Oral and written evidence - Parliament of the United Kingdom

SCIENCE AND TECHNOLOGY SELECT COMMITTEE Public procurement as a tool to stimulate innovation Oral and written evidence Contents The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12) .......................................................................................................................................... 4 Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2) ................................ 9 Birmingham Science City—Written evidence (PP 5)....................................................................... 14 Professor Lewis M. Branscomb—Written evidence (PP 8) ........................................................... 20 Cabinet Office, Department for Business, Innovation & Skills (BIS), Department for Transport and Highways Agency—Written evidence (PP 18) ...................................................... 23 Cabinet Office, Department for Business, Innovation & Skills (BIS), Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 ................ 23 Francis Maude, Minister for the Cabinet Office; David Willetts, Minister of State for Universities and Science, BIS; and Mike Penning, Parliamentary Under-Secretary of State, DfT—Oral evidence (QQ 176-196), 25 January 2011 .................................................................... 23 The Campaign for Science and Engineering—Written evidence (PP 23).................................... 24 Brian Collins, Chief Scientific Adviser (DfT and BIS), NESTA and the Technology Strategy Board—Oral evidence (QQ 52-83), 11 January 2011 ..................................................................... 31 David Connell, University of Cambridge—Written evidence (PP 13) ........................................ 32 David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 .................................................................................................................................. 44 David Connell, University of Cambridge—Supplementary written evidence (PP 38) ............. 57 Colin Cram, Marc 1 Ltd—Written evidence (PP 31) ...................................................................... 60 Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011....................................................... 66 Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35) ............................................ 89 Colin Cram, Marc 1 Ltd—Further supplementary written evidence (PP 36) ............................ 95 Cundall—Written evidence (PP 11) .................................................................................................... 99 Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) ............................................................................................. 101 Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 .............. 111 Department for Business, Innovation & Skills—Supplementary written evidence (PP 33) ... 126 David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 .............................................................................. 128 Department for Business, Innovation and Skills—Supplementary written evidence (PP 37) 142 Department for Business, Innovation and Skills—Further supplementary written evidence (PP 41) ...................................................................................................................................................... 147 Department for Transport, Cabinet Office, Department for Business, Innovation & Skills (BIS) and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 ........................ 150

Mike Penning, Parliamentary Under-Secretary of State, DfT; David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office—Oral evidence (QQ 176-196), 25 January 2011 ........................................................................................ 151 The Design Council—Written evidence (PP 29)............................................................................ 152 East of England Strategic Health Authority—Written evidence (PP 9) ..................................... 155 Professor Jakob Edler, Professor Luke Georghiou and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16)........... 159 Professor Jakob Edler, University of Manchester; David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 ...................................................................................................................................... 159 Jakob Edler and Luke Georghiou—Supplementary written evidence (PP 32) ......................... 159 Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16)........... 160 Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester; and David Connell, University of Cambridge—Oral evidence (QQ 35-51), 21 December 2010 ...................................................................................................................................... 169 Luke Georghiou and Jakob Edler—Supplementary written evidence (PP 32) ......................... 170 Happold Consulting—Written evidence (PP 14) ........................................................................... 172 Professor Chris Hendry—Written evidence (PP 4) ...................................................................... 178 Highways Agency, Department for Transport, Cabinet Office, and Department for Business, Innovation & Skills (BIS)—Oral evidence (QQ 1-34), 21 December 2010 .............................. 180 The Institute of Engineering and Technology (IET)—Written evidence (PP 24) .................... 181 Intellect—Written evidence (PP 19) ................................................................................................. 186 The Intelligent Transport Society (ITS)—Written evidence (PP 17) ......................................... 189 Ivensys Rail—Written evidence (PP 26) ........................................................................................... 191 Johnson Matthey PLC—Written evidence (PP 10) ........................................................................ 197 Juice Technology Limited—Written evidence (PP 3) .................................................................... 198 Rayner Mayer—Written evidence (PP 28) ...................................................................................... 200 The Ministry of Defence—Written evidence (PP 27) ................................................................... 204 NESTA—Written evidence (PP 7)..................................................................................................... 206 NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 ....................................................................... 209 Olswang LLP—Written evidence (PP 20) ........................................................................................ 226 Mr Charles Penny BSc CEng FICE FIHT FCMI MIGEM—Written evidence (PP 22) ............. 232 Alan Powderham, Mott MacDonald; Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty—Oral evidence (QQ 105-146), 18 January 2011 .............................................................. 235 Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30) ............. 236 Rotherham NHS Foundation Trust—Written evidence (PP 15) ................................................ 241 Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 ................................ 242 Technology Strategy Board—Written evidence (PP 21) .............................................................. 253 Technology Strategy Board, NESTA and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 ....................................................................... 263 Transport for London—Written evidence (PP 25) ....................................................................... 264 Transport for London—Oral evidence (QQ 147-175), 25 January 2011 ................................. 270 2

Transport for London—Supplementary written evidence (PP 39) ............................................ 285 Transport for London—Further supplementary written evidence (PP 40) ............................. 289 Transport Research Laboratory (TRL)—Written evidence (PP 6) ............................................ 293 Dr. Elvira Uyarra, Professor Luke Georghiou and Professor Jakob Edler, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16)........... 294 Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) ....................................................................................................................................... 295 Andrew Wolstenholme, Balfour Beatty; Colin Cram, Marc1 Ltd; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011..................................................... 301 Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) ...... 302

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The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12)

The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12) AIRTO is pleased to have the opportunity to contribute to the work of the Select Committee on ‘public procurement as a tool to stimulate innovation within industry’. This submission deals in particular with the impact that public procurement could have on private investment in r&d and on the uptake and wider exploitation of technological research and development. AIRTO believes that this is one of the most powerful levers at Government’s disposal for seeding greater private investment in r&d and promoting subsequent commercial exploitation of UK research and development, both at home and in export markets. It involves the Government being an early adopter of new and innovative products and services. It also assumes that the government would seek to encourage and utilise UK based suppliers, including SMEs with significant global growth potential, within the rules of open competition. There is a further assumption that procuring an innovative solution is more expensive and risky than procuring an established and proven solution. This may not be true in all cases. Innovative solutions can often result in reduced whole-life costs, which are not taken into account in a simple procurement process. The push for lower costs can stimulate innovation. There will often be a greater risk associated with the implementation of innovative solutions, which the Government should be prepared to share with the supplier, otherwise suppliers will be deterred from offering innovative solutions. Sharing of risk between customer and supplier is a key to incentivising the offering and take up of innovative solutions. Rationale What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? 1.1 Government relies on most UK industries to a greater or lesser extent, if only to create wealth and to contribute to its tax take. Some of these industries also provide essential services, equipment and infrastructure (eg transport, defence) for which Government ultimately has an overarching responsibility to the citizens of the country. 1.2 Encouraging innovation on the part of suppliers to Government can deliver multiple benefits: i)

improved infrastructure and services, together with more extensive portfolios of improved products and services for suppliers to exploit overseas. Without such an approach to stimulating domestic innovation it is likely that the Government will, in due course, resort to buying from overseas suppliers whose innovation has been supported elsewhere. This may give lowest immediate cost to the public purse but at the expense of stimulation of the UK industrial supply base.

ii)

Improved whole-life costs of services, equipment and infra-structure. 4

The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12) iii)

increased presence in overseas markets for domestic suppliers of these products and services, backed by the credibility of a UK Government customer.

iv)

where these suppliers are SMEs - greater appeal to potential investors in those companies, who will usually be looking for evidence of customer sales and revenue prior to investment.

v)

encouragement of a healthy ‘customer/contractor’ attitude, contrasting with the tendency to ‘grant dependency’ sometimes seen in the relationships involving government grants to support innovation.

1.3 Such measures are not without a measure of increased risk to the Government, but it is our view that with appropriately improved procurement management the benefits above significantly outweigh the downside risk. Improvement in procurement management will also yield major cost savings on over-runs and disputes. Co-ordination of innovation and procurement policies 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What crossgovernment mechanisms and co-ordination is in place to help to facilitate this? 2.1 There have been some moves to align the technology priorities supported by the Technology Strategy Board with upcoming procurement initiatives through the interaction between the Government Chief Scientific Advisors and through other inter-departmental dialogues. This co-ordination seems to be increasing and is greatly to be welcomed. It should assist UK suppliers attain competitive positions in open competitions for public sector contracts. This would ideally track back to influence the longer term research agenda of the Research Councils and the academic community, but this is harder to achieve given the way that research priorities are set, largely within the research community. 2.2 This lack of influence on the academic community is of concern because the public support for applied research and development across the spectrum is low by comparison with the funding invested in earlier stage pure and fundamental research in the UK. This is a constraint on the ‘muscle’ that the UK brings to bear to exploit its research outputs and results in unrealised exploitation potential from the UK research base. The use of public procurement actions, creating a public sector customer base for innovation, will stimulate private sector interest in investing ahead of or in parallel with public sector procurement and should thereby bring more funds to bear on applied r&d, helping to redress this imbalance. 2.3 ‘Joined-up’ procurement actions across Government Departments can also assist. An example would be in the procurement and management of scientific equipment, facilities and assets, where greater co-ordination could not only increase utilisation and value but help to spread best practice and customer awareness of procurements requirements and processes.

Mechanisms through which government procurement can stimulate innovation 5

The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12) 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? Aside from some initiatives in the healthcare and defence sectors, and the Small Business Research Initiative operated by the Technology Strategy Board, we believe that there is little being done in this respect at present. 4. How might public procurement more effectively stimulate innovation within industry? 4.1 Through a procurement process designed to encourage innovative solutions. This could involve credit in the tendering process for innovative bids, and more comprehensive economic comparisons involving whole-life costing. 4.2 Through greater co-ordination as outlined in 2 above. However, the setting of Research Council research agendas and the Research Assessment Framework can act to undermine this by exerting an overriding influence that tends to dilute the research focus at the more applied end of the spectrum. 4.3 Procurement of translational support for the outputs from scientific research, through mechanisms proposed for the new Technology and Innovation Centres (TICs), will have a significant multiplier effect on the uptake and implementation of innovative products, processes and services in business and industry. Many of the member organisations within AIRTO are already well placed to undertake similar work but the new TICs with their Government procured backing will significantly increase the available capacity, rate and volume of innovation uptake. 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? The USA has a number of useful schemes, including the Small Business Innovation Research scheme, that use a procurement mechanism to stimulate and support innovation within industry. This includes their dual use procurement actions in the defence sector. Using the appropriate features of these in the UK procurement process would have a significant effect on promoting innovative solutions. The procurement process 6. What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? As far as we are aware, there is relatively little current incentive. There are far greater pressures to reduce risk, to use existing proven technologies and products, and to maximise value for money in that context. 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? Again, as far as we can see, those responsible are generally not experienced in complex procurement. Procuring for innovation requires even more ‘intelligence’ on the part of the customer to support the more complex trade-offs involved and to handle the responsibilities involved in taking the associated risk. It will require an 6

The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12) auditing regime that is also cognisant of, and allows for, the risks being taken in the procurement in order to achieve a higher level of innovation. o Do they have the appropriate expertise to identify innovative solutions to procurement needs? They would need additional support. o How well do they identify when innovation could provide a solution to a procurement need? This is not currently done effectively and, again, they would need additional support. o How effective is the identification of and dialogue with appropriate potential suppliers? This is currently driven by the short-term, financial, or low-risk factors discussed as above. Again, additional support would be needed for a more sophisticated relationship with innovative suppliers. 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? The main obstacles are: a) absence of sanction and authority to take such risks (see above). b) absence of the requisite skills to do this unaided (see above also). c) absence of incentive to take the additional risk. d) Use of short-term, unsophisticated procurement criteria. The need for additional skills could be tackled through the use of independent ‘customer’s friends’ to assist with procurement actions. The sanctioning of risk and the putting in place of an incentive will require a change in remit, evaluation procedures and audit criteria together with explanations to the public and other parties interested in the effective use of public funds. It will be important to emphasise that the risk is being taken to increase the quality and usefulness to the public of the assets being acquired. The benefit to UK companies has to come through separate but related measures to assist UK companies compete effectively in open public procurements. 9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? Potential suppliers are competing on immediate price against offers that do not embody the same innovation and functionality and this price tends to be an overriding consideration, rather than whole-life cost. Procurers find it difficult to justify the value of an innovative product or service unless it is accompanied by a lower price. The response in 9 above suggests how these issues might be tackled. 10. Declaration of interests

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The Association of Independent Research and Technology Organisations (AIRTO)—Written evidence (PP 12) This submission is made by the Association of Independent Research and Technology Organisations (AIRTO). The organisation represents research organisations and technical consultants, operating in the space between the academic research of universities and the commercial needs of industry. AIRTO members undertake research and development, and knowledge and technology transfer. They are largely funded by industry, but do undertake competitively bid projects supported by UK and European public funding programmes. AIRTO currently comprises 37 independent organisations, employing more than 20,000 scientists and engineers, with a combined annual turnover in excess of £2billion. The members of AIRTO are: Aircraft Research Association Limited (ARA). ARUP. ATcare. BMT Group Limited. BRE Group. The Building Services Research and Information Association (BSRIA). Campden BRI, CERAM Research Ltd. City University London. CIRIA. E-Synergy Ltd FIRA International Ltd. Halcrow Group Ltd. Health and Safety Laboratory (HSL). HR Wallingford Group Ltd (HRL). Institute for Sustainability. ITRI Limited. Leatherhead Food Research. LGC. MIRA Ltd. The Motor Insurance Repair Research Centre (MIRRC). National Metals Technology Centre (NAMTEC). National Physical Laboratory (NPL). National Nuclear Laboratory (NNL). The Paint Research Association (PRA). Pera Group. QinetiQ. Quotec. SATRA Technology Centre. The Scottish Whisky Research Institute (SWRI). The Smith Institute. Smithers Rapra Technology Limited. The Steel Construction Institute (SCI). Thames Innovation Centre Ltd (TIC). TRADA Technology Limited (TTL). TWI Ltd. University of Surrey. December 2010

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Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2)

Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2) WMG has worked with great success for thirty years at the interface between academia and industry, with major programmes in research, education, and knowledge transfer. It is noted for its promotion of product and service innovation to improve industrial competitiveness and public sector effectiveness. Answers to Questions provided by the Select Committee Rationale 1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? There are various surveys which show the main catalysts for innovation in an organisation (roughly in priority order) are • • • • • • • • • • •

Employees Business partners Customers Consultants Competitors Associations / networks Internal Marketing & Service Units Internal R&D Academia Think-tanks Labs and/or other institutions

Government is such a major customer for industry that, like any other customer, they can require innovation in the products and services they procure (and if product/service innovation is not there they can go elsewhere). The most dramatic example of government-driven innovation is US defence procurement, which has provided the basis for world-leading innovation which has catalysed extensive commercial opportunities. In France government procurement provides a major stimulus for their indigenous industries (especially aerospace and IT). In the UK healthcare is an example for procurement-catalysed innovation (especially in pharmaceuticals). One of the ways in which government procurement can contribute to national success is by driving UK businesses to produce products that are then competitive globally. By being a demanding large-scale purchaser, government procurement can give businesses the focus needed to supply goods that have market niches elsewhere and export value. Co-ordination of innovation and procurement policies 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies 9

Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2) and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? The 2003 DTI Innovation Report “Competing in the Global Economy: The Innovation Challenge” stressed the importance of coordinating procurement best practise across government as a stimulus to innovation (see Chapter 5 of the report). It is sobering to reflect on how few of the excellent recommendations in this report were seen through. Greater conviction and collective long-term commitment across government departments and agencies to innovation stimuli are needed for there to be any long-term gain. There are very few examples of where UK government policy objectives have been effectively meshed with innovation policies. UK government departments and agencies are still failing in practice to deliver credible “joined-up thinking” on procurement on a sustained basis. We are not aware of any coordinated procurement exercises of any significance, for example: across Universities who require very similar advanced instrumentation; or across hospitals (whose requirements for advanced CT or MRI scanners are remarkably similar). Companies could more effectively deliver economy of scale and new innovations if there was serious coordination of procurement. But since they have to handle each tender on a one-off basis there is scant scope for innovation and economy of scale that could be driven by coordinated procurement. Mechanisms through which government procurement can stimulate innovation 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? In high-performance computing, the research councils have been astute in building in regular performance enhancements at various points in a service contract. Of course for something like computing, where “Moore’s Law” drives the innovation road-map, this may be easier than other fields. But there are fields of advanced scientific instrumentation (e.g. MRI field strength) where new milestones can be identified which drive innovation. The US has operated for many years a highly successful Small Business Innovation Research scheme (SBIR) which uses government procurement to drive innovation by offering grants to support small businesses in supplying US government R&D. It provides business opportunities for innovative small companies whilst solving the needs of government departments. It has led to the rapid growth of many new companies. For a number of years the UK has tried to emulate SBIR (the UK version is in fact called SBRI, Small Business Research Initiative) but without much real commercial success, operating at a sub-critical level within individual departments. The “Forward Commitment Procurement” initiative has shown some promise and SBRI is now led by the Technology Strategy Board as a single point of focus, which is to be welcomed. However, the scale of activity is still in the “noise” levels of departmental budgets; for example only £8 million, with an average contract value of £30,000 was committed over a six month period in 2009. The risk/return is insufficient for most companies to participate. A significant barrier to accessing support from government is the relative cost of applications in time and effort. While for large suppliers this can be worthwhile, for a small business devoting resources to access government support can undermine the core business. Simplification of access to SBRI programmes would make them more attractive to potential innovative suppliers. 10

Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2) 4. How might public procurement more effectively stimulate innovation within industry? More effective road-mapping. One of the key issues for potential suppliers is clarity about future government procurement needs. By working with suppliers to set out the future needs of a sector, you increase the reward for companies that rise to the challenge and invest in R&D to meet emerging demands. More effective joining-up of requirements across departments and agencies. For example, a current open SBRI call is from NHS South East Coast in causes of strokes and rehabilitation processes. This is a national need and could have been pursued through a ‘call’ that invited different approaches from, say, twenty organisations each working with a different NHS Trust. This would encourage greater participation, a greater chance of success for applicants and more opportunities for innovation. Better management of the procurement process and recognition of the added value of innovation. Application processes are needed that are ‘light-touch’ and not overly timeconsuming for companies. SBRI should adopt an approach that is attractive to small companies with an acceptable risk/return for companies applying. Greater imagination from procurers. Better understanding of technology from procurers. The shortage of STEM skills across Government means that enlightened procurement is a challenge for well-meaning public servants who lack understanding of technology and the nature of innovation. Perhaps links into independent R&D organisations and appropriate academic teams (such as WMG) or could help inform the procurement process would be helpful. 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? See comments above about procurement practises in US and France. Singapore is a good example where central co-ordination by their Economic Development Board has been a major stimulus for innovation. Thus for example Singapore committed itself to being a global hub for computer storage – and took the measures to train people, build up a research capability, and provide attractive inward investment terms in this technology. Over 40% of global mass storage technology, and over 70% for high-end computing storage, comes out of Singapore as a consequence. In the US agencies such as DARPA have been very successful in the use of “demonstrators” and “grand challenges” in driving innovation through procurement. WMG has argued strongly in the past for the use of “demonstrators” in the UK to drive innovation. (WMG’s Formula 3 racing car based on sustainable materials is a good example of a successful demonstrator; it was nominated by Time Magazine as one of its top 50 innovations for 2009.) Whilst there is now greater acknowledgment of the potential of “demonstrators” the UK national practice remains modest in scale. 11

Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2)

The procurement process 6. What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? The best incentive would be to make it an integral part of job requirements and annual performance reviews. The requirement to demonstrate achievable innovation can be incorporated into most contracts. As already noted the innovation opportunity from public procurement was flagged up many years ago in the 2003 DTI Innovation Report. The response from government departments has been minimal and marginal, and with the exception of SBRI not sustained (and even then at far too modest a level). 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? o Do they have the appropriate expertise to identify innovative solutions to procurement needs? To be an intelligent customer you have to understand the technology and potential added value opportunities as well as effective procurement processes and financial rigor. The UK is weak in STEM skills generally but especially across Government, and there is little collective empathy for innovation, making it difficult to create a cohort of smart procurers. There is also a public sector “Risk aversion” issue to deal with. Civil servants do not wish to be seen to “gamble” on innovation, and so cannot anticipate future developments as well as those in the Private sector. There is a need for culture change that supports those who make breakthrough changes, not financially but through career/recognition. See also the idea above about working with independent R&D organisations and appropriate academic teams (such as WMG) in providing expert advice on technical options and innovation opportunities. o How well do they identify when innovation could provide a solution to a procurement need? No additional comment to make. o How effective is the identification of and dialogue with appropriate potential suppliers? No comment to make. 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? Lack of policy, leadership and imagination on the issue from the top levels of government remains a key issue; the lack of STEM know-how at the top of government, likewise. There is seldom any obvious connection practiced between future strategic requirements and current procurement. Procurement is done now, to meet a current need. There isn’t a pre-competitive innovation phase. With the welcome recent exception of electric vehicle infrastructure initiative there appears to be little connection between future government procurement needs and TSB calls which often appear to be R&D driven. Demonstrators (see above) could have a major part to play here, where competing organisations work together to develop new approaches prior to competitive tenders. 12

Professor Lord Bhattacharyya, Director, WMG—Written evidence (PP 2) 9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? Companies must find it very frustrating dealing with poorly informed “customers” and fragmented procurement. Sure, they get the contracts which keep them in business – but they also know that smart customers driving innovation will help keep them ahead of the competition and open up new market opportunities. Those who win contracts are probably more often than not the companies that ‘know the system’ rather than those who might have the most innovative ideas. Probably many opportunities for cross-sectoral innovation are lost as a consequence. If there was a genuine collective commitment across Government departments and their agencies to use public procurement to stimulate innovation then at least some of the obstacles would disappear. December 2010

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Birmingham Science City—Written evidence (PP 5)

Birmingham Science City—Written evidence (PP 5) 1.

