Just 20% of total direct procurement spending from the public sector went to SMEs in 2023, according to new analysis by the British Chambers of Commerce and Tussell. 

The report on the state of public procurement across central government, local government and the NHS identified that £194.8bn was spent by the public sector in procuring third party goods and services in 2023, of which £39.7bn was spent with SMEs.

Although the value of public sector spending with SMEs has grown by 77% over the past six years, rising from £22.4bn in 2018, as a proportion of overall public sector spend it broadly remains the same. This is despite the government stating it wants to buy from SMEs every time they are the best value for money. 

Proportionally, local government incurred the highest share of procurement spend directly with SMEs, with 34% of their overall procurement spend with SMEs, totalling £24.1bn in 2023. Of this, £15.8bn was spent directly with local suppliers.

This contrasts with central government, where only £5.8bn was spent with SMEs – with some individual departments devoting as little as two per cent of their total procurement budgets to SMEs.

Barriers for small businesses

The Crown Commercial Service says that historically, SMEs have faced a range of barriers in accessing procurement opportunities and in winning contracts. Many lack the resources or do not have the expertise required to appropriately navigate the public sector procurement processes, making it extremely difficult for them to compete against established suppliers with extensive resources and vast experience in this area.

A further area of contention relates to the use of procurement frameworks, which has grown considerably in recent years. The government procured 72% of its large contracts through frameworks in 2021-22, compared to 43% in 2018-19, according to the National Audit Office’s (NAO) report on competition in public procurement. 

A framework agreement allows public sector entities to quickly set up contracts with suppliers without undertaking a full procurement exercise each time. However, the NAO report highlights that these frameworks can reduce competition if not used effectively. Meanwhile, high bid costs, a lack of feedback and a lack of confidence in evaluation can also deter suppliers from bidding, the NAO warns.

What role can the new Procurement Act play?

The new Procurement Act received Royal Assent in October 2023 and is due to come into effect from 28 October 2024, with the aim of opening up public procurement to small businesses and social enterprises. It wants to make it easier for them to compete for public contracts by introducing a simpler and more flexible commercial system, speeding up procurement processes and embedding transparency to allow proper scrutiny of taxpayers’ money.

As part of the Procurement Act, a new central digital platform will provide details of all public sector tenders in one place, making it easier for SMEs to identify suitable opportunities, while public bodies will be required to provide feedback to unsuccessful bidders.

In addition, contracting authorities undertaking public procurement will need to operate in accordance with the National Procurement Policy Statement. The statement sets out that authorities should “ensure that they level the playing field for SMEs… by reducing and removing barriers in the procurement process”. In practice, this should mean not placing onerous requirements on suppliers or inserting disproportionate contract clauses.

Jack Bower, ICAEW Public Sector Audit and Assurance Manager, says: “It is disappointing that spending with SMEs as a proportion of overall public sector procurement spending has barely increased in the past few years. There remains a long way to go before SMEs can compete on a level playing field with more established suppliers. 

“Disparities in the successes of small businesses winning procurement contracts between central and local government are significant, thus central government should consider how it can provide greater access to contracts for SMEs. This could enhance competition, improve overall service quality and ultimately increase value for money for the taxpayer.”

Bower says it remains to be seen how effective the new act will be in improving the overall picture and boosting public sector spending with SMEs. “However, we are hopeful that it will ease some of the concerns of smaller businesses and make it easier to navigate the complex public sector procurement framework.”

Further Resources

• The Procurement Act 2023: will SMEs benefit?
• Public Sector Procurement – Why it makes business sense