Public Procurement as a Tool to Stimulate Innovation: Science and Technology Report

Lord Hodgson of Astley Abbotts Excerpts

Tuesday 13th September 2011 Grand Committee

[Lord Hodgson of Astley Abbotts]

My Lords, let me be the first to congratulate the noble Lord, Lord Krebs, and the committee on a fascinating report that highlights some important issues of public policy. I was particularly glad to hear that his committee intends to return to the issue to see what progress has been made, so that the report does not end up as a doorstop in some department in Whitehall.

I was not a member of the committee, so I was somewhat surprised to find myself chosen first on the speakers list. I normally skulk in decent obscurity some way down, but here I am blinking in the sunlight. I begin by declaring an interest. I am chairman of a private equity firm. I have spent most of my life in the City helping to fund businesses engaged in innovation, much of which has involved work, collaboration and frustration with government departments. Last year, I chaired for the Government a task force looking into the regulatory burdens that affect small voluntary groups and charities. These are groups that offer innovative solutions to some of the most intractable problems in our society: what is known in the trade as the hard to reach 5 or 10 per cent. When we set up our committee, we asked the sector for evidence. We had more than 600 pieces of evidence, many of which are produced and referred to in our report, entitled Unshackling Good Neighbours, but a lot of the issues to which the noble Lord and his committee refer in the report are replicated from those real-life examples.

I shall focus my remarks on three areas: first, the risk aversion issue that the noble Lord, Lord Krebs, referred to; secondly, the section of the report concerned with prescriptive and burdensome procurement processes; and, finally, the need to make sure we safeguard our intellectual property properly.

While it is certainly true that risk aversion is present in the Civil Service, it is quite widespread in our society as a whole. Many years ago I attended an American university. My professor was a great anglophile. He said, “One of the great problems is that, in the US, a new idea is innocent until proved guilty. In your country, it is guilty until proved innocent.” We are inclined to say we must work with what is tried and established, and that has run through the warp and weft of our society.

A great German friend of mine who runs a private equity firm in Germany talked to me about the Millennium Dome. I do not want to talk about what went on inside the Dome, but the Dome itself was a very interesting piece of engineering, a wonderful structure. He said, “If this was Germany, we would have articles in the press about how German technology was leading the world, and how this was going to show how German innovation was there, thrusting and showing the way. What did I read in the UK? Endless articles about what a waste of time it was, how hopeless it was, how awful it was and how it cost more than expected”. As the noble Lord, Lord Krebs said, we find it hard to celebrate success.

[Lord Hunt of Chesterton]

We heard many debates on the Dome in the House of Lords. Many speeches came from the noble Lord’s side of the House criticising the Dome. Not a single speaker mentioned the technology. I was delighted by the noble Lord’s point.

[Lord Hodgson of Astley Abbotts]

I am not quite sure whether that was a pat on the back or a slap in the face. I will take it as a pat on the back.

As I said, we find it hard to celebrate success, and we will, by some behavioural brilliance, have to nudge the public into getting a different view about success and innovation. It is, of course, needed in the Civil Service. My second point is therefore about procurement processes, particularly as they affect SMEs—some charitable, some commercial—whether they operate at local or central government level. If I go into some detail, I make no apology, because this is about hard yards. We can make general statements about how to do this, that or the other, but we have to find the problem and unpick it inch by inch. That is how we will make progress.

I have four or five things I would like to get on the record for my noble friend and her Department to consider. The first is what is known as the use of pre-qualification questionnaires. These are what you have to fill in before you can go to the tender process. Some of them are hugely lengthy and involve 150 questions. None of them are ever the same, so if you are an SME dealing with different parts of government—local or national—you will have to fill in different PQQs. No attempt is made to collect information that is available to the public at Companies House and so on. These small companies and voluntary groups have to go through a process of filling in these forms for very little benefit. I hope that the Government can abandon their use. If PQQs have to be used, they should be in a standard format, so that once you have filled one in you have completed the lot.

