Report (1st Day) (Continued)
Clause 33: Definitions of small and micro businesses
25: Clause 33, page 29, line 28, at end insert—
“( ) Those who represent businesses with 10 to 49 employees and are purchasing goods or services for use within their commercial activities shall be considered consumers with all the rights of consumers under the Consumer Rights Act 2015.
( ) Those who represent businesses with fewer than 10 employees and are purchasing goods or services for use within their commercial activities shall be considered consumers with all the rights of consumers under the Consumer Rights Act 2015.”
My Lords, this amendment proposes to treat small businesses as consumers. Consumers buy goods and services, and enjoy a range of rights and protections. The offer to businesses is lower, on the basis that they should be either smart or big enough to look after themselves. In reality, the smallest of businesses face many of the same problems as consumers do. Our amendment tries to address two core elements. The first is the right of redress and the imbalance that exists. The second is the rights of consideration. This is particularly acute in circumstances where small businesses deal with regulated markets, such as energy, financial services, water and telecoms.
Here we have to take into consideration that in talking about small business we are really emphasising the micro-businesses, those that employ between one and nine people. In these circumstances they need regulators to deal with them as consumers; and they are recognised by a number of regulators and their interests are protected as if they are consumers. It is an uneven practice and our amendment would make it applicable across the board, but there is a great deal of assistance given by some regulators. This should be extended to make sure that things such as tariffs, supplier charge, information and certain difficulties are dealt with more expeditiously, because the small businesses are treated as consumers. When it comes to micro-businesses, third-party intermediaries who may offer services that do some of these things are clearly no substitute for reasonable protections and regulators considering them very carefully.
On the issue of rights of redress, there are protections for businesses under unfair terms legislation, and under the Sale of Goods Act and Supply of Goods and Services Act, but these apply only to business-to-business transactions. A small micro-business buying anything without establishing a business-to-business arrangement cannot be protected. This pushes every small business with one, two, five or nine people not to buy retail and it is entirely misplaced. We are suggesting that the extension of the provisions to allow businesses to be treated as consumers will deal with this.
I am bound to say that the Government have extended the gulf between consumers and these micro-businesses by the extension of individual consumer rights under the Consumer Rights Bill that is still before the other House. There was a debate to address this growing gap through that Bill and the suggestion was that it could be done under this Bill as the most obvious and correct location. These amendments seek to address the gap.
There are arguments against such a provision. One is that it confuses who a consumer is: but that is not really the case. It accords rights as opposed to a sense of definition, and the confusion is not in the definition. As it is, this point is already recognised with respect to how regulators operate in considering small businesses. A second argument is that business does not support the provision, which is true to a degree because bigger businesses do not, but small businesses do. The Federation of Small Businesses has been clear that this is an important and useful device for the very large number of micro-businesses. A third argument is that there is an insufficient level of evidence on which to base this, but that is not the case: there is very strong evidence. It may not meet the highest test of evidence, but that is not for want of the capacity to try to identify it. Putting the burden of trying to monitor this in detail on micro-businesses—many of which stay small—is an unreasonable test.
Finally, I shall raise another important consideration which I thank the noble Lord, Lord Deben, for highlighting in Committee. This amendment is not just about our commitment to helping small businesses but is a strong recognition of the sort of protection small businesses need to be put in place. It shows that we value encouraging enterprise and individual activity in creating small businesses. We should underpin what they do with the most basic of individual protections. This is a good and reasonable measure to create consistency in a law which is currently fragmented. I beg to move.
My Lords, I shall add a few words about this because we are talking about the products and services that very small businesses buy not on a regular basis or within their main business. In the next amendment, we will come to the Government’s welcome attempt to encourage the growth of home businesses, but in other ways aid that could be given is strangely absent from the Bill.
As my noble friend Lord Mendelsohn said, we argued that the Consumer Rights Bill should cover micro-businesses for things bought outside their main area of business. We can all give examples of this, such as when an employee gets married and the boss sends a bouquet of flowers, except that it never arrives; or a sole trader suddenly needs some cleaning done because of an unexpected leak but the dry cleaner damages the chair cover; or a book-keeper needs a new kettle, a radio or a Hoover, but finds she or he will have none of the new protections provided in the Consumer Rights Bill; or, similarly, a charity orders sandwiches for a farewell lunch for a volunteer which fail to turn up.
There is no good reason for those people in such circumstances not to be treated as normal consumers. Unless this amendment is accepted, they lose those rights simply because the cheque is made out on a business account. As my noble friend reminded us, in Committee on the Consumer Rights Bill the Minister told me that such consumer rights for small businesses were best covered in this Bill, but these rights are not there. This is surely the time to add them.
My Lords, I thank the noble Lord for his amendment about treating small and micro-businesses as consumers. I welcome the opportunity to return to this issue. I am very glad to welcome back to the debate the noble Baroness, Lady Hayter. She reminded us of the good and graphic examples she always brought to the Consumer Rights Bill, which is very nearly on the statute book.
Since Committee, we have been giving this issue considerable thought. I remain concerned about the potential consequences of introducing such a wide-ranging measure in primary legislation. As I set out in Committee, we simply do not know the costs it might impose against the benefits which are assumed. The Government of course recognise that these concerns may not be realised, but nevertheless they, and the assumed benefits, require exploration.
Uppermost in my mind is the importance of small and micro-businesses to the UK economy, which the noble Lord, Lord Mendelsohn, rightly emphasised. As we know, these businesses make up 99% of all businesses in the UK and total 5.2 million businesses. Of these, 96% are micro-businesses, which in aggregate employ 8.3 million people and have a turnover of £655 billion.
The Government believe this underscores the need to move carefully. The Bill is designed to support small and micro-businesses and put in place the conditions for them to prosper. The unintended consequences of sudden changes in regulation have the potential to undermine these efforts. We do not know what the impact would be here. We only know that some business groups have concerns, which I will come on to in a minute, especially about the blanket application of consumer rights. This arises, I think, mainly because a protection for small businesses when buying could be a cost for such businesses when selling to others. The worst-case scenario would be where a small business buys an item from another small business and the item fails and causes a significant loss. The purchasing small business seeks to recover that loss from the supplying small business and, as a consequence, the supplier goes out of business. Currently, the businesses could agree in their contract to a reasonable limitation of this type of liability, whereas under this amendment they would not have scope to do so.