Birmingham Science City was designated in the 2005 budget by HM Treasury. Since this time, it has developed a number of important partnerships between the research, public and private sectors with the aim of developing world class research (e.g. through the Science City Research Alliance between the universities of Birmingham and Warwick) but also to develop solutions to user-defined problems through demonstrator activity. In order to do this, we have a number of working groups with a range of partners sitting on them, one of these has the theme of driving innovation through procurement. It is this working group that has provided this response to the House of Lords call for evidence.

Q1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? 2. User Innovation: The rationale for innovative public procurement can be traced back to the 1930s when Herbert Read (1934) noted that ‘the production of well-designed objects of daily use would undoubtedly be stimulated by a higher level of public taste’ (1934: 163). Read was arguing that sophisticated consumers would force British companies to produce well-designed products that would be commercially successful. This argument also applies to public sector procurement. Sophisticated public sector procurement has the potential to encourage suppliers to innovate and such innovation should result in job creation and retention and more importantly enhancement to national gross value added and exports. The importance of end-user led innovation has been recently identified through the work of von Hippel (USA) and Bryson (UK). This highlights the role various forms of participatory innovation play in the design and development of innovative products. In ‘open innovation’ companies invite customers to become partners and co-producers in the design and development of new products (goods and services) while participatory innovation attempts to distribute the design and development process amongst all stakeholders (employees, partners, end-users). Recently Bryson and Rusten (2010: 195) have argued that ‘it is possible to differentiate between processes of active and passive user innovation; ‘active’ involves products and companies that develop procedures to exploit user innovation whereas ‘passive’ occurs serendipitously’. At the moment, it would appear that many of the benefits that come from public procurement are obtained from serendipitous interactions. The introduction of innovative or outcome based public procurement has the potential to transform public procurement from a relatively passive form to an active process of economically and socially beneficial interactions between suppliers and procurers. 3.

• • • 4.

Innovation Value Chain: In 2007 Hansen and Birkinshaw developed the Innovation Value Chain (IVC) as a general framework within which firms’ innovation activities can be considered. The IVC is ‘a sequential, three-phase process’ that involves knowledge investment, innovation process capability and value creation capability’ (Hansen and Birkinshaw 2007, p. 122). The IVC has recently been applied to a major study of innovation in the UK (Roper et al., 2009). The IVC approach highlights that firm-level innovation requires a firm to: Access knowledge for innovation and this includes both the scale of firms’ financial investments but also the extent of their ‘open innovation’ activities with other organizations Build Innovation as firms translate their knowledge investments into innovation outputs Commercialisation activities to exploit their innovations in the market place. Public procurement as an innovation tool is able to engage with potential suppliers by encouraging them to consider the development of new products and also to stimulate the 14

Birmingham Science City—Written evidence (PP 5) commercialisation of public procurement driven innovations. It thus has the potential to catalyse innovation at the start and end of the procurement process (access to knowledge and commercialisation). Evidence: 5. Birmingham City Council (BCC) is one of the pilots for Forward Commitment Procurement (FCP), a methodology developed by the OGC and BIS. Two examples of how BCC is exploring procuring innovation are included below. Project 1: Birmingham Energy Savers (BES) 6. BES aims to offer homeowners and businesses in Birmingham the chance to have significant energy improvements made to their properties, both through insulation and small scale power generation, which in the long term will reduce household expenditure and also has the potential to provide an additional income. The BES is a ground breaking project which could ultimately see all homes in Birmingham retrofitted with energy efficient improvements. It will initially be launched as a pilot project. It is anticipated within the fiveyear target that if 1 in 5 homes in the pilot area take up the retro-fitting offer (5,000 homes), the project will see an annual CO2 saving of more than 3750 tonnes, and create 270 job in the process. 7.

A major barrier to the success of the project is that there is a lack of innovative solutions in the mass market for Birmingham City Council housing stock that is hard to treat with traditional technology. To address this and encourage new innovative technologies, we are using the FCP process. It is anticipated that the FCP will help to create the market conditions that will stimulate and support investment in innovative sustainable solutions this project requires.

8.

The BES will result in better homes, improved housing stock, reduced fuel poverty, more efficient business premises, cutting CO2, creating jobs, and developing skills. It is also likely that the demand for new green technologies will provide Birmingham businesses with the opportunities to develop as installers, service providers and manufacturers.

9.

The project will solve problems not just common to Birmingham’s housing stock but also across other regions, so the technology, once developed, has the potential to be rolled out, amplifying the benefits to other regions; a requirement for the ERDF.

10.

Footnote: FCP has not been accepted within the ERDF bid. It has been necessary to be explicit about the technologies being procured rather than adopting a technology neutral approach. There is a role for UK government to lobby for a joined up approach to EU policy and funding bodies.

Project 2: Creating affordable Ultra Low Carbon mini-buses and vans for use in the public sector 11. BCC recently tendered the contract to transport children with special needs in and around Birmingham. The minibuses used are fuelled using diesel, but there is an opportunity to use Low carbon Vehicles. 12.

BCC’s service provider, West Midlands Special Needs Transports (WMSNT) has a fleet of around 100 minibus sized vehicles used on BCC contracts, of which an estimated 60 are suitable for replacement with electric vehicles on a phased basis. But, although the technology to supply zero emission vehicles is available, the range and costs were not sufficiently acceptable to public and private sector organisations to facilitate large scale 15

Birmingham Science City—Written evidence (PP 5) procurement. As a consequence and due to the higher cost of electric vehicles, compared to diesel, it was agreed that 10 electric vehicles would be purchased for a trial period to assess the benefits. 13.

Since then, an opportunity has arisen to use the trial as a stepping stone to a larger project. The barrier to doing this outright is the cost gap of operating the vehicles, due to higher capital costs. To resolve this, we aim to value engineer the supply chain, utilising FCP to eliminate the cost difference between zero emission and diesel vehicles. To achieve this, it will be necessary to extend the range of zero emission vehicles which will allow access to the mass market, reducing unit costs and leading to inward investment. We have identified potential match funding in the form of the European Regional Development Funds, specifically, the ring-fenced Birmingham ERDF Package Funds for parts of Central, North and East Birmingham.

14.

The overall aim of the project is to create a supply market able to supply ultra low carbon mini-buses and vans at a whole life cost, equal or less than diesel vehicles, through innovative procurement and advanced manufacturing techniques. An additional benefit will be the contribution this procurement project brings to the creation of a low carbon knowledge and technology based economy in the West Midlands, building on its inherent strengths of automotive manufacturing and the Midlands universities’ knowledge leadership in low-carbon vehicle technologies.

15.

If successful, over a five year period, BCC will lead a collaborative partnership of public sector procurers, vehicle manufacturers, technology designers and research establishments to procure zero emission vehicles, and pilot them in real-world situations, creating sufficient demand to overcome market barriers.

16.

Footnote: ERDF bid declined, the project will proceed in a more limited way.

Q2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and coordination is in place to help to facilitate this? 17. There seems to be a disconnect between EU and UK Government intentions on using public procurement to stimulate innovation and how funding is applied. Funding is typically provided for product development via the TSB and other bodies, however there is no funding earmarked to use procurement to bring innovation to market. This is a major obstacle that needs to be explored and is one that perhaps could be addressed by earmarking some funding for public procurers to use to engage in various forms of innovative public sector procurement. Procurement should be considered as an active policy tool that has the potential to produce economic and community benefits whilst at the same time also providing goods and services required to support the delivery of public services. Public procurement tends to be considered as a passive supporting tool with a focus on cost control rather than as an active tool that could transform regional economies. 18. The 2008 White Paper ‘Innovation Nation’ introduced a cross-government policy objective to foster innovation through procurement and committed each Government Department to include an Innovation Procurement Plan (IPP) as part of its commercial strategy. The Department for Business, Innovation and Skills is hosting this policy objective and states IPPs will be “regularly reviewed and renewed to ensure that robust procedures and up to date information on innovation procurement are in place across Government”. 16

Birmingham Science City—Written evidence (PP 5) Q3. What procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 19. Pre-Commercial Procurement, Forward Commitment Procurement, Outcome Based Procurement and Procurement of R&D are used to stimulate innovation. There are limited examples and evidence of the success of these measures. Q4: How might public procurement more effectively stimulate innovation within industry? 20. Innovative outcome based public procurement has the potential to transform the parameters of many procurement contracts. This should reduce costs, but more importantly has the potential to create new employment opportunities and to enhance employment retention. Public sector procurement needs to be transformed so that the public sector encourages suppliers to think the unthinkable. This involves a fundamental alteration in the public sector’s expectations regarding procurement. The public sector should not just be interested in obtaining products for the least cost, but should also be concerned with enhancing the resilience of the regional and national economy. 21.

Outcome specifications should be used more often. The EU Procurement Regulations area is a significant barrier to supporting organisations in developing innovative products and services. Arms lengths relationships are the tried and trusted method of complying with the regulations. Government could issue guidance on how public procurers can work with technology developers within the EU rules.

Q5. What lessons can we learn from success and failures within the procurement processes of other countries to stimulate innovation within industry? 22. The Finnish equivalent to the Dept for BIS provides funding and support for traditional research and development in the same way the Technology Strategy Board does in the UK, encouraging industry, academia and public sector to work together. However, they have also supported 25 projects where funding has been given to public procurers to facilitate procuring innovation. Typically funding of between 50 and 100 thousand Euros is provided and 4 full time employees are employed in this area. 23.

Teke, the funding organisation, works predominantly with local rather than national government. Key objectives are to develop new markets, create demonstrators and stimulate market innovations. Economic renewal and social and economic development are outcomes.

24.

As in the UK, public procurement is typically not driving innovation because of: lack of procurement skills, perceived conflict of vfm and innovation, arms length supplier dealings, disconnect of policy and action, lack of procurement orgs collaboration, fragmented supply markets.

25.

Teke state that to be successful projects are user needs driven and include both buyers and suppliers. There are many successful examples of past public procurement driving innovation in Finland, e.g. Nokia mobiles and ship propulsion systems (1/2 billion Euro industry). One way in which Government deals with risk is to establish separate companies (200 in the last year). These companies are more prepared to take risks.

Q6. What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? 17

Birmingham Science City—Written evidence (PP 5) 26.

This is the most significant barrier to procuring innovation. There is limited or no incentive for public sector employees to procure innovation. Although at a policy level it is accepted that procuring innovation will deliver wider socio-economic benefits this does not usually translate to budget holders’ priorities.

Q8. What obstacles do those responsible for procurement within the public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? 27. One obstacle comes from the organisation of both national and local government into a series of stand alone silos. This means that it is difficult to develop a common approach to procurement at the level of a city council or local authority and this difficulty is replicated throughout Whitehall as well as the European Commission. Overcoming this difficulty requires a strong steer on behalf of the national government that public procurement should be considered as a valuable tool to enhance local economic development. 28.

There is a scale issue here that is also potentially a barrier. A local authority procurement contract may stimulate innovation and employment in places that are outside the local authority’s area of responsibility. This might undermine a local authority’s enthusiasm to deploy procurement as a tool to stimulate innovation in another authority’s area of responsibility. Nevertheless, it must be recognised that anything that encourages firm’s operating in the UK to engage in innovation will have positive benefits for the country’s economy.

29.

Procuring innovation using PCP or FCP is based on the premise of an unmet need. Organisations are adept at finding partial solutions or ‘work arounds’ to these needs and therefore avoid procuring innovation. Procurers are naturally risk averse and unwilling to be first to bring to trial a new approach and the ‘first rider principle’ applies.

30.

Procuring innovation needs to be incentivised, funding needs to be made available to cover the additional complexity and risk of the procurement process. This funding can be quite small as a proportion of the total budget, e.g. 2%. The funding should be conditional on procurers using outcome based procurement including innovation as a selection criterion. Diverting a relatively small amount from product development into ‘market pull’ techniques would provide greater return on investment in some areas (as the 2% is put with 98% core funding).

31.

Use of collective/consortia purchasing systems by public sector bodies: the primary advantages of using these mechanisms are value for money and access to a streamlined and tested purchasing mechanism. Innovation does not appear to be a primary driver in this market yet.

Qs 8 & 9. 32. These issues are being explored as part of a three year ESRC CASE PhD studentship that is a partnership between Birmingham City Council and the University of Birmingham. This studentship is exploring how public sector procurement practices can be adapted, focussing more on outcomes, especially bringing new innovative products and services to market that contribute to strategic outcomes such as reducing CO2 emissions and that support innovation in local economies. The studentship aims to: • Explore the procurement techniques and methodologies in use in the public and private sectors, nationally and internationally, aimed at bringing new, socially beneficial innovative products and services to market. 18

Birmingham Science City—Written evidence (PP 5) • • o o o o • o o o o •

Examine the arguments, benefits, opportunities and risks associated with adopting these new procurement techniques. Identify and explore the potential internal barriers to the adoption of outcome-based procurement, including: Cultural change Risk of process failure Client funding issues, including allocating internal funding sources, potential external funding sources and the risk of loss of investment. Other barriers identified during the project. To explore the potential external barriers to change, including: SME investment Making new supply chain connections Creating sufficient ‘Market Pull’ Public sector procurement processes and regulations. To explore the contribution that the introduction of outcome-based procurement would make to economic development in Birmingham and the West Midlands.

References: Bryson, J.R. & Rusten, G. (2010), Design Economies and the Changing World Economy: Innovation, Production and Competitiveness, London: Routledge Hansen, M. and J.M. Birkinshaw (2007), The Innovation Value Chain. Harvard Business Review, 85(6): 121-131. Read, H. (1934), Art and Industry: The Principals of Industrial Design, Faber and Faber: London Roper, S., Hales, C., Bryson, J.R. and Love, J. (2009), Measuring sectoral innovation capability in nine area of the UK economy, NESTA: London (ISBN 978-1-848754-066-1). von Hippel, E. (2005), Democratizing Innovation, MIT Press, Cambridge M.A. December 2010

19

Professor Lewis M. Branscomb—Written evidence (PP 8)

Professor Lewis M. Branscomb—Written evidence (PP 8) 1.

Each society uses its own policy mechanisms for fostering innovation in the economy. In the US, a combination economic and tax policy, together with massive investments in research, both in and out of government are the favored tools. Our politicians are inclined to believe, in my view erroneously, that commercial ideas born of new scientific research will find their own way to the market place with little or no help from government. This view ignores the well studied “Valley of Death” -- the high risks associated with the transfer of innovative commercial ideas to the market place. Thus attention is appropriately turned to government mechanisms for reducing the risk and rate of failure for early stage commercial innovation.

2.

One such mechanism is for governments not only to support innovative research, but also to become the risk investor on the other side of the “Valley.” Indeed some governments (but not the USA) are given to investing in venture capital to allow investors to take more risk and thus exploit promising innovations that might lead to new industries and more rapid growth. The other alternative is for government to manage its own procurements in such a way that contractors are rewarded for taking risks that lead to more innovative solutions, even where the benefits will be realized only over an extended period of time and the contracts will probably not go to the low bidder.

3.

A Google search of the literature on innovation promotion through public procurement reveals a high level on interest in Europe and almost nothing from U.S. scholars. With one glaring exception, the United States federal government does not use this approach, for it requires three conditions to prevail for public procurement to be an effective mechanism for accelerating innovation in the economy as a whole.

•

First, the government’s range of procurement activity must have sufficient breadth for this method for accelerating innovation make a difference to the economy. [I the USA a combination of American economic policy and the Constitution limit the role of the central government, leaves only a limited number of such opportunities.] Second those opportunities must be in a segment of the economy where innovation is highly valued, and contractors who compete on the basis of their capacity for innovation must be rewarded, not punished, in their competition for contracts. Third, the area of procurement must either be integral to the commercial economy so innovations from public procurement will easily diffuse to the rest of the commercial economic sector.

• •

4.

The one case there the first two conditions are clearly satisfied is the annual investment of more than US$ $536 B in military and space agency goods and services (2009, not including two wars). There remains the debate, however, about the third condition: to what extent do military and space innovations make a significant contribution to innovation in the civil sector of the economy. This belief in the “spinoff” of military innovations to the commercial works was widely held in the US from the end of World War II until the end of the Cold War (around 1992). In its place the US Department of Defense turned to procuring “dual use” technologies and to shifting purchases to off-the-shelf commercial products. 1

John Alic, Lewis Branscomb, Harvey Brooks, Ashton Carter, and Gerald Epstein, Beyond Spinoff: Military and Commercial Technologies in a Changing World, Boston MA: Harvard Business School Press, 428pp, 1992

1

20

Professor Lewis M. Branscomb—Written evidence (PP 8) 5.

