnson to the newly created role of group procurement and estates director. She is dealing with the creation of a group approach to procurement across the department and its agencies, which includes a professionalism work strand, which will encompass how we engage with SMEs, for example. It will do pre-market engagement, which includes seeking out innovation, looking to industry to help develop solutions to our needs and hosting the lean sourcing training programme. We have run two lean sourcing courses so far, with a further three scheduled for next year, providing training to approximately 100 procurement staff across the department. Obviously, what we are trying to do as well is to ensure that we are not simply picking up what Francis and his team are doing at the Cabinet Office but also helping to spread good practice where we can, from the department outwards across Whitehall.

Q5 The Chairman: To follow that up a little, with very long-lived investments, as in transport, we were interested in the extent to which innovation took into account long- term challenges, such as the impacts of climate change. We heard some evidence in our inquiry that led us to believe that some infrastructure providers had a rather short time- horizon of thinking of 25 to 50 years, rather than of infrastructure operating in a climate that may be very different in 80 to 100 years’ time, which is the likely minimum lifespan of much infrastructure. I wondered whether you had anything concrete to tell us about how these grand challenges are being factored in, and whether the departmental chief scientific adviser, Professor Smith, is helping with that. Norman Baker MP: There is clearly, as you will know, Chairman, work across government on identifying the needs for dealing with climate change in terms of both the climate itself and the adaptation measures that will be required. A good deal of work has also gone on in

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) the Department for Transport to look at, for example, the capacity of the railway network and the road network to survive coastal flooding, and that work has been fed in through the department and informs the work of the chief scientific adviser. As I mentioned a moment ago, he has commissioned a review of technologies that could have an impact on transport demand and delivery in the next 20 to 30 years. I appreciate that that is a shorter timescale than the one you have just referred to, but it will look at matters dealing with climate change adaptation. However, it also deals with other matters, which include, for example, smart car technology, which is very important if we are to get the most out of our transport system in the years ahead. There is a good deal of work going on with that. It is also important to stress that we do work collaboratively across government, for example with our colleagues in Defra, to look at issues to do with climate change.

Q6 The Chairman: Yes. I wondered, just before I hand on to the next question— bringing in the Science Minister, wearing his BIS hat—to what extent the Government are bringing in external people from industry to share thinking about innovative solutions and best practice? David Willetts MP: Yes. We have the Technology Strategy Board as our lead agency in promoting innovation across the company, and that has very strong business representation. The particular issues, which we may come to later, that we promote, such as SBRI and Forward Commitment Procurement, also draw on business expertise. Just to comment on the previous question, I would add that we also have, of course, the Foresight Horizon Scanning Centre, which I know works very closely with the DfT in dealing with these particularly long-term infrastructure projects.

Q7 Lord Wade of Chorlton: Going back to what Francis Maude was saying—that the reason why people are not prepared to take the risk is that they are worried about the downside of making the wrong decision—who are they worried about? They can be worried only about Ministers condemning and criticising them, so surely the whole issue here is just the same as in the company. If you want the people down the line to take risks, you have to make it clear to them that they will not be blamed if they make the wrong decision, and that they will be supported at the top in providing the right decision. Ultimately, it shows that they are innovative and going to take new ideas. So although I understand exactly the point you are making, which is probably embedded in a lot of the bureaucratic concepts, who are they worried about who might criticise what they do, and how do you get rid of their criticism? Francis Maude MP: I hope it is not Ministers. I hope Ministers would always encourage them to look for the best solution, wherever it comes from. I think there tends to be a hypersensitivity about the National Audit Office, the Public Accounts Committee and the media, frankly. We in this country tend not to show much tendency to criticise an inefficient status quo in a rigorous way, but anything new that we try that goes wrong we go to town on. In the public sector, I do not think you hear of anyone’s career suffering because they continue to preside over an inefficient status quo, but try something new that does not work and it can really ruin your afternoon.

Q8 Baroness Sharp of Guildford: I notice that you are putting quite a lot of effort into training your procurement specialists within the Civil Service, and setting up this new academy and so forth. How far are you recruiting people who are staying in their jobs as 5