Since we last debated this issue, officials in my department have met business representatives and leading academics. As a result of these conversations, I am confirmed in the view that the issue is not straightforward. The British Retail Consortium considers that that the question of small business protection needs detailed consideration before any action is taken. For example, it raised concerns that the measure would remove businesses’ ability to reasonably limit liability in dealings with other businesses, and the possibility of this leading to significant claims for loss of business earnings.
I am sorry to intervene, but that suggests that the Minister is referring to things which are integral to the business. The example we gave in Committee was hair-dryers bought by a hairdresser. Of course if they failed that would create difficulties, but we are not talking about such things. We are talking about things that are not key to the core business, and therefore any failure would not lead to business interference.
I thank the noble Baroness for her clarification. The problem is that both the items she has described and other items might be covered, but perhaps I could make a little more progress.
I accept that the issue should not simply be dismissed for exactly the kind of point that the noble Baroness, Lady Hayter, has made. There are various points that need to be explored, so in the spirit of collaboration the Government consider that a possible way forward is to hold a public call for evidence, which we need. If the noble Lord will agree to this and withdraw his amendment, I propose that my department publish a call for evidence before the end of this Parliament so this can be taken forward. As I have said previously, small businesses and micro-businesses are not unprotected at the moment. There are protections in the existing law and these also allow businesses to enter into flexible transactions. All businesses need the freedom to contract for their particular requirements, which the current framework allows.
The call for evidence—if this seems a positive way forward—would ask whether these current arrangements offer sufficient protection or whether a gap in the law exists. If such a gap was found to exist, it would enable the Government to better assess whether this could be addressed by extending some of the consumer protections in what should shortly become the Consumer Rights Act to small businesses and micro-businesses, or through other options if they seem better.
I wish to thank the noble Lord and the noble Baroness for the commitment they have shown to this issue. I know we share the same objective of ensuring small businesses and micro-businesses are well supported. I hope that on this basis he will feel able to withdraw his amendment.
My Lords, I am very grateful to my noble friend Lady Hayter for her intervention. As always, she has been able to encapsulate this issue with the use of some very vivid and impressive examples and I pay tribute to her strong advocacy for small businesses and consumer rights.
I will start by saying a couple of words on what the Minister said on the substance of the amendments, and then I will turn to the other matters. I listened very carefully to what she said. I think that there is a limited issue on costs versus benefits in relation to this. The costs at the moment are heavy burdens on micro-businesses and I think that the cost-benefit analysis of this is quite limited. I am less concerned about some of the unintended consequences that she suggests because some of them are already the sort of things covered in the two Acts that she forced me to look at after Committee. I am not sure I enjoyed reading them but I did look at them to try and get better sense of what is contained in the Sale of Goods Act and the Supply of Goods and Services Act and how they operate. A lot of the issues which she raises are already covered there. In addition, the nature of the contractual relationships is clearly covered in the other Acts and is outside that. I know that she is extremely accomplished in her task, and that she does not just take the legal advice that comes from the department without scrutiny. There is an issue here about some of the caution always inherent in some of that legal advice.
Nevertheless, I thank the Minister for a very constructive suggestion and an excellent way forward, which we on this side strongly agree with and for which we are very grateful to her for suggesting. Outside this, I might try to persuade her perhaps to add a little money for a bit of research on the cost-benefit analysis—that will not be too hard a task. However, with appreciation for a very constructive response to our amendment, I beg leave to withdraw it.
Amendment 25 withdrawn.
Clause 35: Exclusion of home businesses from Part 2 of the Landlord and Tenant Act 1954
26: Clause 35, page 32, line 23, at end insert—
“( ) In considering what is reasonable for the purposes of subsection (4), a court shall have regard to all relevant factors including but not limited to the following—
(a) the nature and location of the premises;(b) the nature of the business and the extent to which the activities of the business are comparable to activities carried on at home which are not business activities;(c) whether the business requires any structural change to the premises comprised in the tenancy;(d) the number and frequency of visitors likely to come to the premises in connection with the business;(e) the number and frequency of deliveries and collections of goods likely to occur at the premises in connection with the business;(f) the amount of any noise or other environmental impact likely to arise from the business;(g) the likely effect of the business on the parking of vehicles in the vicinity of the premises; and(h) the proportion of the property used for the business. ( ) Where a dwelling-house is let under a tenancy to which subsection (2) applies, the landlord and tenant may agree in writing under the terms of the tenancy or in any other document signed by them—
(a) that a particular business, or(b) that a particular description of business,if carried on in the premises, shall be a home business for the purposes of this Part of this Act.( ) Any such agreement shall be binding upon the parties.”
My Lords, Amendment 26 stands in my name and that of my noble friend Lord Stevenson of Balmacara. It deals with the issue of home businesses which take place in rented homes.
At present, any landlord who lets residential property to tenants who then also use their homes for business finds that the landlord runs the risk that they will claim security of tenure as business tenants under Part 2 of the Landlord and Tenant Act 1954. Therefore, to protect themselves from that, very often within the tenancy agreement landlords prohibit any use of the residence for business. However, should the landlord in some way acquiesce to such a business, the tenants get security under the 1954 Act, regardless of any wording of the agreement.
Clause 35 would therefore allow that where a home business is carried on by a tenant, it would not qualify for security of tenure under the 1954 Act, and landlords can accept some working at home by tenants, who have only normal residential security of tenure. The clause also allows that where, in breach of any prohibition against business use, a tenant carries on such a “home business” and the landlord gets to know about it, effectively acquiescing in it, that would not in future give the tenant statutory rights.
We support the intention of this clause, but we are concerned about the woolliness of its wording and fear that it will deter the objectives set for it, because the clause does not say what a home business is. It says:
“A ‘home business’ is a business … which might reasonably be carried on at home”.
That caused my legal friends some amusement. The lack of clarity means that the issue will be fraught with uncertainty, which means that it is less likely that landlords or tenants will make the most of this opportunity.
