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Public Procurement as a Tool to Stimulate Innovation: Science and Technology Report

Volume 730: debated on Tuesday 13 September 2011

Considered in Grand Committee

Moved by

That the Grand Committee do consider the first report of the Science and Technology Committee, Public Procurement as a Tool to Stimulate Innovation.

Relevant Document: Public Procurement as a Tool to Stimulate Innovation (1st Report, HL Paper 148).

My Lords, I thank the members of the Science and Technology Select Committee for their excellent contributions to this inquiry and to the report. I also thank our specialist adviser, Dr Paul Nightingale, for his valuable expert advice. My aim in introducing the debate is to give noble Lords an overview of the nature of the inquiry and some of our principal findings. I am sure that others will consider particular aspects of the topic in more detail.

I thank the Minister for the Government’s response to our report, and later I will refer to some of the key points in this response. First, let me be clear about definitions. According to the Merriam-Webster dictionary, “to procure” has two definitions: first, to obtain by particular care and effort; secondly, to get and make available for promiscuous sexual intercourse. To avoid doubt, our inquiry concerns itself with the former definition.

By the word “innovation” in our inquiry, we mean the stimulation and exploitation of new ideas. This could encompass a novel application of an existing idea; a novel product, process or system; or the successful translation of an idea from elsewhere. An example of that last form of innovation is the Oyster card, which was successfully introduced into London’s transport system in 2003, but was based on the concept developed in Hong Kong with the Octopus card and in Singapore with its EZ-Link card.

In 2009-10, the UK public sector spent £236 billion, approximately one-seventh of GDP, on buying goods and services. It is the largest single customer in the country. The focus of our inquiry was simply this: do the Government and other public sector bodies use this massive purchasing muscle to drive innovation? Why should they? We saw two potential benefits of seeking innovative solutions in public procurement. First, it could lead to better solutions and better value for money for the public. Secondly, and not incompatibly with the first, it could stimulate innovation among UK businesses. This latter point is echoed in a very recent survey of 368 companies by Logica, which recommends,

“the introduction of a policy under which public sector contracts are awarded only to companies that demonstrate a commitment to the principles of open innovation and foster a collaborative approach with small businesses and academia”.

While we recognise that much procurement is routine and simply involves reordering the same product or service as last time, there are situations, perhaps many, in which an innovative solution to a problem is better. However, from the evidence we heard we concluded that all too often those responsible for public procurement take the tried and tested route as the default. We are by no means the first to look into this question. For example, in 2009 the Business and Enterprise Select Committee in another place and the National Audit Office both concluded that the Government could do better. The NAO said:

“Only a few departments have strategies which show that they understand where they need innovation or how to encourage and support it”.

It is not that there is a shortage of government reports relating to the question of procurement and innovation—in fact, plenty of trees have been chopped down to write about it—but the evidence we received showed that the writing has not led to action. I shall mention just a few of these reports. One is Transforming Government Procurement, published in 2007. Another is The Race to the Top, the excellent report by the noble Lord, Lord Sainsbury, also published in 2007. I quote his conclusion:

“Government departments can play an important role in stimulating innovation in the companies with which they interact, but in the absence of a clear directive and adequate resources, they are failing to meet the challenge”.

Innovation Nation, a report published in 2008, said:

“In some specific areas, government can provide more direct support using regulation, public procurement and public services to shape the market for innovative solutions”.

These reports and others have led to the establishment of specific initiatives to help to stimulate innovation, including notably the Technology Strategy Board and the Small Business Research Initiative. However, we noted that these initiatives account for only a tiny fraction—around 0.1 per cent—of the public procurement budget. We are urging that, where appropriate, innovative solutions should be embedded into the mainstream of public procurement and not sidelined into specific initiatives. We found no convincing evidence that the various reports, a small selection of which I have referred to, have led to a systematic and coherent change of culture among civil servants and others responsible for public procurement. In fact, as so often seems to happen in this country, excellent reports are placed in the filing cabinet with the “Job done” box ticked.

From our inquiry, we concluded that three important changes are needed. First, there needs to be stronger overall leadership from Ministers. We recommended that one Minister should have overall accountability across government for innovation in procurement, rather than the present split between BIS and the Cabinet Office. BIS has responsibility for innovation policy, while the Cabinet Office—particularly the Efficiency and Reform Group—deals with procurement policy, with an emphasis on streamlining processes and securing value for money. Although we were told that the Cabinet Office recognises that innovation is not an alternative to value for money, we would like to be convinced that this is properly understood by decision-makers and those responsible at all levels. We also recommended that within departments there should be a lead Minister with responsibility for innovation and procurement. That is the first thing that we felt needed to change.

Secondly, there needs to be a better link within departments between the research base—both in academia and industry—and civil servants, so that those responsible for procurement know about the whole range of potential technologies and solutions and are able to act as intelligent customers. We recommend that departmental chief scientific advisers should play a role in improving these linkages with the research base in academia and industry. We also recommend that chief scientific advisers, in improving the “intelligent customer” capability of departments, should help in horizon-scanning to anticipate long-term implications of procurement.

The Foresight programme in the Government Office for Science could play a role here in highlighting longer-term issues. To give an example, the director of group procurement at Transport for London told us that TfL’s long-term time horizon was about 20 years, which implied that procurement decisions that it made would not take into account the effects of, for example, climate change. This is an extraordinary situation, if true, for a procurer of infrastructure that may last for a century or more. Although TfL told us later that the evidence it had originally given us was incorrect, the mere fact that there was a lack of clarity within the organisation does not inspire confidence that long-term thinking is a priority in its procurement decisions. That is our second point.

Our third general point is to do with the culture of risk aversion. It is a long-standing fact, recognised in many commentaries and reports, that those responsible for public procurement are risk averse. You can see why; when a major procurement project goes wrong, people are blamed. This reinforces the view that taking risks is a bad thing. However, properly managed risk-taking, with proper intelligence to back it up, is not necessarily bad; it could be good.

The changes to which I have referred—the three points—refer primarily to central government departments. However, we must bear in mind that, as the report makes clear, most public procurement is carried out by other public bodies. There is a further crucial challenge of how to embed the changes to which I have referred in other organisations that procure goods and services.

Although the report is concerned with procurement across the public sector, we looked in more detail at the Department for Transport. Here there was bad news and good news. The bad news was that the divisional manager of procurement policy and contracts in the Department for Transport told us that the department lacked an overarching strategy for innovation in procurement. This was a view echoed by Happold Consulting. I very much hope that by now this has been rectified.

However, we also heard good news from the Department for Transport—good examples of innovation in procurement. For example, Professor Brian Collins, who was then the departmental chief scientific adviser, told us how he had facilitated the translation of new research funded by the EPSRC into the procurement for the Thameslink project, and that this new technology and innovation would improve the flow of passengers on and off trains. This example underscores our point that the departmental chief scientific advisers could play an important role. Professor Collins, because of his connections to the research world, knew who was doing relevant work and saw how it could be applied. Knowing who and what to ask is a key element of being an intelligent customer.

The Highways Agency also gave us some good examples of its incorporation of innovative solutions, including the variable speed limit system to manage congestion. It is now not only implemented in 35 schemes in the United Kingdom but implemented and sold abroad. I hope that the Minister will explain how good examples such as these are now being taken as a lead for others to follow, and what is being done to embed this kind of thinking throughout government departments and the wider public sector.

We also heard that one important obstacle to potential suppliers of innovative solutions are the cumbersome and bureaucratic processes for public procurement. Therefore, we were pleased to hear from the Minister for the Cabinet Office that the Efficiency and Reform Group is determined to simplify the procedures. However, that group is concerned with central government spend, which, as I have mentioned, accounts for only a fraction of total public sector procurement. It was not clear to us how the benefits of its reforms will be cascaded out to other public bodies. Nor was this clarified in the Government’s response to our reports. I hope the Minister will develop this a little further.

The Government’s response to the report welcomed many of the report’s recommendations and pointed to certain changes that have already been implemented—for example, the appointment of Crown representatives to lead strategic discussions with potential suppliers and thereby, we hope, foster innovative solutions in public procurement. I do not intend to go through the Government’s response in detail, but I shall mention a few key points. The potentially positive changes highlighted in the response include improved training for those involved in procurement and the use of outcome-based specifications. We welcome these changes. However, there are also disappointing aspects to the Government’s response, including their rejection of our recommendation of a single Minister in overall charge of innovation and procurement across departments.

The response also places a great deal of emphasis on the small-scale initiatives to which I referred, rather than on mainstreaming innovation thinking throughout the public sector. I would like the Minister to assure us that the Government intend to mainstream innovation thinking in procurement, not to rely solely on small and as yet unproven initiatives such as the small business research initiative. The response is also somewhat evasive on the question of how local authorities and other arm's-length bodies in general, often short of the relevant expertise, can become more expert in procuring innovative solutions. In fact, the government response deals almost entirely with central government procurement. I ask the Minister for more detail on how she feels that innovation in other parts of the public sector will be fostered. There was also, in my view, not enough to reassure the committee that departmental chief scientific advisers will, as we recommend, play a more central role in building an “intelligent customer” capability in departments. Finally, I felt that the response focused very much on value for money and did not state clearly how innovation can contribute to the objective of achieving value for money for the public sector.