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) procurement specialists, or how far are they subject to the typical Civil Service turnover of moving on to another job every two to three years? Francis Maude MP: There are several different currents here. One is that too many of our procurement people are people who have only ever done public procurement, so all the professional discipline is around understanding how the public procurement rules, which derive from EU directives, operate. In this country, those are typically interpreted in a much more literal and restrictive way than in other countries, which perfectly properly follow the rules but interpret them in a more liberal way. We overinterpret them. There are many senior commercial people in government who have a background in the private sector and take a much more commercial approach, but we need to infuse into the procurement professionals much more commerciality and much less reliance on following what they believe to be the letter of the law, which is often about perceptions and myth, rather than the reality of what the law requires. The broader thing that we are seeking to do is that it is widely recognised by the leadership of the Civil Service, as well as outside, that there is a shortage of general commercial skills in the Civil Service, and indeed in the wider public sector, and this is not about procurement. This is in a world where more and more public services will be commissioned from outside providers, whether in the voluntary or charitable sector, social enterprises, the private sector or indeed the new movement of public service mutuals, which we are supporting. Officials who have been used to managing the delivery of a service in-house need to get used to being a contract manager, which means having the confidence and knowledge to be able to engage with suppliers, shape the market and then—after a procurement process happens, which should be as short and simple as possible—manage the contract in the future. We are very short of those broader skills, which mainstream civil servants should have, which is why we have already set up the virtual commissioning academy. It is very much at the pilot stage, but it will be available for the whole public sector, and that is to provide that kind of confidence and knowledge. It does not need to be in-depth. These will continue to be people whose principal function is not commercial but who need to have that knowledge and confidence. Baroness Sharp of Guildford: I take it that you are training these procurement specialists who will then stay in post for some time and will not be moved over, or stay in the procurement area. Francis Maude MP: Indeed, but, as I say, there are two different problems. There are the procurement professionals, who, particularly at more junior levels, tend to be focused on the legalistic, rather than the commercial, side of public procurement. They need a different balance of skills and knowledge. Then there is the wider arena of public servants, many of whom simply need to have more commercial knowledge and confidence. Baroness Sharp of Guildford: Thank you.

Q9 Lord Willis of Knaresborough: I was very conscious when we did this inquiry that somehow we missed a trick, in that today there is so much what I would call devolved procurement, that in fact government does not directly procure a significant amount of its £180 billion or whatever it spends on services. A lot of it, particularly in areas such as, for instance, two of the big spending departments, health and education, is now devolved to trusts or to individual schools. I just wondered, where do we influence the quality of procurement there, because there is a danger of having inefficient procurement now at a

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) local level, which in fact is counterproductive to what you are trying to achieve at Cabinet level and as a Government? How do you deal with that? Francis Maude MP: You cannot absolutely solve it, and there are different approaches. In schools, for example, you are quite right. With schools, it has always been the case, whether it is the local education authority or independent academies and pre-schools, that they will be doing their own procurement irrespective of the Government. What we can do as a Government is provide aggregated deals on common goods and services where we can encourage into the market new suppliers with innovative solutions and make the volume discounts available to schools. We cannot make them be taken up. Within the NHS, quite right, localism and autonomy for trusts mean that procurement can become very dispersed. It is very much in the interest of hospital trusts, for example, which will be big spenders in their own right, to have the right commercial skills, but they can exercise those collaboratively with others. For example, the Government Procurement Service based in Liverpool contains what used to be an NHS agency called PASA, which does aggregated procurement for NHS entities.

Q10 Lord Willis of Knaresborough: If you take Microsoft, for instance, if you go to the States, there is a federal agreement with Microsoft to provide bundles to schools and other public organisations at roughly $3 to $5. Every school is now negotiating its own contract to buy the Microsoft bundles. Surely that is something that could be sorted out at your level? Francis Maude MP: Yes, absolutely, we can do that, and I will look at that particular example. We have renegotiated our arrangements with big suppliers such as Microsoft, and we can make those bulk deals, as it were, available to the wider public sector. To the greatest extent possible, we do that. David Willetts MP: May I follow up on that point? You mentioned the NHS in one of your examples, and we wrestled with this a lot in the development of the Life Sciences Strategy. First of all, the Department of Health published its NHS procurement guide, Raising our Game, in May 2012 but behind that we produced Innovation, Health and Wealth1, which was very important. Because we think the NHS has been very slow to back innovation, it has reached a stage where the NHS Board is identifying specific innovative products that it thinks should be purchased by the NHS, having gone through its assessment processes, and will, I think, in the course of the next few months, if necessary—I hope it does not happen— dock NHS budgets through the CQUIN process if they have failed to take on board the first six specific innovative products that have been identified.

Q11 Lord Broers: Before I ask the question, I should declare an interest, as I am chair of the Knowledge Transfer Network, the TSB’s KTN, in transport, a board that was responsible for co-ordinating the bid for the catapult in transport, where I would hope the various sectors of transport get together to procure effectively in an innovative way.

Having said that, my question is: what engagement has taken place between industry and the departments to identify future needs and to stimulate innovative solutions? Can you give specific examples of problems that have been resolved through innovative approaches to procurement? What has been the involvement of departmental CSAs in these processes?