Whether a tenant’s business can reasonably be carried on at home will depend on many things, which relate both to the physical building and its locality, but also to the work undertaken. We all know of a range of businesses that could happen at home: the office work that probably most of us do, catering, music teaching, tutoring, web design, computer programming, repairs, hairdressing, jewellery-making, fine art, journalism, counselling, physical fitness, accountancy, and the favourite of both the Minister and myself—dressmaking.
What can be done in the back yard of a remote cottage is a bit different from what can reasonably be carried on in a third-floor flat. Therefore, the problem is that without some guidance on what a court might take into account when deciding what a home business is, our fear is that landlords will be reluctant to venture this way. The Minister, the noble Lord, Lord Ahmad of Wimbledon, was very helpful in the meeting he had with me on this, and in his subsequent letter. However, I am afraid that that letter betrayed a slight lack of appreciation of how easily disputes can occur over whether a business is a home business, and disputes such as that can end up in court because of the lack of any sort of clarification of what is meant by a home business.
There is the same lack of certainty once a landlord—notwithstanding any prohibition in the terms of the letting—acquiesces in the carrying on of a business, because the tenant will not be able to claim security of tenure as a business tenant in future. The problem is that in those circumstances there will not have been any prior engagement or negotiation between the parties; there has been only acquiescence after it, so the exact business being carried out will not have been agreed beforehand. It will therefore come to a straight fight, probably in the courts, sadly, over whether the business to which the landlord has effectively consented falls within the definition of a home business. But “home business” has no such definition in the Bill, and therefore it will be for the judge to try and work it out. He may well ask why Parliament did not give a little more guidance on this. Failing that, litigation lawyers will do what they always do and litigate.
Amendment 26 lays down a non-exhaustive list of considerations that will give the parties and the courts some markers by which they can navigate their way through the definition. The Minister’s letter, which is in the Library, suggests that where a tenant has agreed that a business is a home business, and the terms of the tenancy say so, it would be hard for the tenant to go back on that. Correspondingly, he thinks it would be hard for a landlord who agreed to the carrying on of a business that the tenant thinks is not a home business then to argue that the business is a home business. It is easy to see how disagreements can occur later, partly because the home business might change. It might grow from something that started on one table in the kitchen into something rather larger. There may be a change of landlord. The business and the tenancy might be assigned from the original tenant to someone else. The tenant might get a new lawyer who might try it on, if you like, arguing that it was not really a home business—it was a business and therefore should have greater statutory rights. There are also people who simply go back on their word and will say the business is a real business, not a home business, and therefore they should have statutory rights. We are trying to give some guidance.
There is another part of the amendment that was not addressed by the Minister in his letter, which is perhaps another way to try to solve some of these problems. Where there is an initial agreement between the landlord and the tenant that a permitted business is indeed a home business, it would be binding on the parties, possibly provided they notify the court, as happens in some other circumstances. That might deal with the problem. When we had the discussion with the Minister, he argued at one point that there should be no distinction between a home owner running a business and a tenant running a business. However, there is a third party in this: the landlord, whose interests should not so easily be dismissed. Getting the definition wrong could give tenants rights that the landlord never intended that they should have.
To assist the courts, this amendment sketches out some of the issues that might be taken into account in the definition of “reasonableness”. It lays down the sort of issues to be looked at, such whether it is reasonable for this business to receive deliveries, customers, clients, patients or students; whether they can carry out noisy activities; how close the other neighbours live; and whether the business will generate an excessive amount of vehicle traffic, maybe even congestion or parking problems. The non-exclusive list gives some indication of the sort of issues that should be taken into account.
As I said, we support absolutely the intention of Clause 35, but its success will depend on how such definitions are received in the real world, and whether there is sufficient clarity to enable both parties to know where their statutory rights, particularly the landlord’s, will fall, so that this can go ahead and achieve the objectives that we and the Government want. I beg to move.
My Lords, I am grateful to the noble Baroness for her amendment and for providing the opportunity to return to the matter of home businesses, and I was very glad to hear of her useful meeting with my noble friend Lord Ahmad. The UK is a great place to start and grow a business. There has been an increase of half a million home businesses in the UK since 2010, with business confidence at record levels. New technology has allowed millions more people to work from home, many creating innovative businesses. Home working allows people to enter the workforce who otherwise might not be able to do so, for example because of family or health constraints. These opportunities should not be limited to home owners, but should also be available to those in rented accommodation.
Part 2 of the Landlord and Tenant Act 1954 gives tenants of premises occupied for any business purposes the right to renew their tenancies. Under the Act, this security of tenure would not apply if the landlord had prohibited business use in any part of the premises. So at the moment, private residential tenancies will commonly include a covenant against any business use to prevent a tenant gaining a security that they would not enjoy under a residential tenancy. The new model tenancy agreement developed by the Government for private landlords has highlighted the need for reform. The clauses before us today simply ensure that a business tenancy is not automatically created should a home business be permitted to operate in residential premises.
The Government have deliberately taken a broad approach to the definition of a home business, but the definition is clear. A home business will be a business run from a home, in a premises let as a dwelling, and a business of a kind that can reasonably be carried on in a home. I understand that the noble Baroness is concerned about the question of what is “reasonable” to be carried on from home. This will depend on the individual characteristics of the home: its size, its proximity to neighbours and the access to the property, to name but a few. If we attempt to legislate to restrict the definition of a home business and set out a list of the kind that the noble Baroness suggests within this huge variability, we risk restricting a tenant’s entrepreneurship and placing a brake on the growth of this exciting sector.
I know that there are also concerns about potential disturbance, but we are taking these steps because they are sensible, and there are safeguards in place. Planning and environment laws deal with these issues for all properties, owned and rented, and there is no evidence to suggest that these laws are ineffective in dealing with businesses run by home owners. Landlords can still prohibit all or any business use and are free to set the terms of the lease and limit the noise level, as now. Covenants in existing leasehold agreements remain in place, and taxes and building regulations remain unchanged. It would surely be unfair for the law to restrict a tenant’s home business opportunity more than a home owner’s.
