Something in the water?

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Perhaps they’re just stupid, or maybe there’s something in the ‘water’ that they’re drinking, but it increasingly appears that some Tories can’t see a hole without jumping into it and digging it deeper. I suppose the Environment Secretary’s Press Officer might have had a day off, but he or she would not have been doing the job very well if they had not anticipated the “Let them eat Turnips” headline which followed the minister’s statement to MPs. The basic point she was making – that it is preferable to eat what happens to be in season – is eminently sensible, albeit unlikely to prove terribly popular with people who have become accustomed to year-round availability. To say nothing of the inherent contradiction with the Brexiteers’ message that Brexit would not impact the availability of products on UK supermarket shelves. And who wants to live on turnips anyway, even if it were possible for supply to immediately follow demand in the oversimplistic way that economics tends to assume.

There is, of course, some debate about the extent to which Brexit is to blame for what will surely be known to future generations as the Great Tomato Crisis of 2023. Those Tory MPs denying the impact of Brexit on the shortage are surely right to argue that voting for Brexit didn’t cause storms in Spain or frosts in Morocco, but that doesn’t entirely explain the empirical fact that the shortages are not being replicated across the EU. If suppliers can’t meet all the demand, it would not be surprising if they took the easy way out of supplying those countries to which they can export hassle-free rather than the country which has imposed swingeing economic sanctions on itself by erecting barriers to trade and committing itself to putting further obstacles in place in the future. Brexit is at least part of the problem.

It isn’t, however, the full story. A report on the BBC a few days ago also drew attention to the different procurement models in operation, suggesting that UK supermarkets have signed long-term deals with suppliers so that prices are fixed for 18 months, whereas EU supermarkets tend to buy their fruit and vegetables on a month by month basis at the spot price applying at the time. The UK’s approach works well if supplies are plentiful and stable: both supplier and purchaser have a degree of certainty. Suppliers can plan their seasonal activity well in advance, and retailers can keep prices stable for end-consumers. It falls down, though, when there is a disruption to supply. If producers, forced to prioritise, can get a higher price in the short term by prioritising customers prepared to pay more and with less paperwork and hassle, why wouldn’t they do exactly that?

There’s a wider issue here as well. ‘Procurement improvements’ are often touted by politicians as some sort of ‘efficiency saving’, and it’s true that better procurement can bring savings to the organisation doing the procurement. There are usually costs and consequences to someone else, however. Combining procurement needs for several departments or, in the public sector, for several different organisations (it might well be called a cartel if the private sector did the same thing) can make it harder for small local companies to supply goods and services; but using larger, more remote companies helps to leach cash out of a local economy. And whilst one of the other common tricks – using purchasing power to demand more credit by taking longer to pay invoices – improves the cash flow of the buyer, it has precisely the opposite effect on the supplier. What looks attractive at the micro level to the organisation(s) wielding the purchasing power can be a lot less so at the macro level for local workers and companies in general.

By unfortunate coincidence, the Labour Party announced a few days ago that one of the ways in which they are going to pay for their programme in government (because they’re hooked on the fantasy that everything has to be fully costed) is by improvements to public sector procurement. I’m sure that they’ll even put a specific sum of money on the benefit, even though the actual number is necessarily unknowable. They are unlikely to spell out the consequences for other parts of the economy, but consequences there will be (there always are) even if unintended. They’ve probably been drinking the same ‘water’.

Moving the pieces around

Tweet The suggestion made by Plaid earlier this week that a change in public sector procurement could lead to more jobs in Wales isn’t new.  It’s something that the party has called for for very many years.  That’s not a criticism; using the spending power of the public sector in Wales to boost rather than undermine the Welsh economy is an eminently sensible approach.  It may be harder in practice than it is in theory, which is why oppositions tend to support it whilst governments – including the One Wales government from 2007 to 2011 – make little progress in implementing it.

That doesn’t mean that it isn’t worth working on.  Every time the public sector in Wales spends our money outside of Wales, we ‘lose’ a bit of potential GDP.  Our money ends up circulating somewhere else and adding to their GDP rather than ours.  There are environmental advantages to having a shorter and more local supply chain as well.  And I have no doubt that more local procurement will boost the number of jobs here in Wales.

I’m a little sceptical, though, about the headline figure of 50,000 extra jobs.  It’s a nice round number – too nice and too round for my mathematical mind.  And, of course, ‘local procurement’ doesn’t only work one way; other areas of the UK might follow the Welsh lead and seek to procure their goods and services more locally, which would lead to a loss of jobs in Wales.  Overall, though, I’m confident that we buy more from elsewhere than we sell there, so that we’d be net gainers, even if not quite on the scale suggested.

