Bright ideas: How could an industrial strategy affect public services?

Written by Colin Marrs on 25 May 2017 in Feature
Feature

Theresa May’s fledgling post-Brexit industrial strategy seeks to use government purchasing power to boost UK business if the Conservatives remain in power. Colin Marrs looks at historical precedents and future pointers.

Government cash was crucial for Anglo-French project Concorde. Photo: PA

When Harold Wilson stood before the 1963 Labour conference in Scarborough and promised to unleash the “white heat of technology”, nobody anticipated that the result would be the Austin Metro. By the time the car was launched in 1980, the promise of economic renewal through state intervention in industry remained largely unfulfilled. The Thatcher government rejected any notion of an industrial strategy in favour of deregulation and promoting individual entrepreneurship.

Any notion that Theresa May is the heir to Thatcher seems to be based more on a shared gender than any deep ideological bond. In January, the prime minister unveiled a consultation on an industrial strategy for the post-Brexit world. The document stops well short of signalling a return to the postwar drive towards state-owned industry. However, it does outline a key role for government in using its purchasing power to help drive innovation and nurture UK supply chains. Let us assume it will be pursued if May retains power on June 8.

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There are some striking similarities between the proposed strategy and Wilson’s speech. Both texts, written more than half a century apart, bemoan the greater use of automation in other Western industrial nations. And both identify the need to translate the UK’s excellence in academic research into industrial prosperity. Wilson could have been summarising May’s approach when he told the conference: “Unless we can harness science to our economic planning, we are not going to get the expansion we need.”

Using government procurement as an economic development tool is one of 10 “pillars” on which the industrial strategy sits. According to the government, faster growth and higher productivity are seen in places with more investment in research and development, higher skilled people, better infrastructure, more affordable energy and higher rates of capital investment. “Policies on trade, procurement and sectors are tools we can use to drive growth by increasing competition and encouraging innovation and investment,” the strategy says.

Of course, the new strategy does not exist in a policy vacuum. One existing programme, in place since 2001, is aimed at addressing the barriers to innovative public procurement. The Small Business Research Initiative – inspired by a successful US version – runs competitions to find firms to develop new products for the public sector. Companies retain intellectual property rights, enabling them to commercialise their ideas more widely.

Despite some teething issues, the scheme has had a number of notable successes. However, some worry that it has not reached its full potential due to a lack of awareness among businesses. “The concept is fine but the problem is nobody has heard of it,” according to Ian Fishwick, commercial director at public sector tech services industry body Innopsis. “The government needs to get out there and market it – explain that it is happening,” he says.

Small and medium sized enterprises are vital to the innovation drive, according to Alexander Hitchcock, senior researcher at think tank Reform. “By definition, disrupters are new entrants to any market,” he says. Another existing initiative is the government’s target to place 33% of its spending with SMEs by 2020. However, the target “can be a slight distraction”, Hitchcock adds. “It should be more of a yardstick to see how well the government is functioning.”

Nevertheless, there are limits to the role of SMEs, according to Rob Driver, head of public sector at technology industry body Tech UK. “SMEs do provide a more agile approach,” he says, “but recently I ran a market engagement exercise with the Foreign and Commonwealth Office for a global connectivity solution [allowing mobile devices to connect to a central server]. That is not going to be supplied by a company of 10 people with an office in Shoreditch. There is a place for all companies, but much more thinking needs to be done about how they interact.”

Old-fashioned subsidy is still a key weapon in the government’s armoury, according to Andrew Coulcher, director of knowledge and membership at the Chartered Institute of Procurement and Supply. “A lack of growth in SMEs has been attributed to the lack of access to loans following the economic crisis,” he says. “Government needs to make more funding available and expand on their existing schemes.”

Aware of the issue, the government, in 2016, committed to create a new Industrial Strategy Challenge Fund (granted £270m in the March Budget) to help the UK capitalise on its research and development strengths. Echoing Wilson’s message, the prime minister said the fund would “address Britain’s historic weakness on commercialisation and turning our world-leading research into long-term success”.

Policy initiatives by international governments can provide other sources of inspiration. For example, the US General Services Administration holds reverse auctions for the purchasing of commodities and simple services on behalf of government bodies. Potential customers bid down prices until the auction time ends. “Clearly that democratises the procurement system,” Hitchcock says. “It forces officials to think about outcomes rather than what company is providing the solution.”

Whitehall departments have been wrestling with the concept of output-based specifications for contracts in recent years. The move is the result of a number of costly procurement failures, including the NHS patient record system, which was abandoned at a cost of £10bn. Fishwick says: “Some of tenders are far too prescriptive, which hinders innovation. We must stop people mandating specific technologies. If you want a 100mb connection don’t tell the supplier that it needs to be delivered through mobile. Leave it to them to solve what is the best solution.”

