Insights
Blog co-authored by Professor Henry Overman
In Rewiring the State, the UK government set out a new model of government, committing to more decisions – including on growth – to be made locally. This briefing is part of a series aiming to help local policymakers think through the economic effects of different local growth policies and how to maximise the benefits of those policies. Each briefing introduces the policy, sets out the outcomes it affects, the mechanisms by which it does this, and issues to consider in developing local policy.
What is public procurement policy?
Public sector organisations procure a wide range of goods and services. These purchases create economic, social and environmental benefits directly related to their policy goals. For example, a mayoral strategic authority (MSA) procuring a tram route hopes to improve accessibility to work, study, and leisure opportunities and reduce congestion and air pollution.
Policymakers are often keen to secure additional benefits from their spend. For example, the MSA may want the construction of a tram route to create employment opportunities for young people. The main way to achieve this is by placing social value requirements on contractors – i.e. requiring them to deliver wider benefits as part of the contract.
A complementary option, if the aim is to improve local economic performance is to increase the number and value of public contracts secured by local businesses. This could involve simplifying procurement rules (to make contracts more accessible to local businesses) or creating procurement processes that prioritise local business. Social value requirements tend only to be used in larger contracts, whereas efforts to award more contracts to local businesses can involve contracts of any size.
What are the mechanisms by which public procurement policy improves local economic performance?
It is a good idea to think about the wider economic benefits of public procurement policy separately to the direct benefits of the contracted goods and services.
Social value requirements can relate to economic, social or environmental outcomes. The most common economic requirement is for suppliers to provide employment, often for a specific group, for example, local residents, young people or care leavers. In some cases, this employment is created directly (i.e. by the contractor or a sub-contractor) and in others it will be created indirectly via other requirements (for example, training and work experience placements which help beneficiaries secure employment elsewhere).
Increasing the number and value of public contracts secured by local businesses can also increase local employment if these businesses are more likely to employ local residents or are more likely to have local supply chains than businesses based elsewhere (social value requirements can also target supply chains). Greater demand for local workers may also increase wages of existing workers.
On the business side, revenues may increase, as may profits (depending on the cost effects of meeting procurement requirements and the extent to which contracted businesses are locally owned).
Multiplier effects can lead to additional impacts if, for example, local business owners reinvest increased profits locally or local residents spend higher wages locally.
What do you need to consider?
Impacts of social value contracting depend on requirements chosen
Economic requirements (such as offering employment and training opportunities) are more likely to have local economic effects than social or environmental requirements (such as staff volunteering or upgrading a local playground).
The impact of requirements will vary across areas depending on local economic conditions. For example, providing employment opportunities for young people is more likely to be impactful in areas with high youth unemployment than in areas with tight labour markets.
Even though social value contracting is often reserved for larger contracts, most of these contracts will still be small relative to the size of the local economy, limiting the overall scale of impact. Using social value contracting consistently across all procurement will increase overall impacts. Focusing on a small number of outcomes (within and across contracts) can make it easier for businesses to manage social value contracting and makes it more likely that there will be an observable effect on the local economy. But the trade-off is that this approach is inflexible and could miss opportunities linked to specific contracts or contractors.
Social value contracting will only have an impact if the activities are additional. For example, if the contractor would have recruited locally anyway a social value requirement to do so will not generate any additional economic benefits.
Social value requirements can also increase costs for contractors, leading to lower profit margins. This may be a concern if the contractor is local. It could also lead to changes in contractor behaviour, for example, contractors may make greater use of machinery and technology and reduce use of labour to offset the requirements placed on them.
Start by establishing objectives and structure social value requirement to reflect these objectives. Data can be used to help understand the scale of potential benefits during appraisal. It will also be important to monitor delivery of social value requirements over time as this will help build better understanding of the impacts of the policy, especially around additionality.
The impact of more local businesses winning contracts will vary
The impact of awarding more contracts to local businesses will vary across contracts. For example, goods or services that are labour intensive, such as social care or catering involve more jobs than those that are capital intensive. But a contract that creates or sustains high productivity, high-wage jobs could have a larger economic impact than one that creates the same number of jobs at lower wages. The impact will also vary across areas, reflecting the contracts let and the local business base.
Whereas social value contracting can impose local employment conditions, the labour market effects of awarding more contracts to local businesses will depend on employment patterns. Local employment and wage effects will depend on local businesses winning contracts employing more local people than the ‘non-local’ businesses they are displacing. Wages, commuting patterns, and the nature of the good or service all play a role. For example, home care for the elderly needs to be delivered in the area and is relatively low paid, so ‘non-local’ businesses would most likely have used local workers. In contrast, a business awarded a contract for specialist engineering services linked to an infrastructure project are likely to employ workers from a wider area regardless of where they are based.
As with social value contacting, the total value of locally awarded contracts is likely to be small relative to the size of the local economy. Local public spending accounts for only a small proportion of local output and local businesses will not be able to meet all contract needs. Issues that can make it difficult to secure local suppliers include the good or service required (for example, purchasing specialist equipment is likely to be difficult in most localities), whether contracts require specific accreditations (such as ISO) or particular processes or methods, and whether fixed costs or economies of scale are an issue. Local sustainable employment outcomes are most likely for ongoing or regular contracts (such as cleaning or IT services) than for goods and services that are procured rarely or irregularly (for example, construction of new library).
An increase in contracts awarded to local businesses will only have an impact if the activities are additional. For example, if a local business successfully wins a local contract and chooses as a result not to bid for other contracts elsewhere, there would be no economic impact.
Additional benefits can arise if profits increase and business owners live and spend locally. However, if the policy leads to an increase in competition, there will also be costs for businesses that bid but are unsuccessful.
A good starting point for understanding the likely impacts is to assess the potential increase in revenues for local businesses. This will require a clear definition of a local business, data on current and future spend, and data on current proportion of spend that goes to local businesses. For example, if local businesses already win a large proportion of contracts, a local procurement policy may have limited impact and may be more likely to lead to displacement. Understanding revenues can provide starting point for considering employment, profits, and other benefits. Policymakers should also consider potential costs for businesses and their implications for revenues and profits.
Consider costs as well as benefits
Policies to generate additional benefits from public spend will have costs. We discussed the increased costs to businesses above. If these are passed on through the procurement process this will increase public sector costs. Even if business costs do not increase, reduced competition in the procurement process can increase costs. Increased public sector costs can also arise from the administration of the policy, for example, the cost of monitoring compliance with social value requirements. Evidence also suggests that placing additional requirements on bidders (as in social value contracts) or giving some bidders preferential treatment can lead to an increase in contract costs.
An additional thing to consider carefully is that any of the benefits described above will be reduced, or even reversed, if other areas adopt similar policies and local contractors lose out on contracts from elsewhere.
Policymakers should carefully weigh up the benefits and costs of public procurement policies and compare them to other interventions that might achieve the same objectives. Cost-effectiveness will vary across areas and policy, meaning it may be worthwhile for some types of contracts but not others. In some cases, the social and environmental outcomes may justify adopting the policy even if it does not contribute to local economic growth.
Other resources
- What Works Growth has previously published a briefing on assessing the local economic impacts of local procurement. This draws on a rapid evidence review of the evaluation evidence on public procurement.