I shall return to this critical question, but first let me note that the US government is, of course, a multi-billion dollar purchaser of all the same kind of real estate, transport vehicles, communications and office equipment as would a very large multi-national corporation. The central purchasing house for such supplies and equipments is the job of the General Services Administration (GSA). This federal agency purchases about $66 Billion of products a year. Its operating costs of about $26.3 Billion are funded from its purchasing commissions, not from appropriations. GSA’s focus is on efficiency and cost reduction in government operations; its primary goal is not to encourage innovation by its contractors. However as a part of the US response to the current recession, the American Recovery and Reinvestment Act (2009) contains $4.5 Billion for upgrading federal buildings to “High Performance Green Buildings”, and another $300 B to acquire energy efficient automobiles for federal use. 2 In both cases, however, their purchases are selections from among products already on the market. Only a modest $15 B was made available for more advanced or experimental vehicles, such as all-electric cars and hybrid buses.

6.

Looking back in time, there were experiments performed in the late 1960s when the scientists at the National Bureau of Standards3 collaborated with the purchasers at GSA in an effort to induce bidders of equipment to the government to in fact offer innovative products not available yet on the commercial market, whose elevated costs could be justified by life cycle costs and reduction of cost of externalities, such as improved safety or more productive function. This effort, however, was short lived.

7.

Let me return to the question of “spin-off” from military procurement to commercial markets, and the alternative -- dual use technology. In the first case, the US experience is that in the immediate post-WWII period, when the US defense industry was undamaged and our allies were still recovering, US defense R&D expenditures dominated those of both governments and industry among the OECD nations. Even in 1960, the first year of complete data, US defense R&D was a full one seventh of all R&D, public and private in the OECD countries. Under these circumstances, while commercial R&D was rising much faster than US government R&D, the military technology base was widely used to support commercial innovation. In effect the military-industrial complex, so notably described by President Eisenhower, created a dual-use technology base, especially in electronics and aviation.

8.

By the end of the Cold War the technical strength of the US commercial industry had outgrown that of the defense industry, except in highly specialized military areas. With defense procurements falling rapidly after 1989, defense firms that tried to convert from military to commercial markets discovered that their engineers could easily make the change, but the marketing people could not. The result of this great experiment in defense conversion was a conspicuous failure. Defense procurements that included the full spectrum from specifications to R&D to production to testing and training could indeed deliver high levels of innovation in the context of government procurement of the resulting weapons systems. This is not, however, an effective policy tool for stimulating innovation in the commercial sector.

9.

Thus one might conclude that there are two ways public procurements might stimulate commercial innovation: a more expensive but potentially more effective way, and a

2 3

See www.gsa.gov/portal/content/105234 In 1988 the name of the Bureau of Standards changed to National Institute for Standards and Technology (NIST).

21

Cabinet Office, Department for Business, Innovation & Skills (BIS), Department for Transport and Highways Agency—Written evidence (PP 18) weaker but less expensive way. The distinction between these two approaches depends on whether the procurement requires innovations to meet the required specifications. In this case funding for exploratory research and testing, as well as product development, will increase the bidders’ (and the government’s) costs. The weaker, more frugal, approach is exemplified by the US GSA procurements described above. When government purchases the latest, most innovative commercial products, such as hybrid automobiles, the commercial market may draw more private investment into further innovative developments, but only if the government’s demand is a significant contribution to the market for that product. The more sophisticated approach requires the government to specify its procurement objectives in a way that can only be met by contractor innovations. Conservatives, however, will remain skeptical that the government’s market demand is compatible with what the private market is likely to express. For this reason the American government is not likely to pursue this approach to stimulation of innovation. 10.

A more likely approach by the US government would be to separate the R&D subsidies intended to generate innovation solutions to public procurements from the competition for contracts which might, or might not, benefit from the R&D innovation stimulus. In this way the cost of the R&D is removed from the costs being competitively evaluated in the procurement. One such example in the U.S. is the Small Business Innovation Research grant, which is intended to stimulate innovation in small businesses. It is funded by requiring that the eleven major purchasers of R&D.

11.

D in the federal government must spend 2.5 percent of those purchases through small companies. Thus the primary goal of the program is to rebalance more of the government’s R&D spending to smaller, more widely distributed firms. It is does not require that the SBIR-funded research be commercialized. 4

12.

Finally, it should be noted that this commentary is focused on the Federal level of government in the U.S., not on the governments of the 50 States. The way the Constitution is constructed, state governments are free to engage in public procurements leading to state ownership of facilities in cases where the federal government would do so only rarely. Airports are an example. Dulles International Airport is owned and managed at the federal level; other US airports are owned either privately or by municipal or state authorities. Nevertheless, the principles delineated in this contribution are likely to apply in both cases.

December 2010

In fact, since SBIR is funded by a requirement that each participating agency must spend 2.5 Percent of its R&D purchases on small firms, those purchases much be authorized by the mission of each agency, as specified by Congress. None of these agencies have as their mission the creation of new commercial firms. Phase 1 of a SBIR grant is for research. Phase 2 is proof of concept for the expected use of the research, and phase 3, which carries no federal funding asks for a report on whether commercialization occurred.

4

22

Cabinet Office, Department for Business, Innovation & Skills (BIS), Department for Transport and Highways Agency—Written evidence (PP 18)

Cabinet Office, Department for Business, Innovation & Skills (BIS), Department for Transport and Highways Agency—Written evidence (PP 18) Please see page 101

Cabinet Office, Department for Business, Innovation & Skills (BIS), Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 Please see page 111

Francis Maude, Minister for the Cabinet Office; David Willetts, Minister of State for Universities and Science, BIS; and Mike Penning, Parliamentary Under-Secretary of State, DfT—Oral evidence (QQ 176-196), 25 January 2011 Please see page 128

23

The Campaign for Science and Engineering—Written evidence (PP 23)

The Campaign for Science and Engineering—Written evidence (PP 23) SCOPE AND CONTENTS OF THE SUBMISSION 1.

The Campaign for Science and Engineering is the UK’s leading independent advocacy group for the science and engineering sectors. We work with the science and engineering community to promote the strength of the UK’s research base, STEM education, the use of science and evidence in policy-making, the health of privatesector R&D in the UK, and diversity in science and engineering.

2.

The Science and Technology Select Committee of the House of Lords published a call for evidence on “public procurement as a tool to stimulate innovation”. In keeping with the Committee’s stated preference for short submissions, this documents attempt to provide an answer only to a few of the questions posed in the call for submissions: To what extent are those responsible for public procurement of research and development “intelligent customers”? Do they have the appropriate expertise to identify innovative solutions to procurement needs? How well do they identify when innovation could provide a solution to a procurement need? How effective is the identification of and dialogue with appropriate potential suppliers?”

3.

We identify some areas of problems in the current procurement of research, deriving from a lack of evidence on operation and effects of different research policies. A list of examples of unsolved questions in public procurement of research is offered.

4.

We draw the Committee’s attention to the growing international interest in evaluating the effect of public investment in R&D (variously referred to as “the science of science policy” or “science policy evaluation”).

5.

Finally, we argue that evidence-based policy making has a bearing on the determination of procurement methods and priorities for research. Choices concerning how to best procure research and how to determine research priorities should not be left to chance or always replicate previous practices. Comparative evaluations of the effectiveness of different procurement methods should become standard practice across government departments.

“Intelligent users” 6.

The National Audit Office report on “Purchasing Professional Services” noted the need for staff to have “reliable management information” and “to ensure that they have appropriate skills and access to guidance and information” in the procurement of professional services (NAO 2001: 25).

7.

State funding of science plays a necessary role in support of the economy, but very little is known about which methods of research funding are most likely to foster innovation in the wider economy. 24

The Campaign for Science and Engineering—Written evidence (PP 23)

8.

Public sector organisations cannot act as “intelligent customers” when procuring research because of the shortage of reliable information on the effectiveness of different science procurement techniques.

9.

Many different procurement tools are used in the public sector: competitive tenders for research grants, direct block-funding of research establishments (Stephan 1996: 1225), innovation prizes (McKinsey 2010), innovation tax credits and others. The different effects of these funding mechanisms on researchers’ productivity and priorities have not been studied in considerable detail and very limited evidence is available to guide government in choosing the most suitable funding method among the many available.

10.

Given the shortage of evidence on the comparative merits of different forms of research funding, it is difficult for public procurement of research to most effectively promote innovation.

Competition is not always good 11.

Competition for contracts is often considered the gold standard in resources allocations. This view is expressed in the National Audit Office’s reports on procurement of professional services (NAO 2001: 28) and is applied to the procurement of research - for example in support of the competitive allocation of research grants through peer review: “such competition, although perhaps costly to support, helps ensure that the quality of research remains high.” (RCUK 2006a: 15)

12.

Competition is an appropriate strategy for commissioning a discrete amount of services or goods, but the economic research of Nobel Prize-winning economists James Buchanan, George Stigler, and Gary Becker from the 1980s suggests that competition for public funds may be wasteful when considerable private resources are expended in order to secure them.

13.

The classic example of rent seeking in the economic literature is the U.S. experience with Housing and Urban Development grants, which were aimed to give extra sources of “free money” to local authorities to fund urban regeneration. As competition for “free” grants intensified, local authorities began competing and employed more and more resources on securing the grants.

14.

The paradox of competitive grants as a way of procuring research is that the more competitive the process awarding public money, the greater the amount of private resources which will diverted from research and development work towards winning the competition.

15.

Most government departments, including the DfT, DECC, DoH, DEFRA and DfID, resort to competitive tenders for research grants as a way of fulfilling their commitment to funding research. Open-ended procurement of research and development at the departmental levels is at risk of encouraging expenditure of private resources in the pursuit of public funds, and risks not realising the full potential of public procurement in fostering innovation.

25

The Campaign for Science and Engineering—Written evidence (PP 23) 16.

The cost of administering research grants is often misidentified as the cost to a public body of running a competition. The full cost, however, is higher, and should include the opportunity costs faced by grantees and unsuccessful applicants, including the value of economic opportunities foregone in order to prepare and submit applications for an R&D award.

17.

A concrete example of this phenomenon is offered by the competition facing applicants for grants from the UK research councils. While the research councils spent only £9.8 million running competitive awards of research grants in 2005/06, the total expenditure of resources including costs to universities and charities involved in grant filling and reviewing was close to £196 million, or some 6.9% of the combined budget of research councils and HEFCE’s quality-related research budgets (RCUK 2006: 42-3). This cost was born largely by independent universities and charitable organisations in the form of work-hours spent in the pursuit of grants.

18.

Grants should not always be assumed to be the most efficient way of procuring research and development. Rather, the suitability of different tools for the public procurement of research should be evaluated on the basis of their costs and effects on researchers’ behaviour.

Incentive structures 19.

In 2009 the economists Azoulay, Graff Zivin and Manso studied the effect on research output of different conditions attached to grants in the life sciences. The citation statistics of papers published as a result of funding from the US National Institute of Health were compared with papers resulting from grants by a charitable foundation, the Howard Hughes Medical Institute.

20.

Both organisations administered funds through research grants, but they differ in some crucial ways: grants from the US National Institute of Health are shorter in length, restricted to specific projects and their renewal is conditional on successful results; grants from the Howard Hughes Medical institute fund individual researchers but are not bound to specific projects, they are longer-term and are typically renewed at least once (Azoulay/Graff Zivin/Manso 2009: 2-3).

21.

Using a statistical analysis of published papers, the authors found that the grant format employed by the charitable foundation was more likely to lead to radical innovation, while NIH grants fostered more gradual advance that built on previous efforts. This “demonstrate the impact of nuanced features of research contracts for the rate and direction of scientific progress” (Azoulay/Graff Zivin/Manso 2009: 28).

22.

This paper offers some conclusions of interest to the science policy community as government grants seem unable to generate the kind of innovative research they were set out to remedy - a market failure.

23.

Similar studies as to the comparative effect of government and charitable procurement of research in the UK would clarify what changes, if any, are required for government departments to fulfill their role in procuring research & development services.

Procurement methods and research priorities 26

The Campaign for Science and Engineering—Written evidence (PP 23)

24.

Another under-studied effect of public procurement of research is the impact of different funding methods on the internal organisation of science, the relative importance of scientific disciplines, and the determination of research priorities.

25.

The decline in economic returns from research and development expenditure casts doubts on the ability of both public and private sector organisations to commission research effectively.

26.

Macro-economic analysis of 20th century economic trends shows that although robust increases in funding and number of researchers resulted in growth in patenting rates and productivity, such growth was lower than in previous eras. The specialization of scientific disciplines could be part of the reason for these suggested ‘diminishing returns’ (Jones 2009). Over-specialisation in turn has been suggested - though not proven - to be an unintended consequence of the public funding of science through research grants (see, for example, Milton Friedman 1994).

27.

The suggested ‘diminishing returns’ of research may be a consequence of the increasing specialisation of scientific disciplines (Jones 2009), which in turn has been suggested - though not proven - to be an unintended consequence of the public funding of science through research grants (see, for example, Milton Friedman 1994).

28.

A study by Bishop (2010) highlighted the fact that the amount of research carried out on neurological diseases is not always proportional to their severity or prevalence of the condition. Bishop found that rarer diseases are more researched than common conditions and that this variance is not completely explained by difference in severity: “even among conditions of similar frequency and severity there are some intriguing discrepancies in levels of research activity.”

29.

Dr Bishop suggested this could be at least partly a consequence of the political determination of research priorities in government-funded research, as well as differences in status among professional disciplines, which “may do a disservice to children who are affected by common yet under-researched neuro-developmental disorders.”

What role for prizes? 30.

Alternative procurement strategies that maintain a competitive element and quality control over grantees include the award of prizes by independent panels of experts. Some famous examples are the Nobel prizes, the MacArthur Fellows Program (also known as the “genius awards”), or the X Prize, among many others.

31.

Prizes are increasingly looked at as an alternative to grants or as an additional tool to procure research. The share of US philanthropic giving channeled through prizes relative to other funding instruments is growing (McKinsey 2010: 28), and prizes have recently been rediscovered by governments as a tool for fostering innovation.

32.

To this end, prizes offer the advantage of reducing risk on the financier's side by rewarding successful innovations only and expanding the pool of individuals engaged in R&D (McKinsey 2010: 29). An additional advantage, often neglected in the policy literature, is that whereas grants induce researchers to spend resources and compete 27

The Campaign for Science and Engineering—Written evidence (PP 23) on producing the best proposal on paper, prizes create an incentive to produce actual products or ideas. 33.

Prizes were a common way for government to procure innovation during the 19th century and recent historical analyses challenged the assumption that the decline in prizes was caused by the superiority of research grants (Hanson 1998). The contemporary enthusiasm for prizes neglects the historical evidence suggesting that prizes are only as good as the jury awarding them and are not exempt from administrative problems.

For an evidence-based research policy and procurement strategies 34.

Research policy and strategies concerning the procurement of research have traditionally been elaborated through “top-down” approaches to policy-making (GSF 2006: 4). These include a mix of foresight exercises, senior civil servants and academic experts determining research priorities and procurement methods.

35.

Research policy is, paradoxically, one of the areas of public policy where scientific evidence plays a very limited role due to the scant availability of reliable studies.

36.

Relevant evidence and expertise is hard to access even when it does exist, as a consequence of the small size of the research communities working on relevant topics and the fragmentation of relevant expertise across a number of disciplines and specialties (the economists of science, economic history, history of science, sociology of innovation, sociology of scientific professions, innovation studies).

37.

Traditional approaches to the procurement of research in the public sector do run into criticism. For instance, there are four kinds of criticism levelled against state R&D expenditure and the ways in which government procurement of research operates (Feller 2000: 2(4)): • skepticism about the public sector’s ability to outperform the private sector; • need to justify public R&D expenditure amidst budgetary pressures; • increased political pressure on short-term economic returns or “translation” of research; • and increase in accountability measures to counteract eroding trust in the self-policing nature of research communities.

38.

A growing awareness of the need for a better understanding of the institutions and organisation of scientific research, including state-funded research (Grant/Wooding 2010) also pervaded the funding community. In 2005 Dr. John H. Marburger, III, science advisor to the U.S. President, talked publicly about the need for “a new interdisciplinary field of quantitative science policy studies”. As a result in 2006 the U.S. federal government introduced an Interagency Task Group on the science of science policy, while the U.S. National Science Foundation introduced a grant-making programme to fund research in the area, which has been operating.

39.

The ‘science of science policy’ agenda has also been adopted by the Organisation for Economic Cooperation and Development (OECD). The Global Science Forum reported favourably to the OECD Committee for Scientific and Technological Policy on the usefulness of a greater evidence base for science policy: “All parties would benefit from a better understanding of the methodological and computational 28

The Campaign for Science and Engineering—Written evidence (PP 23) challenges associated with deriving high-level societal impacts from investments in fundamental research.” (GSF 2006: 4) 40.

The United Kingdom is perceived to lag behind in this area. The Department for Business, Innovation and Skills did fund a small stream of research on Science and Society, whose remit did partially include governance issues and the critical studies of research priorities. But the fate of this programme will remain undecided until BIS’s internal budget allocations following the spending review are published at the end of the year.

41.

The Campaign for Science and Engineering believes that the government should undertake a similar programme of investigation on the comparative effectiveness of different mechanisms for the public procurement of science and development. Historical, economic and sociological evidence should be gathered to determine which procurement tools work, what the priorities for publicly-funded research ought to be, and how best to foster innovation through public expenditure.

42.

The allocation of a small budget to this end would help advance current government efforts to find efficiency savings within the BIS science budget and reinvest any savings in research, thus maintaining or increasing the quantity of publicly-funded R&D performed in the UK. Such research has the potential to save money as well as enhance our understanding the role of innovation and public procurement of research in a competitive economy.

43.

Ignoring the need for an evidence-based research policy would lead either to greater risks of political tinkering and misuse of research budgets, or with perpetuating the status quo in research policy, when evidence-based changes to the system could hugely benefit the research base and the economy of the UK.

References • • •

• • • •

Azoulay, Pierre; Graff Zivin, Joshua S.; Manso, Gustavo. 2009. Incentives and Creativity: Evidence from the Academic Life Sciences. NBER Working Paper No. 15466. Bishop, Dorothy V.M. (2010) “Which Neurodevelopmental Disorders Get Researched and Why?” PLoS ONE 5(11): e15112. Feller, Irwin. 2000. The Academic Policy Analyst as Reporter: The Who, What and How of Evaluating Technology Programs. In Proceedings from the 2000 U.S.-European Workshop on Learning from Science and Technology Policy Evaluation. Bad Herrenalb, Germany. Edited by Philip Shapira and Stefan Kuhlmann. http://cspo.org/library/presentations/?action=getfile&file=217§ion=lib Friedman, M. 1994. “National science foundation grants for economics: correspondence.” Journal of Economic Perspectives 8(1): 199-200. Grant, Jonathan; Wooding, Steven. 2010. “In Search of the Holy Grail: Understanding Research Success”. RAND Occasional Papers. Cambridge: Rand Europe. GSF. 2006. Summary of the Workshop on Science of Science Policy: Developing Our Understanding of Public Investment in Science. Paris: Organisation for Economic Cooperation and Development. http://www.oecd.org/dataoecd/42/63/37470200.pdf Hanson, Robert. 1998. “Why Grants Won Over Prizes in Science.” Unpublished research paper. http://hanson.gmu.edu/whygrant.pdf 29

The Campaign for Science and Engineering—Written evidence (PP 23) • • • • •

Jones, Benjamin F. 2009. “The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?” Review of Economic Studies 76 (1): 283-317. McKinsey. 2010. And the winner is... : Capturing the promise of philanthropic prizes. London: McKinsey. Munger, Michael. 2006. “Rent-seeking and you will find.” The Library of Economics and Liberty. http://www.econlib.org/library/Columns/y2006/Mungerrentseeking.html RCUK. 2006a. Research Councils UK, Report of the Research Councils UK Efficiency and Effectiveness of Peer Review Project. Swindon: Research Councils UK. Stephan, Paula E. 1996. “The Economics of Science”. Journal of Economic Literature 34(3): 1199-1235.

