By Ram Puvinathan, FGF Policy Associate
Did you know that government spending with suppliers accounts for approximately £400bn annually, making it one of the largest levers available for delivering economic growth across the country?
That’s why it is very welcome that reform of public procurement is being seriously considered by the Chancellor John Healey and the Chancellor of the Duchy of Lancaster Louise Haigh as part of the new government’s agenda.
Recent discussion of procurement has focused heavily on the roles of social value (how public spending can be used not just to buy goods and services, but also to advance wider public policy goals) and domestic sovereignty (how to incentivise more of that UK public spending to be spent on goods and services provided by UK companies). This is right: both deserve consideration as part of a wider package of change, nationally and regionally.
Government is right to sharpen the focus of social value
Finding the best supplier and securing value for money is the first order of business for public procurement. Suppliers are formally evaluated against multiple award criteria, but in practice contracts are disproportionately awarded on price, in part because evaluation panels tend towards caution, and because a price-based decision is easier to defend.
Social value was introduced to widen what gets assessed beyond price, requiring suppliers to demonstrate progress against government objectives such as employment and environmental commitments. These are legitimate goals, but in practice social value criteria are often only loosely related to the contract in question, with individual contract opportunities expected to carry a wide range of objectives at once. The think tank Re:State has referred to this phenomenon as ’everythingism’. In practice, this means social value criteria often function as a tick-box exercise for bidders, while also creating an administrative burden that disadvantages smaller suppliers.
Government ministers are therefore right to refocus social value objectives on a smaller number of outcomes that align more closely with the government’s strategic priorities, particularly employment and skills, and tackling the crisis among those young people who are not in employment, education or training (NEETs). This sharper focus should be paired with proportionality. Social value criteria are best prioritised for very large-scale contracts, where the administrative cost is proportionate to the contract’s value and where meaningful, well-evidenced outcomes can be delivered and monitored. It is worth distinguishing this critique from an important argument made within the social sector that social value shouldn’t be a scored add-on, but built into the definition of value for money itself. That is to say a contract costing more upfront can still represent better value if it delivers savings elsewhere in the system, such as reduced demand on health or policing services.
Procurement should be used by government as a strategic lever for growth
Beyond the delivery of any single public service, government procurement spending on suppliers has a much larger effect on local economies. At scale, it creates markets, determines which companies grow and employ people, and shapes the resilience of the core services those markets ultimately support.
Harnessing its full potential requires a shift in mindset by ministers and officials from treating procurement as a business-as-usual commercial process to seeing it as a broader industrial and strategic lever that aligns closely with the government’s wider policy objectives.
Central to this is economic growth, which if improved will make addressing other policy challenges – from easing the cost of living to improving the quality of public services – easier to tackle.That means supporting the broadest possible base of businesses able to compete for, and benefit from, public spending. A wider, more diverse supplier base grows more companies, builds resilience by reducing dependence on any single supplier, and improves government’s access to new approaches and innovation.
One approach is for the government to act as a first customer for thousands of Britain’s innovative startup companies, giving successful pilots a route to scale. Yet scale-ups, the businesses best placed to bring new approaches into government, currently win just 4% of public sector contracts, despite accounting for a far larger share of the economy’s growth potential. As we argued in our Rebuilding the Nation 04: A Mountain to Scale report, a dedicated procurement target for scale-ups, paired with removal of process barriers to bidding, would help close that gap.
This is also where the new Chancellor’s ambition to ‘buy British by design’ is best delivered. Instead of a prescribed preference for domestic suppliers, which sits uneasily with the UK’s obligations under the World Trade Organisation’s Government Procurement Agreement and the EU-UK Trade and Cooperation Agreement, the government should focus on building a more diverse and competitive domestic supplier base.
So if the government wants to take a more targeted approach to social value, and a more nuanced approach to domestic sovereignty, what does it need to do in practice to make that happen?
Four priority areas for reform
Grow and diversify the supplier base – As we have argued above, the government is already committed to widening participation among the firms that bid for public contracts, and The Procurement Act 2023 introduced tools to do it, such as the Competitive Flexible Procedure (CFP), which replaced a set of fixed, standard commercial procedures with a single flexible tool that contracting authorities can design themselves. But as things stand, these tools are not yet being used consistently. A recent Impact Review of the Procurement Act found that only around 5.8% of procurements had used the CFP, with its use concentrated among central government departments with dedicated commercial teams and the capacity to experiment. The task ahead is as much about spreading these existing tools as it is about inventing new ones. The government should also be bold and set a dedicated procurement target for innovative businesses, building on our previous recommendation of an initial 5%, to create a clear benchmark for increasing participation from the UK’s world-leading startup ecosystem.
Embed deeper commercial and market expertise – Commercial teams within government are too often brought in late into the commissioning process. Bringing them in earlier lets them shape the commercial approach and feed relevant market insight before decisions are finalised. In parallel, structured market engagement with potential suppliers through the broadest range of channels, such as trade bodies and sector networks, can ensure the market has greater visibility of what the government and its agencies intend to buy.
Invest in commercial capability across the public sector – Procurement isn’t only, or even primarily, the preserve of the central government. Local government and the NHS, where commercial capacity is often most constrained and the consequences for frontline services are greatest, have made relatively limited use of the Procurement Act’s new flexibilities, such as reserving low value contracts for local suppliers, or lot splitting, which allows agencies to divide large contracts into smaller lots, making them accessible to bidders that are unable to compete for the whole contract. This is a particularly live issue given the government’s wider devolution agenda, which is transferring more spending decisions to local and regional bodies. This will require building the commercial capability to match, by investing in commercial skills and sharing best practices, with support from the Government Commercial Agency.
Make better use of data and AI – The government should make far greater use of AI and data analytics throughout the procurement lifecycle. This includes identifying potential suppliers, analysing markets, benchmarking prices, monitoring supplier performance and analysing spending patterns. Used well and with appropriate guardrails in place, these tools will improve both the efficiency of procurement and the quality of commercial decision-making.
With government procurement accounting for approximately a third of the UK’s public expenditure the government should make it central to delivering the Prime Minister’s ambition for ‘growth in every postcode’. And using procurement as a strategic lever for growth offers the opportunity for millions of businesses, large and small, who employ over 25 million people, to grow and prosper. There’s no time to waste!
