Since the introduction of compulsory competitive tendering in the 1980s, government spending on goods and services has increased significantly. In 2022, as the preamble to the forthcoming Procurement Bill states, ‘one in every three pounds of public money, some £300 billion a year, is spent on public procurement’. This accounts for approximately one-third of all government spending – or even more if one considers the cost of civil servant time spent designing, implementing and overseeing the procurement process for 45,000+ contracts to more than 16,000 suppliers per year.

Procurement is expensive for suppliers too. The top 40 strategic suppliers to the UK government spend approximately 10% of the value of their public sector contracts on tendering. A supplier that delivers £1bn of contract value, therefore, will likely spend £100m on bid writers, solution designers, estimators, senior management staff time and so on. A significant spend – especially when not all tenders are successful.

What does this mean for public sector procurement?

While most mainstream economists and politicians agree that contracting out some services does drive efficiency, value for money and innovation, the high cost of competition can limit these positive impacts.

Innovation and diversity – or a lack of?

Prohibitive bidding costs can dissuade new businesses from entering the market, which ultimately limits the amount of competition and choice available to the government. Tussell’s 2022 interim report found that in the 12 months to September 2021, the top 40 suppliers to the government earned £19bn – 11% of overall spending despite making up just 0.3% of the total number of suppliers. However, as mentioned above, while those suppliers may have a large piece of the pie, their profit margins are often squeezed by the enormous cost of bidding for them in the first place. This can impact the amount of money spent on research and development, and on testing new approaches once the contract is won.

The cost of procurement also limits the diversity and type of supplier. Civil Society reports that between 2016 and 2020, non-profits were awarded less than 5% (7,330) of government contracts – and of these, the majority were large charities with the capacity, capability and confidence to bid for public sector work.

Reduced efficiency and value for money

Competition can paradoxically lead to less efficiency and value for money, particularly in utilities. In many cases, time and money spent on tendering (as well as advertising and other forms of marketing) to increase market share could better be spent on frontline services. Moreover, this competitive environment can lead to firms duplicating efforts and resources; of which tendering is an excellent example. At least 20 organisations ploughing tens to hundreds of thousands into a procurement with only one winner means that inevitably the cost of tendering finds its way into the project’s budget (albeit hidden within other costs), driving up prices for the taxpayer and reducing value for money.

The pressure to succeed in a competitive market can also lead to unethical practices, such as using sub-standard materials – tragically exemplified in the Grenfell Tower case – or overcharging the government. These factors are leading some to increasingly question the contracting out of natural monopolies such as energy, utilities and the railways, as well as inefficiencies in the NHS internal market, which critics estimate cost between £4.5 billion and £10 billion a year.

What is the solution?

While the scope and scale of contracting out public services is under renewed discussion post-Carillion, no one is questioning the need for a rigorous procurement process, which – as the controversies around the government’s Covid PPE ‘VIP lane’ that by-passed the procurement process and has since been ruled illegal shows – is a bulwark against corruption.

However, the government recognises that procurement must become leaner. Its new Procurement Bill, currently passing through parliament, promises a post-Brexit ‘shake up’ of the current ‘outdated procurement system’ aiming to ensure that the £300bn annual bill for procured services ‘goes further for our communities and public services’.

The Bill aims to simplify rules for lower value contracts, thus reducing the ambiguity that unscrupulous providers have been able to use to their advantage and increasing oversight. However, there appears to be few concrete measures to reduce the cost of compiling a tender – for both supply and demand.

One method of reducing costs for both government and suppliers is the use of language engines that harness AI technology to speed up the production of, and response to, tender documents, specifications and scopes of work. AutogenAI is pioneering the creation of bespoke language models which, at a conservative estimate, can halve the time it takes to respond to a tender. As we have seen, the resulting benefits could spread way beyond the bottom line to more money for frontline services, research and development, and innovation; and a fairer procurement process through which more suppliers can compete on equal terms, unencumbered by the huge cost of bidding.