December 2010

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Brian Collins, Chief Scientific Adviser (DfT and BIS), NESTA and the Technology Strategy Board—Oral evidence (QQ 52-83), 11 January 2011

Brian Collins, Chief Scientific Adviser (DfT and BIS), NESTA and the Technology Strategy Board—Oral evidence (QQ 52-83), 11 January 2011 Please see page 209

31

David Connell, University of Cambridge—Written evidence4F (PP 13)

David Connell, University of Cambridge—Written evidence5 (PP 13) 1. Background and Summary 1.1. In 2004, I launched a campaign with Anne Campbell, then MP for Cambridge, to encourage Government to introduce a policy similar to the US Small Business Innovation Research (SBIR) programme by requiring that departments use 2.5% of their external R&D budgets to procure “Innovation Contracts” with companies, particularly SMEs. A Private Members Bill was presented to Parliament in March 2005. 6 This proposal was picked up rapidly in Gordon Brown’s March 2005 budget, but failed to bring about any change in departmental behaviour and the campaign therefore continued. In April 2008 the Government announced a revised programme based much more closely on our proposals. The resulting Small Business Research Initiative is managed by the Technology Strategy Board. 1.2. Today SBRI is the only procurement based innovation policy that is systematically producing tangible results, albeit at modest expenditure levels. 1.3. This submission draws on experience gained during the course of this campaign and on research projects undertaken at the Centre for Business Research. It first gives an overview of the US SBIR programme and discusses why “lead customer” policies are important. It then explains the problems experienced in trying to implement such policies in the UK and makes detailed proposals to address these problems and improve the SBRI’s effectiveness and coverage. 2. Procurement Based Innovation Policies in the United States and the SBIR Programme 2.1. The role of Federal Agencies in stimulating the development of new high technology sectors in the United States is well known, with the Department of Defense, through DARPA and other branches playing a key role. 7 A topical example is iRobot, currently advertising its “Roomba” vacuum cleaning robot in the national press as the ideal Christmas present. Started by MIT alumni, iRobot’s breakthrough came when it was awarded a series of development contracts in the early 90’s by the Department of Defense. This and revenues from sale of the resulting products provided the platform for a move into domestic robots some years later. 2.2. Today, the most visible US procurement innovation mechanism is the SBIR programme. This was established under legislation enacted in 1982 and was expanded in scope through subsequent legislation in 1988 and 1992. It has played a major role in funding early stage US science and technology companies. 8 2.3. The SBIR legislation requires that all federal agencies with R&D expenditures over $100m spend 2.5% of their external R&D budgets with small businesses through the SBIR process. Only majority US owned businesses are eligible and the R&D must be undertaken in the US.

5 David Connell was founding Chief Executive of TTP Ventures, an early stage venture capital fund. Besides his position at CBR, he is currently a Director of TTP Capital Partners Ltd and SIMUL8 Corporation Limited and Chairman of Opportunity Links Ltd. Since 2008 he has been an unpaid adviser to the TSB and NHS East on the implementation of SBRI. 6 Procurement of Innovative Technologies and Research Bill 7 See for example The Biggest “Angel” of Them All: the Military and the Making of Silicon Valley, Stuart W. Leslie in Understanding Silicon Valley, ed. Martin Kenney, Stanford University Press, 2000 8 “Secrets” of the World’s Largest Seed Capital Fund: How the United States Government Uses its Small Business Innovation Research (SBIR) Programme and Procurement Budgets to Support Small Technology Firms; David Connell, Centre for Business Research, University of Cambridge, July 2006.

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David Connell, University of Cambridge—Written evidence4F (PP 13) 2.4. The way in which the SBIR programme is structured and managed is an important reason for its success. Key elements are as follows: (i)

Agencies advertise topics (”solicitations”) in groups, typically twice a year; each topic relates to an agency’s requirements for new technology, either for an agency’s own use or to meet its broader objectives

(ii)

Awards are made on a competitive basis in two phases: i.

Phase I, typically $100k for a feasibility study

ii.

Phase II, typically $750k for development of a demonstrator, awarded to roughly 50% of Phase 1 winners

SBIR projects that subsequently receive follow on government funding from nonSBIR budgets are defined as entering “Phase III”. (iii) Unlike UK and EU R&D grants, SBIR awards cover 100% of firms’ project costs plus a profit element; this is especially important for smaller firms (iv) Again unlike most UK grants (under TSB and EU programmes) there is no requirement for collaboration with any other organisation. (v)

The company owns any IP generated.

(vi) Companies can apply for and win multiple awards for different projects in parallel. This is common practice; iRobot won at least 19 separate SBIR awards between 2001 and 2009 totalling $8.6million. This number excludes non-SBIR R&D contracts, which are typically much larger. (vii) There is complete transparency in terms of information on solicitations, timescales, award winners and contract amounts, all of which is detailed on public web sites. The legislation requires that the process is timely and efficient. 2.5. Today, Phases I and II of the SBIR programmes are worth over $2 billion per annum with a further $250 million from the closely allied STTR programme which requires academic collaboration. Phase III funding adds perhaps another $2 billion. 2.6. Firms that obtain Phase III funding from mainstream agency budgets also derive significant commercial benefits, including an expectation that they will become a designated “sole supplier” of the technology to the Government. The higher margins this usually leads to makes them highly desirable partners and acquisition targets for large firms. This, and their potential contribution to small firm subcontracting targets (see Para 2.11), means that large firms are encouraged to monitor the SBIR community closely. Some large defence contractors have established dedicated SBIR Officers. 2.7. The majority of SBIR award winners employ less than 25 people, though there are also firms with hundreds of employees, including NASDAQ listed companies, with SBIRs. 2.8. The SBIR programme is just the first step on the procurement ladder for small science and technology based firms. Larger contracts, particularly from the Department of Defense, are available through Broad Area Announcements (BAAs) and other mechanisms and there are significant opportunities for small businesses to 33

David Connell, University of Cambridge—Written evidence4F (PP 13) participate, directly, or as a subcontractor to a larger firm. 9 Through these mechanisms, early stage US firms can receive significantly more financial support from the government per company than their UK counterparts. 10 2.9. Each agency operates SBIR in a slightly different way, and the National Institutes of Health and National Science Foundation designate awards as “grants”, rather than procurement “contracts”. This reflects greater openness to company ideas and the fact that the term “grant” does not carry the same connotations as it would in the UK. (Under EU State Aids rules, a “grant” to fund 100% of a firm’s project costs would be illegal). In fact, even where SBIR “grants” are awarded, they are for directed research and development (usually highly specified by the agency concerned) and therefore represent procurement contracts in all but name. 2.10. The US SBIR programme has been independently reviewed on several occasions and is highly regarded. 11 2.11. It should be noted that the United States also operates a number of policies to favour mainstream (i.e. non-R&D) procurement from small businesses, both directly and indirectly as subcontractors to other US firms. In 2005 44.6% of US federal government procurement was spent through small US businesses in this way 12. Whilst these broader programmes would be more difficult to operate in a smaller, more open economy like the UK, there can be little doubt that as practised in the US they act as a barrier to UK companies seeking to sell there. 3. Why Innovation Procurement Matters; the Role of Lead Customers in the Innovation Process 3.1. Recent research by the Centre for Business Research on successful new science and technology based companies in the Cambridge cluster underlines the crucial role played by lead customers in stimulating and financing the development of new products and technology based businesses. 13 3.2. The evidence shows that the most successful new Cambridge companies, in terms of jobs and profitable revenues, are not university spin-outs based on academic inventions, but firms whose origins lie in developing innovative technology solutions for individual customers. 14 This is best illustrated by the four main Cambridge technology “consultancies”, Cambridge Consultants, TTP Group, Sagentia and PA Technology. Most of their revenues come from overseas. The term “consultancy” is really a misnomer, as their business consists mainly of developing new products and equipment for individual clients rather than reports. Together they have probably created more jobs in product spin-off companies over the last thirty years than spin off businesses built on Cambridge University IP, certainly in relation to engineering and physics based products. However lead customers and customer funded R&D contracts also play an important role in many other sectors. There are typically some 50 pages of BAA announcements on the FedBizOpps.gov website, representing around 500 separate R&D opportunities. 10 UK Plc: Just How Innovative Are We? Cosh, A., Hughes, A. and Lester, R.K. (2006) Cambridge-MIT Institute, University of Cambridge and MIT 11 See “Secrets” of the World’s Largest Seed Capital Fund”; op.cit. and also “An Assessment of the SBIR Programme”, ed. Charles W. Wessner, National Research Council of the National Academies, Washington 2008. 12 See Appendix D, “Procurement - Lessons from US Policies to Support Small Businesses and Progress in Implementing UK Policies”, written by David Connell, in “Small Business and Government, The Richard Report to the Shadow Cabinet”, 2008. 13 See Connell, D. and Probert, J. (2010), Exploding the Myths of UK Innovation Policy: How ‘Soft Companies’ and R&D Contracts for Customers Drive the Growth of the Hi-Tech Economy, Research Commissioned on Behalf of the East of England Science and Industry Council by the East of England Development Agency. CBR, University of Cambridge. 14 The role of university IP may be greater for drug discovery companies than for physics, engineering and IT based companies. 9

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David Connell, University of Cambridge—Written evidence4F (PP 13) 3.3. This is not to undervalue the key role that the university plays in the Cambridge cluster. However this is more diverse and indirect and in relation to new start-ups, just as at Stanford and MIT, entrepreneurial alumni have more impact on the growth of the local economy than inventions arising from university research. 3.4. The evidence from Cambridge also shows that its most successful entrepreneurial SMEs are very wary of becoming involved in the kinds of multi-partner collaborative R&D programmes which are the traditional mechanism by which the UK government (currently through the Technology Strategy Board) and the European Commission have funded R&D. 15 This emphasis on collaboration as a requirement for funding differs markedly from funding policies in the US and Japan, for example. Multi-partner collaborative projects tend to be far too research (as opposed to development) orientated for most SMEs and the multiple partners involved results in IP issues, weaker project management, and a lack of flexibility. When coupled with the fact that firms must bear a significant share of the cost this means that SMEs often prefer to devote their efforts to trying to win a fully funded R&D contract with an informed and committed customer. Although the TSB and EC have tried to address these issues and TSB grants are now more flexible, in the author’s view the over-emphasis on this model has reduced the effectiveness of UK innovation policy. 3.5. Besides stimulating the creation of innovative new technology solutions and products, the CBR research also shows that R&D contracts with customers and the “soft start-up” 16 model has played the dominant role in funding these successful companies through their early stages, with venture capital playing a less significant, or later stage, role than the conventional wisdom would imply. 3.6. The importance of customer funding also reflects three important shortcomings of the alternative “hard start up” model in which venture capital plays the dominant role. First, it is only appropriate for a small subset of innovative new businesses – those offering rapid growth and exit within around seven years. Second, it must focus on building product lines for larger (usually foreign) firms to acquire. This nearly always results in the dispersal of the entrepreneurial founding team and a loss of potential UK jobs through failure to capitalise locally on early success through the development of further new products and lines of business. 17 Third, the average return delivered by venture capital in the UK, especially by funds focusing on early stage technology investments, has for many years been far too low for most pension funds and other institutional investors to wish to allocate a proportion of their funds to the asset class. 18 As a result, many private equity investors, including 3i, have moved out of the asset class and into buyouts and other later stage investments. Firms that wish to focus on early stage venture capital find it very difficult to raise money. 3.7. Despite the shortcomings of venture capital described above, it is an essential part of the financing mix for certain sorts of business. But if the UK is to have a viable early 15 EU projects are particularly problematic and participation by SMEs is often seen by VCs as a distraction. Commercial companies account for only 20% of the R&D funding that the UK receives from the Commission under FP7. 16 A “soft company” is a science or technology based company whose business model is to provide R&D based services (e.g. technical consulting, contract R&D) and which draws on its expertise and/or proprietary technologies to provide bespoke offerings for a range of customers and applications. A “soft start-up” is a company that uses this model in whole or in part to finance its early development, thereby reducing or avoiding entirely the need for external equity investment. Soft start-ups may continue to adopt this model and remain a service business, or they may transition to a “harder” business model based around standard proprietary products. iRobot is a classic US soft start up. 17IPO, the alternative exit mechanisms for VCs and one which preserves the management team to enable further growth is relatively rare in the UK 18 See British Venture Capital Association and European Venture Capital Association investor return statistics. There is a range of returns around the average, but asset allocations are made largely on the basis of average returns.

35

David Connell, University of Cambridge—Written evidence4F (PP 13) stage VC industry it must put more money into funding long lead-time R&D alongside it, so that fund investors (including our pension funds) can get high enough returns to encourage them to participate in the asset class. Government R&D contracts could provide a way of doing this. 3.8. Besides the benefits they themselves derive, lead customers therefore play a series of crucial roles in the process by which new technologies are commercialised and new products brought to market: i) by providing an informed description of unmet needs and in-use requirements, thereby ensuring that R&D is well focused ii) by funding the development of specialised applications of new technologies and new products for their own use, and the creation of innovation teams in their suppliers able to exploit that technology more widely in due course iii) by being the first to buy new ‘standard’ products, often effectively funding prototype development and helping to refine product designs through early trials iv) by acting as reference sites for more risk averse customers at home and abroad for the same product as well as for customers for other applications of the same expertise or platform technology v) by implicitly endorsing new products (and their suppliers) and helping to de-risk investment decisions by venture capitalists vi) by reducing the time before new product companies start earning product revenues, thereby helping them grow ahead of competitors

Exhibit 1

Policies for Translating Long Lead Time Technologies into Commercial Businesses

3.9. Customer contracts can play a particularly important role in funding the “exploratory development” stage associated with long lead time “platform technologies” with multiple possible applications. This is illustrated in Exhibit 1. Many technologies that emerge from the academic science base are of this kind and the risks associated with developing any one application are usually high. Coupled with the time scales involved this make venture capital unsuitable. Nevertheless, this part of the exploitation process must be undertaken in a commercial environment rather 36

David Connell, University of Cambridge—Written evidence4F (PP 13) than a university. Making it easier for potential customers to place R&D contracts with the private sector firms commercialising these kinds of technologies therefore represents a complementary policy to the new “Technology Innovation Centres” proposed by the Government. It should be noted also that the TIC concept itself relies on Centres being able to earn significant revenues from R&D contracts. 19 3.10. From the point of view of the UK economy, therefore, government policies that reduce the risks to organisations of acting as lead customers represent one of the best ways of encouraging innovation and accelerating the growth rates of entrepreneurial firms. 3.11. Many private sector companies have long played a lead customer role. Indeed it is the obverse of what is now called “open innovation”. And the impact can be seen across many successful technology companies. For example, Intel’s first single chip processor, the technology on which its success has been built, was developed under contract for a Japanese calculator company. 3.12. In contrast to the private sector, government procurement plays only a very modest role in stimulating innovation in the UK, and SMEs in particular generally find government agencies unwilling to act as lead customer. However, the exceptions demonstrate the power of this approach. Both the Bank of England and the Post Office funded early ink jet printing developments (for bank notes and postage franking respectively) at Cambridge Consultants. Alongside larger and later contracts from ICI and others this helped CCL develop proprietary technologies and build a world class ink jet printing technology team. This led to a series of product spin-off companies today employing over 3,000 people. 20 And Acorn Computers, whose alumni founded a string of semiconductor and software companies, was made possible specifically by the BBC’s decision to run a competition for a new home computer for its ground-breaking computer literacy programme in 1981. 21 Autonomy is another company which benefitted from a lead customer in the public sector, in this case a county policy force. 4. UK Policy on Using Procurement to Stimulate Innovation and the Small Business Research Initiative 4.1. The potential role that UK government procurement could play in stimulating innovation has been regularly highlighted for at least three decades and was a key theme of the DTI “Innovation Report” in 2003 22 . This was rapidly picked up in a report by the Office of Government Commerce. 23 Additional OGC guidance on innovation was published in August 2007. 24 The Department of Innovation Universities and Skills’ White Paper “Innovation Nation” 25 called for each department to produce an annual “Innovation Procurement Plan”. However, when published these were very general in nature. For example, the Department of 19 See also: The Role of TICs in Rejuvenating British Industry; Submission to House of Commons Committee on Science and Technology Enquiry on Technology Innovation Centres Submission to House of Lords Enquiry on Technology Innovation Centres, December 2010 David Connell, Professor Alan Hughes and Dr Andrea Mina, Centre for Business Research, Judge Business School, University of Cambridge 20 Exploding the Myths of UK Innovation Policy: How ‘Soft Companies’ and R&D Contracts for Customers Drive the Growth of the HiTech Economy, op cit. 21 Though the BBC did not actually pay Acorn to develop the BBC Micro, its involvement in the process and endorsement of the brand underpinned its success. 22 Competing in the Global Economy; the Innovation Challenge, Department of Trade and Industry 2003. 23 Capturing Innovation, OGC, April 2004 24 Finding and Procuring Innovative Solutions; op. cit. 25 Innovation Nation, DIUS, March 2008

37

David Connell, University of Cambridge—Written evidence4F (PP 13)

4.2.

4.3.

4.4.

4.5.

4.6.

4.7.

26 27

Transport Plan describes many challenges and activities, but gives no indication that it plans to commission companies to develop technology and innovative new technologies needed to meet its objectives. The Glover Review 26 focused mainly on improving SME access to government contracts of ALL kinds and its recommendations on innovation were limited to endorsing Procurement Innovation Plans. Inspired by the US SBIR, the UK SBRI was launched by DTI in 2001. Its initial objective was to place £50m of government R&D contracts per annum with SMEs through the SBRI web site. However, the scheme was non-mandatory and by 2004, contracts worth only £2m per year were being advertised, mostly for policy research rather than technology development. Very few departments participated. The main exception was the Biotechnology and Biological Sciences Research Council which for several years ran a small scale, but well regarded, competitive programme. In the March 2005 budget Gordon Brown announced that the SBRI scheme would be re-launched, with “£100m for small firms guaranteed”. Implementation of SBRI Mark 2 took the form of targets set for each Department to spend 2.5% of their external R&D budgets with small firms. This was, of course, a very undemanding target. The US legislation requires agencies to spend 2.5% of their external R&D budgets through the well defined and completely transparent SBIR process, but SBIR awards represent just the first step on the procurement ladder. Figures published by the SBA suggest that the total share of US federal R&D contacts going directly to small firms is 13 per cent27. Including subcontracted R&D projects from prime contractors the figure is probably much larger. Following the announcement the DTI collected standardised “SBRI returns” from each department. Not surprisingly in nearly every case the 2.5% target was met or exceeded. However, there is a good deal of uncertainty over what each department included in its figures for SBRI expenditure as no detail was provided and there was no review or audit process. Exceeding the target meant no further action was required. Furthermore some departments had difficulty quantifying “external R&D” expenditure. For example, over the next four years the MOD reduced its annual reported figure for external R&D from £3.6 billion to £1.1 billion and its annual reported SBRI expenditure from £539 million to £137 million. Despite the success of the BBSRC SBRI programme, Research Councils UK decided that the Research Councils, including BBSRC, should not participate in SBRI Mark 2 and announced their own “Small Business Research Scheme”. However the author is unaware of any competitions run, or awards announced, under this heading. SBRI Mark 2 was re-launched in spring 2006. This was at roughly the same time as the launch of the Supply2.gov website for smaller procurements and departments were encouraged to advertise SBRI projects through this mechanism. By February 2008, roughly 200 “SBRI” opportunities had been advertised. However, few if any were for technology developments open to commercial companies. The majority were for general procurements with no innovation content whatever. In 2007 Lord Sainsbury’s review of UK innovation policy recommended that SBRI be revamped using a model much closer to the US SBIR programme and responsibility

Accelerating the SME economic engine through transparent, simple and strategic procurement. H. M. Treasury 2008 The Small Business Economy, a Report to the President, Small Business Agency, 2004.