The Science and Technology Committee has said that it will return to this topic in the next 12 to 18 months to find out whether anything has changed. Among other things, we will be looking for measurable indicators that the Government have indeed embedded the culture of innovation into public procurement not only in central departments but elsewhere in the public sector. It would be interesting to hear from the Minister whether the Government have ideas about indicators that they may use to assess their own progress.

It would also be good, when we return to this topic, to hear of success stories. We found it difficult to dig out good success stories of innovation in public procurement. One that was highlighted to us in the Government’s submission was the recyclable mattress in the HM Prison Service, saving £5 million over the life of the contract. I am sure your Lordships will be most relieved that those serving custodial sentences are benefiting in that way from innovative public procurement, but I hope that when we next examine the topic there will be even more inspiring examples of innovation in public procurement. I beg to move.

My Lords, let me be the first to congratulate the noble Lord, Lord Krebs, and the committee on a fascinating report that highlights some important issues of public policy. I was particularly glad to hear that his committee intends to return to the issue to see what progress has been made, so that the report does not end up as a doorstop in some department in Whitehall.

I was not a member of the committee, so I was somewhat surprised to find myself chosen first on the speakers list. I normally skulk in decent obscurity some way down, but here I am blinking in the sunlight. I begin by declaring an interest. I am chairman of a private equity firm. I have spent most of my life in the City helping to fund businesses engaged in innovation, much of which has involved work, collaboration and frustration with government departments. Last year, I chaired for the Government a task force looking into the regulatory burdens that affect small voluntary groups and charities. These are groups that offer innovative solutions to some of the most intractable problems in our society: what is known in the trade as the hard to reach 5 or 10 per cent. When we set up our committee, we asked the sector for evidence. We had more than 600 pieces of evidence, many of which are produced and referred to in our report, entitled Unshackling Good Neighbours, but a lot of the issues to which the noble Lord and his committee refer in the report are replicated from those real-life examples.

I shall focus my remarks on three areas: first, the risk aversion issue that the noble Lord, Lord Krebs, referred to; secondly, the section of the report concerned with prescriptive and burdensome procurement processes; and, finally, the need to make sure we safeguard our intellectual property properly.

While it is certainly true that risk aversion is present in the Civil Service, it is quite widespread in our society as a whole. Many years ago I attended an American university. My professor was a great anglophile. He said, “One of the great problems is that, in the US, a new idea is innocent until proved guilty. In your country, it is guilty until proved innocent.” We are inclined to say we must work with what is tried and established, and that has run through the warp and weft of our society.

A great German friend of mine who runs a private equity firm in Germany talked to me about the Millennium Dome. I do not want to talk about what went on inside the Dome, but the Dome itself was a very interesting piece of engineering, a wonderful structure. He said, “If this was Germany, we would have articles in the press about how German technology was leading the world, and how this was going to show how German innovation was there, thrusting and showing the way. What did I read in the UK? Endless articles about what a waste of time it was, how hopeless it was, how awful it was and how it cost more than expected”. As the noble Lord, Lord Krebs said, we find it hard to celebrate success.

We heard many debates on the Dome in the House of Lords. Many speeches came from the noble Lord’s side of the House criticising the Dome. Not a single speaker mentioned the technology. I was delighted by the noble Lord’s point.

I am not quite sure whether that was a pat on the back or a slap in the face. I will take it as a pat on the back.

As I said, we find it hard to celebrate success, and we will, by some behavioural brilliance, have to nudge the public into getting a different view about success and innovation. It is, of course, needed in the Civil Service. My second point is therefore about procurement processes, particularly as they affect SMEs—some charitable, some commercial—whether they operate at local or central government level. If I go into some detail, I make no apology, because this is about hard yards. We can make general statements about how to do this, that or the other, but we have to find the problem and unpick it inch by inch. That is how we will make progress.

I have four or five things I would like to get on the record for my noble friend and her Department to consider. The first is what is known as the use of pre-qualification questionnaires. These are what you have to fill in before you can go to the tender process. Some of them are hugely lengthy and involve 150 questions. None of them are ever the same, so if you are an SME dealing with different parts of government—local or national—you will have to fill in different PQQs. No attempt is made to collect information that is available to the public at Companies House and so on. These small companies and voluntary groups have to go through a process of filling in these forms for very little benefit. I hope that the Government can abandon their use. If PQQs have to be used, they should be in a standard format, so that once you have filled one in you have completed the lot.

The second issue to consider is the use of multiple tenders. Of course there is a need to safeguard and obtain value for money, but if, to safeguard your position as a commissioner, you ask for 12 tenders, 11 will lose, so the economic friction and inefficiency arising from this is very great indeed.

The third issue is that of proportionate costs for tendering and for monitoring. Very often small contracts are let. The contract documents can be as thick as a small telephone book, and the contract is worth £50,000 or £100,000. There should be yardsticks to measure the value of contracts and their tender and monitoring costs.

Local or central government should set the measurement for success and not change it during the contract. Too often, half way through the contract, the way in which success is to be measured is changed. That is extremely difficult for a small or medium-sized company.

Then there is the question of scale. Where the Government cannot work with an individual company because it is too small and they have to work through a major contractor, there need to be clear guidelines whereby the main contractor shares the risk and rewards with the subcontractor. Too often the subcontractor takes the risk and the main contractor takes the reward.

There is a final thing to consider. Worst of all is when trying to get yourself as a small charity into the tender list, and the commissioner says to you, “Now, just tell me how you’re going to do this. Tell me your innovative leading-edge idea”. The company takes a lot of time and trouble to do that but then finds that all its ideas have been put in the tender document, so all its work and innovation have been lost because everyone is competing on the same basis as it is. Since a large company can probably offer this at a similar or even lower price, the halo effect means that all the work and innovation done by the small group is lost; everyone is able to quote using the work that it has already put into the work. There are some important issues to be dealt with there, and they can be followed through specifically if the Government have the grit and determination to force that through across Whitehall.

Thirdly, I would like to talk about the safeguarding and the value of intellectual property, which is referred to in the report of the noble Lord, Lord Krebs, as the effective engagement between procurers, suppliers and academia. There are some very distinguished academics here today so I know I am treading on thin ice here, but I am afraid that I am far from convinced that universities are using our public funding effectively. I have a specific example, which the Minister has some knowledge of because I have put down Parliamentary Questions about it: the University of Manchester and the development of graphene. What is graphene? I quote from a BBC article entitled, “Is graphene a miracle material?”:

“Our research establishes graphene as the strongest material ever measured, some 200 times stronger than structural steel … It would take an elephant, balanced on a pencil, to break through a sheet of graphene the thickness of … cling film”.

Graphene was developed at the University of Manchester by two gentlemen, Mr André Geim and Mr Konstantin Novoselov, and they won the Nobel Prize for that work. According to a Parliamentary Answer, they used funding provided by the Engineering and Physical Sciences Research Council. I understand, on good authority, that the University of Manchester authorities failed to take out patents on graphene before Messrs Geim and Novoselov published their paper, and of course once it was published any IP value was lost. If the two gentlemen had funded that research themselves, that would be fair enough. I would quite understand that, it was their work, but they did not. They funded it at the expense of us, the taxpayer, so either the University of Manchester authorities were so maladroit that they did not know what was going on, or they were incompetent in funding the research without an appropriate IP protection clause in the contract.

When you look further into the BBC article, you will see that graphene was picked up quite speedily in the Far East. It talks about the work being done in Korea by Samsung, which is now working on the research:

“(Samsung has its) own roadmap where they believe there will be a dozen products (on the commercial market) using graphene in the next five years”.

Far from graphene being exploited and used for the benefit of the UK taxpayer, the science base or indeed UK industry, it is now being exploited in Korea.

I would be delighted to be told that I have got this completely wrong, but my source is a pretty reliable one. I am not asking the Minister to answer this today, but I hope that when she goes back to the department she will have a real drains-up investigation into this and other cases that I have heard of, of which this is the most blatant.

I would like to end as I began. This is a fascinating report. Stating the problem is the easy bit; correcting it will be more challenging. I look forward to my noble friend’s reply and to hearing the follow-up report from the committee of the noble Lord, Lord Krebs, in 12 months’ time.

My Lords, I, too, congratulate the noble Lord, Lord Krebs, on this report. I also welcome the remarks of the noble Lord, Lord Hodgson, with which I agree entirely. I believe the story was that the noble Lord, Lord Sainsbury, made an effort to publicise the Dome and contact was made with the Institution of Structural Engineers. It said, “We don’t publicise our work, it’s all team work”. Enough said.

I have been interested in this topic since I was an academic working on government and industrial contracts, and consulting. Then I was chief executive of the Met Office, a government agency in what was the MoD. There, we were spending more than £20 million a year on advanced technology such as satellites, computers and radar. I think it pretty fair to say that for 100 years the Met Office has adopted new technology, often quite controversially, which is what has kept it in the lead, and it provides excellent services to the UK. The history of the Met Office has been published this year by Cambridge University Press, so you can read all about it. As chief executive of the Met Office, I had no mandate to use its purchasing power to support UK industry—a point made to me over and over again—unlike, interestingly enough, the MoD, which has always taken this into account in developing its relationships with industry on a long-term basis.

Thus, in the 1990s and in the last decade, both under a Tory Government and a Labour Government, the UK participated in the very important and large geostationary satellites, MSG2 and MSG3, which were huge programmes. We made significant financial contributions, but there was no participation by UK industry because we did not spend the extra amount under these curious arrangements to get the juste retour. However, the BNSC will tell you that despite that Logica did a very good job in getting work on the software side. Nevertheless, we in UK industry did not benefit from this.