With the second part of the amendment, I recognise that the noble Baroness is trying to provide clarity for landlord and tenant, but these clauses already include a definition of a home business, and I fear that her amendment could have perverse consequences. Our clause already allows landlords and tenants to use the tenancy agreement to permit a home business that fits that definition. The noble Baroness’s amendment goes further than this by allowing the landlord and tenant to define a home business themselves. This could allow the landlord to avoid security for business tenancies such as those for shops, which rely on this protection to build and develop their businesses. I am sure that this is not the noble Baroness’s intention for the amendment to add more uncertainty and risk for the tenant.
This clause should not be a vehicle for landlords to remove security of tenure from business tenancies. It would be much harder to broaden the scope of these provisions later to encompass new types of business than to narrow or refine them through secondary legislation. We have included within the clause the power to make secondary legislation which could further limit the scope of a home business, and I assure the noble Baroness that the Government will keep this under review.
Since the 1954 Act, the world of work has changed. We need to make changes to ensure that the Act is not stifling tenants’ innovation. We do not think it is for government to limit the business activity people can carry out in their homes, so long as it is not causing adverse impact on the landlord or neighbours. Existing protections are in place to guard against any adverse impact to others. Why should privately renting tenants be treated any differently from home owners who run businesses from their homes?
I greatly appreciate the work of the noble Baroness to scrutinise this provision, but there is little more that I can say. I hope that the reassurance I have given her today in this House and the discussions that she has had with my noble friend Lord Ahmad will mean that she feels able to withdraw her amendment.
I mean it sincerely when I thank the Minister, but I think she has fundamentally misunderstood. She says that my amendment would restrict and narrow the scope, but it is exactly the reverse. My fear is that, without certainty, landlords could still ban—I think she used the word “ban”—all businesses. My fear is that they will keep doing that because of the uncertainty. I think she has misunderstood what I was trying to achieve. The lack of certainty will leave many landlords banning, restricting or forbidding proper businesses because they will not be confident that it really will be a home business as opposed to someone starting a business and then saying, “Well, actually, this is a proper business”.
She also asked why a tenant should not be treated the same as the owner. The reason is that there is a third party, the landlord. The owner already has security of tenure because he owns his house, but tenants can get that extra security by taking it from a landlord. It is a different relationship. The question of why they should be the same as owners has not really been answered.
I accept that secondary legislation is possible. The Minister said it could be used to restrict use, I think, but it is the other way around. I want to enlarge the scope, so that landlords can do this safely, without automatically giving that extra security to the tenant. I have clearly failed to convince the Government. I am sorry about that because Clause 35 is important, and my fear now is that it will not be used as much as they would like. With those comments, I beg leave to withdraw the amendment.
Amendment 26 withdrawn.
Clause 39: Regulations about procurement
27: Clause 39, page 36, line 6, at end insert—
“( ) The Minister for the Cabinet Office or the Secretary of State may by regulations ensure that the provisions of this section will not undermine the impact of the Localism Act 2011 and the Public Services (Social Value) Act 2012 and have due regard to—
(a) local authorities’ duty to promote economic growth in their relevant area;(b) local authorities’ duty to promote skills development in their relevant area;(c) the advertising and procurement tender period appropriate to the size of the business to ensure a secure procurement process; and(d) the potential harm caused to local companies and businesses by the relevant contracting authority’s choice of supplier through the procurement process.”
My Lords, I shall also speak to Amendment 31. Amendment 27 ensures that the principles of localism and social value are upheld, and that local authorities have a duty to promote economic growth in their relevant areas. It ensures the duty to promote skills development; that the advertising and procurement period is appropriate to the size of the business; and there is due regard to potential harm caused to local businesses by the contracting authority’s choice of supplier.
Amendment 31 proposes that the Secretary of State must publish a report detailing the procedures of the procurement process, which must include: an assessment of the current systems of redress available to small businesses engaged in the procurement process; an assessment of the viability of the small business procurement adjudicator; and guidance on suitability to estimate which companies are best suited for the contracts on offer.
We are proposing amendments that we hope will help round out the Government’s proposals, which we welcome. These amendments seek to add to Clause 39, which currently provides for the Secretary of State or the Minister for the Cabinet Office to make regulations imposing duties on contracting authorities in relation to procurement functions. Ministers can issue guidance to which authorities must have regard. This power can be used in a variety of ways and is extensive in scope.
Concerns have been widespread that these powers could centralise, cause approaches that may well not be suitable for a particular scenario—sometimes considered a “one size fits all” approach—and limit the capacity, particularly of local authorities, to procure strategically and adjust to local circumstance. Local government is already the best-performing part of the public sector in encouraging and obtaining services and working with small businesses, and is a successful local agent. In many ways, it seems incongruous that the Government, who have devolved so much to, for example, Manchester—appreciating its local capacity to do so much and to be such a strategically significant player—do not provide this for others and still do not allow for that sense in which a local authority can act effectively as a strategic agent.
Ninety-nine per cent of UK businesses are small but they account for 10.5% of central government expenditure on procurement. Local authorities have a much better record and just over 50% of such expenditure is with small businesses. Local authorities are also able to create skills, clusters, partnerships and arrangements with a variety of local participants, from the smallest micro-businesses to universities, and make a big difference to the profile and capacity of small businesses in their areas.
As with many other things, there is an issue here about ambition, forward direction and the sense of what we are trying to achieve in opening up public procurement to small businesses. Part of our issue, and the reason we have made our suggestions, is that we would wish small businesses to be able to be even more ambitious than the measures that the Government have already introduced. There can be circumstances where, in procurement, collaborations with small businesses could be better placed to deliver an outcome that would traditionally have gone to a larger business. In our discussions in Committee and beyond—we are grateful for the way in which the Government have been open to the considerations that we have raised—we have even raised examples in which contracts identified as being worth just under £10 million could be procured to a small business, which could deliver tremendous capacity and benefits, and even cut prices significantly.
It is therefore important that we do not consider this issue only in regard to the smallest contracts and we should have a much bigger view about what small businesses can achieve for the public sector and in public procurement. Therefore, that is why we are concerned about requirements placed on turnover or levels of insurance. These are important areas in which government needs to find other ways to increase its skills in procuring these services to make sure that we are delivering the right opportunities for small businesses and encouraging them. Additionally, we are conscious that small business representatives are very concerned to make sure that small local firms’ benefits to local communities are protected. Where they can be, they should be enhanced.
