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Flint advises international businesses and investors on policy, politics, regulation and competition.
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The Procurement Act recently became law and the new regime it introduces is expected to go live in October 2024, close to the anticipated General Election. The Act and the likelihood of a Labour government, with expectations of higher public spending, has seen increased investor and corporate interest in B2G.
While there are genuine growth opportunities, especially where productivity and operational gains can be demonstrated, B2G firms should expect:
We set out key points for investors and B2G firms to consider when identifying and leveraging policy and funding-driven opportunities and consider mitigations of the associated risks.
1. The reform programme set in train by the Procurement Act will continue under a Labour government, though we expect a greater emphasis on VfM, SMEs, transparency, and social value.
B2G firms should work on the basis that the legal and regulatory architecture of public procurement will not be changed much under Labour, but guidance (such as Public Procurement Notices) and other tools will be used to shape how the new regime is developed, interpreted and implemented by public sector bodies.
2. Labour will build on aspects of the Act that allow more flexibility in award criteria, encouraging a move away from price-driven awards.
The Act attempts to reduce the primacy of price weighting in procurement decision-making. For example, it facilitates awards to the Most Advantageous Tender (MAT) rather than the Most Economically Advantageous Tender (MEAT). We can expect increased demand for providers that don’t compete primarily on price.
B2G firms should not expect a less price-driven environment to emerge quickly, especially if procurement officials are worried about greater VfM scrutiny under Labour. However, as this shift occurs firms can address this by demonstrating the VfM, efficiency and operational outcomes benefits of their proposals more clearly.
3. Labour is very focused on securing and scrutinising VFM in government, particularly on procurement, and has promised to instate an Office for Value for Money.
The Shadow Chancellor has said that the Office would be a ‘hit squad’ that would go into departments to ensure VfM before it is spent. This might lead to project and procurement delays for larger contracts.
Labour’s pursuit of VfM is also likely to mean a clampdown on off-framework spending, especially where this results in costly practices, such as providers charging much higher fees off-framework that far exceed framework limits.
B2G firms should help contracting authorities build VfM cases for their projects and the related procurement spend. They should also price their work in recognition of a less price-focused environment, though some officials may take time to embrace this new regime.
4. Labour will try to reduce spending on consultancies, but will be unable to significantly shift the dial.
The Shadow Chancellor in October said that ‘we will aim to cut consultancy spending in half over the next Parliament’ and has also said that departments must ‘demonstrate the value for money case’ to contract consultants.
Though we can expect more rhetoric and initiatives in this area, the objective will be difficult to achieve in practice, particularly where government currently lacks technical capability, notably in IT and digital transformation.
B2G firms with consulting revenue should emphasise VfM in terms of cost savings and efficiencies as a result of their work and should underline their technical expertise (where this cannot be met in-house). They should also expect more delays on consulting spend resulting from Labour renewing Cabinet Office controls on departmental spending on consultants.
5. B2G firms could benefit from a renewed focus on public sector productivity improvements, particularly where structural reforms are difficult, which we expect Labour to largely continue.
Firms that can identify and implement productivity improvements through process re-engineering and automation, especially through AI, will benefit at a time when there are new efforts to improve (falling) public sector productivity.
The Deputy Prime Minister, Oliver Dowden, has set up a new unit dedicated to using AI to ‘streamline the functioning of government, fight welfare fraud and help process asylum claims’. B2G firms could also benefit from efforts to reduce public sector headcount, with the Chancellor recently committing to save £1bn by freezing recruitment across the civil service and to cutting 66,000 jobs by March 2028.
B2G firms should focus on how they can support the productivity agenda, which Labour will also pursue. They should also consider the potential benefits of public sector headcount squeezes but should not expect recent job cut commitments to be maintained under Labour.
6. The size of the fiscal envelope will likely not increase dramatically in the short term, due to fiscal pressures and the Labour leadership’s determination to be seen as fiscally responsible. Beyond the short term, we would expect tax rises at some point under Labour to support their public service and net zero missions.
B2G firms should expect a new Comprehensive Spending Review (CSR) under Labour and one that will allow for more predictable spending (and related procurement) by departments, given the stabilisation of inflationary pressures (which undercut the 2021 CSR). A new CSR may be announced in late 2024 or Spring 2025, setting out 2025-26 budgets, but it’s not certain that the CSR will be for three years.
7. Labour is likely to encourage the greater use and weighting of ESG/social value criteria in procurement awards, though Labour local authorities will probably emphasise this more than national government, especially in relation to promoting the engagement of local suppliers, local workers and local charities.
Labour could, for example, update the current procurement guidance on social value (PPN 06/20), which mandates a minimum 10% social value weighting for central government contracts. It could also incorporate different social value themes and objectives.
B2G firms should improve their ESG credentials and align bids with the varying social value criteria of different public sector bodies. They should also anticipate likely changes in emphasis and requirements under a Labour government.
8. Labour will do more to promote the utilisation of SMEs, especially small and micro-enterprises, though some of this may be reflected in more requirements for large providers to subcontract.
Public procurement spending on SMEs is still low: constituting 13% by value in central government in 2021/22; 24% in the NHS; and 38% in local government. Current Chancellor Jeremy Hunt recently announced measures to improve payment terms for suppliers, punishing the larger firms which fail to pay their suppliers within a 55-day limit and falling to 30 in the coming years.
B2G SMEs should plan to grow their business in parts of the public sector that offer the greatest scope for greater SME utilisation; firms that aren’t SMEs should focus on how they can utilise SMEs more through subcontracting and partnerships.
9. Labour’s employment agenda will have an impact on many labour-intensive B2G businesses through regulation and new procurement requirements
Labour has promised extensive reforms, including banning zero-hours contracts, ending the qualifying period for certain rights, repealing some trades union legislation, and the roll-out of sectoral collective bargaining – though, apart from adult social care, it has made no firm commitments as to which sectors would be prioritised.
B2G firms, especially labour-intensive ones, should model the likely impact of such reforms on their costs, particularly as some changes (and hence additional costs) may be imposed during the course of a contract. But some elements (e.g. a ban on zero hours contracts on trades union recognition) may be reflected in procurement requirements by particular public sector buyers before legislation is introduced.
10. The increasing importance of pre-market engagement practices will likely continue under Labour, it will not be enough to rely only on the formal procurement phase.
Senior leaders in government are now encouraged to be proactive in early market engagement (EME) in order to secure the best services for their departments. It will be key for suppliers to build trusted relationships in this phase and look to build excitement within government around their service offering.
It is vital that B2G firms develop strong relationships within government during the early market engagement phase and that they display an understanding of the key challenges facing their buyers departments. By identifying key departmental policies and priorities and spelling out how their offering can achieve this, B2G firms can position themselves favourably for the formal procurement phases.
This blog was written by Martin Summers and Dylan Saralis. Martin works with private equity and their portfolio companies and has worked on over 60 transactions, including many in the B2G sector. Dylan advises businesses and investors on political, policy and commercial strategy, having worked on multiple transactions across multiple sectors.