Even sadder is the fact that weather radars, which are extremely important for weather, used to be built in the UK but are no longer. There was no mandate by the head of the Met Office to do that. That is completely different in other countries. If you run the Météo-France, Deutscher Wetterdienst or the National Weather Service, your job is in part to help the industries in your country.

I raised this idea at a big meeting of 150 chief executives of government agencies to a Tory Minister. First, he said, “I really appreciate government agencies working in the community—village fetes, Sunday afternoon, that kind of stuff”. I said, “We have in mind something rather different, the importance of UK industry”. The Minister replied, after being pressed privately, “That is the sort of thing they do in France”. Quite so, and we should be doing it in the UK. They do it in other countries. The United States, the great apostle of private enterprise, uses its government agencies extremely strongly, not only in promoting technology but in software, know-how, commerce, law, et cetera.

The other important point, which this report might have overlooked and the Government seem to overlook, is that if you make sure UK know-how is used abroad, that will enable us to use it in the UK. We are an international world now. We cannot just do our own thing. If the advances are happening abroad, we are going to import them. An intelligent programme has to be international by government departments. An example of this is the UK Government and private sector developing world-leading software for air pollution modelling, especially in cities. The private sector includes the SME of which I am chairman. We set it up 25 years ago. This provides street-by-street forecasts, which are sent by SMS and the internet to identified individuals to enable them to take appropriate measures. It is interesting that this product development was highlighted by the Cabinet Office in January this year as being the most significant demonstration of the use of software and data science in the UK.

For a Tory Government, it was surprising that there was no mention of the private sector in the public statement, nor of the company that was doing much of the work. However, this innovation might feature next time around in the good list of the noble Lord, Lord Krebs. The innovation should lead to significant savings to the National Health Service. As we know, 20,000 or 30,000 people die prematurely each year from air pollution. The Health Protection Agency, which, I am glad to say, will now survive, is working to ensure that these data are available every day during the Olympic Games.

This brings me to the point that the Government should promote not only intelligent procurement but its adoption internationally. The United States Environmental Protection Agency has an office in Beijing to provide United States science and technology consultancy to China. The Environment Agency is forbidden by Defra from any overseas promotion of environmental science and technology. The same applies to water technology. By contrast, the Netherlands and Denmark, which now lead in water technology in a way in which the UK used to, benefit hugely from significant programmes in their countries and abroad. The result of such negativity is that the UK’s strengths will steadily diminish in many areas of technology. Root and branch change is required. Foreign businesses have often commented that they are astonished that UK companies survive at all and that they must be jolly good, given the policies of the UK Government.

However, I am pleased to end on an upbeat note. There is now a government web page describing many private sector projects and consultancies. Perhaps it will do more to highlight technological innovation. My recommendations are as follows. Big innovation should be international at the European level, through collaborative projects and in promoting UK developments. There must be supporting research by government departments in considering their long-range investment. There should be small but steady investment in, for example, government laboratories, as there is in the Netherlands, which has had a huge global impact in water technology. Finally, we need to introduce intelligent procurement to the job descriptions of senior officials and agencies. I hope that in future the relevant official for the Met Office will have that as the first or second point in his or her job description.

My Lords, I am a member of the Science and Technology Select Committee. I pay tribute to the leadership of the noble Lord, Lord Krebs, which has produced an absolutely excellent report.

There is an inescapable logic that, with public sector spending of more than £236 billion a year on goods and services, the Government have a unique opportunity to use their procurement to drive innovation, cut costs, improve services and develop new technologies, which will in turn generate economic growth. The power of state procurement has long been recognised across the globe. Entrepreneurs, merchants, industrialists and venture capitalists have sought government contracts as a fail-safe way of sustaining their own economic performance, as well as enhancing the quality of services or goods offered to the public. However, the perception for generations, rightly or wrongly, has been that centralised public sector procurement led to overpricing and a lack of quality, imagination and innovation. This in part fuelled the privatisation and decentralisation of public sector suppliers by the Conservative Government in particular and, indeed, the previous Labour Government.

Despite these changes, inefficiencies and lack of innovation in UK public sector procurement are well documented, with the MoD a prime culprit, followed closely by big-spending departments such as health and transport. What is more, the process favours large organisations that can afford to understand and comply with the often highly bureaucratic and overly expensive procurement processes and compliance procedures. Large suppliers in turn often hold undue power over procurers. The current state of the economy should not only drive innovation in procurement but offer huge incentives to private sector companies, not simply to bid for new contracts but to bring new ideas, technologies and systems to the attention of public sector procurement officers. Our report saw some evidence of openness to allowing SMEs to bring new ideas to departments, particularly in the MoD and the Department of Health. However, we saw precious little evidence that this was part of a wide-scale procurement culture.

The debate about procurement driving innovation is hardly new. As the noble Lord, Lord Krebs, said, the previous Government regularly returned to the theme of The Race to the Top. The innovation White Papers were major pieces of work. Shortly before the previous election, a very readable pamphlet about driving innovation through public procurement was produced by the noble Lord, Lord Drayson, then the Minister for Science, and Ian Pearson, the Economic Secretary to the Treasury. If you read the introduction to that pamphlet, the words are exactly the same as those used by civil servants in response to the committee’s report.

Following all that work by the previous Government to try to link innovation and procurement, it is hugely disappointing that our report should have reflected that but, sadly, simply reflected opportunities lost. As Colin Cram, the managing director of Marc1 Ltd, a witness to our inquiry, said, the response is weak and effectively confirms that there is no coherent use of public procurement as a tool to stimulate innovation, either in central government or the wider public sector, nor any intention to do so. That is a damning indictment of where we are. Indeed, even Iain Gray, the chief executive of the TSB, admitted to the committee that the use of government procurement to stimulate innovation was a “patchy picture” and, considering the sums involved,

“there is a lot more that could be done”.

Our conclusion that the fault lay entirely at the door of government was, for me, summed up by the decision to abandon the departmental innovation procurement plans put in at the end of the last Parliament. The IPPs were abandoned not because they were not valuable but because they were variable in quality, with some relatively strong but others rather weak. So why, I ask, were the strong performers, such as the MoD and the Department of Health, not used as the standard to drive up the quality rather than abandon any sort of performance measure? The answer appears to be that no one in government, then or now, is a driving this agenda. That is exactly why the Select Committee proposed that a Minister should have responsibility for linking procurement and innovation agendas and that each department should have a Minister in charge of the overall policy. Our recommendation was dismissed, largely because the innovation is seen by many in government merely as a tool to drive down cost and create efficiencies to address budget reductions. It is about incremental change and it is about avoiding risk.

There is nothing wrong with risk avoidance, as our report states, but the sad thing is that innovation is not seen as a tool to do things radically differently, to introduce quantum change, to drive new technologies, and to create new markets and, hence, new income streams. In fact, innovation that strays beyond cost-cutting and efficiency is seen as risky. However, sadly, without taking risks, innovation simply cannot flourish.

When Sir Martin Sweeting decided to abandon the orthodox wisdom about satellite technologies, he did not simply look to lower costs; he revolutionised the concept of large expensive-to-launch satellites by building small satellites and delivering them in clusters on the back of someone else’s rocket. Surrey Satellite Technology is now the world’s largest producer of small satellite technology with a global order book, although sadly no longer in UK ownership.

The UK has the same potential in areas of genomics, bioinformatics, stem cell technologies, energy, nanoscience and, as we have heard, graphene materials science. However, I have to say to my noble friend that the fault lay not with Manchester University and the scientists but entirely with the venture capitalists, who in this country seem to be incapable of picking up those ideas and running with them. You have to have two to tango. We saw exactly the same with plastic electronics, which were taken from Cambridge University and sold to Korea, Germany and the United States rather than developed here. We are not short of brilliant ideas but we need to turn more of those ideas into world-beating products.

Crucially, the same innovative process that created the iPod, the Dyson cleaner or the robotics used in satellites needs to be brought to the development of our infrastructure in transport, power generation and communications, and the Government are ideally placed to drive that process. Procurement without innovation should be a barrier to government contracts and not, as is so often the case, a safe option. Indeed, it is this attitude of risk aversion that has seen a huge drop-off in private sector interest in innovation, according, as we have heard, to recent surveys by Logica, the computer software company. Simply making it a condition of contract that innovation has to be shown to be present would make a huge difference to the way in which SMEs approached the whole business of getting procurement contracts. Indeed, as Birmingham Science City said to the committee,

“public sector procurement needs to be transformed so that the public sector encourages suppliers to think the unthinkable”.

Before the Minister jumps into the Thames in desperation this afternoon, I should say that there are some encouraging signs that indeed all is not quite lost. In fact, the Government's response to our report was more encouraging than the evidence they gave us. The TSB appears to be working well, the investment in new technology and innovation centres is hugely welcomed—as are the phones that are ringing in the Room at the moment—and the SBRI initiative has demonstrated real potential. However, these are extremely small initiatives that are dwarfed by what is happening in the US, Germany and France, not to mention China, India and Brazil. The SBRI, which is supposed to drive new departmental initiatives, has only really been taken up by the Department of Health and the MoD, and with a total spend of a mere £41 million represents 0.008 per cent of total public sector procurement—hardly the big idea that will change departmental procurement processes.