Essentially, we are looking for an environment with more effective commissioning. We would like the Government to see these amendments in the context of how we can upgrade our expectations of what small business can achieve, address one of the bigger obstacles in public sector procurement—the procuring skills of the public sector institutions themselves—and deal with the issue of which many people have direct experience: the great caution and risk-averse culture that exists when procuring these tenders.
As part of these amendments, we would be very keen for the Government to consider the requirement to demonstrate how their commissioning for these contracts would promote economic growth and provide skills development in the relevant areas, take account of the local economic impact and make sure that small businesses are not excluded by dint of a contract’s size or documentation requirements. It is important to point out that we are not saying that procurement processes should be designed in favour of small businesses or local suppliers. We are saying that we need to understand what local suppliers can offer in innovation or support of outcome delivery before commissioning plans or procurement processes are signed off.
Too often, the complaint from local and small suppliers is that they have no opportunity to provide input at the pre-procurement stage. This input is often critical to driving innovation and can lead to improved outcomes and often dramatically reduce costs. If this pre-procurement process is not executed, central government, local authorities and agencies will follow the path of least resistance. The larger suppliers, with the resources to invest in marketing heavily to their customers and prospective customers, will have an in-built bias towards large enterprises. In this context, the suggestion of an adjudicator underpins this capacity to create a much more dynamic capacity for government to interact with these procurement processes. It allows for a much more open discussion, in many ways building on some of the work the Government have done with their mystery shopper scheme, but giving a lot more scope to intervene.
The Minister said that she would like to see better, simpler documentation that makes contracts more accessible to small businesses and voluntary organisations. We agree. However, while the structure and form of documentation is critical, it is not inherently the most important part of the procurement process. In fact, before that process commences, much can be done and much benefit derived. There is sometimes too much focus on simplified documentation, which may well trigger the unintended consequence of an obsession with process and the efficiency of that process at the exclusion of the outcome. If organisations have not properly specified and thought carefully about how to include small businesses in the process, we may well be creating a more efficient machinery for excluding small businesses. It is in the design of the procurement process, and the clarity of the definition of the outcomes that we are looking to deliver, that small businesses will be best advantaged.
We agree that small businesses can be and often are excluded at the commissioning stage. That relates to the notion that due and proper consideration should be given to the role that small businesses and third-sector organisations can play in support of the delivery of whatever outcome is required. It is at this stage that the public sector should be engaging with the market in a structured manner, with early market engagement, telling the market what the issues are, being clear and structured about the outcomes it is looking to deliver, and calling on its local supply chain, including small businesses and third-sector organisations, for their input at this pre-procurement stage. Too often, the public sector bypasses this commissioning process, dusts off the tender document from the previous procurement process, makes a few superficial changes and presses the button. If we get that process right and engage the market in a structured manner, we will specify correctly and ask the appropriate questions at all stages of the procurement process to elicit the right outcome and be able to design the contract that will benefit that. This is not loading the dice in favour of small businesses; it is allowing their voices to be heard in a structured manner to enable local authorities to understand what they have to offer and what innovation they can deliver in support of the required outcomes.
Our amendments in effect build on what the Government are suggesting to create an outcome-based culture and a win-win situation, where central government, local government and their agencies can accelerate the shift away from an input-driven approach and be much better able to design processes that work.
We have been very supportive of a number of things. I mentioned the mystery shopper, the website and the portal. We are also very supportive of the Government’s intentions. We have some issues about the withdrawal of the pre-qualification questionnaires. We do not believe that they are great panacea. As it is, they have been withdrawn only for a particular financial limit and that limit seems quite arbitrary. We could, in fact, have the PQQs. They could be standard, but if they are withdrawn that is fine. It is not, in a sense, material for us. What is more material is the thrust, which we hope the Government share, of local authorities being good at procuring from small businesses and focusing on the outcomes and strategies that will benefit small businesses. That should be protected. We should widen the scope for promoting small businesses, building better procurement skills and strategies inside the public sector, and providing an adjudicator to intervene more clearly. These two amendments will help to build the place of small business in public procurement. As I said, we acknowledge the work that is done but we believe that these amendments add to the Government’s initiatives in a very constructive way. I beg to move.
My Lords, I am grateful to the noble Lord for his amendment and for the opportunity to return to the public sector procurement issue. I also thank him for his interesting and wide-ranging introduction, which I and the officials concerned will read afterwards with considerable interest. The importance of outputs, not inputs, the value of the mystery shopper and the strength of some local authorities in the procurement area are common ground.
In response, I should like to update the House on where we are. Only last week, we were pleased to announce that in 2013-14 central government gave 26.1% of its total spend to smaller businesses, up from 19.9% in 2012-13. This Government have delivered on the aspiration set in 2010 that 25% of this spend would go to small businesses by May 2015. Looking forward, of course we want to do better.
Furthermore, the Public Contracts Regulations 2015 came into force last week. These make it clear how wider policy issues can be delivered through procurement where this achieves value for money and satisfies EU legal requirements and where the policy is clearly relevant to the contract subject matter. This includes, where appropriate, factors related to stimulating local business and growth.
As a result of the recommendations of my noble friend Lord Young of Graffham, the 2015 regulations help to level the playing field for SMEs, working to remove barriers that prevent them accessing public sector contracts. I pay tribute to my noble friend for the work that he has done in this area. All new procurement opportunities will be accessible on a single portal—Contracts Finder—launched last week. PQQs will not be used for contracts below EU thresholds, and there will be 30-day payment terms in all public sector contracts. Clause 39 will build on these new measures to break down further barriers. Following consultation, and once the final regulations are made under this clause, any published guidance will reflect the new obligations in a proportionate and meaningful way.
I shall now look at the amendments, starting with Amendment 27. The Government’s intention is to improve procurement practice. It is not about taking control away from local authority procurers, whether in Manchester or elsewhere. The noble Lord is completely right to emphasise the scale of local government procurement and the opportunities for SMEs for the benefit of both local government and the businesses themselves.