However, Michael Bowyer, innovation director at Innopsis, says that departments are sometimes suspicious that such arrangements could provide a blank cheque to suppliers. On the other side of the fence, “for companies working for government, it can be frustrating if they create a solution that the department decides it doesn’t like,” he says.

Officials need to use the pre-tender stage to improve innovation and work out their desired outcomes, Fishwick says. He says that government is much more willing to engage with potential suppliers at the earliest stage than it was 10 years ago, when civil servants were wary of such conversations. “There are two advantages of doing consultation at the early stage,” he says. “Suppliers know what to expect, so you get good tenders from an informed seller. On the other hand, the government becomes an intelligent buyer, having learnt from all the feedback.”

The latest  strategy promises that government will publish guidance for public buyers on conducting effective pre-procurement market engagement, as well as how to design procurements to stimulate innovation through outcome based specifications. It says that this will allow “for the broadest range of ideas to be proposed and optimises the scope for innovative or alternative solutions”.

The white paper also commits the government to extending its “balanced scorecard” approach recently developed by the Cabinet Office across all major construction, infrastructure and capital investment projects above £10m. The scorecard helps departments develop and monitor project requirements, balancing costs against social, economic and environmental considerations. “We will introduce a reporting mechanism to provide assurance that the scorecard approach is being adopted effectively, and to hold departments to account,” the strategy promises.

The move is welcomed by Coulcher. “By giving a target or goal, devising metrics the supplier can score against, this gives a company a framework to work with so they can reach client expectations. On the other hand, SMEs can become more visible and be considered for larger projects where the normal go-to position would be seeking out larger firms.”

“For companies working for government, it can be frustrating if they create a solution that the department decides it doesn’t like" - Michael Bowyer, Innopsis

However, some question whether focusing on getting the outcomes and structure of a contract right is failing to address the real problem – one of civil service culture. Tightly drawn contractual relationships can have a tendency to stifle innovation, according to Richard Wilding, professor of supply chain strategy at Cranfield Business School. “If you try to define everything down to the last little detail, it doesn’t allow you to explore different ways of approaching problems,” he says.

In the Far East, and even in the private sector in the West, effective partnerships are often done on little more than a handshake, according to Wilding. “You should be asking how to create business relationships to engender innovation,” he says. “Where these arrangements work best, parties may make changes to systems without getting approval from the other party. It is a bit like a marriage certificate – it doesn’t have very much detail but there is a commitment there.”

Policy initiatives are useful, but progress will rely equally on improving procurement skills within the civil service, Driver says. A survey carried out by TechUK found that 96% of suppliers didn’t think civil servants had a good understanding of how SMEs could meet their needs. In addition, Whitehall needs to build on progress it has made in simplifying the number of procurement frameworks it runs. “The fact remains that the procurement landscape is very confusing for suppliers. More has to be done to support industry, which involves being very clear on where frameworks are and how to navigate the system.”

Civil servants must also improve their own use of the procurement tools that are already at their fingertips, Wilding says. Specifically, he criticises the reliance on standardised contract templates, saying each deal needs to be individually tailored to maximise innovation.

“If you are buying stationery or toilet rolls you won’t need much innovation,” he says. “If you are starting to think about procuring a hospital and warship, you have to think more collaboratively,” he says. “The problem is that many organisations confuse the two, and take just one approach to managing all contracts. If you have an average approach, it means that half of your contracts will be over-engineered and on the other half, you won’t be supplying customers properly.”

Others worry that using government purchasing power as a tool to boost UK industry could conflict with cost-cutting pressures from the centre. “There is a trade off,” says Hitchcock. “If you are restricting your market by focusing on the UK, there will be some circumstances where you will not always get value for money.” But he points to the success of the US government’s procurement of services from the embryonic Silicon Valley as an example of where such a tactic led to spectacular economic success.

Whether Brexit increases the government’s ability to use procurement as an economic development tool is a moot point. Currently, large tenders are governed by rigorous European Union procurement rules, which would prevent favouritism based on geographical location. “The EU does create very clear rules of the game,” Hitchcock says, “and it is unclear that the government would want to move away from that.” He adds that even if rules change, it won’t guarantee that procurement becomes an effective tool: “Where you tend to see the problems, it is not because of the rules themselves but the way they are implemented by officials.”

Government statistics show that the public sector spends around £268bn each year – equivalent to 14% of the UK’s GDP. With such spending power, the government has a massive opportunity to help boost companies in domestic supply chains across a wide range of industries. It is unclear if the strategy amounts to a coherent plan or just a collection of disparate policy ideas. Either way, the failure to follow-through on the scientific national renewal promised in Wilson’s Scarborough speech provides a reminder of the challenges ahead.

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