As for the much heralded technology and innovation centres, the TSB has a mere £200 million to establish them before they are expected to become self-sufficient. Only £20 million for each centre is hardly enough to burn huge lights in the sky. That is why a more imaginative use of the massive public sector procurement budget must be rethought. A 0.5 per cent innovation procurement levy would inject over £1 billion into the process without departments losing money, and would have the potential to draw private sector capital into the process without having to create new structures.

The Government, individual departments or NDPBs could use part of a procurement innovation levy to sponsor high-profile competitions to solve specific challenges relating to procurement or the delivery of new services—not a loss of money, just a refocusing of existing resources. The Longitude Act 1714 created a prize fund to solve the difficulty of plotting where ships were when at sea, so why not take that idea and use the TSB as a vehicle for sponsoring high-profile innovation, with prizes from a procurement levy?

Finally, the Government have rightly recognised that without a cadre of well qualified and appropriately trained procurement specialists the public sector cannot act as an intelligent customer. The capability programme set up by the Cabinet Office is welcome. The licence to operate, to source, to supply and to contract and manage are sound developments, but we must guard against window dressing that gives the appearance of activity.

The innovation launch pad is yet another good idea, but of the 300 suppliers who entered the first innovation launch pad initiative, we are down to a shortlist of some nine companies, and at the end no one is guaranteed a contract. Given the huge amount of work that goes into the process, I doubt whether many will ever return. The same criticism could be levelled at the advent of Crown representatives, which, again, is an excellent one-stop initiative aimed at bringing coherence to common procurement processes. However, given that these posts are in addition to all other duties, I fear that once again it will be the lower-level civil servants who will do the bulk of the work and who are notoriously risk averse.

Conspicuously absent from the Government's response is a key role for CSAs. Our report emphasised the importance of the CSA being part of the procurement process, particularly at an early stage where the assessment of innovative ideas or products and links with academia are absolutely essential. However, it is more important that the departmental chief scientific advisers should interface with the science, engineering and technology communities to encourage innovative ideas, such as graphene, that are coming through and that can be brought to people’s attention and used.

While CSAs continue to have a role, it is far from the prominent role that the Select Committee envisaged, and yet again sends out the signal that the end is in sight for departmental CSAs, as the Government sideline their important independent challenge function. Nowhere could this be more apparent than in the Minister's own department, which has no CSA at present and appears to have little urgency about replacing the excellent Professor Collins, who was ideally suited to the role the committee envisaged. A similar tale can be told across government, with vacancies in DCMS, the Cabinet Office, the Department for Transport and in key departments such as the Treasury, the Department for Education. “CSA” is little more than an add-on title to their current job descriptions. The committee will return to this issue in a forthcoming inquiry.

This has been a far more useful inquiry than I thought it would be when I was faced with the evidence. The Government have given a robust response and promised significant changes, and I am sure the Minister will deliver. As a Lib Dem, I am ever an optimist.

My Lords, I congratulate the noble Lord, Lord Krebs, and his distinguished committee on this most important report. It could not have been more timely and we would do well to treat its recommendations with great urgency. I begin by declaring my own interests. Until last year I was chief executive of NESTA. I still serve on the governing board of the TSB but, perhaps most pertinent to this report, I am now the chief executive of Lord Rothschild’s family investment interests—a large and imaginative investor in UK technology businesses.

What we all learnt from this report is the increasing consensus that Governments around the world see innovation as the key component to economic growth, and they have pledged, as has our Government, to shape public policies accordingly. Therefore, right at the outset, the report conclusively debunks the sterile argument that when it comes to innovation you have two policy choices, either a constant flurry of well intentioned interventions or staying firmly out of the way.

As noble Lords have remarked, we should consider the United States. The conventional wisdom is that, in the US, government does best when it is invisible. Yet procurement was the major factor in the growth and development of Silicon Valley. Military spending funded that generation of microwave technology companies, which were a mainstay of the region before the semiconductor industry arrived. It is no exaggeration that whether it is the GPS navigation system that we all use or internet protocol technology, the public procurement of technology has been the basis of some of the most transformational global innovations of recent decades.

The noble Lord, Lord Krebs, covered the ground thoroughly, but with his permission I should like to emphasise two points. The first relates to intelligent customers. The report speaks convincingly of government as an intelligent customer, and from my perspective as an investor, and an investor in technology, I wish to stress how vital these intelligent demanding customers can be in transforming the opportunities for small entrepreneurial companies in particular—companies that at a time such as this will be the absolute lifeblood of recovery. Intelligent customers, as the TSB evidenced in the report, allow procurement to be the vehicle in which companies—technology companies in particular—can step up to the task of solving major national challenges. Surely, government departments must increasingly frame their procurement needs as challenges for small businesses to solve, rather than as bureaucratic hoops to jump through.

The noble Lord, Lord Willis, referred to the SBRI scheme as an example, and I am sure he is right in suggesting that progress is being made. It is worth noting NESTA’s evaluation of the SBRI since its relaunch in 2008: that it is beginning to deliver on its potential to provide clever new solutions for government that generate business opportunities for private sector innovators. That is certainly encouraging. I cannot help thinking that to build on this we might want to focus on one or two areas of real scale that could have great and lasting impact that would generate evidence for others and encourage imitation. NESTA has spoken of a centre of excellence for innovative procurement, and that is certainly something worth considering.

I should also welcome the Minister’s views on the issue of focus. Most obviously, the lead candidate for focus is the prospect of the NHS—an enormous customer. As a potential lead and intelligent customer, the NHS would perhaps have a strong mandate to work with the TSB. That would surely provide the health service with a real way to drive innovative solutions to healthcare challenges.

The second point that I wanted to emphasise was that of leadership. I am concerned at how such a dramatic cultural shift that the report encourages can genuinely get embedded in the procurement system without the strongest of directives and—I know they are not fashionable these days—central directives. We know that there are insufficient incentives within the system to reward the intelligent customer. We therefore seem increasingly dependent on dynamic leadership, either in government departments or in the public sector, informally to influence customer behaviour. I shall give an example, which of course can work.

Only yesterday evening in preparation for this debate, I met the winners of the Times national procurement award. The winner was an institution very close to the Minister’s heart, Plymouth University, which won the national procurement award. When I met its representatives, they told me an inspiring story of how Plymouth University, working with the city council, while not compromising on standards or value for money, transformed the prospects for innovative entrepreneurial technology companies bidding for public sector contracts. As I listened, I understood that yes, there was procurement expertise in the exercise and greater simplification—all the formulas were there—but ultimately it was driven, cajoled and inspired by the institution’s dynamic leadership, who would not take no for an answer.

So what is the point? The point is that such leadership is not always widely distributed across this field, so I respectfully ask the Minister: where appropriate departmental leadership is absent or where civil service incentives to procure intelligently are inadequate, how will the procurement revolution be driven? How will this cultural change genuinely take root? I cannot help thinking that this is an instance where the laudable aims of localism need a little more than a gentle steer.

My Lords, I intervene briefly to re-emphasise the importance of the report and to hope that the Government will return to the recommendations as they develop what they promise will be a significant programme of reform.

I, too, pay tribute to the noble Lord, Lord Krebs, and his eminent committee for the robust, trenchant and fearless way in which they have approached this vital issue. “Fearless” may seem an odd word to use, but many reports over the years have tried to persuade successive Governments to take this subject seriously. In this report, there are recommendations that the Government may find inconvenient but which in my view go to the heart of the problem. That is why I urge the Government to keep these recommendations in mind, even if, as their response suggests, they do not all find immediate favour.

The Government’s response to the report has some very encouraging aspirations and sentiments, but I feel that it does not yet grasp the magnitude of the persuasion, mindset change and culture shocks that will be needed to change a decades-old approach. I recall being part of the government technology foresight programme discussions, some years ago now, which started with such promise and with the engagement of commercial, industrial and small business interests. The programme had some really good outcomes and certainly encouraged a better understanding of government decision-making processes, but it would be difficult to argue that it produced the significant departmental engagement in the use of new technologies and processes that had been hoped for.

I do not think it is possible to exaggerate the importance of the report’s main themes: that a clear vision for publicly funded projects can have a huge influence on the behaviour of both purchasers and providers, and that embracing innovative ideas and processes must be embedded in the minds of all those involved in government procurement projects.

I should explain that my interest in this area stems from my involvement with the university sector and its role in developing innovative ideas, in both science and the humanities, that could aid our country’s development and prosperity. The university sector was particularly encouraged by the 2007 report of the noble Lord, Lord Sainsbury, The Race to the Top, to which the Science and Technology report refers, which showed that there had been a dramatic increase in knowledge transfer from all universities and that UK universities’ performance in this area now compares to the United States. I do not know the example used by the noble Lord, Lord Hodgson, of universities and intellectual property. I can say only that the usual criticism of universities is that they are far too ferocious in their protection of intellectual property.

I saw the previous Government’s investment in its Ten Year Science and Innovation Framework as part of its procurement framework, albeit on the supply side. On the demand said, I applauded the Sainsbury report’s encouragement of the use of departmental R&D budgets to support innovation and to harness the power of government spending to create demand for innovative products and services. However, as I know David Willetts, the Minister for Universities and Science in another place, recognises, building productive links, particularly with small and medium-sized enterprises, is problematic for universities, just as it has proved challenging for government departments in their purchasing processes to engage effectively with myriad small enterprises.

