Last week, the UK government published the 2021/22 data on central government spend with SMEs (small and medium-sized enterprises). It showed spend going down slightly – but this sort of policy objective is notoriously difficult to turn into objectively good outcomes. Here is an abridged and relevant extract from the Procurement with Purpose book.
“Social Value” and Government Preferences
Many governments have introduced policies to support certain businesses because of their ownership, size or business location. In some countries, that is primarily aimed towards support for SMEs (small and medium enterprises). Another common initiative is for public bodies (or indeed private firms) to support buying from minority-owned firms, through setting targets or even quotas.
The reasons for such government policies are varied. Some argue it is to support worthwhile causes, such as helping military veterans get back into civilian life. Smaller firms might be seen as a group that can provide economic stimulus to the country. But the cynics might say that such moves are primarily about winning votes; from small business owners, veterans, women, or whichever group is being favoured.
The definition of what is included under the “minorities” heading varies. It might cover firms owned by people from ethnic groups, woman, disabled people or military veterans. Or organisations may wish to support local businesses, based on where the supplier operates from or head office location. That is a significant aspect of “social value” as used now in the public sector sense, as it is often a key driver for local government at city, state or regional level. In the post-pandemic world, with economies struggling for some time to come, there is likely to be more focus on that sort of approach.
However, there are questions and issues to be addressed here, at both strategic and operational level. In some cases, the strategy is clear, but execution has not lived up to expectations. Various governments in developing countries, for instance, have tried to give preference to suppliers owned by their own citizens, or to certain ethnic groups. But the results have not always been as hoped.
Perhaps the best-known global example is the key role public procurement plays in South Africa’s broad-based black economic empowerment (BBBEE) framework, aimed at reversing historic racial injustice and inequality. The US government also has policies in place to support a number of different types of businesses through “set-asides”, when contracts are reserved for certain firms. According to the US General Services Administration website, these are:[1]
· Women-Owned Small Businesses (WSOBs)
· Small Disadvantaged Businesses, also called 8(a) Small Businesses
· Historically Underutilized Business Zones (HUBZone) Small Businesses
· Service-Disabled Veteran-Owned Small Businesses (SDVOSB)
But there is limited evidence that these policies really deliver against the stated goals. In terms of South Africa, for instance, a 2019 paper[2] from Shai, Molefinyana and Quinot found that there is a significant “knowledge gap” that makes analysis of the outcomes difficult, and that “the intervention’s effectiveness has largely been undermined by various challenges and demonstrates that it remains unclear whether BBBEE’s observed achievements have translated into targeted impact of meaningful participation of all black people in the economy”.
Many consider that the policies have led to more corruption in that country, by muddying the waters when it comes to choosing suppliers to win government contracts. Certainly, South Africa’s economy has declined dramatically in recent years, with corruption a key element of that failure. If these policies around preference are not managed carefully, being seen as the right sort of business (and having the right contacts, of course) can become more important than your actual capability to do the work competently and at a fair price.
[1] https://www.gsa.gov/small-business/-become-a-gsa-vendor/explore-business-models/-setasides-and-special-interest-groups
[2] https://www.mdpi.com/2071-1050/11/24/7164/htm