Is the UK moving towards 'innovative small business' procurement set-asides? Would it be a desirable move?

PM Theresa May announced yesterday that the UK Government is to look at how its own public procurement can be used to drive innovation in small businesses that “not only spurs innovation in the public sector, [but] gives new firms a foot in the door”, as part of a review into the Small Businesses Research Initiative (SBRI). It is not clear what innovation in small businesses means, as it could both refer to technologically-innovative small businesses, or to diverse or new forms of small businesses (as part of social or economic innovation more generally).

It is worth noting that PM May indicated that the UK could follow the example of the US government, which concentrates its small business policy in the Small Business Administration (SBA) and the small business set aside of federal government contracts. This seems to indicate a preference for the second type of small business policy (ie a policy for diversity in small businesses, or in support of new business governance forms, on which see here).

In the US, the current, government-wide procurement goal stipulates that at least 23% of all federal government contracting dollars should be awarded to small businesses. This figure is further broken down into additional targeted sub-goals for: Women Owned Small Business (5%), Small Disadvantaged Business (5%), Service Disabled Veteran Owned Small Business (3%) and Historically Underutilized Business Zones (HUBZone) (3%). Notably, none of these set asides are technology-innovation driven, but rather aim to support targeted social groups through a reverse discrimination approach in the award of public contracts.

It is also possible that what PM May had in mind is closer to a policy to provide support for technological innovation-driven small businesses, particularly as she said the review would look at how they could “increase its impact and give more innovators their first break”. 

This is a policy that, even without the industrial policy pressures related to Brexit and its surrounding negotiations and attempts of political capture by economic interest groups, other political parties are seeking to explore in other EU countries. For example, in Spain, a proposal to introduce set-asides of 3% of public contracts for 'legally certified innovative SMEs' was floated recently (see criticism by Dr Pedro Telles and myself here). Thus, a certain trend seems to be emerging in the area of innovation oriented industrial policy, which seems to be the early 21st century hype.

One of the main hurdles to the creation of small business set asides in EU countries derives from EU public procurement law itself, which simply bans this option. Further, the EU's negotiating position in international procurement treaties, and in particular in the WTO Government Procurement Agreement (GPA), have locked in an anti-SME set-aside policy approach (as discussed by K Dawar and M Skalova, 'The Evolution of EU Public Procurement Rules and its Interface with WTO: SME Promotion and Policy Space' in GS Ølykke & A Sanchez-Graells, Reformation or Deformation of the EU Public Procurement Rules (Elgar, 2016)]. 

For the UK, then, the prospect of Brexit may change the legal situation and open the door to an unrestricted 'innovative small business' set-aside policy. But this would only be possible provided the UK exited the single market and resiliated the EU's WTO GPA commitments and negotiating position regarding SME set-asides. This does not seem a likely, and indeed is not a desirable scenario, so the exploratory policy announcement made by PM May may well result in no relevant policy after all. In any case, and more importantly, before aiming to the develop such a policy, the UK would be well advised to think hard about this and try to gain a more sophisticated understanding of the US' system.

Far from the rosy picture painted by PM May and others, the US federal government's set-aside programme is permanently criticised for the opacity of its direct and indirect costs to the tax payer [very clearly, see [AG Sakallaris, ‘Questioning the Sacred Cow: Reexamining the Justifi cations for Small Business Set Asides’ (2006–2007) 36 Public Contract Law Journal 685; and K Loader, ‘The Challenge of Competitive Procurement: Value for Money versus Small Business Support’ (2007) 27 Public Money and Management 307].

The system has clear explicit costs in terms of its administration and the litigation ensuing classifications of businesses as small or not (or innovative or not) in the first place. Additionally, and simply put, the main implicit cost of a small business set-aside programme, be it for innovative enterprises or of a general nature, is that it reduces competition for public contracts, and the reduction of competition resulting from this artificial division of the market comes at a cost in terms of potential higher contract prices as well as reduced incentives for innovation for non-small businesses [generally, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) 60-77]. Thus, this is a very expensive system to run and, in a scenario of ever stronger competing pressures for public funds, legitimate questions can be raised about its desirability.

Moreover, already under the existing UK and EU rules, there are plenty opportunities to engage in a small business friendly management of public procurement without creating set aside programmes (see, for instance, the work of the Procurement of Innovation Platform). Providing better access to public procurement for small businesses has the advantage of making the process more accessible to all interested bidders and, in the end, has the potential of unlocking stronger competition for public contracts. This, of course, is also not a cost-free policy and it requires investment in training and skills in the public sector. However, this is bound to be a much more productive investment in the long run.

Overall, then, following PM May's announcement of the inclusion of government procurement in the innovation review, in my opinion, the best path to follow is to think seriously about how public procurement law can really be simplified and transformed in a way that benefits from technological development and with a view of closing the shortage of skills and human resources in the public sector. This is something that can and should be done independently of Brexit, and which can benefit every public procurement system (for my general ideas, see here). Conversely, starting a path of creation of set asides--and, more generally, the emerging policy of piecemeal deals to appease specific business interests--is only bound to leave the UK taxpayer worse off, Brexit or no Brexit (but particularly in the event of Brexit).