I noted that the Government in their response to the report take head-on the committee’s finding that there is conflicting evidence of the contribution of SMEs in promoting innovation. The Government clearly continue to see the engagement of SMEs as crucial, but it would be helpful to hear from the Minister what new initiatives are planned to make this happen. I certainly agree with the Government’s view that departments will need to use more open procurement methods to drive up competition. They will need to engage with industry much earlier in the procurement process, and they will need to specify the outcomes and outputs rather than the product that they believe they want to buy. I hope that the Minister will explain in more detail how that is to be achieved.

I said I wanted to be brief. I refer to two recommendations in the report to which the Government in their response have given a rather dusty answer. The report recommends that a Minister should be responsible for both procurement and innovation. The Minister would formulate a national framework and would be accountable for how well procurement decisions are made. It further recommends that there should be a lead Minister in each government department with these specific responsibilities in order to create a high-level network across government. Although I appreciate the Government’s argument that the Minister for the Cabinet Office has responsibility for central government procurement policy and that each department’s procurement activity is subject to ministerial oversight, I am tempted to say, “It was ever thus”, and therein lies the problem. Something more radical is needed. The same arguments were applied to the approach to science in government departments, and I do not think that anyone doubts the change in attitude that has followed the creation of the chief scientist post to drive the agenda, together with a senior scientific adviser in each department.

The committee of the noble Lord, Lord Krebs, has tackled a long-standing problem. It has taken advice from a range of well informed practitioners, whose only aim is to promote innovative ideas to improve our country’s effectiveness. They have looked at a plethora of reports on this subject, which all show that the present processes do not work well enough. Indeed, they do this country a disservice. So I hope that the Minister will be willing to say that she will look again at the way in which government can be held to account for how its £236 billion of public procurement funds is spent and turn to the committee’s recommendations for inspiration.

My Lords, my comments this afternoon will be somewhat oblique to the main thrust of the report, but I will conclude with a specific recommendation. As the noble Lord, Lord Krebs, explained, our committee was concerned with the mindset within government, whereby innovative procurement is inhibited because it is safer to use an established contractor and a well tried technique. But sometimes there is a compelling need for something that has never been achieved before and, in these cases, innovation is a prerequisite and risk-taking is unavoidable. The key issue then is how to jumpstart or accelerate R&D.

In this context, we can perhaps learn from historical precedents dating back nearly 300 years. Specifically, we should emulate the British Government’s response to the need to determine longitude at sea, a crucial requirement both for the Navy and civilian shipping. As is well known, in 1714 the Government set up the longitude prize, which offered £20,000—equivalent to many millions in today’s money—for a method that would determine longitude to better than 30 miles, with smaller sums for achieving less precise targets. This prize was administered by one of the first quangos, the Board of Longitude. It stimulated a variety of approaches—most famously, of course, John Harrison’s accurate chronometer.

There are some more recent precedents. We have heard a lot about DARPA, run by the US Department of Defense. It is extolled in our committee’s report as an effective agent of innovation, mainly for the defence sector, but often with spin-offs of commercial or social benefit. One way DARPA has achieved all this is by offering high-profile prizes. For instance, a few years back, it organised a competition for driverless vehicles. These robotic cars had to navigate a long, complicated path in the Mojave Desert. In the first year, no competitor did more than seven miles. A year later, 22 entries did better than that. The total investment by contestants, commercial bodies and universities was far more than the $4 million offered in prizes. The net effect was to stimulate the technology and raise the profile of those who had succeeded in an engineering challenge.

DARPA is, of course, publicly funded. In the US, the powerful incentive of prizes is recognised by entrepreneurs in the private sector. Pre-eminent in such ventures is the X Prize Foundation, a wide ranging and highly professional enterprise that has the savvy and the organisational infrastructure to establish, organise and monitor grand challenge prizes on various themes. It describes its mission as,

“inspiring the revitalisation of markets which are currently stuck due to existing failures or a commonly-held belief that no solution is possible.”

First, there was the much publicised prize for suborbital space flight, which was won in 2004. Under the auspices of this foundation, this has led to a diversified menu of grand challenges, spanning not just technology but societal and social issues. There are prizes for fuel-efficient cars, cheap genome sequencing, robotics, better ways of diagnosing TB, for cleaning up oil slicks and so forth. The special virtue, or USP, of these big prizes is that they enlist the interest of many people and organisations taking diverse approaches to reach the goal. They thereby release much investment, totalling a sum far larger than the prize itself. They bring about a tremendous focus of competitive talent. To the individual, or the small company, the prize money of several million dollars is a significant incentive. To the big company, the publicity and the PR are more important. These prizes have a high public profile.

If the challenge is manifestly of public interest and importance and incremental progress can be quantified, then these prizes not only attract continuing interest from the public, but have an important educational function. They also offer PR to the engineering profession and raise the profile and the schemes of innovators.

Here in the UK, there have been modest initiatives along these lines. In 2008, ESTL ran a grand challenge competition to help design robotic systems to help ground troops seeking to probe hostile environments. Competitions run by the SBRI have led to innovative contributions to, for instance, mobile phone security. But these precedents could be more widely followed. Organisations such as the SBRI and the TSB could build on what has been done already and establish Longitude-style prizes with a mixture of public and private support, perhaps in association with learned societies and academies. Better still, could not the UK trump what is being done in America by something really high profile? How about celebrating 2012 by, for instance, a series of Olympic or Diamond Jubilee grand challenge prizes open to the world?

My Lords, as a member of the committee, I endorse the remarks of the noble Lord, Lord Krebs, about the support we were given by our adviser and the secretariat. I also pay tribute to the noble Lord for his leadership of our inquiry.

On my way to the Committee this afternoon, I had an experience of public procurement using innovation in action. The House authorities have put a Dyson hand-dryer in the men’s loo at the other end of the Corridor. However, they have demonstrated the tried and tested approach of the public sector by retaining not one but two of the existing systems for drying your hands. We have a living example here of some of the dilemmas caused by public procurement and the use of innovation.

The Government are the largest purchaser in the UK. In spending more than £236 billion a year, they are spending on procurement more than the combined budgets of health, defence and education, so making some modest gains here could have major effects on public spending programmes.

I had some experience of dealing with the frustration of the commercial sector over public procurement when I was a Health Minister. In order to respond to the frustrations of that sector, I spent a year co-chairing with the chief executive of Smith & Nephew, a healthcare industries task force, which in the end led to the establishment of the NHS national innovation centre, which is featured in the report. That experience showed me that industry looks very strongly to public procurement as a means of developing products. It is a way to expand their products and market them overseas. The brand of the NHS is very strong overseas, so if you have a product that you can develop within the NHS, prove that it is safe and use it in the NHS, you have a strong marketing aid to sell your product.

We found in that exercise, as was borne out in the committee's inquiry, that public purchasing for quite big sums of public money is undertaken, for the most part, quite a long way down the managerial food chain. The boards and chief executives of those public bodies have only a marginal interest in many of those purchasing and procurement decisions. So we have a system in which quite senior people in the private sector are concerned about the issue but the responses are being undertaken by people quite low down in the organisation. Not surprisingly, those people are cautious about change. Why should they not be? Most of us would be if we were that far down the food chain.

You see the same thing in the Civil Service if you are a Minister. I am old enough to have joined the Civil Service under the old class structure of administrative, executive and clerical staff. The executive staff did money and procurement. They did not do policy. The Civil Service still likes to give policy to the fast-streamers, and the less fast-streamers do sordid things with money, such as buying things. We have a problem at central government level and at local level. We do not like to talk about it very much, but that culture is what the inquiry exposed.

Every so often—about every 18 months to two years—Ministers change, so unless the Minister really wants to get a grip on some of this, nothing much will change in the culture of the public service about these issues because there is no longevity in the ministerial cadre for the most part. There have, however, been Ministers in both parties—I cite Michael Heseltine and Denis Healey—who stayed in their jobs long enough to take these management issues seriously. However, they are the exceptions, rather than the rule.

In the course of this inquiry, we found some good things and some bad things. The Government’s launching of an open public services White Paper has much to commend it, building as it does on the previous Government’s policies. However, a large chunk of public procurement is decided locally and cannot simply be drawn into the centre. Therefore, a large amount of that £236 billion is spent way outside the vision and influence of Ministers. No matter what Francis Maude does in the Cabinet Office, his impact at the moment on many of these local agencies, which spend large sums of that public money, is minimal.

I understand the importance of localism to this Government, and the importance of delegating responsibilities down to local level as far as possible. Certainly, as an ex-public-sector manager, I understand that. However, the Government have some responsibility for finding out and explaining to Parliament and the public what is happening to public money at that level. It is no good saying that there are directly elected bodies in local government. A large chunk of their budget comes from centrally directed grants that are paid for by the taxpayer and sent down in the post, so to speak, from Whitehall. There is an accountability issue, but what do we find? The Government are to abolish the Audit Commission, which is one of the bodies that looked at the value for money of local government activities, and have stopped its value-for- money inquiries. Therefore, despite the protestations of the Government in their response to this inquiry, there is no mechanism for monitoring and finding out what is happening to that public money and how procurement is being used away from central government to drive innovation and best value.

There is something of a conundrum for the Government when they genuinely want to do a good job in securing the best value for taxpayers’ money. They want to drive efficiency but seem to be slightly stuck in a mindset that separates innovation from efficiency and best value. They are not contradictions; they are part of the same way of achieving improved public services. You need innovation, efficiency and best value. In my experience you are likely to get best value—certainly in the health service—if you are also driving innovation. I cannot see from the Government’s response to the committee’s inquiry how they can be sure about what is going on in procurement and innovation away from the central departments. Nor can I see how they can have any confidence whatever that a major chunk of the £236 billion of procurement includes a satisfactory element of innovation.