1 Innovation Health and Wealth, Accelerating Adoption and Diffusion in the NHS was published by Sir David Nicholson in December 2011. It contained within it six High Impact Innovations that require implementation by the NHS in order to qualify for CQUIN payments in 2013/14. 7

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) Norman Baker MP: I think I referred to the CSA in my previous reply, but I can assure you, Lord Broers, that we are working with industry. For example, we work with the train companies to ensure that their forward railroading procurement pipeline is co-ordinated with what the Government are doing. We are working with different sectors of industry, for example on the highways maintenance efficiency programme, to identify best practices and ensure that procurement best practice is rolled out for local authorities, so that is an example where we are able to influence, to pick up Lord Willis’ point, the cross- procurement from national to local level. We are extending the scope of the Highways Agency’s pipeline reporting to include major maintenance, and part of the answer to your question, which I think is about transparency, is that we also have Contracts Finder, where documentation for all procurements valued at over £10,000 is stored for public viewing as part of the Government’s transparency commitment. Prior information notices are published via the EU Commission journal notices, of course, and we have project-specific trade days with industry. We also have links, for example, with the motor trade, specifically auto manufacturers, through the Office for Low Emission Vehicles, which is looking at future policy, and there is a lot of money going in from the Government in terms of low-emission vehicles—£400 million, in fact, in this spending review period. That requires procurement to be effective and efficient, for example in terms of charge points, which are rolled out to ensure electric vehicles can be charged when they have been purchased and so on. I think David referred to the Technology Strategy Board, which also has a role to play. I think there is quite a lot going on to ensure that we link across with industry and make the best of procurement.

Q12 Lord Broers: So you are fairly confident that in the future our industry will be in at least as good a position as competitors overseas in bidding in an innovative way for future— Norman Baker MP: Yes.

Lord Broers: Transport is a huge purchase area, after all. Norman Baker MP: Indeed. I think a great deal of work has gone on in the department, and the Committee was kind enough to recognise the work that we have done through the Highways Agency, for example, and other parts of the Department for Transport. That is not to say we could not do more. I was at a trade fair in Berlin, InnoTrans, a couple of weeks ago, where a great deal of British companies with innovative products were making their mark and doing well in securing exports, but I did come away thinking that we ought to do rather more as a country to have an umbrella organisation for the rail industry. We have SNCF, who are marking off-the-shelf products, if you like, for developing countries, to say, “This is what we could do with your railway”. We have Deutsche Bahn doing the same thing for Germany, and in the UK we had a whole range of companies with bespoke products that were in many ways superior to what was being offered as part of the off-the-shelf package by other countries because they had been developed for particular purposes, but there was not an overarching body to market those. So I think there is the issue about marketing those, and I sent a note to Lord Green about that when I came back to suggest we might do something to market UK rail, if you like, more effectively than we have done so far. I think we are doing quite well, but I think there is always potential to do more.

Q13 Lord Wade of Chorlton: I think what is behind Lord Broers’ question was the fact that when we did our report, we had evidence, from the United States particularly, where the Government or government bodies—it does not have to be the central Government—

David Willetts MP: I absolutely accept that the US does more of this than we do, but if you look particularly at our SBRI initiative, which is very much based on the American SBIR—you see the connection—it is absolutely about such competition, and I can, if you like, give the Committee a couple of very good examples. The TSB ran a competition with DECC essentially on energy-saving devices, which led to a new start-up company, Solaveil, developing a new glazing that stabilises and reduces solar energy through buildings. There was a great competition that the MoD ran, where it knew that it had a problem, which was that the total amount of kit being carried by soldiers simply weighed too much. I think as much as 70 kilograms was being carried by soldiers. The MoD’s invitation was, “Who can come up with innovative ideas for reducing the weight that has to be carried?” That led to some ideas that would not otherwise have occurred to the MoD. So we are running SBRI contracts modelled on the US, and we want them. The scale is increasing and we would like to see that increased further. Francis Maude MP: If I can just add to that, one of the things we have been doing is encouraging new suppliers to come forward with solutions to problems that the Government do not even know they have. David is talking about seeking solutions to known problems, but one of the things we did last year was to set up what we call the Innovation Launchpad, inviting suppliers to submit innovative proposals for things for which there was no prospect of a procurement, but where we just wanted to give them the opportunity to showcase ways of saving money and new proposals. That was very successful. More than 350 suppliers submitted innovative proposals to us. We went through a competitive process. Three suppliers among them have gone on to win government business since because it threw up the prospect of a procurement that would be worthwhile. We have continued this with product surgeries, where suppliers are invited to pitch innovative new ideas and services directly to senior government officials, and eight departments have done this in six surgeries in different parts of the country. We are encouraging departments to use these as a regular tool for pre-market engagement. Earlier this year we piloted a new online service called Solutions Exchange, which again brings together government buyers and suppliers, which is, we think, a valuable platform for identifying and fostering innovation by allowing potential providers to pitch the ideas again directly to the Government. There are loads of ways in which we can tap into the huge stock of innovation that there is and make sure that the taxpayer benefits from it.

