Sebastian Charleton: Labour’s reforms to government procurement will hammer small businesses | Conservative Home

Sebastian Charleton is Digital and Communications Manager at the Adam Smith Institute.

Last week, Rachel Reeves stood up in the House of Commons saying that she wants more small businesses to win procurement contracts. It’s a familiar promise. In fact, every government since the Coalition has made it.

And with good reason: SMEs bring specialist expertise and local knowledge to a range of public sector challenges. Their leaner structures allow them to operate with lower overheads, which translate into better value for public money.

Take Wonde, an SME who provides data management systems for schools. During the pandemic, the firm rapidly scaled its services to support thousands of schools across the UK adapt to lockdown regulations. Agile and responsive, the small firm far outstripped slower-moving corporate giants – earning themselves a 3,917 per cent increase in government procurement funding.

Unfortunately, due to changes in the procurement system, such examples are likely to become fewer and further between. Despite over a decade of warm words, the share of central government procurement going to SMEs has fallen from ten per cent in 2011 to just seven per cent in 2023.

I’m sorry to say that, despite their natural hostility to red tape, successive Conservative administrations share much of the blame for the present situation.

In 2012, they introduced the Social Value Act, which added a raft of regulations and requirements for businesses seeking government procurement contracts. One such requirement, ‘Cyber Essentials Plus,’ costs thousands of pounds to obtain – even when the contract has nothing to do with IT or software.

In a recent survey, 76 per cent of SMEs said that addressing social value requirements in contracts created an administrative burden. These regulations disproportionately disadvantage small businesses, which often lack the resources to absorb the added costs. This undermines competition, shutting SMEs out of the procurement process and paving the way for an oligopoly, where only large firms can afford to navigate the complex requirements.

With regulation preventing SMEs from winning government contracts, it should be no surprise that procurement is already so broken. In fact, over the last thirty years, procurement failures have already cost the British taxpayer over £140 billion and today only nine per cent of major government projects are running to time and on budget.

Now, Labour is poised to make a bad situation worse. A new directive from the Crown Commercial Service (CCS) would prevent thousands of SMEs in the consulting sector from accessing government contracts. In fact, it could result in £1.6bn being rerouted away from smaller firms to the six biggest providers of government consultancy services in the UK.

Historically, individual government departments have had the autonomy to choose procurement frameworks, enabling them to select systems that encouraged SME participation and innovation. Thousands of small consultancies have relied on these frameworks to sustain their day-to-day operations.

But a new directive threatens to upend this system, mandating that all consultancy procurement spend must go through firms listed on the Crown Commercial Service (CCS) framework.

For the many small consultancies not currently on the list, this would be a cliff edge. Without access to future government contracts, these businesses face a sudden and significant drop in revenue. The financial strain could force many to downsize – or shut down entirely – putting livelihoods and local economies at risk.

And it’s not as though getting onto a CCS framework is easy. Take Management Consultancy Framework Four, CCS’s flagship programme. Gaining access requires an exhaustive set of documentation.

Businesses must submit a detailed carbon reduction plan – despite the fact that only three per cent of SMEs currently have one. They must also complete the Modern Slavery Assessment, a 60-page form requiring detailed explanations of policies, supply chain practices, and support for workers who lack trade union representation.

This might be routine for global firms like McKinsey, which spent over £1bn on HR and legal services in the last five years. But for the average SME – whose annual turnover is just £424,000 – it’s a mountain to climb.

This effect shows up in the data; in the most recent set published, the CCS admitted that 76 per cent of its consultancy spending went to the largest six suppliers – far lower than the Government’s average of 28 per cent.

Centralising the system doesn’t only threaten small businesses around the country, it jeopardises the government’s own objectives of improving value for money. By funnelling all consultancy spend through a single, rigid framework dominated by a handful of large providers, the new directive will drastically reduce competition in the procurement market.

With fewer suppliers in the mix, the majority of SMEs are effectively locked out – and there’s less incentive for firms to offer competitive pricing or innovative solutions. Instead the system would shift towards an oligopoly, with the taxpayer ultimately footing the bill.

This might all seem quite theoretical. But based on illustrative scenarios provided by the Cabinet Office, the reforms could cost upwards of £129m each year due to the reduction in savings generated through competition in the system.

The Labour Government’s intention to rein in consultancy spending is understandable. But this blunt reform risks doing more harm than good, shutting out the very firms that drive innovation.

For the Conservative Party, this is a chance to take a stand. By pledging to reverse the proposed CCS reforms, they can defend competition and support the small businesses that fuel innovation across the public sector. It’s also an opportunity to draw a line under the last 14 years, where Tory policies – however well-intentioned – baked waste and complexity into the system.

Conservatives should commit to meaningful procurement reform: cutting unnecessary red tape, tailoring requirements to the scale of contracts, and ensuring SMEs aren’t locked out by rigid, one-size-fits-all frameworks.

Labour may talk about supporting small businesses, but their actions will only serve the interests of a handful of big companies. The Conservatives should seize this moment to rebuild their reputation as the party that truly champions small businesses.