The second issue to consider is the use of multiple tenders. Of course there is a need to safeguard and obtain value for money, but if, to safeguard your position as a commissioner, you ask for 12 tenders, 11 will lose, so the economic friction and inefficiency arising from this is very great indeed.

The third issue is that of proportionate costs for tendering and for monitoring. Very often small contracts are let. The contract documents can be as thick as a small telephone book, and the contract is worth £50,000 or £100,000. There should be yardsticks to measure the value of contracts and their tender and monitoring costs.

Local or central government should set the measurement for success and not change it during the contract. Too often, half way through the contract, the way in which success is to be measured is changed. That is extremely difficult for a small or medium-sized company.

Then there is the question of scale. Where the Government cannot work with an individual company because it is too small and they have to work through a major contractor, there need to be clear guidelines whereby the main contractor shares the risk and rewards with the subcontractor. Too often the subcontractor takes the risk and the main contractor takes the reward.

There is a final thing to consider. Worst of all is when trying to get yourself as a small charity into the tender list, and the commissioner says to you, “Now, just tell me how you’re going to do this. Tell me your innovative leading-edge idea”. The company takes a lot of time and trouble to do that but then finds that all its ideas have been put in the tender document, so all its work and innovation have been lost because everyone is competing on the same basis as it is. Since a large company can probably offer this at a similar or even lower price, the halo effect means that all the work and innovation done by the small group is lost; everyone is able to quote using the work that it has already put into the work. There are some important issues to be dealt with there, and they can be followed through specifically if the Government have the grit and determination to force that through across Whitehall.

Thirdly, I would like to talk about the safeguarding and the value of intellectual property, which is referred to in the report of the noble Lord, Lord Krebs, as the effective engagement between procurers, suppliers and academia. There are some very distinguished academics here today so I know I am treading on thin ice here, but I am afraid that I am far from convinced that universities are using our public funding effectively. I have a specific example, which the Minister has some knowledge of because I have put down Parliamentary Questions about it: the University of Manchester and the development of graphene. What is graphene? I quote from a BBC article entitled, “Is graphene a miracle material?”:

“Our research establishes graphene as the strongest material ever measured, some 200 times stronger than structural steel … It would take an elephant, balanced on a pencil, to break through a sheet of graphene the thickness of … cling film”.

Graphene was developed at the University of Manchester by two gentlemen, Mr André Geim and Mr Konstantin Novoselov, and they won the Nobel Prize for that work. According to a Parliamentary Answer, they used funding provided by the Engineering and Physical Sciences Research Council. I understand, on good authority, that the University of Manchester authorities failed to take out patents on graphene before Messrs Geim and Novoselov published their paper, and of course once it was published any IP value was lost. If the two gentlemen had funded that research themselves, that would be fair enough. I would quite understand that, it was their work, but they did not. They funded it at the expense of us, the taxpayer, so either the University of Manchester authorities were so maladroit that they did not know what was going on, or they were incompetent in funding the research without an appropriate IP protection clause in the contract.

When you look further into the BBC article, you will see that graphene was picked up quite speedily in the Far East. It talks about the work being done in Korea by Samsung, which is now working on the research:

“(Samsung has its) own roadmap where they believe there will be a dozen products (on the commercial market) using graphene in the next five years”.

Far from graphene being exploited and used for the benefit of the UK taxpayer, the science base or indeed UK industry, it is now being exploited in Korea.

I would be delighted to be told that I have got this completely wrong, but my source is a pretty reliable one. I am not asking the Minister to answer this today, but I hope that when she goes back to the department she will have a real drains-up investigation into this and other cases that I have heard of, of which this is the most blatant.

I would like to end as I began. This is a fascinating report. Stating the problem is the easy bit; correcting it will be more challenging. I look forward to my noble friend’s reply and to hearing the follow-up report from the committee of the noble Lord, Lord Krebs, in 12 months’ time.