Not all procurement requires innovative solutions. As the Government rightly say, in many areas innovative solutions may not be needed. It may be sufficient just to get the best price for the quality of goods or services required, as Francis Maude told the committee. There may well be risks attached to innovative solutions. I would be the first to acknowledge that. That is why a degree of testing innovative solutions, often on a smaller scale before you go national in a big way, is a sensible way to proceed.

However, too often the committee was left with the impression that “tried and tested” was the default position for public procurement. There was a conspicuous absence of challenge mechanisms to that default position. We did not hear much evidence of what were the challenge mechanisms to that approach to public procurement. As I said earlier, innovation was somehow seen as being in conflict with efficiency and saving money. It is striking that in their response to the committee’s report the Government have decided to scrap the departmental innovation procurement plans, as the noble Lord, Lord Willis, said, established following the previous Government’s Innovation Nation White Paper in 2008. I found the current Government’s reasons for scrapping these plans extraordinarily curious, as I think the noble Lord did. As he said, clearly some departments produced rather good plans, and most of us who have managed things would have thought that that was a good excuse to say to the other departments that were rather less good, “Why don’t you emulate the good plans in, say, the Ministry of Defence or the Department of Health?”. But no—because some were less than good, they scrapped the whole system. What are the Government going to do to put in its place a mechanism for strengthening the weaker brethren whose plans were inadequate in their approach to innovation? Are they just going to be left to slumber contentedly with their mediocre performance or is something going to be done to drive it up?

As public expenditure gets tighter, the need for new ideas and thinking in public procurement becomes more critical. As President Obama’s former adviser, Rahm Emanuel, so graphically said:

“Never let a serious crisis go to waste”.

If we want our business sector to grow, we should be using this procurement programme to stimulate UK enterprise and innovation. That is, for example, why the previous Government brought in David Cooksey, a venture capitalist, to look at the way we try to exploit clinical research in this country. A lot of very good work was done in that area, but it took someone of eminence to drive, with Ministers, that kind of change. In my experience in the public service, the gnomes do not come in the night and just drive change. Ministers and senior civil servants have to get their hands dirty, and they have to drive that change by providing what needs to change as an example to people outside the Civil Service and the departments—and within the departments.

That is why it is disappointing that the Government have not seen a stronger role for chief scientific advisers, as we have recommended. They are a bit of grit in the oyster. They could be some of the people who would build the bridges between industry and public procurement systems. They could be the people who could innovate, and have the authority to innovate if they were given it. I hope that the Government will look again at this issue and try to come up with some ideas about who in these departments will drive change—and not just in the departments but at local level. They are the bodies which come within the general rubric of those departments and whose budgets are usually shown on the departmental public accounts. They should bring about a step change in the way that public procurement is used to drive innovation.

In conclusion, I say to the Minister in a very friendly way, as a former Minister, that these things do not change in areas such as procurement unless Ministers really want to make them change. It simply does not happen. Ministers have to be prepared. I am less concerned about the committee’s recommendation for a single Minister for innovation and procurement, although I would like that. However, if the Government are not going to pursue that course, they really must take seriously the issue of finding a Minister in each department who will drive this change, because if it is not going to be driven from the centre of Whitehall, it will need to be driven across the departments and will need political leadership to make this change happen. It will also need continuity of political leadership as Ministers come and go within different departments.

I offer that in the most friendly and constructive way to the Minister. This issue is too important to simply bat back with fairly standardised Civil Service responses—I have seen those responses to Select Committee reports. As a civil servant, I have drafted a few in my time and I recognise a fairly standardised report when I see one. There is too much money at stake at a time when this country needs to grow its industries and private sector and get best value for its public service. We need a bit more energy in political leadership on this issue.

My Lords, the report that we consider today addresses some important issues. Successive Governments have had difficulties in procuring goods and services of high scientific or technical content. The committee’s report asks what can be done to improve the situation. It proposes that clear responsibilities for stimulating innovation should be assigned to Ministers and officials, who should be held accountable for this.

One does not have to look far to find startling instances of the problems that the committee is addressing. A current example of the failure of the Government's procurement policies in respect of modern technology is provided by the virtual abandonment by the NHS of its plans to create a centralised computerised system of patient records that would be accessible throughout the service.

The national programme for IT in the NHS was initiated nine years ago. So far, £2.7 billion has been spent on the patients’ records system to no discernible advantage. Several private sector suppliers were engaged, including the American CSC company. This company failed to deliver the bulk of the systems that it was contracted to supply. Instead, it has implemented a large number of interim or stop-gap solutions. These are preponderantly off-the-shelf solutions that the company has in its inventory.

It is doubtful whether the Government can obtain adequate redress from CSC or from BT, which is the other surviving supplier. Several other suppliers have walked away, including Fujitsu in 2008. This is the company that in 1990 absorbed the rump of the British ICL Corporation, which was created in 1968 through a government initiative. In fact, ICL was intended to rival IBM. Notice that the second and third letters of ICL are adjacent in the alphabet to those of IBM.

The defence that the suppliers might offer, if the matter were to come to the courts, is that they were confronted with inappropriate specifications that were subject to revisions so numerous as to make their task incapable of fulfilment. There might be some justification in such an argument but there is a more fundamental issue at stake here.

It is clear that the gains in efficiency that could result from enhancing the computerised records systems in the NHS are considerable. It is almost inevitable that eventually there will be such a facility for instant access to a patient's records from anywhere in the country. However, the advantages of such a system will accrue to the NHS and to the nation as a whole. They should not be expected to accrue to a private supplier; nor, as far as I am aware, is there any intention that they should do so. Therefore, the private supplier has little or no incentive to bear the costs of research and development, for they cannot reap the profits.

A further mismatch between public and commercial interests is occasioned by the nature of a developing technology. The private contractor is bound to seek an engagement that has a definite duration and which will result in profits that are calculable at the outset. The client, which is the NHS in this case, has an ongoing engagement and a need to adapt continuously to changing demands by exploiting evolving technologies. In brief, it needs to rely on its own technical expertise, which must be at a high level.

The IT disaster of the NHS has been analysed in two parliamentary reports, which are readily accessible. One is from the National Audit Office and the other is from the Public Accounts Committee of the House of Commons. This debacle is only the latest in a long line of similar failures from which we might have learnt our lessons. These failures owe much to the decline of the technological and scientific culture in our country. It is almost inevitable that a country that loses its manufacturing base should have difficulty in sustaining its technological competence.

The demise of Britain manufacturing has been hastened by the failure of our export industries, which has been mainly in consequence of the overvaluation of sterling in international currency markets. A contributory factor here has been the hypertrophy of our financial sector, which has led to large inward investments in financial assets and hence to a high demand for sterling.

Britain also has a peculiar social history that has militated against the survival of its scientific and technical competence. The pursuit of science and technology in the 18th and 19th centuries was strongly associated with people of a dissenting and nonconformist tendency. For them, the pursuit of codified technical and scientific knowledge was almost a moral endeavour. The established ruling classes had very different cultural motivations. During my own schooldays, I was keenly aware of the opinion that a gentlemanly education should be based on the classics and the humanities and that it should eschew matters of science and technology. I see that others have had the same experience. Social ambition and a distaste for hard, masochistic studies led many to abandon mathematics and science, as students continue to do today.

The once powerful Civil Service, whose members played leading roles in the process of government procurements, rarely contributes nowadays to any of the Government’s decisions. Those who are in the ascendancy are civil servants who have been trained in the humanities and the social sciences, if they have not been trained to be lawyers, accountants or financiers.

Great damage was done to Britain’s scientific and technological heritage throughout the 1980s and beyond. Numerous factors contributed to this, but it was the demise of the Government’s scientific establishments that deserves particular attention in the present context. These establishments had served Britain’s industry before, during and after the Second World War. When some of their original research agendas had been fulfilled or were abandoned, new purposes were not found for them. Their disbandment was justified by the doctrine of privatisation.

Among the victims that come very readily to my mind are the Post Office Research Station at Dollis Hill, the Royal Aircraft Establishment at Farnborough, the National Gas Turbine Research Establishment at Pyestock, the Atomic Energy Research Establishment at Harwell and the Road Research Laboratory at Crowthorne. The ICL Corporation, although not a government research establishment, could be counted among these. The list can be extended to include a wide variety of medical, veterinary and agricultural research establishments, some of which survived in a severely curtailed state. The scientific research institutes that best survived the onslaught were those that adhered closely to the UK universities. Nevertheless, during the period in question they were subject to a famine of research funding.

More recently, the research assessment exercises to which they are subject have had the perverse effect of limiting their interactions with industry. The assessments are based upon research published in academic journals, and research that has immediate commercial and industrial applications cannot be published in this manner.

During the period in question, the doctrine of outsourcing was widely propagated. It proposed that organisations should concentrate on their core activities, which are the things that they do best, and that they should assign other functions that had hitherto been performed in-house to external providers possessed of specialised expertise.