I assure the noble Lord that Clause 39 complements the Localism Act 2011 and the Public Services (Social Value) Act 2012 rather than conflicts with them. It is true that the clause does not reference social value considerations but it does not prevent a contracting authority considering them under the 2012 Act. The social value Act places duties on contracting authorities to consider how they might achieve social value in what they procure and how they procure it. The duties in Clause 39 and those in the social value Act are therefore entirely complementary. The Localism Act is designed to devolve more powers from central government to communities and councils. It does not address the need for procurements to be run in an efficient and timely manner.
Clause 39 is consistent with recommendations made separately in the Local Government Association’s national procurement strategy. That strategy addresses the involvement of small firms, encourages the use of portals, and places more emphasis on pre-procurement market engagement. This is entirely consistent with the 2015 regulations and the way that the Government intend to regulate under Clause 39.
I turn to paragraph (d) in Amendment 27. The Government understand the importance to local authorities of being able to support local business. Such support must, however, comply with EU rules. The noble Lord’s amendment, while well intended, might lead to contracting authorities discriminating in favour of suppliers within a particular region or locality, which would be a breach of treaty principles.
The clause is not about centralising procurement, or taking a “one size fits all” approach. It is about helping all contracting authorities to establish good procurement practice in an effective way across the whole public sector in support of local economies and sustainable growth.
On Amendment 31 on reporting and the adjudicator, as a result of the 2015 regulations, contracting authorities are now required to ensure advertised procurement opportunities on the free-to-use Contracts Finder website and must report on the number and value of contracts awarded to SMEs. For contracts above the EU thresholds, the EU rules require contracting authorities to publish how many SMEs tendered for the contract and whether the successful bidder was an SME.
Regarding the question of a procurement adjudicator, to which the noble Lord referred, I do not consider that an adjudicator would be appropriate or needed as there are already—perhaps I can explain—two distinct and effective systems of redress for small suppliers. First, there is the traditional approach of taking legal proceedings, and all suppliers have clear legal means of redress set out in the remedies directive and in our new regulations. Secondly, there is a less formal scheme that we are setting in statute through this Bill—our mystery shopper service, which investigates referrals about poor procurement practice. I am glad to say that we are giving more teeth to this service, through Clause 40, so that contracting authorities must co-operate with investigations promptly, and suppliers can expect a robust and expedient conclusion, building on the strength that we both agree on.
Turning to the second part of the amendment and the question of requiring the Cabinet Office to publish guidance, I should make it clear that the new Contracts Finder portal will include information on public sector procurement opportunities above specified thresholds. The system will flag which contracts have been awarded to SMEs. The current rules allow for flexible procurement with appropriate controls, and the Government do not believe we should remove contracting authorities’ autonomy to choose how to award their contracts. Equally, we must not unfairly tip the balance in favour of SMEs by effectively reserving contracts for them. To do so would contravene our policy to deliver value for money through competition and would go against the EU treaty principles. I have spoken at length, but I hope that what I have said gives the noble Lord some assurance on the points that he has raised and has given comfort to the House more generally that we have done this in the right way. I hope that the noble Lord will agree to withdraw his amendment.
I thank the Minister for that reply. I do not wish to sound churlish, but I hope she will forgive me if I raise a couple of points in relation to what she has said. I made the point twice that this was not about trying to create a process that was rigged in favour, but was much more about making sure that procurement was open to small business because everything—the skills, systems and outputs—was designed towards achieving a better outcome, so that small business would find it easier to compete to try to gain those sorts of contracts.
I think there are different ways in which the numbers have been calculated. I do not wish to doubt them too much, but some of the tier 1 classification subcontracting has been reclassified. It seems that the numbers have changed slightly. There is progress and I do not wish to undermine or contest that, but it is important that we maintain our ambition for this.
On Amendment 27, I am encouraged that the Minister stated very clearly that it was complementary.
This is important and I would be grateful if the Government would consider what they could do to make sure what they are trying to do was much more explicit. I am afraid that there is great concern about what local authorities must do; how they must act and comply. I think they are actually very good at the job. One of the guides I read recently was for Wiltshire. If the Minister can show me a better central government guide to how to procure than Wiltshire has produced, I would be very surprised and more than happy to give her even more fulsome praise from the Dispatch Box than I have already. An important dimension is that we are placing the onus on local authorities, which have been so good at doing it. I thank the Minister for her comments but an outstanding issue is that some local authorities have done a very good job and we should be mindful of that.
On Amendment 31, the procurement adjudicator has a very useful function. There are systems of redress, but this is not really about those. It is about systems of intervention. As the Minister rightly says, they are doing things on redress, like strengthening the mystery shopper, and we discussed this in Committee. There are also the usual methods of employing lawyers and going through the courts. However, the point of an adjudicator in these circumstances is to be much more dynamic, engaged and involved in encouraging the capacity of those procuring and the people involved in designing the processes. There needs to be a more dynamic conversation to make sure the skills are there. I make the point again that everyone will recognise at different times that there is a risk-averse culture; systems are repeated and there is a lack of a dynamic sense about how you procure better. In the private sector, some go through a sort of performance to make sure their procuring capacity becomes ever more skilful, but this is probably lacking in the public sector. That dynamic conversation, which may need a mediator, is what the adjudicator is for. It is not just about systems of redress.
I have had a quick look at Contracts Finder as it stands at the moment in its beta version. Although I welcome the initiative, it is not particularly user-friendly and needs a fair degree of work to make it so. If the Minister would consider making it available also as an app, then the design might be more useful and reflective of what is needed and it would be more accessible to some businesses. There is no point in putting it on one site if it is not as readily available as it could be. In summary, I would be very grateful if the Minister would give further consideration to what we have said and see if there is any way to deal with the areas we are trying to address on how to get the systems working to procure better. I am very grateful that the Government will look at what I said earlier but anything that would give a stronger indication of how we could do something a little bit more inventive, to add to the efforts that she has already outlined, would be greatly appreciated at Third Reading.
Before the noble Lord withdraws the amendment, I say that I am very happy to reflect further on the important discussion that we have had. I thank him for drawing attention to the Wiltshire guide, because I am a native of Wiltshire, and for his suggestion of making the finder into an app. I will, perhaps, pass that challenge on to those concerned at the heart of government and see whether they can deliver it.