What we do need to be clear about though is that this isn’t, whatever the headlines might say, about ‘creating’ jobs.  ‘Creating’ is a word that politicians love to use when talking about jobs, and it’s easy to present the opening or expansion of a factory or office as something which ‘creates’ jobs.  But much of it is really just ‘relocating’ jobs rather than ‘creating’ them.  Buying the same goods and services from a different and more local supplier doesn’t result in an overall increase in economic activity; it merely moves economic activity from one place to another.  Only by drawing lines on maps and looking at what happens on just one side of the line whilst ignoring what happens on the other does it look like ‘creating’ jobs.

To repeat – that isn’t a reason for rejecting the policy or for not doing more to bring it about.  It’s a policy which would bring significant benefit to Wales.  But it can never be enough.  Real job creation depends on increasing rather than just moving economic activity.

Dismissive Labour

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I was more than a little disappointed with the Welsh government’s response to a question from Leanne Wood on procurement last week.  The question highlighted how much more successful some other EU countries are at ensuring their public procurement is 'internal' rather than 'external'.

That doesn’t mean that I was entirely convinced about all aspects of the question.  Whilst I have no reason to doubt the accuracy of the figures quoted (Germany 98.9%, France 98.5%, the UK 97%), the precise figures may not be particularly helpful.  I doubt that they tell us much more than that a larger country with a bigger population and a more diverse economy will be able to meet more of its needs internally than a small country.  And I wouldn’t be at all surprised if a breakdown of the German figures, for instance, by region and municipality showed an increasing level of external spend.

But it’s the principle rather than the detail which is important.  Every pound spent by Welsh public authorities outside Wales is a pound lost to the Welsh economy.  It represents a loss of GDP and wealth – it’s like passing that pound note out through the window.

Leanne is surely right to draw attention to that as an issue, and increasing local procurement is something within Welsh control which can help to boost our economy.  Local procurement also has environmental advantages, of course.

The Welsh government response was to say that setting a precise target for internal procurement would be against EU law.  Well yes, I’m sure they’re right – but is that really an answer to the question, or just the politicians' way of avoiding the issue?

Successive Welsh governments – involving three of Wales' four parties – have regularly talked about improving local procurement, but it’s been mostly talk with little action.  And whilst the Minister in one department talks about local procurement, his or her colleague in another has been busy pushing Welsh public authorities into bigger and more collaborative procurement arrangements which may well save money but would also make it harder for small local companies to compete.  Holding seminars to help those smaller companies to understand large and complex procurement exercises is a bit like trying to hold back the tide.  Like Canute, they merely demonstrate how ineffective the approach is.

There are things that the Welsh government could do, and it would have been better had their response demonstrated some understanding of that, and some willingness to act rather than an airy dismissiveness.

The first thing they could do is to simply stop doing those things which make it harder for local companies to supply goods and services.  Cheapest isn’t always best.

The second would be to look at what is being procured from outside Wales and ask why we can’t supply that internally.  There will always be some things that we can’t provide internally, but there are many which we can.  And targeting economic development resources at encouraging the production of goods and services for which we have a home market is probably going to give us a more sustainable economy for the long term than concentrating on activities which depend on producing and selling goods and services for which there is no – or only a very small – home market.

I was left with the impression that dismissing any suggestion from an opposition party was seen as more important than doing something positive.

False economies

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This story in today’s Western Mail neatly highlights one way in which attempts to cut costs in the short term can backfire and lead to cost increases in the long term.  And whilst this may be an extreme example, I’ve seen other similar cases before.  The public sector is particularly prone to this problem, in its striving to achieve – and demonstrate – open competition and value for money.

I’m not sure that I entirely accept the figures quoted in this example, to be honest.  I find it hard to believe that each of 30 different companies would really decide, individually and separately, to spend £3,000 on bidding for a contract worth only £20,000, knowing that price was a key element in winning.  Spending 15% of the maximum total revenue value of a contract on the sales process looks excessive to me.  The only sensible decision for a company faced with that level of cost and competition for such a small contract is to qualify themselves out and decide not to bid.

And that’s the first way in which an excessively costly pre-sales process can actually push prices up – some of the more competitive and cost-conscious companies will simply decide not to bid.

If we take the figures as correct however, then presumably the procurer – in this case an unnamed local authority – might argue that the £90,000 in costs incurred by bidders isn’t their problem.  They’ve secured the best possible deal for their own authority, and that’s the beginning and end of their responsibility.  It’s a short-sighted viewpoint. 