Q14 The Chairman: Good. Could I just ask David Willetts a follow-up point on the SBRI? We did in our inquiry hear positive comments about it, but we also heard, as you are aware, it is very small in scale, particularly when compared with the American initiative with similar letters in a different order. £25 million a year is small-scale.

Also one comment that was made was that the SBRI is really focused on a small number of areas, so 50% of its support has been for companies supplying the MoD and 25% for those supplying the NHS. Those, of course, are two very large procurement areas. I just wondered what the forward thinking was about the SBRI in scale and breadth of impact? Linked to that, of course, there is a review of SBRI that I guess is due to report either later this year or early next year. Could you comment on those things?

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) David Willetts MP: Yes. I accept that it is still on a small scale. We want to see it grow. You have correctly identified the two departments that have used it most so far. We want to see it spreading and it is spreading. Since April 2009, there have been 1002 competitions and 1,000 contracts worth £84 million awarded to technology-based businesses, but we are expecting these contracts to grow. The TSB expects to issue £40 million of contracts this financial year, which would be higher than in previous years, and we want to see it go significantly further. To some extent, it depends on departments coming forward with the TSB to identify specific procurement decisions that lend themselves to this, but it is growing.

Q15 The Chairman: Most of those contracts are in phase 1, I think, and rather fewer projects have gone through to phase 2 funding. I wondered whether you have done any evaluation of why contracts fail to move to phase 2, if they do fail? David Willetts MP: I think that some of them have gone through to phase 2, but as you rightly say, as we—I am trying to find the—

The Chairman: My figures are 730 at phase 1 and 122 at phase 2. David Willetts MP: All right. We are trying to push more through to phase 2, and as we conduct our review, we are indeed looking at the performance of SBRI, and we are slightly more optimistic than you, partly because one of the things that happens, just from the sheer signal of winning an SBRI contract, is that they can secure third-party funding. According to the figures I have here, 15% of companies that won SBRI contracts have gone on to secure third-party funding from venture capitalists, angel investors and suchlike, so they can be a signal to other external investors as well, but we are keen to expand that further3. If that includes further support for phase 2, I am happy to hear the advice of the Committee.

Q16 Earl of Selborne: The coalition programme included an aspiration that 25% of government contracts should be awarded by value to SMEs. How is this going? Are we likely to hit that target? How many SMEs have successfully bid for government contracts in the past two years? Francis Maude MP: We have made progress towards it. We do not describe it as a target; it is an aspiration. It would be illegal to have a target because it would prejudge to a great extent. The first problem is that no one was measuring this at all. Most departments had no idea how much of their spend was going to SMEs at all. We now have a much better database. The number is growing, but not uniformly, across government. There have been some signal successes, for example procuring travel for government. We now have two central deals, one broadly for international travel and one for domestic travel. The second of those contracts was won by an SME based in Yorkshire. As a result of winning that contract, it is now more of an M than an S. There was a view that aggregating procurement militated against the interests of SMEs. I think that shows that it does not necessarily do so. We are making progress, but we would like to see more. We think we have grown from a baseline that we think was 6.5% to 10% in 2011-12—the previous financial year. That is an increase of about £1.5 billion going to SMEs. That does not, for the most part, count the spend going to SMEs further down the supply chain, and we again are encouraging prime

2 Updated figures to end Sept 2012: 107 competitions, 1010 contracts awarded to the value of £87,791m 3 SBRI aims is to support companies to grow, through generating revenues from sales, but also through increasing their attractiveness to potential investors (venture capitalists and business angels). 10

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) contractors to deal more with SMEs. Some of them are already starting to use our Contracts Finder website, which Norman referred to, to advertise subcontracts. We are doing a lot of things to make it easier for SMEs to bid for and win government business: breaking up contracts to a greater extent; removing prequalification questionnaires, which too often have required suppliers to put up big performance bonds, which again militates against smaller suppliers; and what I referred to about requiring three years’ audited accounts, which militates against the new challenger suppliers. We are doing a number of things that make it easier, but we want to go further.