Amendment 27 withdrawn.
28: Clause 39, page 36, line 10, leave out from “authority”” to “, or” in line 12 and insert “has the same meaning as in regulation 2 of the Public Contracts Regulations 2015 (S.I. 2015/102)”
My Lords, I shall be brief in speaking to these relatively minor but important amendments, and I shall start with Amendment 28. The Government are grateful to the Delegated Powers and Regulatory Reform Committee for its scrutiny of the Bill. In its report, the committee recommended that the power in Clause 39 should be changed from the negative to the affirmative procedure. The noble Lord, Lord Mendelsohn, also raised this in our debate in Committee, and so I am glad to be able to give effect to the recommendation.
Amendments 32 and 33 are technical amendments to update references to procurement regulations in Clauses 39 and 40 in the light of the new regulations that came into force last week. I hope noble Lords will support the amendments, and I beg to move.
My Lords, there is an error in the Marshalled List and the proposed amendment should read as follows:
Page 36, line 10, leave out from first “authority”” to “, or” in line 12 and insert “has the same meaning as in regulation 2 of the Public Contracts Regulations 2015 (S.I. 2015/102)”.
Amendment 28 agreed.
29: Clause 39, page 36, line 42, at end insert—
“( ) duties to require an appropriate number of apprenticeships.”
My Lords, at the end of a long day I will endeavour to be as succinct and to the point as possible. We did think carefully about returning to this issue and I have today read through the comments made by the Minister in Committee. Given the importance of the issue, we felt that it was worth doing so. I shall quote the Minister from the previous proceedings:
“We have already delivered 2 million apprenticeship starts in this Parliament, and there are 20,000 apprentice vacancies around England at any one time. However, I share the noble Lord’s concern about getting enough young apprenticeships”.—[Official Report, 14/1/15; col. GC204.]
That goes to the heart of these amendments, although they are not necessarily aimed just at apprenticeships for the young. However, that is surely a primary concern given that there has been a decline in that area and given that in some parts of the country, despite welcome drops in unemployment, we still have significant high levels of youth unemployment. In that respect, I make no apology for returning to this matter.
I pay tribute to the Government’s commitment to apprenticeships but I have also complained in the past about simply quoting the number of 2 million, because the number is not particularly helpful. It needs to be disaggregated if we want to look at the figures for 16 to 24 year-olds. We can then see that more than 50% of those 2 million apprenticeships are in fact adult apprenticeships, and some of them would fall under the classification of reskilling rather than new jobs—not that I would dismiss that as unimportant. But I have yet to hear an argument from the Government or the Minister which is a rebuttal of our view that if we are talking about public procurement contracts, there should be a requirement on the part of those bidding for them to stipulate how many apprenticeships they will provide and what level of training will be available.
Of course this should not necessarily apply to all contracts. There needs to be a cut-off figure, which we have suggested should be for contracts worth £1 million or more. That is an appropriate level. The response from the Minister has been that this might be a deterrent to smaller suppliers in the chain. I again cite the Crossrail model, where that has not proved to be the case. It remains a serious problem that only around one in five employers is recruiting apprentices, and that only about a third of FTSE 100 companies do so. The challenge is to involve a larger number of employers. One way to do that is for the Government to show that they are serious about this issue and that if companies want to bid for significant public procurement contracts they have to demonstrate the seriousness of their intention. I have looked carefully at what the Minister said and still cannot find any reason why we could not go down that road. We do not believe that there is any legal impediment to encouraging smaller employers or contractors to bid for such contracts.
The Government should recognise that if they want to encourage more companies and more employers to get involved, the apparatus with which they replaced the RDAs, the local employment partnerships, should surely be part of the strategy. There should be a requirement on local employment partnerships to work with local employers and local authorities to produce the maximum number of apprenticeships within the geographical areas that they cover. That is a fairly modest aim in the circumstances, unless we feel that we are being so successful in apprenticeship provision that we do not have to worry about it. I do not believe that we have reached that situation.
That is why we suggest in Amendment 30 that there should be,
“duties on local employment partnerships to work with the relevant small and medium enterprise organisations to deliver an apprenticeship strategy”,
and an annual review. In that way, the Government would have real information on where the best practice and achievements were taking place and they would be able to focus on local employment partnerships that were not delivering.
The second part of the amendment refers to,
“duties on schools, colleges, university technical colleges … and other relevant education institutions to have established links with local businesses to encourage apprenticeship development”.
As I have said on a number of occasions, another challenge that we face—I see it in schools that I visit as part of the Lords outreach programme—is that far too many schools are still committed only to pushing the maximum number of their students through to A-levels, regardless of whether it is suitable for them. They do not carry out the legal requirement on them to give their pupils a wide range of career guidance which shows them that there is another, vocational route, that they can earn while they learn, and that it is just as successful a route—for some students, it is even more successful—to a very worthwhile career.
It is not as though there is not a real need to do this. We know that we have an enormous number of vacancies in engineering and construction. We know that there is a huge gender imbalance as well. There is an awful lot of work that schools and colleges need to do in establishing links with business.
I look forward to the Minister’s response. I hope she will use this as an opportunity to take away the suggestions that we have proposed in these amendments and have another look at it before she comes back to us at Third Reading, rather than just giving us the arguments that we heard in Committee. On those grounds, I beg to move.
My Lords, I am pleased to follow the noble Lord, Lord Young. In my heart, I am with him 100%. The opportunity to encourage through public procurement the expansion of apprenticeships and training and development is certainly worth while. The trouble is that these clauses are very much concerned with trying to enable small businesses to have a greater chance for public procurement contracts. Obviously, if we over-complicate the procedure, that is a problem. However, I just wanted to register my hope that the Government are continuing to look at this. It is something that they can encourage in the public sector and, indeed, they are already doing so. We need to do much more and there is a lot of very good casework and examples of where this is being done successfully at all levels of industry. I hope that the Government will continue to give this particular priority.
In addition, the linkages to the work of the LEPs are very important. We also have in schools a big obligation to promote technical apprenticeships and encourage more young people to take part. I am dubious as to whether the Government will be able to accept something at this stage in this Bill but it is something that should be a continuing priority.