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David Connell, University of Cambridge—Written evidence4F (PP 13) was given to the Technology Strategy Board for coordinating implementation through spending departments. 28 4.8. Pilot competitions were run with the MOD and NHS in 2008/9 and it was rolled out to other departments from April 2009. 4.9. In 2009 I made proposals to the European Commission for an EU initiative under which €800m a year of the FP8 budget would be used to cofund SBIR style competitions run by individual member states. 29 In October, the Commissioner for Research and Innovation announced a significant commitment to introducing precommercial procurement programmes such as SBRI, including an early pilot. 30 5. The Current Small Business Research Initiative 5.1. Discussions with departments and the OGC enabled a standardised SBRI model to be developed which can be adopted by any public sector body. Issues such as compliance with EU and UK Government procurement rules and the EU State Aids concerns expressed earlier by officials have all been resolved. This has been helped by the European Commission’s own commitment to “Pre-Commercial Procurement” and clarification of how it can be used as a legitimate innovation policy measure 31. 5.2. SBRI Mark 3 has the following important features: i) It focuses on funding the development and trialling of innovative technologies and products to help Government bodies improve their effectiveness or meet other policy goals ii) It involves a competitive process which is in principle open to all EU businesses, though the focus on innovation and the need for close customer and user engagement means than in practice nearly all awards go to SMEs based in the UK. Competitions are not required to be advertised through the Official Journal of the European Communities. iii) Awards take the form of contracts covering 100% of firms’ costs. Collaboration is not required but companies may use sub-contractors and consultants if they wish. iv) Firms own any IP they generate. v) Projects are phased to manage risk, with Phase 1 awards providing £50-100k for a feasibility/design study, and a percentage of these (ideally 50%) going on to win Phase 2 awards, each providing £250k to £1m to develop a demonstrator or prototype. In this respect it mirrors best practice as demonstrated in commercial R&D and ensures funding is focused on the best propositions. 5.3. There is no requirement for departments to spend any given amount on innovative procurement, or to use the SBRI process and they have been unwilling to commit to targets. The Technology Strategy Board has therefore had to market the process 28 The Race to the Top, A Review of Government’s Science and Innovation Policies, Lord Sainsbury of Turville, H.M. Treasury, October 2007. 29 Creating an EU SBIR Programme; Lessons from the UK SBRI and Proposals for EC Action, Presentation to EC Workshop, Brussels October 2009. These ideas were later presented to Commissioner Maire Geoghegan-Quinn at a meeting with Malcolm Harbour MEP. 30 Europe 2020 Flagship Initiative, Innovation Union; European Commission, SEC(2010) 1161. 31 Pre-commercial Procurement: Driving innovation to ensure sustainable high quality public services in Europe. {SEC(2007) 166. European Commission December 2007

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David Connell, University of Cambridge—Written evidence4F (PP 13) actively to a range of individuals in spending departments and the public bodies they sponsor. In principle, “problem owners” have to fund projects from their own budgets, but in recent months the TSB has co-funded some competitions to encourage participation. One of the best examples of an SBRI competition is summarised in Exhibit 2. 5.4. The TSB has done an excellent job in developing the SBRI process and marketing it to departments, and the experience of running competitions has led to considerable support from individuals in sponsoring departments who see it as a very useful way of addressing unmet departmental needs. 32 The feedback from award winners has been overwhelmingly positive. 5.5. However, some important problems remain: (i) Departmental R&D budgets tend to be fragmented, tied up under long term contracts or framework agreements and in some cases focused on academic research and/or policy advice. With the exception of BIS and to some extent MOD, funding technology development has not historically been seen as a part of their role. (ii) Mainstream (non R&D) budgets are focused on delivery and value for money and there is little incentive for officials to get involved in funding innovative technology other than as a component of large scale systems procurements through established turnkey suppliers. Reputational benefits are likely to take some time to appear and may not attach to those taking the risk of commissioning projects. There can be severe career penalties for being associated with failure. Despite government exhortation, there is no obvious tangible mechanism at work to encourage the development and testing of component technologies, solutions and subsystems in advance of major procurements, such as the investment in the Olympics or major transport infrastructure projects. (iii) Those individuals that do wish to sponsor SBRI competitions find it hard to access large enough budgets, so there has been a steady downward pressure on project size and a danger that the “norm” becomes too small to make a meaningful impact on a company’s ability to develop products.

32 See NESTAs review of SBRI progress: Buying Power; Is the Small Business Research Initiative for Procuring R&D Driving Innovation in the UK?, Kirsten Bound and Ruth Puttick, NESTA, June 2010

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David Connell, University of Cambridge—Written evidence4F (PP 13)

EXHIBIT 2. NHS EAST SBRI COMPETITION In April 2009, NHS East launched an SBRI competition designed to help industry develop new technologies to support the achievement of regional health priorities and increase the probability of their adoption by NHS. The competitions were co-funded by the East of England Development Agency, TSB and European Regional Development Fund giving a total budget of around £2.8 million. After a series of workshops with clinicians three topics were defined: i) Managing long term conditions ii) Patient Safety iii) Keeping Children Active 177 proposals were received and after a shortlist of applicants had been interviewed, 11 were awarded contracts for feasibility studies, typically worth £100k each. On completion of these, those wishing to continue were interviewed by a panel comprising clinicians and nursing staff in the relevant fields, and people from the private sector with a venture capital or technology development background. All companies will receive clinical assistance in trialing their products. Four companies have been awarded Phase 2 contracts: •

Cambridge Design Technology, whose technology for reduction of Ventilator Associated Pneumonia has the potential to save 2000 lives and £150m in NHS costs per annum. It plans to spin out a medical device company based initially on this technology

•

Eykona, whose portable 3D camera for assisting wound care, has the potential to reduce healing times for 38000 patients suffering with ulcers. Eykona raised £1.2m in investment on the back of the award

•

Oxford BioSignals, whose non-invasive system for monitoring patient vital signs can give early warning of patient deterioration by up to 6 hours and is expected to be able to reduce hospital stays by 8%

•

Sonovia whose novel ultrasonic patch technology for therapeutic and drug delivery applications is expected to allow for better treatment of osteoarthritis in the home.

“It’s guided by market need, based on merit, 100% funding and, above all, you let us spend the money in the way we see most effective. In a nutshell, that’s why it’s so good.” Dr Keith Turner, Cambridge Design Partnership

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David Connell, University of Cambridge—Written evidence4F (PP 13) The lack of participation by the Research Councils is particularly disappointing as their ability, through the academic researchers they help fund, to help create lead customers for new “research tools” would do much to help this important hi-tech sector. A “Research Tools” SBRI would also probably be the easiest way of encouraging university spin out companies. The two most successful spin outs from Cambridge University of the last 15 years, Abcam and Solexa, both fall under this heading, for example. 33 (iv) The departments with the next largest R&D expenditures, Defence and Health have both made very productive use of the SBRI process. However the amounts they have been able to commit - under about £5million each - are quite modest in relation to their size and there is no sign that they feel able to increase their financial commitments. In the case of the NHS the problem is compounded by the fragmentation of budgets and responsibilities, with the reorganisation currently taking place likely to make this worse. (v) The Department of Transport has so far only run one competition, worth £300k and without a Phase 2. This compares with an overall R&D budget of £60million per annum. (vi) A laudable desire to engage with new departments and agencies has led to the TSB taking on some competitions which do not fit the ideal SBRI template, for example, because the awards are less than the desired norm or where sponsors have been unable to fund Phase 2s. Budgetary uncertainties mean that many current competitions do not commit to Phase 2 funding. 5.6. As a result of these difficulties, the total value of SBRI competitions has been running at less than £25m per annum. Moreover, the financial pressures on departments and lack of visibility over future budgets are exacerbating these problems and this number is likely to fall. Based on the US SBRI and the relative sizes of the US and UK economies, a more appropriate number for the UK SBRI would be £240 million per annum, with several times this amount being placed with firms for larger projects outside the scope of SBRI. 6. Conclusions and Recommendations 6.1. The catalogue of problems associated with getting SBRI established shows just how difficult it is to introduce systematic procurement based innovation programmes into organisations focused on operational deliverables and cost effectiveness. Exhortations, guidelines, “plans” and targets have all had virtually no impact. 6.2. The problem is analogous to that faced by the boards of large corporations. To meet shareholder expectations, large firms must continually drive down costs in their individual (usually mature) operating businesses. This process inevitably squeezes investment in R&D out of the system and hampers major innovations. To counter this wise Chief Executives ensure that there is some central control of R&D budgets, so that the corporation as a whole continues to create new products and revenue streams at the same time as pushing hard on annual financial targets. Spending money outside the company, through the process now known as “open innovation”, has become an important part of the picture.

This argument is developed further in “Scientists are customers too; How the SBRI can help Research Councils drive economic growth”, David Connell, NESTA, March 2010.

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David Connell, University of Cambridge—Written evidence4F (PP 13) 6.3. If government departments are to pull their weight as drivers of innovation and growth, the Treasury must play a similar role, by ensuring that defined budgets are available to those within spending departments capable of playing the lead customer role. Neither BIS nor TSB can achieve this alone. SBRI is a good place to start. 6.4. My recommendations are therefore as follows: i) That Treasury allocates £20m to TSB in 2011/12 to enable it to cofund departmental SBRI competitions. This should be increased in steps to £75m per annum over the next three years ii) That all departments, including the Research Councils, be asked to participate in SBRI during 2010/11 iii) That details of all awards , including the recipient, amount and project description, should be published on the TSB web site within 1 month of contracts being signed (this should be a condition of TSB cofunding) iv) That TSB, jointly with Treasury, publish a full, factual analysis of SBRI competitions each year v) That Treasury use this analysis to agree innovation budgets and programmes with spending departments in subsequent years vi) That within two years, spending departments be required to publish an annual breakdown showing in detail how R&D and innovation budgets are used vii) That departments, with the help of TSB and major systems suppliers, identify component and subsystem level technologies likely to be needed in future years and use part of their SBRI expenditures to fund their development viii) That additional budgets are made available, when finances permit, to fund larger scale lead customer projects outside SBRI ix) That government lobbies the European Commission to use a significant part of the FP8 budget to cofund national SBRI budgets. 6.5. The aim should be to build up a suite of lead customer programmes worth £500m in total by the end of this Parliament, sufficient to play a major role in rebuilding the UK’s high technology manufacturing sector. December 2010 Note on Conflicts of Interest David Connell is a Director of TTP Capital Partners Ltd, Opportunity Links Ltd and SIMUL8 Corporation Ltd. I am also a minority shareholder in TTP Group plc and various small specialist technology companies.

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David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 Evidence Session No. 2.

Heard in Public

Members present Lord Krebs (Chairman) Lord Broers Lord Crickhowell Baroness Hilton of Eggardon Baroness Neuberger Lord Patel Baroness Perry of Southwark Lord Rees of Ludlow The Earl of Selborne Lord Warner Lord Willis of Knaresborough ________________ Examination of Witnesses Witnesses: Professor Luke Georghiou, [Professor of Science and Technology Policy and Management, Manchester Business School, University of Manchester], Professor Jakob Edler, [Professor of Innovation Policy and Strategy, Manchester Business School, University of Manchester], and David Connell, [Centre for Business Research, University of Cambridge].

Q35 The Chairman: I would like to welcome our second panel of witnesses. You will have heard that the proceedings are being webcast, and for the members of the public gallery who remained behind, one of them, you will have seen the note that has been circulated before giving the purpose of the inquiry and Members’ interests. So I’d like, without further ado, to invite our witnesses to introduce themselves, and if you do have any opening comments you’d like to make please feel free to do so but please also keep them brief. So if I can start with Professor Georghiou. Professor Luke Georghiou: Thank you, my Lord Chairman. I am Vice President for Research and Innovation at the University of Manchester, but today I am speaking in my capacity as a professor interested in this field. Our institute, the Manchester Institute of Innovation Research, and its predecessors, has been studying the demand side of innovation for something like 50 years, and my personal interest goes back about ten years in the study of procurement for innovation. With my colleague, Professor Edler, I am currently holding a 44

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 grant from the Economic and Social Research Council, BIS, NESTA and the TSB to study this issue in some detail and we are about halfway through that work. Professor Jakob Edler: Thank you, Lord Chairman. I am Professor Edler. I’m a Professor of Innovation Policy and Strategy in the Manchester Institute of Innovation Research at the Manchester Business School, University of Manchester for exactly four years. Prior to that I was in the Fraunhofer Institute for Systems and Innovation Research in Karlsruhe and that’s where I actually started to work on demand-based innovation policy, including the public procurement of innovation. It’s one of my focal areas and I’ve worked at European level and for various national Governments, now also doing studies in the UK on this subject. I don’t really have an introductory statement other than that I find the approach of the Inquiry fascinating and very interesting. Thank you very much for inviting me. David Connell: Good morning, I’m David Connell. I’m a Senior Research Fellow at the Centre for Business Research, which is part of the Judge Business School at Cambridge University. I’m also a director of a venture capital fund and two software companies. I’d like if I may to make a short statement giving some background to my submission and a very brief summary of the points within it. The Chairman: Yes, if you could keep it really brief. David Connell: I will do so. I spent the majority of my career not as an academic, but working in the technology sector including setting up and running a Cambridge venture fund. Over this time I came increasingly to the conclusion that the lack of a US-style procurementbased innovation programme was a disaster for the UK technology sector. So in 2004 I set about trying to do something about it by launching a campaign with Anne Campbell, who was then MP for Cambridge, initially through a Private Members’ Bill, and one way or another I’ve been on the case, so to speak, since that time. As a result I think I have a rather long-term perspective on the different attempts to implement this kind of policy, and this has led me to put some very specific conclusions and recommendations in my submission. They’re based on three contentions, each backed by evidence from research that I’d like to just very quickly summarise. The first is about the role of lead customers. Contrary to conventional wisdom, the evidence from Cambridge shows that if you look at the most successful new science and technology companies in terms of profitable growth and jobs, R&D contracts with customers and solving problems for them are actually more important as sources of innovation than university IP, certainly IP in terms of inventions. They’re also more important in terms of funding than venture capital for the early stages of these sorts of businesses. In fact, solving customer problems and developing technologies and products for them with their money is the dominant model in terms of creating new firms with significant economic impact. There are also many examples from elsewhere. Just to give one, iRobot, currently advertising its robotic vacuum cleaner as the ideal Christmas present in our national press, is a very good example. Its early growth was largely funded through R&D contracts with the US Department of Defense and the product sales that followed. As a result, in the submission I argue that one of the most important things that Government can do to help grow the high-tech sector is to encourage more organisations in the public and private sectors to act as lead customers, by funding the development and trialling of new technologies for customers and, in particular, by placing R&D contracts with 45

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 innovative suppliers. My second contention is that the US SBIR programme is the model that we should be following. My third contention is that in order to deliver what Government is looking for we need the Treasury to provide significant budgets for departments to enable them to fund this kind of programme. The issue to my mind is not about guidelines and policies and so on; it’s very simply that Government departments do not have budgets available to undertake this sort of activity.

Q36 The Chairman: Thank you very much. I would like to kick off by asking the three of you in turn to comment on some general questions around Government procurement that are on our minds. We have heard from witnesses in the Cabinet Office that the Government is currently working to streamline the procurement process, and moving to outcome-based specifications. We are interested to know whether in your view, as experts in this, this will help to encourage innovation through procurement. We are also interested to know what other barriers you think ought to be removed. Another concern we have had is whether those responsible for public procurement are intelligent customers, and able to identify suitable innovative solutions that might be available for their problems. I wonder if you could comment on that. Finally, we are concerned about how the agenda of localism will affect the ability of the public sector to be intelligent in procurement to stimulate innovation. So, perhaps you could take that bundle of questions, and perhaps I could take Professor Georghiou first and then Professor Edler. Professor Luke Georghiou: Thank you. Perhaps I’ll begin with the barriers. I think these are probably fairly well understood and fall into two main categories, the one being a greater aversion to risk in the public sector than in the private sector, and the second being a question of expertise among procurement professionals in handling the more complex processes involved in innovation. On that latter point, I think it was in our written evidence that we talked about the very thinly spread procurement professionals in local government, and this is a fact. The larger community are people who do procurement but are not regarded as highly trained professionals. Even among the professional community their expertise tends to be honed in the art of procurement, on recent developments such as e-procurement and so on, and not necessarily in how to handle innovation. There are a number of specific things that are needed to do this, for example conducting some kind of foresight activity: widening the scope of possible suppliers beyond the current ones, and beyond the technology base of the current ones, which is not necessarily that easy to do, and simply handling the new kind of procedures of outcome-based specifications, or standard-based specifications. So, that goes straight into what you’ve described as the intelligent customers issue. My colleague will probably say a bit more about this, but it can sometimes be misleading simply to talk about the procurers, because the process starts before the procurement professionals come in. It starts with those who are commissioning the innovations, and their expertise and involvement is important as well. It’s a rather undefined border between the two. Professor Jakob Edler: Maybe I’ll come in here. I just echo this and would maybe add that we always talk about the intelligent customer we directly focus on the professional procurers. Of course, they are key to all this, but they are just one player in the whole procurement game. We cannot put too much weight on their shoulders without changing the context in which they lift it. It has to do with incentive structure, it has to do with 46