Q17 Earl of Selborne: We are familiar, are we not, with many years of complaints from this sector about overbureaucracy, lack of transparency, leaving aside late payments and the rest, and I think you said in your response to us that you would try to do further analysis of what further work can be done to tackle barriers faced by SMEs. Has further work been done to focus on precisely what issues can help smaller businesses? Francis Maude MP: Yes, and those complaints were entirely justified, and we are gradually addressing them. There are various things: we appointed a Crown representative for the SME sector, a very distinguished serial entrepreneur called Stephen Allott, who works with the sector. We have an SME panel, which meets regularly. I meet with them. They are not shy about raising concerns, but they say that it is better. We have done things such as creating the Cloud Store, which is an ability for suppliers to sell IT services direct to the public sector. An SME supplier said about getting on to the Cloud Store catalogue, which is effectively what it is, “I would never have believed that anything to do with government would be as simple as this is” which I took as an immense compliment. Earl of Selborne: That was a compliment? Francis Maude MP: It was, absolutely—it is major progress. The other thing we did was to set up the mystery shopper service, so that smaller suppliers who come across a procurement that is clunky, bureaucratic and militating against the interests of smaller suppliers can phone us and tell us about it. We then get on the case, wherever it is in the public sector, whether it is government or the wider public sector. I would continue to encourage SMEs to use that, because we cannot possibly know how every procurement is being conducted, but we do want to know where there is bad or old-fashioned practice, and we will get on the case and make an impact.

Q18 Earl of Selborne: Could you update us, too, on the Innovation Launchpad? SMEs were able to bid direct to government. Has there been any follow-up work on the lessons learnt on that, and is it something on which further development work is likely to take place? Francis Maude MP: It was not to bid. It was to showcase new products and services that could be beneficial for the taxpayer and the public sector. It was done as a one-off. It was very useful. We learnt a lot from it. We are trying different things all the time. I talked about Solutions Exchange. We talked about the product surgeries, where we encourage new suppliers to come and talk to senior officials in a number of different departments, and the Department for Transport, I think, was the first to do one of these. This increases the likelihood of procurements being set up in a way that enables innovative suppliers to supply. I talked about Solutions Exchange as well, which is an online continuous means for new suppliers to put forward solutions, whereby people in the public sector can put a problem out there and encourage solutions, around which a specific procurement can then be fashioned. I do not think we have remotely begun to finish this. We are learning all the time, and any ideas are gratefully received. 11

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) Q19 Earl of Selborne: Thank you. Would Norman Baker like to add to that from the Department for Transport’s perspective? Are there any concrete points you would like to make? Norman Baker MP: Yes, happily. We are very enthusiastic about having more contracts awarded to SMEs and their having more involvement generally, first, because we think it is right and fair that they should have an opportunity to compete on an even basis; and, secondly, because it potentially provides better value for money for the public purse and gives the opportunity for innovation to occur. That is all to the good. We were indeed the first department to run a product surgery designed to help SMEs pitch new and innovative solutions to the department. We have overhauled our web presence to make it more SME-friendly. We are running an internal campaign to help DfT staff think differently about how they can engage with SMEs. We are reviewing insurance requirements and the way we financially assess suppliers. This is a regular item on our monthly meeting of the DfT procurement board, when we challenge ourselves to make sure that we are following our own best practice and helping those who can bid from the SME community. We have an SME champion in the department, and I am officially the Minister with responsibility for making sure we take this forward. We are also helping, I think, towards the Government’s overall aspiration of 25%. Since the 2010 general election, we have increased our contracts with SMEs from 3% to 9%, which I think is not bad—from a pretty low base, in a couple of years—and we have identified opportunities for SMEs in our major ICT contract re-lets. We are very enthusiastic and keen to take this forward as fast as we can.

Q20 Lord Wade of Chorlton: To follow on from what you just said, in the 1990s I chaired a little not-for-profit business in the north-west that was set up specifically when we had European funding objectives 1 and 2 in those areas, and they were very anxious to get specific opportunities for small businesses. We did exactly that. It was our job, and we were paid to do it—to provide the staff to do it by the fund. We would identify companies, identify the opportunity and make sure that the company obtained the skills to deliver. It was very effective in the Merseyside and Manchester areas. Such a thing could probably be done again, and it probably is being done. Francis Maude MP: I think that is a good thought, which I will pursue. One of the things we have done is to publish in a whole lot of sectors—I think 13 altogether—pipelines of future procurements, so that the supplier market can look at what is coming and prepare much better. We have tended to do procurement in a much more transactional way, and much less strategically than France and Germany, for example, where they lay out for high visibility. So that supports the ability of UK-based suppliers to look at what is coming and prepare themselves to bid effectively for them. David Willetts MP: Can I just add there, that of course we also run competitions in which we promote R&D, even though the public sector is not the ultimate purchaser, which I think may have been the examples you were thinking of?

Lord Wade of Chorlton: That is right, I was thinking of that. David Willetts MP: For example, the Home Office has run competitions to find solutions to reduce mobile phone theft. Defra is running a competition to develop efficient lighting solutions with low-energy consumption. We promote those competitions so that the best ideas emerge.

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) Q21 Lord Wade of Chorlton: Good. One final question. Perhaps I have been remiss in not declaring my interests, but I am a director of a fund-management company and a director of a specialist engineering company.

