Public sector organisations, including local and combined authorities, use public procurement to award contracts for the purchase of goods and services. As public procurement reflects policy goals, this spending generates economic, social, or environmental benefits (for example, a local authority commissions a contractor to build segregated cycle lanes to help improve accessibility to work and study, and reduce congestion and air pollution).
There is increasing interest in using these contracts to secure additional economic, social and environmental benefits. Continuing the example above, a local authority might also wish to use a construction contract for cycle lanes to create employment or apprenticeship opportunities for residents. The mechanisms to pursue these wider benefits include:
- Increasing the number and value of contracts secured by local firms.
- Using social value contracts to require contractors, who may or may not be local, to use local ‘resources’ as part of contract delivery.
This briefing provides a framework to help local policymakers think through the benefits and costs of pursuing these additional outcomes through local procurement.
Summary of findings
Local procurement increases revenues of local firms. Some of this increased revenue will go to workers, some to suppliers, some to providers of capital and some to business owners. Not all beneficiaries will be local. For most contracts, the largest impact on the local economy will come through increased employment. Some issues to consider when assessing the employment impacts include:
- Data on the labour share and labour costs can be used to convert revenues into an estimate of the number of jobs that could be created by local firms winning contracts. Alternatively, this could be done using data on revenue per employee. Using more granular data can improve estimates as job creation can vary across sectors, business size and business models.
- For social value contracts, the number of jobs specified as outcomes can be used as a starting point for calculations – but make sure to assess whether these will be additional.
- Consider what proportion of jobs are likely to be secured by local residents, and whether a social value contract should be used to set targets.
- Account for displacement and crowding out – and use a multiplier to estimate the total number of jobs created directly and indirectly. When applying a multiplier, carefully consider the factors that will affect the size of the multiplier, including supply chain links and commuting patterns.
- Consider the number of jobs created relative to the overall size of labour market to assess the potential impact on the employment rate. This can help assess the relative value of using procurement to create jobs compared to other policy options.
Our rapid evidence review (discussed below) finds that procurement can be an effective way of delivering wider social and environmental objectives. However, not all contracts will generate all forms of wider benefit, with the evidence suggesting contractual requirements are important. To maximise the wider benefits from local procurement:
- Ensure alignment between the contract and the social value outcome.
- Carefully consider whether the benefits will accrue to the local area and whether they are additional – firms may have undertaken some of the activities to achieve wider outcomes anyway.
Potential costs should be considered alongside benefits. Additional benefits from public procurement have been policymakers’ focus – but adopting local procurement will also have costs and these must be included in any consideration of whether to pursue this policy option.
- Benefit-cost calculations should recognise that placing additional requirements on bidders or giving some bidders preferential treatment is likely to lead to higher contract costs.
- Letting contracts at the local level can be cost inefficient. Given that local procurement could increase costs further, it is important to consider how costs could be reduced. Auctions, bidder training and promotion could help reduce costs.
- Compare benefits and costs to assess whether pursuing local procurement is worthwhile.
Rapid evidence review
To support the drafting of the evidence briefing, we undertook a rapid evidence review. This looked for evaluation evidence on the impact of public procurement on economic outcomes. Our search identified 26 evaluations. Unfortunately, no studies evaluate the impact of public procurement on local employment or wages. No studies look directly at social value contracting, or policies to increase the number or value of contracts won by local firms.
- The evidence on the effects of winning a public procurement contract on business performance is limited and mixed – with some evidence that it can improve access to finance but can have a negative effect on productivity over the medium-term.
- Winning a public procurement contract can have positive effects on stimulating innovation, such as increasing R&D spend, or increasing share of firm turnover from new products and processes – but this is more likely if innovation is a contractual requirement.
- The evidence finds setting green criteria in procurement can lead to the adoption of green practices.
- The evidence suggests that procurement design has a strong impact on costs – with centralisation, auctions, supplier development and digitalisation all reducing costs, whilst preferential treatment and corruption increase costs.
Need for more evidence
- To address current gaps in knowledge, there is a need for more evidence on the local economic impacts of public procurement, especially on local employment and wages.
- Government and local policymakers should undertake robust impact evaluations of social value contracting, approaches to increase spend going to local firms, and supplier development initiatives. This will help improve understanding of the local economic impacts and ensure that public money is used effectively.