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 training, but it has also to do with the division of labour and the functional specialisation within large organisations. Not only between the commissioning and procuring, it’s also the actual end user within administrations, or maybe then later on the citizens. What is the acceptance or the potential acceptance of the innovation? If the procurer knows that there is a risk of adoption then he faces another risk. So, it’s how to make sure that all the organisational changes that are needed for many of those innovations in the public sector are adopted, and are done in the way they need to be done when you bring in innovation. So it’s not only being risk averse because it may fail in terms of delivering the solution. It’s also a problem of the adoption of an innovation, and that is a big problem also when we talk about diffusion of innovation. So, the argument is simply don’t look only at the procuring body, at the procurer. It’s much more than this, and that, of course, is where it gets complicated with recommendations. The intelligent customer is much more than the procurer. David, do you want to add to that, on the customer? David Connell: I think that Government officials, especially those that are close to ,or “own”, a problem needing an innovative solution, rather than procurement professionals can act very effectively as intelligent customers. And if we look at where they’ve been involved in the SBRI programme there have been some really good projects defined and placed. The issue is that they need the tools to do the job and those tools are, first of all, money with which to seek, develop and trial innovative solutionsand, second, responsibility and a mandate to do so. Q37 The Chairman: If I could just go back to one part of my question, or multi-pronged question, it was about whether the current proposals to streamline procurement and moving to outcome-based specifications will actually help. In your evidence, you referred— and I quoted it earlier—to the 40,000 contact points, a plethora of documents, guidance, strategies and so on, and you highlight the problem is actually doing something about it. Is the change that we’ve been told about by the Cabinet Office a change that’s going to help to streamline things and overcome some of the problems that you identify in your written submission? Professor Luke Georghiou: Certainly, outcome-based specifications are themselves more or less a necessary condition for innovation and procurement, but the streamlining of procurement could both help and hinder the process of innovation depending on the directions it takes. There’s no doubt that reducing the number of points of procurement will make it much easier for innovations to diffuse, which is one of the big problems we face. Somebody can find an excellent innovation in one hospital or one health authority and we have no mechanism for it to move to others. But what has been worrying us, particularly in the fairly strong climate of austerity that we find ourselves in at the moment, is that the pressure to go for economy and short-term cash savings as opposed to most economically advantageous bids might mean that the streamlining could take us to the lowest common denominator and towards off-the-shelf goods rather than innovative ones. Q38 Lord Warner: Could I pursue the two points, really, that both Professor Georghiou and Professor Edler raised, one about broad risk aversion in the public sector and the other about not just focusing on the procurement—the people who do the nuts and bolts of procurement—but on the wider context in which organisationally they’re operating? I want to give you an example, then ask whether you think this is actually common. I made the mistake of reading the NHS Chief Executive’s Operating Plan for the NHS of 2009-10, which is 90 pages and is setting out the agenda for a £100 billion a year industry to operate on. 47

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 There is not a word in that plan—and it has also got a lot of stuff about austerity and how much saving—about R&D and how R&D innovation, which the NHS is pretty strong on, is actually used in procurement to meet the challenges of the NHS at a time of austerity. Is that a common approach in public sector organisations? Do they just simply culturally, not operationally, use R&D? Professor Jakob Edler: If I may, just as an example, I might come in because I’ve worked a little bit on the NHS in the last couple of months and I’ve visited two NHS procurement conferences, one in London just three weeks ago. I had the pleasure to talk to them about the topic of innovation and procurement. The conference before that in Manchester was also all about procurement. It was a full day and innovation was not on the agenda. No one talked about it. There was just one question and then they could answer because there are a couple of extremely good people in the Department of Health and in procuring bodies. But overall, at the moment, across the board it’s all efficiency and austerity. So, what I don’t fully understand, and that would be my criticism of that, is that of course there is a lack of public money at the moment, we all know that, but efficiency and innovation are not opposite poles. You can do the one to achieve the other, and the other way round. Of course, you cannot have the same leverage as three years ago when we all had too much money; of course we all know that. So, it is a common problem at the moment. They’re all scared. It’s a total shift, I think. Two years ago, with BIS and what was DIUS, the innovation procurement plans, there was almost a new beginning to really do things differently, and that has almost died. If you look at the Efficiency Reform Group, it’s all about efficiency. So, all the streamlining, the centralising through centres of excellence that will come, is about getting more for the same but not better for the same. Professor Luke Georghiou: If I could make a general point on risk aversion, it perhaps sounds over-simplistic but I think one of the problems is that there is a mismatch between the electoral cycle and the cycle in which benefits are yielded from innovations, and this applies as much in local government as it does in central government. Therefore, even an innovative and less risk-averse politician, who might go for the disruption of changing the base of their city’s transport, may not see the benefits before they come up for re-election. They may be in the more difficult phase of the project, and this is probably one of the reasons that we encounter systematic risk aversion. I noted one of the Government officials talking about how the closer you are to politics the more difficult it is to be innovative. David Connell: It is very intersting that Lord Warner mentioned the NHS, because the NHS actually has a statutory requirement for innovation and budgets have been made available for individual regional health authorities, and you can see the effect that that has had. It has unleashed a lot of work on innovation, mostly around ensuring the spread of good ideas, but some other stuff as well. I I was also interested that Lord Warner talked about the role of R&D, because R&D is not the same as innovation in departments.Infact if you look at most R&D activities within departments, they tend to be focused on research, including academic research and scientific advice, all laudable things, but not a lot is spent, outside the MoD, in terms of funding technology development. Q39 Lord Willis of Knaresborough: I just wanted to pick up your issues, Mr Connell. You said the two key things were mandate and budget. Let us leave mandate to one side. What did you mean by budget? Are you recommending for the Committee that departments should have specific budget heads that are called innovation? Because I find that quite a difficult concept. 48

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 David Connell: For specific programmes, yes. To be honest, I think it’s very similar to a large company. A large company typically has to focus on cost management and financial management and that squeezes innovation out of the system. So a wise CEO will ensure that R&D budgets are managed to some extent centrally to ensure that that doesn’t happen. Using procurement as an innovation tool should be an important part of that sort of policy within the public sector. The real example to look at is the SBRI programme which is, to my mind, the only procurement-based innovation tool that is actually working systematically in Government, led by the TSB very effectively. But the amount of money that they’ve been able to persuade departments to put into that programme is very limited, about £15 million a year. If we were to match the US programme, taking into account the different sizes of the economies, we’d be talking about £240 million. Government has been trying to make this programme work using different methods of encouragement since 2001, and it seems to me there is no way that it’s going to be operated on the scale that we need without those budgets being made available, and it’s a job that only the Treasury can do. Q40 The Earl of Selborne: You have given us three or four ingredients for successful public procurement: professional qualifications, responsibility of structures, money—of course, I think that goes without saying. Could you give us examples of best practice? Would you say the SBRI is the only example of best practice, or are there other examples in local government? And what professional qualifications would be appropriate in local government? Professor Luke Georghiou: I think it’s important first to make a distinction between the different kinds of procurement. SBRI is about procurement of R&D and is working in the world of rather small budgets. When people talk about the potential of 16% of GDP, £175 billion, they’re not talking about R&D budgets; they’re talking about the procurement of goods and services. They work to different legal frameworks and although the two things can be made to work together to some extent, I don’t think we should drift from one to the other in terms of cases. If we take cases of procurement of goods and services, in this country one of the most cited examples from Forward Commitment Procurement is that of sustainable disposable prison mattresses, but since that time a number of other cases have been produced by departments and BIS. We ourselves have compiled a collection of some 50 or 60 cases of innovation procurement across Europe, and a number of studies, both our own and those of other people. You wouldn’t look at one and say, “That’s the archetype”. Each of them have good achievements and good lessons within them. Some of them are R&D-intensive; some of them are simply involving new configurations of technology to respond to problems; some of them are even non-technological. In fact, the most interesting case I’ve come across in the last few months is in a small country, Estonia, where they took advantage of their small size to procure through seven cycles a system that made all of their Government databases compatible with each other so that they could collate information. This not only worked for them but was a classic example of a lead market because they’re now exporting this system to three other countries in fairly short order. Professor Jakob Edler: Yes, I would add that we have to distinguish between specific schemes like SBRI or other pre-commercial procurement schemes and forward commitment schemes on the one hand and the normal procurement process on the other hand where we find cases that work where innovation was procured despite the lack of any supporting 49

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 scheme. It was just regular procurement that was done intelligently, so we have to distinguish between the two. I think that’s very important. For me, one part of the solution of all this is to link the two more intelligently: those who have the expertise—who have specific schemes—and those who roll out procurement in a broader scale. We have to really distinguish the two. SBRI is interesting but it’s tiny. It is not the thing that shifts the whole balance. There is maybe one interesting example of something that’s not so much procurement of brand new innovation but more about diffusion of existing solutions but at the higher end of innovation. There were market transformation programmes in Sweden in the late 1990s that were extremely successful where they applied something called catalytic procurement. They had a cooperation of public users—user groups, broad involvement of the general public— and then bought the first batch of energy efficient technologies to set an example to bring down the price, and then to roll it out much more broadly, and that was done not only through procurement but through a whole raft of the accompanying measures in terms of marketing, labelling, regulation, and all these kinds of things. It was a very efficient scheme because it created market-ready technologies rather than simply solving one specific problem of the specific agents. Q41 Baroness Perry of Southwark: I think very largely you dealt with much of my question, which is really about the SBRI. You have all said that you approve of it as a multidated programme, but what could Government do to make it better and to make it more effective, apart from just more money, as Mr Connell has mentioned? And are there other schemes that we should be looking at that would be equally good, perhaps not necessarily only dealing with small businesses but getting innovation out of some of the larger companies that work with Government? David Connell: My colleagues are right that, when it comes to incremental innovation, that can be done through the normal procurement mechanisms and, to be honest, I’m not sure there’s a big problem there. Innovative procurement is difficult when there is a risk; when there is risk in terms of making a technology or product work or when there is a risk to the individual in the department of being associated with something that might not work, and they don’t have a mandate to deal with that and so they don’t have a budget to draw on. Q42 Baroness Perry of Southwark: It’s the Daily Mail factor, really. You’re dealing with taxpayers’ money having been wasted and come to nothing. David Connell: Yes, yes. SBRI is actually a misnomer. Companies of any size can apply for SBRI and should do, but a lot of innovation takes place within small businesses. The key point about SBRI that is appropriate for many different applications in that it deals with risk in stages. It allows an organisation or a department to specify a requirement, spend a little bit of money—£100,000 typically—with a company or a few companies to do feasibility studies to see if they might be able to solve the problem, and then take one or two of those to go further and spend some more money to develop the solution. This approach is appropriate in lots of different environments. If we are about to spend a huge amount of money on ,say, a new transport system or a new computer system for the NHS, the way to minimise the risk and maximise the participation for UK companies is to put some components or subsystems out in advance, the difficult bits, and spend some money with companies that can develop those technologies so that in 50

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 five years’ time, when the department concerned is ready to do the full scale procurement, they are included and it’s not just the overseas suppliers that we’d buy from. I’m clearly an advocate of the SBRI programme but it’s the principles of that that are applicable across a whole range of different areas, anything where risk is involved and it isn’t just a question of making a slightly different choice to last year but choosing someone with a different kind of offer, a non-traditional offer. Professor Jakob Edler: Yes, I share your view but there is the danger, when you ask what could be done better with SBRI, that there needs to be more buy-in from departments. At the moment I have the feeling they have a tendency to say, “Give the TSB budget, give them expertise and somehow they’d take care of it, and we might come in here and there but they take care of it”, and that’s exactly the wrong approach. Of course we especially need some expertise who push it all, but the success of the American model is that because of the mission-oriented legacy that they have in the various departments, they have a different kind of buy-in and a different kind of expertise to push it through, and even there they have a problem of commercialisation of many of the solutions that are developed. It needs a more credible buy-in in terms of budgets and expertise and champions in departments, and the reality is the SBRI still can work. Professor Luke Georghiou: No more on SBRI, but the other part of the question, is there a possible other scheme involving large companies? I believe there is one but I can’t set out for you a readymade one that works. I spent ten years on the board of Manchester Science Park, and one of the things I’ve observed is that small innovative companies often have got to the point of having an excellent product but find it difficult to find a customer who will take the risk of being first to use it. This is one of the arguments for public procurement but sometimes they’re not aimed at the public market; they’re aimed at the private market and I wonder if there could be some sort of insurance-based risk guarantee scheme from the Government that reduces the risk for a private purchaser of these highly innovative products. Q43 Baroness Perry of Southwark: You didn’t mention the Forward Procurement Strategy. Is that something that you would recommend before commitment— Professor Luke Georghiou: Yes, I think it’s probably worth saying about both that and SBRI that we, like others, sit here making statements of belief about them based on vignettes and case studies; both of them are probably ripe for a systematic and dispassionate evaluation and that would be helpful to everybody. Q44 The Earl of Selborne: I think I can preface my remarks by saying that I have an interest in the sense that I have run an SME for 40 years. SBRI is accessible to companies of all sizes but there is, nevertheless, a government policy expressed in the Small Business Initiative, that 25% of government contracts should be awarded to SMEs. As an aspiration, does that make any sense? Given that a lot of innovation does take place in small companies, why do you need a specific target like that? Also, referring to the needs of the SMEs themselves, the Glover Report of 2008, which the Treasury commissioned, said that the problem for SMEs is the structure of the bidding process, the expense, and the commitment that is needed in order to involve yourself in this. Is this anything to do with some of these issues that SBRI is addressing? 51

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 Professor Luke Georghiou: I was a member of the Glover Committee and Chairman of its expert sub-group so I can perhaps draw up on that experience. Our conclusions were, as you say, that there should not be a quota. We believe that this would distort certain sectors and in fact be very difficult to measure, and if you count supply chains we might already be over the quota that is currently proposed. Instead, the Committee made recommendations around transparency, simplification and strategic use of procurement, as we are discussing today. There is not very strong evidence that SMEs are more innovative than large firms, it needs to be said. I think we cited some data in the Glover Report that they spend a smaller proportion of their R&D, for example, but they do have a slightly bigger percentage of novel innovations in their turnover: 9% compared to 7% for larger companies. Where we thought they were important and why it is important to stimulate innovation in that sector is that they do give us a greater variety and competition that should, in itself, support innovation, and they are willing to go into smaller niche markets that large firms might neglect. But it’s not an overwhelming case to say that they are more innovative, and therefore schemes that encourage all sizes of firms to get involved in innovation through procurement are very welcome. The Chairman: Do any other witnesses have anything to add? Professor Jakob Edler: Maybe just one minor thing. There are certain obstacles, and you mentioned most of them, but one of the thoughts for pre-qualification is you have to some kind of history. You have to have a history that you are trustworthy as a client. And new start-ups, of course, have a problem there so we have to look at the specific problems that they face within the normal procurement process and tackle that rather than having specific schemes, maybe. As I understand, SBRI is not really a specific scheme, within European regulation is quite difficult to discriminate in favour of SME. Q45 The Earl of Selborne: You will have heard earlier the evidence from the Cabinet Office, from Ms Sally Collier, and I think it was impressive to hear the amount of work that has been done within the Cabinet Office to try to reduce the plethora of guidance and perhaps even the contradictory requirements from certain departments. It may be unfair to expect results already as it is a new initiative, but is there any evidence that this is addressing the issues that SMEs need to have addressed in order to be able to contribute successfully to the public economy? Professor Luke Georghiou: I think the Glover report was the only time I’ve ever been on any kind of public committee where all recommendations were accepted in full and, indeed, in the Pre-Budget Report. They do seem to be doing the things that were recommended: having a single electronic portal; allowing pre-qualification information that is used in one context to be used in another so that firms don’t have to fill in the myriad details that are asked for; allowing private sector experience to be used to qualify for public sector bids, which was excluding a lot of SMEs, and probably the most radical saying that large firms could not pass on to their sub-contractors terms that were worse than those that they themselves experienced in Government. All of these on a timetable for up 2012-13 appear to be being implemented, as far as I can see. I’ve not seen any change in this following the change of Government. Q46 Lord Warner: Could we just go back to Professor Georghiou’s statement a few minutes ago? He had his little list of 50 to 60 examples. I think we’d be very interested to 52

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 see those examples but even if they are impressive, if that’s a pan-European list, that’s pretty small across public services across Europe. Professor Luke Georghiou: Absolutely. Lord Warner: Leaving that to one side, my question is related to that. Do we now have a fundamental problem that the decision-makers on these issues in the public services in this country tend to be boards, chief executives, finance directors? Procurement is done way down the food chain in most public sector organisations. Do we have a problem of the knowledge base about what options are available when these decision-makers set their budgets and set their operational strategies in public bodies? Do they just not know what is around and what is on offer? Professor Jakob Edler: I think that’s correct. The simple answer would be yes. One feature of most of these positive examples in a normal procurement process that lacked innovation was that when the decision was prepared and later on when implemented, it was a very close co-ordination between those who have the need, those who take the decision and those who procure. In many cases this happens in local authorities, like in the little city where I come from, Heidelberg, I made a case. The person who made the whole procurement process had the mandate by the highest political leadership to say, “Okay, you are responsible for our IT system; you know the market; we give you a lawyer next to you but you make the crucial decisions and you do the market intelligence”. So in a way they cut off the departmentalisation and said those that who have the knowledge of the internal use and the external market environment should be running the show. The procurement official of course is there, but it’s not – as is often the case – driven only by the highest level decision-making and the procurer; those two doing it without really interconnection, and those in the middle who have the knowledge are not involved properly—it’s the other way around that makes more sense. Professor Luke Georghiou: Closer to home, one of our current large case studies is waste disposal in Greater Manchester where, because of regulation, they’re going to much more recycling and a bio-gas plant. That is a story of very close co-ordination between political leadership and those responsible for procurement and bringing in expertise from outside as well. There are probably 15 key people involved in a large and complex project. Q47 Lord Broers: I’ve got a general question in and around this and it’s to do with roadmaps. In certain instances, certainly in the States, the use of roadmaps is very useful and the Department of Defense, having established a roadmap for micro-electronics, for example, then specified that nobody could deliver a weaponry system to the DOD that had more than three-year-old micro-electronics in it. This struck me very strongly when I came back here and found Nimrod flying around with vacuum valves in it. I think you can drive technology that way and in the transport systems I would have thought it’s useful, but it does mean that within Government you’ve got to have people at a pretty high technical level to understand how to accurately implement that. Do you think there’s a role for Government in working with industry to set roadmaps? David Connell: I think there is, yes. I think it needs Government to work with suppliers, particularly lead suppliers and systems builders plus probably the TSB in order to identify areas where component technology is required in the future and trying to ensure that that’s available. I’m not sure I see that happening at present, though. The Chairman: Professor Georghiou, do you want to add anything to that? 53

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 Professor Luke Georghiou: Only to agree. I think roadmaps and, in general, foresight-type approaches are an important tool in promoting the idea of innovation in procurement. I slightly hesitate on the defence sector because there are some that believe it has perhaps over-egged the pudding in terms of going for innovation when it was not strictly necessary. Q48 Baroness Neuberger: I think you have answered part of the question. I was going to ask you about what structures are in place or should be in place to anticipate the needs of government departments—and that is taking a 5, 10 or 15 year look—in order to facilitate the procurement of innovative solutions. I think one of things you’ve said is that roadmaps is one way of doing it. You’ve also, I think, suggested—Mr Connell particularly—something about how we need to have a method of having small amounts of money made available and then it goes as a much more gradual process, and you’ve all also said something about evaluation. But adding to those, is there more you would say about what needs to be put in place to make the thing work? Professor Jakob Edler: One thing to add to what both of my colleagues said is if we talk about foresight, it’s not only the technology side and the Ministry talking about the future, it’s also of course the general public, the citizen or other private users. So what we label constructive technology assessment would be a process whereby we think about the potential and the risk of a certain technology, and then the role of public procurement and public agencies within that. And you start early on a discursive process as to which direction we want to go, what are therefore the decisions we need to take in terms of supply measures but also later in terms of demand side measures. So it’s not only technology side and public bodies, it’s also the private user and the general public in certain areas. Q49 Baroness Neuberger: Can you give us an example of that? Professor Jakob Edler: The country that is a front-runner is certainly the Netherlands, and they have, for example, a constructive technology assessment programme, a large one, on nanotechnologies. So that is where they try to establish an understanding of the risk and opportunities, and then of the decisions that need to be taken. That of course involves much more than procurement, it’s much bigger. Baroness Neuberger: About public acceptability and how you make it work. Professor Jakob Edler: Yes, exactly. Q50 Baroness Neuberger: Can I just press a little bit further also, because you said more about how one makes normal procurement work? And if you were looking at a 5, 10 and 15-year timescale, how would you change the thinking about some of the normal procurement linking it up, not only doing it with new SBRI-type initiatives but changing the way we do it normally? Professor Jakob Edler: That’s where we come back to the very different question. How do we change the capacities of those involved? And there are so many tensions on the shoulders of those involved that innovation at the moment is not their concern, it’s just a matter of fact. Professor Luke Georghiou: There was some talk earlier of grand challenges. If we are talking about large-scale projects, of changing the fuel or energy base of the country, for 54