This question specifically relates to—I know it was mentioned earlier—what the Government will do to promote innovation and excellence in procurement in the public sector beyond central departments. I wondered whether, specifically in answer to my question, you could consider the role of the LEPs in that activity. Francis Maude MP: I had not, to be honest, considered the role of the LEPs, but that is a very good suggestion and we will do so. In terms of generally promoting better procurement practice, I have talked about the commissioning academy that we are setting up. I think it is quite important to separate in our minds commissioning, which is a much broader activity, from procurement. Procurement is a narrow technical process, carried out once the service has been defined, and which should only be done after extensive, informal engagement with suppliers. Commissioning encompasses all the way through to contract management afterwards, the shaping of the market and the encouragement of new challenger providers into the market. Procurement should be quite narrowly considered. We can promote good practice; we can spread it as much as we can by finding bad practice and getting on the case with them. We are localists, as a Government, so we will not get into the business of mandating to the wider public sector how it should procure, but we can make available to the wider public sector means of procurement and commissioning being done better and promoted very actively, which we do.

Q22 Baroness Perry of Southwark: Following on from that, I wondered whether either BIS or the Cabinet Office give any advice to universities about procurement? It is still the custom, even in larger universities to allow individual and sometimes quite small departments to do their own procurement, quite pricey procurement in some cases. Also, of course, we have a lot of new universities that have sprung up in the past 10 or 15 years, where perhaps there is not much experience of that kind of procurement. I just wondered whether either of your departments gave any guidance, help or training to people over what is a very large sum of money? David Willetts MP: I do occasionally have people come to me with blandishments of how, if all universities clubbed together, they could get fantastic terms through procurement, but of course I emphasise that universities are autonomous bodies. It is not for us to instruct them to do that type of thing. What has happened as a result of our wider financial reforms on universities is that the decline in the proportion of university income that comes from conventional public expenditure means that they have fallen out of EU procurement rules, which gives them greater flexibility, if they want it, in some of these areas. I regard that as one of the welcome by-products of our changes. We did commission Ian Diamond, the vice- chancellor of Aberdeen University, to do a very useful exercise for us, and for universities as a whole, on how they could save costs and improve their efficiency, and procurement was one of the areas that he identified, and his report contains advice on that.

Q23 The Chairman: Do you know what amount of money might be saved by that? David Willetts MP: I am afraid I cannot remember the figure for universities, but if there is any figure I will happily send it to the Committee.

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) Q24 Lord Dixon-Smith: This is a question that has been answered in part, but is there a co-ordinating system across the whole of the public services in which information is supplied from the peripheral parts back to the centre, so that somebody can look and find out whether something being done in one part of the country is infinitely less costly than what is being done elsewhere? Francis Maude MP: The answer is that in an ideal world there would be, and there are means available but they are not always as well used as they might be. I think one of the approaches to which we are giving some thought, and which is consistent with localism and respect for independence and autonomy but will stimulate an interest in buying more effectively and more collaboratively, is the use of transparency. If, for example, NHS trusts choose not to use a centrally negotiated bulk deal for common supplies, they are completely entitled to do so, but I have heard it argued that they should be required then to disclose that they are not getting the financial advantage of using the aggregate deals, and the public residents and patients locally would then be able to see that the trust is forgoing that advantage. It may be completely justifiable and there may be a perfectly good explanation for it, but at least it would be transparent, whereas at the moment there is no means for anyone to see how the money is being spent. Norman Baker MP: May I just add to that point about local procurement in particular? It is the case that we do, in the Department for Transport, identify best practice undertaken by local authorities, for example, in highway maintenance. There is the Highway Maintenance Efficiency Programme, on which we are spending £6 million, to help local councils identify what works best, and indeed to help with their procurement process. As a consequence of that, it has become apparent that some local authorities are spending much more on mending a pothole than another local authority would do, and it is also because some are dealing with them rather more effectively than other local authorities. What we are doing is helping the local authority family to identify those best practices, and that has been quite useful, but I think that in future the local government associations, perhaps with the LEPs as well, to pick up Francis’s point, may have a wider role in disseminating good practice, and will not necessarily assume that government departments will do this but do it themselves. I think the Local Government Association needs to step up to the plate a bit more than it has done in taking a lead role in these sorts of matters.

Q25 The Chairman: I hope that my local authority learns how to plug up the potholes better than by sticking in a bit of tarmac that comes out again. I will not name the local authority; you may be able to guess it.