A requirement of outsourcing is that there must be sufficient in-house expertise in order properly to assess the need for outside assistance and to assess the quality of whatever assistance is on offer. Moreover, given the requisite in-house expertise, outsourcing may become unnecessary. It is clear that, in the case of the procurement of computer systems by the NHS, and in other cases I could have cited, there has been insufficient in-house expertise to inform the organisation of the opportunities and of the limits of the available technology and to predict how it might evolve. Instead, grandiose wish lists were created, which have become weighty and impenetrable documents once they have been made to conform to the nostrums of European Union contract law.

The managers of the NHS have been outsmarted and bamboozled by the commercial IT providers to such an extent that they have found that they have no redress against the manifest failures to fulfil the contracts. The organisation has lacked the technical expertise that might have informed and guided the endeavour and that might have averted the disaster. The Public Accounts Committee report attributed much of the blame for the debacle to the senior management of the NHS, including its chief executive, who did not fully discharge his responsibility for the oversight of the project. This criticism is in line with the recommendations of the Science and Technology Committee report, which proposes that there should be clear lines of responsibility at a senior level for the management of technology, as well as enhanced accountability. However, I fear that this misses the point to some extent. What is required is a technical and scientific intelligence that should be widely distributed throughout the organisation.

Some of us have witnessed outstanding examples of the successful management of technology. They were provided by many of the government research establishments that no longer exist. In the main, these organisations were characterised by a lively technical discourse and a remarkable intellectual democracy that allowed intelligent and inventive ideas to be propagated rapidly throughout the organisations, regardless of where they had originated. In most respects they were the antithesis of the modern top-down organisations that nowadays predominate in our public sector. Such managerial structures have been created in response to the demands of politicians, who have required clear lines of command to enable public organisations to respond rapidly to political initiatives. However, politicians are not well placed to assess the opportunities and limits of available technologies or to predict how they might evolve.

The problems that have been dramatically illustrated by the debacle of the NHS programme could be overcome by strengthening the scientific civil service and recapturing some of the ethos of the erstwhile government research establishments. Groups of computer scientists located within the relevant departments could be relied upon to co-operate across departments in ways that rival commercial suppliers are not able to do. There are some well known and striking examples of how co-operation among widely dispersed computer scientists can achieve results that are markedly superior to the results of scientists and technicians working under the direction of commercial organisations. The Linux operating system is a prime example, as is Wikipedia.

Of course, the virtues of technical co-operation are not confined to computer scientists. They characterise much of the scientific and technical culture that our country has lost, and we urgently need to rekindle that culture.

My Lords, I, too, congratulate the noble Lord, Lord Krebs, and the committee on their succinct report. That is an innovation in itself, isn’t it? You were not deterred by the sheer size and weight of it from reading right through it. I found the report fascinating, as I have found the debate. If the Minister goes through Hansard after this, as I am sure she will, she will find that there have been a number of interesting contributions with some worthwhile and constructive recommendations. I have heard on many occasions that the prize is enormous, given the size of the procurement contracts— £236 billion was quoted. If the Government do not get this right then we damage the country’s ability to deliver new business products and services.

We are not using procurement to unleash the potential of SMEs, which I know is an aspiration of this Government. I am not sure about their commitment to the target of giving 25 per cent of public procurement to SMEs, which seems now to have been downgraded to an aspiration.

The small business research initiative has been successful in generating value, and it ought to be significantly scaled up to produce further innovation and economic growth. Why the delay? I see that an evaluation of the small business research initiative and the forward commitment procurement process is planned for some time in 2012. The sooner that evaluation takes place, the better; it looks as if on a small scale both those processes are beginning to produce valuable uses for innovation and better value for money.

The noble Lord, Lord Krebs, cited mattresses. There was another case involving lighting and the Rotherham NHS Foundation Trust. The report says:

“Cundall, a multidisciplinary consulting engineering practice, is one of the bidders involved in the Rotherham energy efficiency project … They were enthusiastic about FCP. Through FCP, they said, ‘we were no longer bound by technical specifications that might not deliver what the customer actually wanted, but were free to suggest innovative solutions that could meet this outcome-based requirement ... we clubbed together with other members of the supply chain so that we could offer an optimal and innovative solution ... we believe FCP has been totally revolutionary. Rotherham NHS Trust has been offered a solution that delivers energy savings, carbon savings and a “step-change” in patient and staff experience’”.

Building on that kind of approach is worth while. I hope that this evaluation, which will be done by Professor Georghiou and Professor Edler, will not take too long.

It is interesting that the World Economic Forum’s latest global competitiveness report, published last week, ranked the UK 49th for government procurement of advanced technological products, despite it being ranked 13th for overall innovation. The report ranked the UK second for university/industry collaboration in R&D—referred to by my noble friend Lady Warwick—third for the quality of its research institutions and 13th for its capacity for innovation, but 49th for government procurement, one place behind France and 36 places behind Rwanda. The sort of thing I used to get on my school report, “Plenty of room for improvement”, applies here. The same report revealed that 13.5 per cent of businesses believed that inefficient government bureaucracy was one of the most problematic factors for doing business in the UK. That has been referred to in several contributions.

Many people have talked about the default position of the tried and tested route. In some cases that might be appropriate, but on every occasion innovation ought to be considered before one embarks on the tried and tested route. The noble Lord, Lord Krebs, talked about embedding innovation into the mainstream and a change of culture. In one of the few management courses I have ever been on, we looked at organisational culture. I remember being told that that is the hardest thing to change within any organisation.

The Government’s response talks about improved training, but we know that on its own that probably will not be enough, although I would welcome it. I know that the Government are still interested in the concept of employee engagement, where we listen to some of the good ideas that are around. I was surprised at how often management failed to recognise the good ideas that exist among their own employees. Many of the recommendations are top-down; we ought to be looking also at the bottom-up approach.

As soon as my internal search engine finds the word “apprentice” in a government report, I cannot help but be attracted to it, and I was attracted to the response to recommendation 10, which states:

“Pan-Government Apprenticeship Scheme—research is being undertaken into the feasibility of introducing a ‘Pan-Government Procurement Apprenticeship Scheme’ in 2011/12”.

I would welcome more information on that. The response continues:

“The aim would be to attract new talent into Government and creating a more skilled, flexible and productive workforce”.

I like the concept and I assume that these will be high-level apprenticeships, but I should welcome a bit more information. It sounds a good idea to bring bright young minds into Civil Service and public sector procurement.

The noble Lord, Lord Hodgson, talked about simplifying the tendering process. The Government say that they will go down that road. From the examples given, there is certainly a need for that. My noble friend Lord Hunt gave us the example of the Met Office. We seem unable to take advantage of the innovation that we have created and use it abroad in the way that France seems so good at doing.

The noble Lord, Lord Willis, reminded us that a number of reports have contained very good ideas, such as the report of the noble Lord, Lord Drayson. My noble friend Lady Warwick reminded us all of the report of the noble Lord, Lord Sainsbury. There has been a plethora of reports. The real innovation would be to seize the key recommendations and drive them forward.

Having a Minister in charge of innovation does not seem to appeal to the Government, but I think it was my noble friend Lord Warner who said they should give it some thought. Clearly, we need more drive and we need to ensure that best practice created in one government department, especially in relation to innovation, is spread across all government departments. I think the same argument would apply to chief scientific advisers in making their role more powerful.

I was very interested in Longitude by Dava Sobel, mentioned by the noble Lord, Lord Rees. It is a great read, and the wonderful clocks in the museum at Greenwich are an inspiration. Having prizes is a great idea, and I should be interested to hear the Minister’s response to that. Perhaps I may suggest one in relation to the NHS. One idea has been referred to but another one that has recently emerged is the use of catheters. I cannot remember how long ago the catheter was invented, but I think it goes back well over 100 years, and I do not think the design has changed substantially in that time. It is one of the biggest causes of infection in the NHS and, unfortunately, the longer we live the more likely it is that we will be inflicted with the curse of the catheter. It certainly happened to me on one occasion, although I am not sure that I should have revealed that in Hansard. I also liked the example of the Dyson dryer mentioned by my noble friend Lord Warner. The innovation involved was good but the element of risk aversion meant that it was not possible to resist leaving other methods of hand drying in place.

I should like to pose a couple of questions, although I have already raised some during my contribution. What progress have the Government made on their aspiration for 25 per cent of their resources to be supplied by SMEs? Although the comments on SMEs seemed to be that the jury is still out, no one said that we should not involve SMEs to a greater extent. I am pretty convinced that in that way we will get more innovation in public procurement.

What is being done to increase government procurement of advanced technology products? I must admit that I could not help groaning inwardly as we were treated by my noble friend Lord Hanworth to the history of the computerised system for patient records. I suppose that that is an example of how not to do things and, as he said, there are some painful lessons to be learnt from it. I should think that one lesson is obvious; before embarking on a large scheme, you make sure that it works on a small scale, but perhaps that it is too easy and obvious an answer.

What plans do the Government have for Labour’s successful and innovative SBRI procurement programme? They have said that they are going to evaluate it, and I would welcome hearing the timescale for that. In addition, what are the Government doing to promote more innovative procurement from the European Union and other EU member states that would benefit UK companies?

In conclusion, I again extend my thanks to the committee for its report. It has stimulated a fascinating debate and I look forward to the Minister’s response.

My Lords, I am grateful to the noble Lord, Lord Krebs, for bringing forward this debate and for highlighting the potential of public procurement to drive innovation.

The speeches of noble Lords both on and outwith the committee gave me much food for thought. We could all be here until about 7 pm if I tried to answer all the questions put forward this afternoon. I shall try to answer some as I go along, but I shall of course write regarding the others—that is, if the civil servants are still friendly enough towards some of the people around this table today. However, I am sure that I have confidence in their ability to answer those questions.