My Lords, I thank the noble Lord, Lord Young, for his amendments and for allowing us to debate the important subject of apprenticeships, albeit rather late in the evening. I am also grateful to my noble friend Lord Stoneham for adding his wisdom to the debate, expressing concern about the particular provisions we are looking at but making absolutely the right point about the need to move the apprenticeship agenda forward and do ever more.
Starting with Amendment 29, I should, perhaps, remind the House that there is some outstanding work currently under way in this area. The noble Lord mentioned Crossrail as a trailblazer. It is an amazing project in all respects and has recently hired its 400th apprentice. Obviously, there is a huge opportunity to train apprentices on big construction procurement projects of that kind.
The Government have agreed to support apprenticeships growth in the provisions brought forward by city deal partners, linked to their growth sectors in the local economies. For example, 1,500 new high-value manufacturing apprenticeships have been created in the West Midlands and 420 apprenticeships have been created in Greater Cambridge in different priority sectors, from professional and scientific, through to advanced engineering. We are also encouraging employers to take on apprentices by creating the apprenticeship grant for employers and relaxing national insurance contributions for employers who take on apprentices. However, not every procurement is appropriate for delivering apprenticeships. I think the noble Lord acknowledged that. Trying to deliver a policy where it does not properly fit creates bureaucracy. We do not want a situation where suppliers are forced to meet a requirement to create new apprenticeship opportunities every time a new contract is awarded. This would change the very nature of apprenticeships, meaning that they were not linked to the company’s needs. Young people could be let go before their apprenticeship ended, a concern that I have heard from the Local Government Association. Even more important, it could be damaging to the individual apprentice.
We also have to follow legal requirements. For above-EU threshold contracts, a contracting authority must always be able to show that the requirement to provide an apprenticeship is sufficiently linked to the subject matter of the contract. Some contracts will have no links with apprenticeships, so forcing apprenticeships into all of them could even breach these EU rules.
The noble Lord might say that the amendment refers to requiring an “appropriate number” of apprenticeships so this does not apply to every procurement. But how would a contracting authority or Government know what an appropriate number was? A blanket requirement about apprenticeships as proposed in the amendment would not work. However, the Government support the appropriate inclusion of training and apprenticeship criteria in procurement and we believe that such requirements are most likely to be relevant on major construction and infrastructure projects. We need to adopt a thoughtful and considered approach, working with industry. I assure noble Lords that we are actively working to achieve this.
I turn to Amendment 30. I should like to reassure the noble Lord that we support schools and local enterprise partnerships working together with SMEs to deliver more training and apprenticeship opportunities. There are some highly successful examples of this work taking place. Indeed, following a debate we had on an Oral Question that the noble Lord asked, I shared some of those good examples with him. I will not delay the House by repeating those this evening.
I understand that the noble Lord’s intention is to place general duties on local enterprise partnerships and educational institutions such as schools to encourage, develop and promote these apprenticeships. However, I do not believe that moving away from good practice in this area to regulation is the right way ahead. Local enterprise partnerships are flourishing because we are addressing exactly the barriers identified by employers, getting them involved directly, simplifying the system and giving them a free hand so that they can do the right thing. The Government are working with a number of such partnerships as part of the city and local growth deals to drive up business demand for apprenticeships in their localities. This allows local enterprise partnerships to choose the most effective way to promote apprenticeship development.
I share the noble Lord’s concern about the way apprenticeships declined in the first part of the 2000s. As he knows, we are getting back on track and doing many of the right things. My noble friend Lord Stoneham is right to urge us to do more and to make it a priority—which I can confirm that it is. However, I do not believe that legislation of the kind proposed in the amendments is right or sensible. While the noble Lord, Lord Young, knows I share his wish to increase apprenticeships, it is wrong to introduce new bureaucratic regulatory burdens in a small business Bill. I fear that these amendments could be perverse in their effects and I hope that on reflection he will feel able not to press them.
I thank the Minister for her response. Like my noble friend Lord Mendelsohn, I do not want to appear churlish, especially at this time of night, but it was a predictable response and a rerun of the previous analysis. Of course, I do not want to introduce any level of bureaucracy that would act as an impediment to SMEs in bidding for contracts. That would be perverse. However, that does not need to be the case.
I am not suggesting that the words within this amendment are by any means perfect. We do not establish the criteria one would need to apply in introducing this. However, I do not believe that there is a legal barrier. We proved that with the Olympic requirement and the Crossrail requirement. If it was approached in the right way, this could be positive. I listened carefully and tried to think of a scenario where somebody bidding for a significant public procurement contract could actually say, “Well, no, we don’t need any apprenticeships in this circumstance”. I find that hard to believe. It is interesting: when I look at the analysis of the types of apprenticeships that have occurred under the Crossrail experience, they are rich and varied, including finance, accounting and business administration. There is a whole range. It is not just the engineering things. They have been much more imaginative in their approach there, so I am baffled by this idea that somehow there are significant public procurement contracts where no apprenticeships would be merited. Then, on the question of the role of local employment partnerships, of course we want them to flourish and be imaginative and proactive.
My concern is that we still have significant numbers of schools and colleges that are not carrying out their legal requirement to give a full range of career guidance to their pupils and students, and that they have not established the kind of links with business that they should. The idea that it would again be bureaucratic to put a requirement on them to establish these links is not a bad one: it would be a good practice for them. They should also report annually, so that we could see the progress that they are making.
I hope that the Minister will reflect carefully on this brief discussion and see whether she will be able to address these issues when we come back to them on Third Reading. In the circumstances, I beg leave to withdraw the amendment.
Amendment 29 withdrawn.
Amendments 30 and 31 not moved.
32: Clause 39, page 37, line 4, leave out “negative” and insert “affirmative”
Amendment 32 agreed.
Clause 40: Investigation of procurement functions
33: Clause 40, page 37, line 31, at end insert “or
the Public Contracts Regulations 2015 (S.I. 2015/102) apply, disregarding for this purpose the operation of any financial threshold provided for by those regulations;”
Amendment 33 agreed.
Consideration on Report adjourned.
House adjourned at 10.01 pm.