I wonder if I could come back to the very starting point, which was that we have heard about a lot of very impressive initiatives and attempts to streamline the procurement process and to stimulate the search for innovative solutions, but I asked Francis Maude how this would be measured and assessed—how we would know, if we looked back in three or five years’ time, whether we have changed the game. To paraphrase, you said it would be quite difficult to assess that, and I suppose some of it will be through individual case histories that show us convincing and impressive novel solutions that have saved money for the taxpayer, delivered better solutions and, at the same time, stimulated industry. I would like to press you a little bit further on that. Is it basically going to be a collection of stories and, if so, who will collect together the stories and how will we judge them? Or is there going to be some other form of metric that will give us a sense of whether all this shift is happening and delivering what you promise?

Rt Hon David Willetts MP, Minister of State for Universities and Science, BIS, Norman Baker MP, Parliamentary Under-Secretary of State, DfT, and Rt Hon Francis Maude MP, Minister, Cabinet Office – Oral evidence (QQ 1-27) Francis Maude MP: I am open to any suggestions about what a suitable metric would be. I do not think we have been able to think of one. The best proxy, I suspect, for whether we are moving in this direction is the proportion of spend that is with smaller and newer businesses, but newer businesses will tend to be innovative because they will become new businesses by having invented a better mousetrap. That is a reasonable proxy for it, although old, established businesses are perfectly capable and deliver innovation themselves. I do not know a metric for measuring the extent of innovation, and I think we will be dependent on some combination of that fairly rough-and-ready proxy for it, together with the anecdotal evidence.

Q26 The Chairman: Yes. But presumably you want some way of looking back over the initiatives and saying, “Yes, we made a difference”. That would be important in terms of the satisfaction that you and we have that something is happening. Francis Maude MP: Yes, but I think a lot of it is about the anecdotal part of it. I was in Liverpool last week and visited the office of the UK Border Agency, where a fairly young but very talented procurement director there outlined a completely new way they had of doing a procurement that had cut costs. This was in the field of providing accommodation and services for asylum seekers, where the costs have been cut radically and the quality and reliability of the service had been improved. It was a brilliant and rather uplifting example of a public official doing something relatively unglamorous and low profile—finding a new way of procuring. It was not particularly innovative; the suppliers were not providing anything particularly new, but it was a very good way of doing something that had not been done particularly efficiently. David Willetts MP: Perhaps I could just follow up. Going back to what I said earlier about how we are trying to review the performance of the SBRI, we are doing that through the TSB tracking two groups of companies that have been in receipt of support from SBRI to see how they subsequently perform. If it would help the Committee, I could happily send a note about what the TSB has found to be the effects of SBRI with those two groups of companies.

Q27 The Chairman: That would be very helpful indeed. Yes, thank you, we would appreciate that. Norman Baker, is there anything else you would like to add? Norman Baker MP: No, I think my colleagues have covered that point. Thank you.

The Chairman: Do any members of the Committee have any burning questions? If not, I would like to thank the Ministers very much for their helpful responses to our questions. We will obviously keep an eye on this area, which is of immense importance given the volume of procurement and the impact that it has. Thank you very much indeed. David Willetts, you kindly agreed to drop us a note about the review of the SBRI and some of the examples that came out of that. Thank you very much.

Department for Business, Innovation and Skills – Supplementary written evidence

1. Efficiency and Effectiveness in Higher Education: A Report by the Universities UK Efficiency and Modernisation Task Group – Savings in Procurement

Across the UK, collaborative procurement is undertaken by the following regional consortia: • Higher Education Purchasing Consortium, Wales (HEPCW) • London Universities Purchasing Consortium (LUPC) • North Eastern Universities Purchasing Consortium (NEUPC) • North Western Universities Purchasing Consortium (NWUPC) • Southern Universities Purchasing Consortium (SUPC)

While the consortia have different forms of governance and business models, the benefits that accrue to their members are significant, and the returns on investment have been improving over time.

The report identified – through figures supplied to the Higher Education Funding Council for England (HEFCE) – that in academic year 2008/09 £68.82 million of savings were delivered by the regional purchasing consortia to English higher education institutions.

A range of other collaborative arrangements were identified. For example, national working parties look to leverage better value in areas such as photocopying, vehicle hire, laboratory supplies and computers, and The Energy Consortium (TEC), a not-for-profit company providing a range of energy procurement services to its members from within the further and higher education sectors, has been acting on behalf of its higher education members for over 15 years. In academic year 2008/09 TEC products saved the sector £5.94 million, while new initiatives funded by HEFCE to develop e-procurement systems for large universities and a generic e-marketplace for smaller institutions should also deliver clear benefits.

The report also looked at capability in procurement and highlighted the following case study. As part of a wider review looking to overhaul the procurement processes within one institution, a professional procurement consultant was used to streamline internal processes and to maximise value for money from existing arrangements.