It was lovely hear about prizes—the noble Lords, Lord Hunt and Lord Rees, talked about the historical precedents here–—to get things going for the risk-taking and the jump-starting. It made me think of the most reverend Primate the Archbishop of Canterbury, who is going to stand down next year perhaps after struggling for 10 years. He started off by launching a prize for theological writing, which at the time I thought was an excellent idea. Let us see how good these prizes are in taking things forward and away from the traditional practices that we have used.

The noble Lord, Lord Young, rather shamefacedly had to spell out the sorry state of public procurement in this country. It is the system that this Government have inherited. I can assure him that by the time we have finished being in government we shall leave it in better heart than it is in now.

All public procurement must achieve value for money for the taxpayer. This is essential to managing the fiscal deficit that we face. The Government recognise that by procuring innovative products and services they can both improve the efficiency and delivery of public services and provide opportunities for UK business to grow. Both outcomes will benefit our economy.

With this in mind, the Government are currently carrying out a reform of public procurement to increase efficiency, value for money and transparency. Doing this will enable us to better plan procurements to drive innovation. It will also enable us to use more innovative procurement mechanisms that can deliver innovative products and services. This programme of reform will help to maximise the conditions for encouraging and fostering innovation that delivers value for money. I will highlight some of the key elements of this as we go through.

The noble Lord, Lord Hodgson, gave us a masterclass from the private sector investment area, and then started talking about intellectual property. As the Minister for Intellectual Property, I would be only too delighted to talk to him in my office about the way universities are going ahead and putting down what they should do. We have already had a response to that this afternoon.

The noble Lord, Lord Kestenbaum, talked about the Government as intelligent customers. I am very taken with that description. I shall take that away and, as with many of the things I have heard today, see whether we cannot benefit from some of the marvellous speeches that we have heard.

In response to the noble Lords, Lord Willis and Lord Kestenbaum, and the noble Baroness, Lady Warwick, I should say that the procurement capability of the public sector was a key feature of the Select Committee’s report. A change in culture and direction from the top must challenge this risk aversion. The new departmental board structures as detailed in the Government’s response to the committee’s report will help to drive forward this cultural change and it is a start. I hope there will be agreement on that at least.

The noble Baroness, Lady Warwick, asked what new initiatives are in place to engage SMEs in public procurement. To quote one in response, all central government contracts over £10,000 must now be advertised in Contracts Finder, central government’s procurement portal, and this will give greater visibility of procurement opportunities to SMEs. Suppliers can flag up instances of poor procurement practices, including overtly bureaucratic tender documents that lock out SMEs. The Cabinet Office will investigate these instances through its mystery shopper scheme.

The noble Lord, Lord Warner, asked about planning in best practice. The reform of public procurement that is currently under way will mean greater focus is placed on planning, on properly identifying what is needed and on how best these needs could be met by exploring different options before the formal procurement process starts. This includes thinking about long-term value for money. We will ensure best practice from these changes is shared across the various departments.

I return to the capability improvement programme and the SBRI. The programme will help to raise the level of expertise across central government to ensure that public procurers have the right skills to deliver what is expected of them. Part of it includes a commercial interchange programme, which is currently running as a pilot and is designed to facilitate two-way commercial skills and knowledge exchange between government and industry. I am sure we will find that very helpful. There have been seven placements to date, including one at the Department for Transport.

I should like to mention the small business research initiative and the forward commitment procurement model—two procurement mechanisms covered by the committee’s report. I shall update noble Lords on the small business research initiative. Since the reformed programme was launched in April 2009, various departments and other public bodies have run more than 60 competitions. These have been in many areas, including: defence, where we have sought to improve the energy efficiency of operating bases and to reduce the weight that individual soldiers need to carry; healthcare, where we have developed technologies for detecting asthma in children and the means of reducing healthcare-acquired infections; and sustainable construction, where we have installed sustainable technologies in more than 50 social housing units and developed more efficient and easily recyclable lighting technologies. To date, more than 600 contracts have been awarded to technology-based businesses to a value of just over £41 million. Sixty-seven per cent of these contracts have been awarded to micro-businesses—those with less than 10 employees—or small businesses, which have less than 50 employees. These businesses are typically the cadre of companies with which the public sector has the greatest difficulty contracting.

I should also mention that the Technology Strategy Board, which manages the small business research initiative scheme, is constantly engaging with public sector organisations to get greater engagement in the programme. The most recently launched competitions are in the areas of food security and animal research.

The committee’s report mentioned that the forward commitment procurement model is not currently as widely used as the small business research initiative. This is true, and we are seeking to expand the programme. The Government have recently started a project with the private sector to develop private-public forward commitment procurement compacts.

In addition, following the success of the zero-waste mattresses project with Her Majesty’s Prison Service, which was mentioned earlier, a second project has led to the development of an ultra-efficient lighting solution for use in hospitals, which we will demonstrate at the Building Research Establishment. We intend to use this as an opportunity to generate wider interest in this mechanism.

I turn now to the Department for Transport, which was a particular focus of the committee’s report. Since the start of the inquiry, the Department for Transport has introduced several new measures to ensure that it is able to identify opportunities for procuring innovative solutions. For example, it has established a board-level investment and commercial committee, which provides oversight and scrutiny of major commercial and investment decisions. The chief executive of the Highways Agency is a member of the committee and is therefore able to offer the benefit of the Highways Agency’s innovative thinking to the broader department—an area that was highlighted by the committee’s report.

The Department for Transport recognises that small and medium-sized enterprises are a source of innovative ideas and is keen to encourage solutions from them. It has published an action plan with specific targets and measures designed to provide real opportunities for small and medium-sized enterprises to meet its business needs. The department held a product surgery for small and medium-sized enterprises in June. It also participated in the Government’s innovation launch pad, offering mentoring support to small businesses to develop innovative solutions for public services. The department is also considering the development of supply chain charters to encourage fair treatment of small and medium-sized enterprises by prime contractors.

The noble Lord, Lord Krebs, asked how effective central government is in encouraging the take-up of these initiatives. They are being taken up across local government, so there is some hope there.

I know that this debate and the recent government response are starting to show that the Government recognise the important role of public procurement in encouraging innovative solutions in the public sector that deliver value for money.

The noble Lord, Lord Krebs, said that he will return to this topic with his committee. I am very pleased. If I could stand here and say what I personally think about a lot of things that have been said today, I would no doubt get the sack immediately. Certain things strike such a chord with me. When I started working with the Civil Service, it took me a while to realise that in the private sector, in business, where I come from, the biggest talent—certainly in a FTSE 100 company—is always in management, and writing wonderful reports and giving you all the information you need is regarded as something that you can buy in almost by the hour. You come into the Civil Service and it is completely the reverse. People who can write public policy are top of the heap and the people who do management are not.

I am not saying that one way of doing this is better than the other, but somewhere along the line, if we are to get public procurement right, we have to bring the two sides nearer to each other. It would be rude indeed to say that people are too far down the food chain to be taking such enormous decisions that have such a long-term effect. Some of the contracts that I have seen are enormously long. Some of the payment terms that I have seen have been idiotic. I have seen one that paid the main contractor on five days sight of invoice and he was paying the small businesses that contracted to him on 30 days sight of invoice. If that had happened when I was in business, he would have been out of the door tomorrow morning, but that is not how it can be run.

I have whistled through this. I have answered very few questions. We will write to answer the questions asked and when we come back the next time that the noble Lord, Lord Krebs, brings a committee report here, I hope that noble Lords will know that the Government are aware of the problems of public procurement. We will address it better than the previous Government did. As many noble Lords have said, the prize is enormous if we can get this right. I again thank the noble Lord, Lord Krebs, and his committee for bringing this debate here today.

Before the Minister sits down, I could not let go her answer that I was shamefaced; I was not shamefaced about our record. It was a difficult task and we made significant improvements. I am only too happy to wish the Government success in building on those improvements. I am certainly not shamefaced about some of the initiatives that we took.

I hope that I might get an answer—if not, no doubt she will answer in writing—about the pan-apprenticeship scheme.

Ah! One moment. That I do have, and I will be delighted to give it to the noble Lord. As he knows, because we stand opposite each other many times at many times of the day and night, I certainly did not want to appear rude. It was tongue in cheek, but the truth is that his Government did not do terribly well in 10 years, and we have to make a better fist of it.

The noble Lord requested more information on the feasibility of introducing an apprenticeship scheme to improve Civil Service procurement skills. As this is a Cabinet Office lead, I will liaise with my colleagues in the department and write to the noble Lord with more details. As he knows, apprenticeships are close to both our hearts.

My Lords, I thank all noble Lords who have taken part in the debate this afternoon. It has been of extremely high quality. For me, particularly important is the different perspectives that have come in the debate from academia, the private sector and government organisations. I do not intend to try to summarise any points; it has all been clear. In general, the contributions in the debate have supported the conclusions and recommendations of the Select Committee. I believe that I understood that the Minister indicated her support for our recommendations although, on the face of it, the Government have not accepted all of them. I very much hope that when we come back to this in 18 months’ time we will see significant progress and understand how the Government are measuring it. We will try to establish how we might measure progress on the hugely important topic of promoting innovation in public procurement. With that, I commend the Motion.

Motion agreed.

Sitting suspended.