Jeremy Peat: Getting the procurement right can pay off

Finding the best buying policy can save millions of pounds over the lifetime of a project, writes Jeremy Peat

Believe it or not there is a great deal of attention being paid at present in policy-making circles to the seemingly somewhat obscure and peripheral topic of procurement.

It is my contention that this attention is merited and that getting our approach in Scotland on procurement correct – particularly procurement in the construction sector – could be a significant factor in strengthening our economy so far as future competitive potential is concerned.

My interest in the topic emerged from a seminar we organised a couple of weeks back at the Royal Society of Edinburgh. That seminar was postponed from the back end of last year – when it would have coincided with the consultation phase of a new Procurement Bill that will be coming before the Holyrood Parliament in a few months’ time.

It was also most valuable to have a round-table the following morning with MSPs from the relevant Holyrood committee. So why does our approach to procurement matter? The first reason is because we spend many billions of pounds in related sectors each year and how we procure matters to the efficiency of a host of programmes.

But it is not just this first and immediate efficiency effect that matters; not just a matter of saving money by buying paper clips or girders at the best price. One key point to note – as stressed by our speakers at the seminar from Scottish Water (the first UK utility to obtain the professional body’s gold standard in procurement) and Morrison Construction – was that the focus should not be just on the immediate capital cost of the project.

Lifetime maintenance costs for a building can be five times the construction cost. Further, Peter Reekie of Scotland’s Futures Trust told us that 85 per cent of a building’s carbon footprint is in use, not construction.

Hence to ensure the most efficient – in both financial and environmental terms – lifetime costs of anything constructed it is essential to look at design issues beyond initial build and to procure accordingly.There is also the question as to whether we can develop suitable measures to encourage the growth of small firms in Scotland, to help small firms become bigger and spread their wings for international competitiveness; and indeed to encourage training of Scottish engineers and apprentices in a range of construction disciplines. Beyond these issues should we have local priorities within Scotland? Should we aim to focus procurement locally, so that more of the impact of construction projects ripples through to the domestic economy? This could work to the benefit of under-employed and unemployed for projects in west central Scotland.

The economist in me asks what trade-off we are prepared to accept between reducing unemployment and enhancing future skills on the one hand and potentially adding to construction costs on the other.

A similar question emerges on the carbon footprint front. Do we know what price we place on reducing emissions? What extra financial costs are we prepared to accept in order to reduce emissions by some specified amount?

I increasingly hear the phrase “triple bottom line” bandied about. This means that we should take account of economic, social and environmental issues in decision-making.

Agreed, but private sector companies can only be expected to do so to a limited degree, commensurate with their Community Social Responsibility (CSR) policy. It is up to government to decide the extent of these trade-offs that it sees as appropriate, as the nation’s representatives; and then to develop design and procurement policies consistent with this stance. This is never going to be easy, but if folk wish to achieve an optimal impact in “triple bottom line” terms, then central guidance is essential.

Many within the sector argue that to some extent procurement can be set up so as to have the proverbial cake and eat it – at least so far as encouraging small and local companies is concerned. If procurement rules are not unduly prescriptive, and at the same time the rules are transparent and access to tenders straightforward, then more small and local companies should be able to win contracts via the standard approach.

Another argument from many in the sector works in favour of long term contracts. The first point made is that bidding for contracts is hugely expensive – and the costs involved cannot be absorbed and will in one way or another be passed on to the end users.

If a consortium knows it has a three-to-five year contract in a particular sector or region, then it can take on full-time apprentices and train them thoroughly through this period; it can build links with small firms in a multitude of sectors – and build social relationships with local communities.

A downside is that other companies are locked out for the duration – and at the very least there have to be regular and tight value-for-money tests, built in, with break clauses if standards slip.

So here are a few lessons I took from the seminar and subsequent round-table 
with MSPs at Holyrood:

• It is essential that for each major public sector body engaged in significant construction activities economic strategy leads, and is wholly consistent with, procurement policy and rules

• The new Bill and Act should avoid being unduly prescriptive. It should enhance transparency of and access to tendering processes but in a number of other areas it should encourage good practice rather than prescribing practice.

• Certainly means should be found of encouraging skills training – linking here with our evolving college network. This may mean long-term contracts in some cases, but these must be monitored regularly at arms-length, with outcomes followed through rigorously and dispassionately.

• In some instances community benefit clauses may be appropriate, but linked to strategy and very carefully articulated – not open-ended.

• We may need a source of good practice in Scotland to feed across all public sector bodies – certainly these bodies should systematically share good practice and skills. Not every public sector body can be expected to have first rate expertise in all aspects. Scotland’s Futures Trust looks well placed to take on this role and to encourage first rate practice, to the longer-term benefit across all sectors.

In short, procurement does matter.

• Jeremy Peat is director of the David Hume Institute. This article follows a seminar at the Institute on 29 January supported by Morrison Construction. The speakers were Geoff Aitkenhead of Scottish Water, Peter Reekie of the Scottish Futures Trust and Ken Gillespie managing director of Morrison Construction and the chair Sue Bruce, chief executive of Edinburgh City Council