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 example, this has to be done through large procurement. That is also true of transport projects such as road crossings and so on. The Chairman: Mr Connell, do you want to add anything? David Connell: One really needs to separate out the two kinds of procurement. There’s the kind of procurement where what Government needs to do is to give advance notice to the suppliers of what it thinks it would need in the future and encourage them to develop that at their cost. We have to recognise that most of those suppliers will not be British companies. That’s obviously also appropriate for very incremental innovations. That seems to me to be relatively easy to do. There are other kinds of innovative procurement where Government needs to bear some of the cost of the innovation for various reasons, either for reasons of industrial policy, because we want to encourage UK companies, or because the product is so specialised that basically you won’t find a private investor to fund it. There are lots of examples of that. That is, I think, where over a period of time we need to encourage and enable spending departments to do that. I think that needs to be done in stages. My suggestion is that the first stage should be for the Treasury to provide TSB with £20 million to enable it to co-fund more of these SBRI programmes alongside departments and then to try and move forward over a period of time, say, over the life of this Parliament, so that government departments are required and encouraged to take more and more responsibility for their innovation procurement budgets and to report against them on spending—not brochures but spending, in other words, where does the money go? Over time departments should also be asked to bring larger-scale types of innovative procurement, such as large-scale demonstrators within this kind of risk management approach. My view is that an appropriate target, say in four or five years’ time, is we should be thinking of defined pots of money totalling around about £500 million being spent on this kind of high-risk activity, both shorter-term and longer-term activities informed by the kinds of road mapping approach that Lord Broers has mentioned. Q51 Baroness Hilton of Eggardon: I think my questions have already been answered but I was going to say, in relation to the grand challenges like climate change and one or two other major issues, ageing populations and so on, if you had a magic wand what would you suggest the Government should be doing in relation to those major things? Is there some way it should be an overarching strategy rather than individual departmental strategy? What would you like the Government to be doing in relation to those? Professor Jakob Edler: Magic wand. I think there would have to be a much more coordinated approach in terms of what the specific needs are. The label grand challenge of climate change is easily defined. But what does it concretely mean for which department? What are our goals? What are the contributions departments can make? What then is the technological role for specific areas? What are the systemic bottlenecks—the market failures, the system failures—that are most likely to be there, and how can we overcome them? Many of them might not be done with innovation procurement, but some of those, and what kinds of innovation procurement? So, in my view, it would have to be a much more systemic approach to all this. Of course, it couldn’t deliver within three, four, five years; it’s a much broader general approach with innovation procurement being one tool. The second one would be to maybe define a couple of specific areas where this country would then aspire to become a real lead market and therefore also would have economic spill-over effect even on the export opportunities of companies in this country. 55

David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 Professor Luke Georghiou: There are two essential advantages to a grand challenge approach. One perhaps is for the benefit of the technology and innovation community because it provides a device to help the public, and therefore their political leaders, to understand the contribution that our communities can make to things which are really on their minds. But the other more practical one, hinting at what Professor Edler was saying, is that it provides a co-ordination envelope. Often our ability to address these large scale challenges falls down because of an inability to co-ordinate not only across Government but with business, with social stakeholders of various kinds. If you wrap this into a grand challenge initiative it gives you a framework in which you can do that. It’s interesting that the most thinking about how to deal with such challenges has been done by people who study environmental innovations and environmental economics when they’re looking at what we would have to do for a transition to the hydrogen economy or something like this. They give quite good, if hypothetical, examples. David Connell: A selection of tools to enable you to do the appropriate work at university, the appropriate work collaboratively with industry, and then progressively move it out into large-scale demonstrations. So, a series of tools to do each of those jobs. Horses for courses. The Chairman: Thank you very much. We’re drawing to a close now. There was one point that I wonder if you could follow up with a written note. You said it was possibly time to have a thorough evaluation of the SBRI. I wonder if you could give us some indication in writing as to how you think that evaluation ought to be carried out. That would be very useful to us, and also the FCP as well, if you are able to fold that into a note. Any of you who wish to may respond, but particularly Professor Georghiou who raised that point. So, in closing the session I’d like to thank all three of you for coming along and giving us some very interesting comments. As you will be aware, there will be a transcript of this session; it will be sent to you some time, I guess probably after Christmas now, for you to correct if you wish to and then it’ll become the formal record of this session. I’d like to thank you very much indeed and wish you a happy Christmas and a safe journey home. Thank you very much.

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David Connell, University of Cambridge—Supplementary written evidence (PP 38)

David Connell, University of Cambridge—Supplementary written evidence (PP 38) Thank you for inviting me to give evidence before the Committee on 21 December. I would like to follow up my evidence with some additional points of clarification. Small Business Research Initiative I have been an independent (unpaid) adviser to the Technology Strategy Board on implementation of SBRI since it was given this responsibility and am also a member of the Management Board of the NHS East SBRI programme, There was some suggestion at the hearing that SBRI is a rather specialist tool with only limited relevance to the subject of the inquiry. I believe this view is mistaken. The Small Business Research Initiative is actually misnamed as it is concerned with the "development" and "trialling" of new technologies and products rather than "research". As I indicated, it is also open to companies of any size from across the EU, though its focus on non-incremental innovation and the need for close engagement with a lead customer or specifier mean that the vast majority of contracts go to UK based SMEs. This is helped by a set of rules that are SME friendly and do not overly favour established suppliers. Within these rules there is flexibility to deal with a wide range of innovation requirements and many different types of technology, product and service. Furthermore the typical contract sizes- £25 to £100k for Phase 1 and £250k to £1m for Phase 2 - are sufficient to enable firms to make significant progress in bringing solutions to the point at which they can be tested by lead customers. In fact the key features of SBRI represent best practice in relation to innovation management generally, and they are equally applicable to larger projects. These features include: defining public sector customer/specifier requirements based on challenges and outcomes; a competitive awards process; a phased approach to manage risk and focus expenditure on the best projects; and transparency in terms of funding. The great advantage of SBRI is that it is a proven, "out of the box" tool that any public sector agency can use today. I would argue that if Government is unable to persuade spending departments to commit more significantly to SBRI, then there is very little chance that tangible progress will be made with other, exhortation-based policies to encourage the use of procurement to stimulate innovation, where levels of commitment and success are much more difficult to measure. On the other hand, embedding SBRI as a regular, funded process within departments will have a catalytic effect, first by providing a mandate for those officials that wish to use procurement to encourage innovation, and later by demonstrating the benefits of so doing to others, and encouraging a range of behaviours and spending patterns that support innovation generally. These include the kinds of road-mapping approaches Lord Broers mentioned as a means of identifying future requirements for new component and subsystem level technologies, and stimulating their development and de-risking prior to mainstream procurement and deployment. As I have indicated in the Conclusions section of my submission, I believe the cultural change required within the public sector necessitates a long term programme supported 57

David Connell, University of Cambridge—Supplementary written evidence (PP 38) with ring fenced funding built up gradually as public finances permit. SBRI is the obvious place to start. Role of Small Businesses in Innovation At the hearing, Professor Georghiou said that the evidence does not support the idea that small businesses are more innovative than large businesses. I did not have time to comment on this at the time. Having spent many years advising large corporations on innovation and the creation of new ventures, I know that there are a whole range of barriers to all but incremental innovation in large firms, not least that new markets are rarely large enough to attract their attention. Most know this only too well, which is why acquisition and open­ innovation are often important features of their strategies. I would point also to data on patenting, job-creation, high technology employment and exports from the United States Small Business Administration (see· attached). This data shows that small firms play a pivotal role as agents of innovation in the US. lt is the kind of role, I suggest, that we should also strive for in the UK. Most large firms start as small companies of course. The break up or decline of many of the UK's large industrial concerns in recent decades means that SMEs have a particularly important role to play in rebuilding the UK's industrial base at this time. Role of Procurement Based Innovation in Addressing Climate Change and Other Societal Problems I did not have time at the hearing to adequately answer Baroness Hilton's question on this subject. lt is my view that innovation is largely about solving problems. So the key to addressing these large scale societal problems is to define them in as much detail as possible and then bring to bear scientists and engineers to try to address them. Collaborative research involving academia, government and industry typically plays the key role in problem definition and the early stages of solution generation. But to move quickly to development and deployment, a procurement based model is required, with government funding industry to undertake technical feasibility studies, key component level developments and demonstrator projects. These can range from small projects, manageable within SBRI project norms, to very large projects requiring tens or hundreds of millions of pounds and often co-funded with the private sector. Policies appropriate to each stage in this process are needed if the UK is to play a major role in addressing these challenges and capturing some of the economic benefits for itself. Procurement based policies have a key role to play. Conclusion As the Government's recently published "Blueprint for Technology" points out, "Innovation rarely comes for free". The evidence shows that this is especially true for procurement based innovation policies; the absence of departmental budgets for this kind of activity has for many years remained the main barrier to translating successive governments' policies into action. 58

David Connell, University of Cambridge—Supplementary written evidence (PP 38)

In the Conclusion section of my submission I suggest how the Treasury could finance the build up of a portfolio of procurement based innovation programmes as experience is gained and the public finances permit. I fear that, unless it does so, the UK public sector will never be able to pull its weight as a lead customer in helping to rebuild the UK's industrial base. 2 January 2011

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Colin Cram, Marc 1 Ltd—Written evidence (PP 31)

Colin Cram, Marc 1 Ltd—Written evidence (PP 31) MAIN FINDINGS AND CONCLUSIONS Analysis 1. Public sector procurement is a huge resource – £220bn pa, approximately one 7th of UK GDP, the potential benefit of which is well short of being realised. 2. Public sector procurement, despite improvement and some excellent examples of procurement organisations, is fragmented and expertise varies hugely. Its structures are a legacy of its past and a prisoner of the way the public sector is structured. Its structures are therefore inward and not outward looking. Overall, it is not fit for the purpose of delivering value for money for the tax-payer. Expecting it overall to deliver ‘higher level’ objectives is wishful thinking, though some individual organisations are able to do so. 3. There has been muddled thinking about public sector procurement objectives for many years. In particular there is little evidence to support assumptions that greater use of SMEs will lead to more innovation. The government’s target for use of SMEs has probably been exceeded for many years, but this has not necessarily brought the anticipated benefits. 4. Procurement policies and objectives have regularly been announced by various governments without ensuring that the pre-requisites for delivering them have existed. Monitoring of delivery has been absent and there is little evidence that initiatives to achieve the policies have been effective. 5. Procurement commissioners, e.g. public sector construction organisations, vary hugely in expertise and can be resistant to influence by good procurement personnel. Many commissioners like to stick to long established suppliers and specifications. 6. New and innovative suppliers are deterred by unnecessarily complex tendering procedures, anti-innovative specifications and can be discriminated against by not having previous business in the public sector that can be used as a reference. 7. An over-reliance on framework agreements by the public sector shuts out new and innovative suppliers for the lifetime of the agreements, usually about 4 years. 8. EU Procurement Directives are no longer a barrier to innovation. Changes Required 9. An integrated public sector procurement model needs to be created along the lines proposed in ‘Towards Tesco’ (see main report below). This would enable delivery of public sector procurement objectives to be monitored and accountability for delivery to be introduced. 10. The NHS has a centre for innovation. This could be built on and extended to the rest of the public sector.

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Colin Cram, Marc 1 Ltd—Written evidence (PP 31) 11. A little used EU procedure, a ‘Dynamic Purchasing System’ (DPS), could be used to create ‘approved lists’ of suppliers based, amongst other things, on their capability at innovation. This is a simple procedure for suppliers. 12. Mirroring the proposed integrated approach to public sector procurement, there needs to be a similar approach to the management and commissioning of functions such as construction, local passenger transport and reprographics. 13. Existing initiatives to support SMEs should be retained. MAIN REPORT Public Sector Procurement Spend 1. UK Public Sector Procurement amounts to some £220bn a year. This is one seventh of UK GDP and amounts to £3500 per adult and child. Approximately one third is spent by central government departments, one quarter by local government, one tenth by the NHS and the rest by education and other public sector bodies. 2. The range of UK public sector procurements is immense. The following examples give an indication of the diversity: • • • • • • • • • • • •

Commodities, goods and services Major outsourcings Research and development Medical equipment Health and social care Roads Buildings Drugs Scientific equipment - a vast range Transport and means of transportation IT and major computer projects Major service contracts

3. There are some 2000 procurement organisations, most of them very small. Collaboration exists, but amounts to no more than 10% of public sector spend. It tends to be in identifiable groups, e.g. further education and central government, but increasingly there are examples of collaboration across the public sector. Central government procurement, in particular, is increasingly coordinated. Achieving Innovation through Procurement 4. Procurement by the UK public sector represents an immense resource, the potential benefit of which is well short of being realised. Traditionally, procurement has been expected to produce value for money and to demonstrate probity. There has also been a policy of 25 years to increase business with SMEs. Many local authorities have a policy to support local suppliers. 5. More recent developments have been the introduction of policies to support sustainability, social development and innovation. The scale of public sector procurement is such that, for better or for worse, it can have a major impact on all these areas. 61

Colin Cram, Marc 1 Ltd—Written evidence (PP 31)

6. Thinking about implementation of policies for procurement has often been simplistic. Key to the delivery of procurement objectives are the operational teams (e.g. construction), who hold the budgets and commission the procurements. These teams, operating in a very devolved and fragmented environment, can be the main obstacles to the delivery of procurement policies and value for money. 7. Thinking on public sector procurement policy has been muddled for many years. Policies and objectives have been announced • without any understanding of what would be required to deliver them, • without any analysis of the existing situation, • without any means of monitoring the changes as a result of introducing the policies and • without any satisfactory assessment as to whether the objectives would have been achievable through the particular policies. £millions have been spent on these policies with little evidence as to their impact. 8. Policy on use of public sector procurement to support SMEs is one example. The original policy to support SMEs was introduced in about 1985 on the basis that there was evidence from the USA that SMEs created more employment than established large players and were more innovative. However, there was no analysis of public sector purchase spend. There was an assumption that the proportion of public sector procurement spend with SMEs was small (well below 10% was implied) and this assumption has continued pretty well to the present day. 9. However, I commissioned a purchase spend analysis in 2006, when Director of the North West Centre of Excellence, and 31 local authorities took part. We were able to make an assessment of spend with SMEs. 65% of contracts went to SMEs and this amounted to 33% of procurement spend. Extrapolating and making certain assumptions, it appears that, overall, the proportion of public sector contracts let to SMEs is unlikely to be less than 30%, of which local government would account for about 15% age points. It seems likely that these percentages have remained reasonably stable for many years. This means that successive government policies and recommendations from reviews, such as Glover, have been based on questionable assumptions. 10. The conventional wisdom that greater use of SMEs will lead to more innovation proved open to question. There was some suggestion in discussions about the figures from the study that many (most?) SMEs were used because they did not innovate. Many had been used for many years and would have had long established specifications. An example is the procurement of ‘tarmac’ in Greater Manchester. There were well over 100 specifications to which people insisted on sticking. However, in practice, there are only about 6 different grades, so most would have been the same specification expressed in different ways and some would have gone back a very long time. It seems likely that due to product changes over the years that some of the product no longer met the specification. However, councils have continued to stick to their specifications and procurement personnel generally lack the authority to challenge them. 11. Is the UK public sector either capable or motivated to procure innovation? The answer is ‘yes’ and ‘no’. Government policies have sometimes driven innovation, such as in the early days of outsourcing and the introduction of the Private Finance Initiative. Scientists may 62

Colin Cram, Marc 1 Ltd—Written evidence (PP 31) sometimes drive procurement innovation. The Olympic Games preparation is an example where innovation is of key importance. There are many local initiatives, but adoption often remains local. 12. Local passenger transport is an area where value for money and innovation depend on the capability of individual local authorities. A national initiative sponsored by the North West Centre of Excellence, demonstrated that joint working between local authorities and innovation should be able to save up to £200m a year and improvements to services should be possible. Some transport managers were up for the challenge. It became apparent that the capability of transport management and construction teams varied hugely between local authorities. 13. Overall, little of the innovation stems from procurement personnel. Most commissioners of procurement (see paragraph 10 above for an example) do not commission innovation and procurement personnel rarely have the influence or motivation to challenge this. However, my experience is that top class procurement professionals with specific commodity or service and market expertise can deliver up to 35% better value for money and effective policies for sustainability and other desirable outcomes that the average procurement professional or administrator can barely dream about. 14. Procurement capability has been improving generally for the past 10 years. But it has been uneven. Despite some procurement organisations recognised for their excellence: • •

• •

•

• •

There is plenty of evidence that, overall, public sector procurement does not achieve value for money – the most basic of objectives. Expecting it to achieve ‘higher level’ objectives is wishful thinking. There is a lack of data on procurement spend. Whilst the situation is improving for much of central government, much of the rest of the public sector does not know its total procurement spend with any accuracy. An accurate picture of, say, the top 100 public sector suppliers could not be provided. Procurement remains very fragmented. Whilst the procurement of common categories is being pulled together for central government, this represents just 6% of public sector procurement spend and the emphasis is on saving money. Innovation for any type of procurement requires procurement officers with expert professional and category expertise. Such people are a scarce resource. Fragmentation of public sector procurement spend prevents the best being used on behalf of all. Fragmentation of the management of public sector procurement spend often prevents a coherent approach to and effective dialogue with the market. Capable public sector procurement personnel often do not have the clout to manage the market and drive through innovation. Industry has little incentive to be proactive and invest in innovation. Fragmentation and varied capability and expertise of operational teams, which commission procurements, make a coherent approach to procurement, the market and innovation doubly difficult. Fragmentation also means that adoption of best practices may be limited. (For example, how could one ensure widespread dissemination and adoption of lessons learned from preparations for the Olympics?).

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Colin Cram, Marc 1 Ltd—Written evidence (PP 31) 15. An analysis of the state of public sector procurement is in ‘Towards Tesco’, written by me and published in March 2010. See link below to the document. https://www.iod.com/MainWebSite/Resources/Document/policy_article_towards_tesco.pdf It argues that the structure of public sector procurement is a legacy of its past and a prisoner of public sector structures. Its structures are inward rather than outward looking. Despite the improvements taking place, the findings and conclusions remain broadly relevant. 16. New and innovative suppliers find it difficult to enter the market. • •

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Specifications tend to be anti-innovative and are over-prescriptive. Tendering is often unnecessarily complex (more complex than required by the EU procurement directives). It is often process rather than business driven and companies with experience in tendering, particularly those which employ full time tendering teams, have a built-in advantage. Innovation implies change, which can imply risk, which procurement personnel may have neither the time nor capability to handle. New and innovative suppliers do not have a track record in the public sector, which disadvantages them against established suppliers. The public sector relies too much on framework agreements which shut out new and innovative suppliers for the length of the agreements, which is typically 4 years.