Every company which spent £3,000 on an unsuccessful bid will be looking to recoup that sum on the business it does win; those pre-sales costs are thus effectively factored in to its prices.  And if they are going to lose 29 out of every 30 bids they submit, that’s an awful lot of factoring in.

It’s also the second way in which open tendering for small contracts can push overall prices up rather than down.

Most companies tendering for business should be expecting to win 1 in 3, or at very worst, 1 in 5, of the contracts for which they tender.  Any lower than that, and their pre-sales costs will start to make them uncompetitive.  A wise public sector procurement process which was serious about wanting real, long-term, value for money would recognise that.  If the rules to which public bodies are working are forcing, or even encouraging, the sort of approach highlighted by this article then they need to be changed.

The other coloured report

Tweet I referred to the Browne report yesterday, time to turn to the Green one.

Some of the examples of price differences across government departments are horrific, of course. And there can really be little excuse for the way in which some departments have been persuaded to part with our money. It’s hardly a good advertisement for some private sector companies either that they’re prepared to take advantage of the incompetence of their customers to charge excessive prices.

But some aspects of Green’s recommendations do give cause for concern.

The suggestion that there should be more central purchasing so as to achieve bulk discounts might well produce some savings in terms of public expenditure in the short term, but what is its overall economic effect? It is likely that government would be supplied by a smaller number of larger companies rather than a larger number of smaller ones, which would be less able to supply the quantities required. Guess where they’re likely to be located? And pressure on prices means corresponding pressure on costs, usually labour costs.

The suggestion that government should simply extract more credit from its suppliers by delaying payment is also something that would make smaller companies less willing to do business with government – and again increase pressures on costs.

Both are things which large companies do as routine, of course. And both are potentially damaging to the business prospects of their suppliers. I’m aware of one large company which routinely looks at the accounts of its suppliers and demands price reductions if they regard the overall profit margin as being too high. Note – not the profit margin on the business done specifically with that large customer, but for the supplier overall, effectively demanding that the profit made on dealings with other customers is shared with the largest single customer.

It’s like supermarkets and the price of milk - large buyers can distort the market in their favour – is that really what we want of government?

We need to take a more balanced and holistic view of government procurement than to simply assume that forcing prices down is always the best answer.

Efficiency savings and job cuts

Tweet It's hard to disagree with the notion that organisations, including public ones, should do things in the most efficient way possible. So the phrase 'efficiency savings' has a nice friendly ring to it; much nicer than the idea of 'cuts'. In practice, however, they frequently amount to the same thing - the way the government achieves its 'efficiency savings' is simply to cut budgets and tell the budget holders to find a way of managing on less money. Whether they do so by actually achieving the same outcomes for less money, or by changing the outcomes, is entirely down to what they can actually (as opposed to theoretically) achieve.

One of the major elements of the government's proposed efficiency savings in this week's budget is something called 'extended collaborative procurement'. A lovely piece of jargon; but what I think it means is that if public bodies work together to buy their goods and services, they can purchase those goods and services in fewer, bigger, contracts, and they can manage both the procurement process and the implementation of the contract with fewer staff, as well as getting lower prices by buying in bulk.

Simple, and effective; and clearly a genuine efficiency saving. But it isn't the whole story, because there are other consequences of this.

The most obvious is that bigger contracts are more likely to go to bigger companies – and bigger companies are likely to be less local – so money flows out of local economies into the 'headquarters' of the organisations concerned. The jobs in those headquarters are often better paid than the jobs of the operatives delivering the goods or providing the services. And that differential in salaries is one of the reasons why those places which serve as headquarters for large companies tend to have higher GVA per head than those areas which only have the staff delivering the goods or providing the services.

I'm aware of two instances recently where companies headquartered in Carmarthen have lost out in bidding for contracts to the public sector, to be replaced by larger companies headquartered outside the county. I don't doubt that proper procurement processes were followed, and that the public authorities concerned have duly made their 'efficiency savings' by awarding the contracts in the way that they have. But is the decision 'right' in overall terms for the local economy?

There are times when, for a slightly higher cost, and by awarding a larger number of smaller contracts, public bodies can keep more of the money and jobs locally, and the overall effect on local GVA per head will be more positive – and I'm utterly convinced that too many public authorities are looking only at the short term cash savings which can be achieved, rather than at the greater picture.

It's not helped by government – including in this case, the Assembly Government. Whilst the left hand of the Assembly Government (Economic Department) has talked a great deal recently, as a result of the economic summits, of encouraging public authorities to 'buy local' (quite rightly), the right hand (Local Government Department) seems still to be encouraging local authorities to join bigger and bigger purchasing consortia to achieve more and more 'efficiency savings'. They can't both be right – and it isn't what I would call 'joined-up' government.