Curing British procurement
Civitas, 20 June 2011
Although the business press concentrated on Greece’s economic woes over the weekend, more attention should’ve been paid to the British economy and news that train-maker Bombardier is to review its UK operations. It is speculated that the reason for the review is the failure of the firm to win a major contract to build carriages for the Thameslink project. Does the decision suggest it’s time to rethink the Government’s procurement strategy?
On 16th June it was announced that the Canadian firm had lost the £1.4 billion deal to the German company Siemens. While Bombardier, based in Derby, would’ve built the trains in Britain, Siemens will build the trains in Germany, although the company has said that some of the components will be sourced in the UK. The reason given for the decision, according to Transport Minister Theresa Villiers, was that it represented value for money for taxpayers.
Without dwelling too much on this particular case it is worth questioning the Government’s decision and the underlying rationale of its procurement policy. Rules governing public procurement are heavily influenced by the EU; European rules dictate that public sector contracts issued by government bodies, local authorities and utility companies of £100,000 or more for services and supplies, or £4 million or more for works, must be advertised throughout Europe. Furthermore discrimination on national grounds in the awarding of contracts is prohibited. EU rules are designed to support the single market and encourage cross-border procurement. Underlying the rules is the belief that it is in every country’s interest to open their market up: if the UK can buy trains cheaper from Germany then British workers can get on producing things which other people want to buy from us – in essence the theory of comparative advantage as outlined by Ricardo over 150 years ago.
The problem is that Ricardo’s theory makes some important assumptions: firstly it assumes that British workers can just get on with producing something else which other people want to buy. However, in many cases workers find that their jobs have moved abroad, and their skills are no longer required in the British economy. Learning new skills is not always an option for older workers or those without the necessary ability to do so. Furthermore, and perhaps more damningly, Ricardo’s theory assumes that markets are working naturally. (there are further, far more detailed, critiques of Ricardo’s theory: of note recently are Ian Fletcher’s and Baumol and Gomory’s)
The European market in Government procurement is far from a free market. In 2004 the Wood Review for the Office of Government Commerce detailed practices in other European countries, including forced domestic subcontracting, and outright favouring of domestic bids, which clearly violated the spirit of the EU’s rules. It is perhaps not surprising that in 2004 the European Commission calculated that 67 per cent of proposals for government contracts came from domestic firms, with 30 per cent coming from foreign subsidiaries and only 3 per cent from foreign-based firms.
The problem is that the EU’s rules, while appearing clear, offer significant opportunities for covert national bias to influence procurement decisions. In particular bids do not have to be judged purely on price but can be judged according to ‘best value’, an amorphous concept which allows domestic bidders to be favoured.
What should the UK do? So far the UK has tried to push for further strengthening of the single-market. However, this assumes that the UK is in the right, is playing by the rules, or is following the correct policies. Other European countries may not see things this way. I would venture that there are very few countries in the world which do not feel that national considerations should play a part in procurement decisions.
Perhaps the UK government should rethink its stance. I’m not advocating blatant nationalist discrimination, or a move towards autarky. International trade is immensely beneficial and trade liberalisation should be pursued, however it should also be recognised that procurement decisions can take national economic interest into account. The law of comparative advantage is not infallible, and few Britons will applaud the British Government for resolutely following it while Britain’s competitors continue to support their industries to the detriment of ours.
I find this a very interesting article. Having spent most of my career in engineering, often trying to stay ahead of the next round of redundancies, I know what it feels like to see major contracts lost. And it is doubly frustrating when it seems apparent that we are playing by the rule book when other governments are not.