The process led to the introduction of new performance management systems and targets for response times. In the area of soft services provision, the consolidation of the supply chain and redefinition of procurement specifications led to a reduction in the number of suppliers from nine to three, which helped to reduce management, processing and administrative costs, and deliver benefits from economies of scale. On an investment of £14,000, this element of the project alone is expected to deliver £910,000 in savings. The same process, this time focusing on security provision, utilised similar mechanisms, with suppliers reduced from three to two and projected savings of £375,000 identified on an investment of £7,000.

Department for Business, Innovation and Skills – Supplementary written evidence

2. Note on the Small Business Research Initiative (SBRI) Programme

BACKGROUND SBRI uses the power of public procurement to drive innovation, bringing innovative solutions to specific public sector needs by giving 100% funded R&D support to help businesses develop new technical solutions and products. It provides innovative solutions to challenges faced by the public sector, better public services and longer-term cost efficiencies, and new business opportunities for companies.

The SBRI programme has two phases: • Phase 1: a feasibility phase lasts generally 2 to 6 months, with contracts typically being up to a maximum of £100K; and • Phase 2: Following assessment, the most promising projects may be awarded a second phase contract which can be for up to 2 years, and a maximum of £1m.

These contract values and durations are dependent on the challenge being addressed. This second phase will generally be for the development of a prototype or demonstrator. After completion of the second phase, companies are expected to commercialise the resulting product and be able to compete through usual procurement processes.

PROGRESS Since its re-launch in April 2009, the SBRI programme has launched 110 full competitions across 35 public bodies, resulting in over 4000 applications from industry and over 1000 contracts awarded with a value of just under £88m. Over 50% of these contracts have been awarded to micro (>10 employees) or small (>50 employees) companies, typically the cadre of companies the public sector has the greatest difficulty contracting with. So far during FY12-13, 23 competitions have been run, compared to 30 during FY 2011/12; the scheme is growing in volume as well as value. The TSB expects to issue £40m of contracts this FY, with c£22m in contracts awarded to date.

SBRI is already successfully being used by some departments as a risk-managed phased development programme to harness and fund cutting edge innovation to help them meet major challenges. For example, the Department of Health and the Ministry of Defence are significant adopters of SBRI and are running continuing programmes of competitions to help solve strategic challenges.

There have been good results from competitions to date. A group of 21 companies has been tracked as they progress through their SBRI contracts. Of this group: • 5 (approx 24%) have raised additional investment totalling £12.6m, this group received a total of £1.5m in SBRI contracts (so the leverage of investment on SBRI contract is 8 times) • 6 (approx 29%) have grown their workforce by 78 jobs, 3 of these have grown their company 3 fold or more.

SBRI has been well-received by business and generated some very innovative ideas for the public sector, including:

Department for Business, Innovation and Skills – Supplementary written evidence

• a Respiratory Rate Counter developed by Anaxsys Technology which automatically and continuously monitors a patient’s respiratory rate, one of the best indicators of a worsening medical condition; and • plasma technology that kills pathogens and reduces the need to wash hands, to reduce Health Care Acquired Infections in the NHS, has been developed by Creo Medical. SBRI helped the company grow from 3-26 employees and raise £3m in additional funding.

CASE STUDY The Home Office and the Design Council ran a competition with the focus on developing innovative and marketable solutions to make mobile phone handsets and the data stored on them harder or less desirable to steal and to make future mobile-commerce transactions secure and fraud proof. As a result of the competition Proxama developed TouchSafe, a single key card which is worn or carried by the user to make m-commerce contactless cash transactions more secure. As a result of the support from SBRI the company is now working with some of the world’s biggest businesses to create the next generation of smart phone payment security.

• Following the SBRI competition in 2009 Proxama was bought back from American firm ABnote by its founder Neil Garner and is now under UK private ownership. The firm now has 40 staff and is set to double in size this year. • In 2011 the company generated an additional £1m in private funding and also acquired proximity marketing specialist Hypertag, incorporating senior members of its senior management team. • Near Field Communication (NFC) payments are starting to roll out worldwide. The first live services were launched by Orange and Barclaycard in the UK and Proxama is working with both companies. The Proxama brand concentrates on the creation of technology services for NFC applications including contactless payments and ticketing. Proxama has also been working closely with businesses such as Nokia, MasterCard, BT, Tesco and Virgin to create NFC applications ready for launch when mass market handsets emerge. • In February 2012 Proxama announced a strategic relationship with ARM, the Cambridge processor Design Company. Showcasing at Mobile World Congress their partnership is paving the way to a more secure m-commerce future.

SBRI REVIEW The TSB intends to hold an initial mid programme review in the first quarter of next year which will analyse the outcomes of the first 40 - 50 SBRI projects. By the end of the following quarter a further 40 projects are likely to be available for review. TSB will use the analysis of the first quarter mid-programme review to decide on the design of the full review.

30 October 2012