PM’s ‘levelling up’ dream can be realised by ensuring most of the Government’s £290 billion annual private contract budget goes to UK firms in left behind areas, urges think tank

The poorest parts of Britain could gain spectacularly from Brexit if ministers cashed in on their new-found powers and insisted that most of the State’s annual £290 billion spend on private contractors was concentrated on UK firms in deprived areas, according to a report by the Centre for Social Justice.

Before the UK quit the EU, the awarding of government contracts – amounting to one third of all State spending – was bound by EU rules, meaning that effectively the deal had to be done with the lowest bidder, often a Continental firm.

But now that the country can set its own rules free of Brussels interference, ministers have the scope to insist that orders placed by Whitehall, government agencies and local authorities must go to companies operating in the poorest parts of the country, such as the north east and the north west – home to many of the so-called Red Wall seats that switched from Labour to Conservative at the last election.

Crucially, the CSJ plan lends some real muscle to Boris Johnson’s “levelling up” agenda targeted on narrowing Britain’s severe regional divides.

In a landmark new report, the CSJ, founded by former Conservative leader and Cabinet minister Sir Iain Duncan Smith, declares:

“The CSJ therefore calls upon the Government to adopt an explicit Levelling Up Test, binding on all public authorities. Wherever possible, public bodies should be obligated to award contracts to tenderers that are active in an area that is economically underperforming, measured by factors such as the Index of Multiple Deprivation (IMD) and local unemployment levels.

“The burden of proof should lie on the authority to justify any decision not to follow this principle in any specific case. For local authorities there should be a presumption of spending locally unless there is a reason not to. The Government should establish a Public Contracting Taskforce to devise an enforceable mechanism to prioritise levelling up through the regime and to monitor and enforce it.”

Sir Iain commented: “This excellent paper from the CSJ fits perfectly with the Taskforce for Innovation, Growth and Regulatory Reform (TIGGR) report that I recently delivered to the Government. My report was all about how to change our regulatory system and take advantage of the fact that having left the EU, we now can control our own regulatory system and get rid of the over-regulation that besets the British economy.

“This new report makes it clear that it is in the UK Government’s hands to ensure that the hundreds of billions of pounds that is spent on procurement is directed towards helping British companies in Britain and ensuring that those areas of the country that most need investment receive it, rather than foreign-owned firms.”

The UK government spends around one-third of all its annual expenditure on contracts to private companies, amounting to around £290 billion per year, more than twice the total annual NHS budget, more than five times the size of the defence budget, and greater than Britain’s total expenditure on social security, including the state pension.

The money spent on procurements goes to private suppliers of vital goods and services to the UK government: building schools and hospitals, running prisons, cleaning and maintaining public buildings, constructing and maintaining roads and rail rolling stock, running social care facilities, providing catering and other services for public institutions, and supplying our emergency services with vital equipment.

Until now, the rules according to which these contracts were awarded have been determined not by UK government policy but primarily by EU law, in the form of the Principles of the Treaty on the Functioning of the European Union (TFEU) and the EU Procurement Directive.

The effect of these rules often leads to awarding contracts based on the lowest bid, with public bodies liable to be sued by tenderers who felt they had lost out under the EU rules. The regime was legally enforced ultimately by the ECJ and the European Commission.

The CSJ’s newest paper, Spending it Better, points out that since the UK’s exit from the EU, the UK is now free to redesign its own procurement rules within the more flexible WTO regime, the Government Procurement Agreement (GPA).

The think tank warns that recent controversies surrounding the awarding of PPE contracts, and the problems with UK supply chain resiliency exposed by Covid-19, have thrown into sharp relief the urgent need to get public contracting right.

A major example of the old rules having a perverse effect was the awarding of a £1.5 billion public contract for City Thameslink to the German firm Siemens rather than the Bombadier site in Derby, resulting in a £100 million loss to the economy, £20 million lost tax revenue for HMRC, and around 500 job losses.

Attempts at reforming procurement to deliver social value rather than focusing purely on the bottom line, through the Social Value Act 2012 and the government Civil Society Strategy, have had some positive effects. However, Lord Young’s 2015 Review of the Social Value Act found that it had suffered from poor take-up, resulting from a lack of enforceability and overly vague requirements.

Although the Government published a Green Paper outlining ideas for reform in December 2020, the CSJ argues that it should go further by linking its procurement strategy explicitly to its “levelling up” agenda, prioritising the award of contracts to areas with high levels of economic deprivation.

From GDP per capita to Gross Value Added (GVA) to average household incomes, the gap between London and the South East on the one hand, and the rest of the country on the other, has been increasing over time. The increasing divergence in growth rates between UK regions means that this trend will not only increase but will accelerate with the passage of time.

The CSJ also calls on the Government to review its understanding of “value for money”, noting the inconsistency of saving £2 million through a lower contract bid, while losing more than £2 million due to welfare pressures created elsewhere. The potential costs of taking a contract away from a local supplier, or of not giving a contract to a given tenderer, should therefore be taken into consideration in the round, including the social security costs implied for the DWP.

Finally, the CSJ calls upon the Government to diffuse its spending power by creating a mechanism by which local authorities with an above average score according to the poverty index can apply to the Cabinet Office for the right to award a central government contract within their local authority. In this way Whitehall’s enormous spending levers can be devolved, but in a way in which there is still oversight by and accountability to the Cabinet Office, resulting in an effective fiscal stimulus in the areas that need it most.

Andy Cook, Chief Executive of the CSJ, said:

"This is a real opportunity to use existing government spending in a way that benefits the areas and communities that need it most. By spending it better, we can drive up jobs and opportunities in places where employment is currently low. If Brexit was about taking back control, we now have an opportunity to put that into action.

“Government is tasked with the responsible and constructive spending of taxpayers’ money. While this new framework could entail costlier contracting measured purely by price, the return on investment arising from alleviating poverty and redressing unemployment would more than compensate. Far from being protectionist, using procurement spending strategically is a case of the Government acting as a purchaser, not as a protector or regulator.

“The Government should adopt a formal principle of public money for public good, and use its enormous spending power to bring much needed investment into Britain’s most left-behind communities.”