17. The EU Procurement Directives are no longer a barrier to innovation. However, their potential is not being realised (see below). 18. An increasing tendency to buy through ‘catalogues’ of framework agreements can also limit innovation. It is easier to buy through a ‘catalogue’ and easy to demonstrate savings. However, the weakness of this approach is demonstrated by reprographics (total public sector procurement spend about £2bn pa), where there is evidence that a more innovative managed print service can save up to 40% compared to a ‘catalogue’ approach. What Should Be Done? 19. An integrated public sector procurement model needs to be created along the lines proposed in ‘Towards Tesco’ (illustrative diagram attached). This would enable delivery of public sector procurement objectives to be monitored and accountability for delivery to be introduced. 20. The NHS National Innovation Centre could be built on and extended to the rest of the public sector. Suppliers with innovative ideas could have them assessed and if considered suitable could be promoted in the public sector (see below for Dynamic Purchasing System) and, in exceptional cases, some financial support could be provided for product development. 21. Thirdly, a little used EU procedure, a ‘Dynamic Purchasing System’ (DPS), could be used to create ‘approved lists of suppliers based, amongst other things, on their capability at innovation. The DPS enables new suppliers that meet the appropriate criteria to be added to the list at any time during the (normally) 4 year life of the DPS. Use of these suppliers could be monitored. Applying to be on the DPS is a simple process, ideal for this purpose and easy for SMEs and suppliers unfamiliar with public sector procedures. 64

Colin Cram, Marc 1 Ltd—Written evidence (PP 31) 22. Mirroring the proposed integrated approach to public sector procurement, there needs to be a similar approach to the management and commissioning of functions such as construction, local passenger transport and reprographics. 23. The existing initiatives to support SMEs should be retained. However, the approach set out in paragraphs 16-19 will have a much more fundamental impact. 10 January 2011

AN INTEGRATED PUBLIC SECTOR PROCUREMENT STRUCTURE? Central/ Major Industry Regional Departments/ Specific P Hubs/ Buying Medium Solutions Depts

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Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Evidence Session No. 5.

Heard in Public.

Members present Lord Krebs (Chairman) Lord Broers Lord Crickhowell Lord Cunningham of Felling Baroness Hilton of Eggardon Baroness Perry of Southwark Lord Rees of Ludlow The Earl of Selborne Lord Wade of Chorlton Lord Willis of Knaresborough ________________ Examination of Witnesses Witnesses: Colin Cram, [Managing Director, Marc1 Ltd], Andrew Wolstenholme, [Director of Innovation and Strategic Capability, Balfour Beatty], and Alan Powderham, [Director of Transportation, Mott MacDonald].

Q105 The Chairman: Welcome to our three witnesses and thank you very much for taking time to come and give evidence to this inquiry into innovation in public procurement with a particular interest in the transport sector. In a moment I will invite the witnesses to introduce themselves, but before that I would like to also welcome the members of the public and inform them that the proceedings are being webcast and also draw your attention to the information note available that provides some background on the inquiry and lists Members’ interests. I’d like to kick off by inviting each of our three witnesses to introduce themselves for the record. If you could say who you are and where you come from but also if you have any short opening statement that you would like to make, please feel free to do so and then we will lead off with the questioning. So perhaps if I could start with Mr Wolstenholme. Andrew Wolstenholme: Thank you, my Lord Chairman, and good morning to the Lords and Ladies. I understand you have had a late night, so you’ll want this to be this interesting and entertaining. Apologies on two counts: I have some written evidence that I understand should have been submitted earlier, and I apologise for not doing so, and also for the slight croakiness of my voice. 66

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 I would like to take this opportunity to tell you a bit about my background. I spent five years in the Army as a graduate and as a civil engineering post-graduate. I joined Arup, an international firm of consultants, for 10 years. I then became a client for 12 years with BAA and recently, a year and a half ago, joined the infrastructure group Balfour Beatty. I, therefore, feel that I am able to look through a fascinating lens from consultant to client and now as a member of the supply chain. Just before I joined Balfour Beatty I was asked to chair a report for the industry to look at the last 10 years and to understand what had happened since Sir John Egan wrote his report Rethinking Construction, why progress hadn’t happened at the speed that was anticipated and what would be the big themes that we look for in the future. I called the report Never Waste a Good Crisis. Having had 10 years’ opportunity to change, with a huge agenda of decarbonising on our doorstep and with an anticipated reduction of both private and public sector spend, this is the moment to innovate and this is the moment for our industry to change and move forward. In my evidence, I have tried to answer the questions that arrived about a week ago. I have also tried to tie together a lot of the thinking that I believe needs to be joined up now from various different Government bodies and Government agents, including what Paul Morrell, as Chief Construction Adviser, is doing in the IGT, the Innovation and Growth Team, including the recent National Infrastructure Plan and the Infrastructure Cost Review that has recently been completed by Treasury and including my own work as chair of the ‘Never Waste a Crisis’ report. Lots of the clues that I think still affect the ability for innovation to move forward faster than it is are contained within these reports. If we can stand for a moment to look at how they all interconnect with each other then I really do believe that, over the next 10 years and shorter horizons, we have the opportunity and ability to stimulate this wonderful construction industry and look at construction not as an act for four or five years in delivering major infrastructure programmes, but as a vital part of delivering built assets with a life cycle of 50, 60 or even 100 years and that this lifting of our horizons is going to stimulate innovation for the future. The Chairman: Thank you very much. Sorry, the written evidence to which you referred, have we seen that yet? Andrew Wolstenholme: I am afraid not. The Chairman: But we will have a chance to look at that? Andrew Wolstenholme: You will, yes. Q106 The Chairman: Colin Cram? Colin Cram: My name is Colin Cram. I have spent about 40 years in the public sector, the final 30 years of which were creating new and quite innovative procurement organisations and models. I brought that experience together in a report that was published by the Institute of Directors in March last year called Towards Tesco. It proposed how public sector procurement should be restructured in order to start delivering value for money, to start delivering sustainability and to start delivering innovation and various other Government policies. Originally, I have to say, I was a marine climatologist and my main interest in life still is climatology. So I have kept up to date with developments. Some general comments about public sector procurement: I think, despite improvements, particularly in central Government, procurement in the public sector is still too fragmented. 67

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 I have worked right across the public sector, unusually, and capability is too variable to deliver much innovation through procurement. Overall, I would say it is still not delivering value for money and it cannot, by and large, engage because of its fragmentation, effectively with industry and it tends to be procedure-driven and in response to specifications from operational units, many of which are very conservative. There are some good exceptions but much of the £200 billion public sector procurement spend, I would suggest, is a wasted opportunity. In my last position, as Director of the Northwest Centre of Excellence, I initiated a project, Local Passenger Transport. Total expenditure on local passenger transport is about £5 billion per year—we managed to establish that—but there are about 1,000 to 2,000 different organisations involved. The purpose of the project was to start to try to get this sorted, to improve services, to save money and to have more sustainable transport. But, unfortunately, funding ceased in 2008 when the Centres of Excellence were replaced by the Regional Improvement and Efficiency Partnerships. So there is a big wasted opportunity there. Q107 The Chairman: Thank you very much. Sorry, could you just clarify this £5 billion per year and the 1,000 to 2,000 organisations. That was for the region that you were studying, was it? Colin Cram: No, that’s national. The Chairman: Is that the UK as a whole? Colin Cram: There’s around about £2,000 million per year spent by local government in supporting passenger transport, whether it’s buses, taxis and so on. Other related spend builds this up to £5 billion, perhaps £6 billion in total. Q108 The Chairman: Mr Powderham? Alan Powderham: Good morning. Thank you, my Lord Chairman. It is a real pleasure to be here. I am Alan Powderham. I am a Director of Transportation in Mott MacDonald and also a visiting professor at Imperial College. I spent over 40 years in the private sector primarily; mostly with consultants but I worked with contractors, too. I guess you could say that two of my driving passions, apart from civil engineering itself, would be to have that robust connection between theory and practice and relate design to construction. More recently, I have focused on safety as a driver for innovation and I’ve specialised in underground construction, although I did start in other transport infrastructure with bridges. I appreciate this opportunity to contribute. It’s a fundamentally important and exciting subject. I hope to provide evidence through my direct experience of innovation and, moreover, it’s pretty obvious that this is a pretty well-ploughed furrow but I do believe, surprisingly, that there is some low-hanging fruit that I’d like to pick for consideration. Thank you. Q109 The Chairman: Thanks very much indeed. Perhaps I could just kick off with a general question. You have hinted at some possible answers to this question but I would very much appreciate if you could expand a little bit, all three of you; I don’t mind in which order. My question is whether the Government is currently doing enough to foster innovation through procurement to the public sector in general, and particularly with major 68

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 infrastructure projects, and if you can give us some concrete examples either of successes or failures, because you don’t want to just have the theory of it. You want to know exactly where you can point to some examples where innovation has been stimulated through public procurement and infrastructure or cases where it has failed. Mr Wolstenholme, perhaps since you hinted at this in your starting comments, you could expand a little bit. Andrew Wolstenholme: When I was asked to be the chair of this industry report, I was advised to look carefully at the evidence over the last 10 years. Interestingly, we are very good at writing reports in this country and many of the themes are common, such as innovation, work-sharing, trust and partnering. The surprise I came up with in looking at this evidence is that those are the themes picked up by Simon and Finniston in the 1950s and 1960s. So this agenda is 50 or even 60 years old for us. Looking at the evidence since Egan—and there were 10 years of key performance indicators in the industry; there were 10 valuable industry reports and there were 1,000 questionnaires that went out—the themes of partnering and strong leadership, of product development, of quality as laid down by Egan, were all as relevant today as they were 10 years ago. But the KPIs were indicating while costs and programme and quality were being delivered by demonstration projects, in other words advocates who wanted to change their business model, the industry was simply growing at the rate of economic growth. Therefore, for the past 10 years, there has been no need for this industry to change as there was, for instance, in the ‘80s and ‘90s for automotive and manufacturing. Therefore, the thesis that you could take lessons that were well-judged for manufacturing and the car industry, applied to UK construction, fell slightly fallow because there was no driver for change. Yet you could look at those demonstrations of projects and examples where innovation had occurred and there was a correlation between the business model and, in some cases, the regulated model that forced people to change. Some examples, for instance: in the regulated sector, water and utility industries, supply chains had to prove after five years that they were delivering greater value when they started their framework and the result if you didn’t was that someone replaced you. I think my own organisation, BAA—as, I hope, a reasonably informed client—set the environment where suppliers found it safe to be able to transfer their intellectual property and to innovate. As a client, we were very receptive to good ideas and we shared the risk in taking and importing it. There are some very good examples in the public sector. I have to say that the Highways Agency in developing its frameworks has a lot of experience in working at the scale of the M25 with Connect Plus, on A3 Minehead projects with Alan’s organisation Mott MacDonald, which is a highly successful partnering project with the Highways Agency. I could identify PFI and PPP as an example of a framework where it asks suppliers to have skin in the game beyond the act of construction. By doing that and by asking them, for instance, to pay the electric bill in year 10 and year 20, it forces supply chains to innovate in terms of how you manage that difficult balance between capital and life cycle investments. More than just taking capital off balance sheets or transferring risk to those people that are better placed to manage it, it has created in this industry, I believe, a sense of innovation that didn’t appear before. Building Schools for the Future is another example. Disappointingly, it collected a whole heap of overheads that that programme didn’t deserve or shouldn’t have done. But the innovations coming, for instance, from Balfour Beatty in some of the school schemes—recently we have been appointed for Hertfordshire—where you take a school completely offsite and 69

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 manufacture it, you can take 25% off the cost by doing that and deliver 16-week savings. And when you get the delivery through a procurement model, stimulating innovation from the supply chain, I do believe there are some very exciting combinations where we can have a win-win as we look forward across the industry. On other questions I will just demonstrate and give you further examples where this is possible and indeed happens. Q110 The Chairman: Thank you. Mr Cram, do you have anything to add? Colin Cram: Yes. I think I would like to change the question in some ways: is the Government doing the right thing to foster innovation? I would suggest that initiatives to foster innovation have been, perhaps, rather wishful thinking and haven’t achieved their objectives. In the paper I have provided to the Committee I mentioned small firms. It was assumed that if the public sector used more small firms then there would be much more innovation. But the evidence I’ve come across suggests that the small firms that are used tend to be those used precisely because they don’t offer innovation and they offer the same old solutions. I think that exhorting departments or requiring departments to produce procurement innovation plans has not been particularly successful. If one looks at most of those innovation procurement plans, they’re almost motherhood and apple pie. The departments are not doing anything different to what they would have done anyway. I think the real problem, as I’ve concluded and as I’ve experienced, is that the infrastructure simply isn’t there to deliver innovation in most instances. So the vehicle isn’t there and unless we get the vehicle right, we’re not going to get the innovation. It’s why I’ve argued for some years that we need to restructure public sector procurement and not just central Government procurement. I think that there are examples of innovation. They’ve not been driven so much by procurement, but they’ve been driven by needs. Private Finance Initiative is a pretty good example whereby private sector companies, if you like, build and run a hospital for 20 years, and they have the incentive then to start to introduce sustainable practices in order to keep the costs down, which the public sector didn’t have before that. It tended to build to lowest price and the costs would sort themselves out later. So I think the Private Finance Initiative has driven innovation. Outsourcing has driven innovation and there have certainly been some pretty good innovations from some parts of the public sector. If we look at schools, then Hampshire claims to be now able to build 10 schools for the price of nine. I think Building Schools for the Future is an example of where there was innovation but it was also an example where many local authorities did not have the capability to implement it. And if you look at Building Schools for the Future, perhaps the real flaw was the lack of capability in many local authorities and, even though it was enhanced by throwing in consultants, it perhaps failed to recognise the base line. It was a great policy but there wasn’t the mechanism to deliver it effectively right across the board. Q111 Lord Crickhowell: Thank you very much. I would like to ask you firstly, Mr Cram—and you will probably think I am being unfair—when I came in and we were looking at the possible questions I observed that, having read your interesting paper, you clearly addressed some of the shortcomings and you produce your Tesco Solution, which is clearly very helpful in achieving cost-savings in efficiency and so on. But I said, “Does it answer the question that this Committee is inquiring about whether all these changes in the sort of 70

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Tesco-like groups, which you describe, encourage innovation, which is what we are all about?” Then Andrew Wolstenholme arrived with his paper and his comments, and I thought, “Gosh, we have a sector here that is talking about innovation and what generates it”. Risk was one factor that emerged in one of the papers I think I’ve skimmed over quickly that was submitted. But going back to Mr Cram: the question that I think I am asking you is the Tesco-like solutions that you advocate, clearly they are desirable from all sorts of other points of view in terms of cost and everything. How far, though, are they really the source and inspiration of the innovation that this Committee is looking for? Colin Cram: I don’t think there’s ever quite a right answer, so you end up with the best fit. But in my experience, when I’ve been able to bring procurement together—and I was able to do that in the Benefits Agency to create a very powerful contracting team that brought things together—it meant I was able to employ the very best people, of which there are very few, and those people were able to deliver results, often through innovation, that average procurement people couldn’t dream about. I know it’s not transport but one obvious example of success we had was on office furniture, of which there was an expenditure of about £20 million per year then by the Benefits Agency. The person I employed worked up and down the supply chain, so he was able to work with suppliers. He had the reputation. He took out hardwoods, which no one had thought of then, reduced the use of materials, reduced the use of transport, improved the design, so it was a very popular product, and reduced costs by about 35%. The National Audit Office independently observed that that was the case. So I think that illustrates what you can do. If you have a fragmented operation, by and large most of the operations, firstly, don’t have the clout to be able to engage in industry, to even talk about innovation and, let’s face it, a lot of our supply chains extend to the Far East now in one way or another. Secondly, there are very few people with the expertise. So with the combination of not having the clout and not having the expertise and often not having the motivation, you’re not going to get much innovation with the present system, I’m afraid. The mechanism just doesn’t exist. Q112 Lord Crickhowell: Can I ask just one supplementary question based on a different experience as the chairman of— Colin Cram: I thought it was a very fair question, by the way. Lord Crickhowell: —an IT services company that tendered for a very important central Government contract for IT, organised by the Cabinet Office. Certainly I would endorse fully the need for expertise because it takes two to tango and one of the difficulties we found was a total inability or lack of willingness in the Government team to engage in the dual operation that produces a good product. But it does cite one problem: that you talk about IT and you want to bring it together. That is precisely what the contract was about. It was led by the Treasury but, of course, one of the difficulties is each other department being brought into it had their own perfectly legitimate, separate requirements. One lesson about IT is that you want to have something that is simple, straightforward, without too many bells and so on added onto it. And so there is a complication here that if you bring together seemingly like organisations that do have separate requirements, you may be up against complexities, particularly in the IT field, that are destructive rather than helpful. Colin Cram: My experience is that a lot of these differences in requirements are down to people and not down to genuine differences in requirements. 71

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Q113 The Chairman: Thank you. I would like to continue with the question, because Alan Powderham hasn’t had the chance yet to respond to my initial question about whether the Government is doing enough to foster innovation and giving us some examples of successes or failures in public procurement to foster innovation. Alan Powderham: Enough? Well, in some ways you might say it is doing too much in the sense that there’s a lot of information. But what is the reality the word is “stimulate”? I haven’t found it generally very seductive, given the fact that in my opening statement I said engineering was very exciting. So engineers should be serial innovators. It’s an incredibly creative profession that I have found enormous fulfilment and satisfaction in pursuing, and I’ve enjoyed being involved with a wide range of major infrastructure projects where I’ve been able to initiate and lead innovation. However, at times it’s felt that one is more innovating despite all the help. It’s almost a confirmation of the ironic dictum of Will Rogers that things will improve despite our efforts to make them better. So it’s a qualified “yes”. We’re talking about innovation and we’re talking about procurement. I think both words need to be looked at in a very holistic and cradle-to-grave way and it needs to start at the beginning. The later you leave it, the less the opportunity is and, frankly, I’ve only been overtly asked, as part of the intrinsic process of starting a project, to provide innovation twice, at least by two companies; one in the private sector, which would be BAA, and the other one in the public sector but not in the UK. That would be the Massachusetts Highway Authority. I can give plenty of examples in the UK of a qualified “yes”. They would include, in my direct personal experience: Channel Tunnel, Mansion House Protection, Limehouse Link and so on. I’d also like to draw the attention of the Committee to a report called Innovation at the Cutting Edge. It was produced by CIRIA, for the DETR, and it provides the experience of three major infrastructure projects and two of them were in the public sector. There were quite a lot of aspects that worked very successfully. There was an overt desire to deliver innovation. But I think sustaining it is one of the big questions. Q114 The Chairman: Sorry, that report highlighted—was it three projects? Alan Powderham: Yes. The Chairman: So if we look at that in the round, as a percentage of projects that have been commissioned, is that 3%, 0.3%, 30% or what? Alan Powderham: We need to get the metrics on that. I would say the percentage in terms of overt stimulation of innovation right through procurement is relatively low, not by intent but by the result. I’m talking, obviously, from my direct experience. I’m working in an area of civil engineering, which is incredibly creative but the industry is risk-averse. We don’t generally have the opportunity to produce prototypes. We have a duty of care to the public, so we need to be mindful of safety. So to innovate in that environment is fascinatingly challenging but also the usual suspects—there’s a whole range of constraints that I’m sure we’re all familiar with—operate. So to overcome those issues is understandably not easy, but there are many strong examples of doing it and I believe there are some major opportunities. There always have been and they are certainly present now. Q115 The Chairman: Thank you. Before I turn to Lord Cunningham, I would just like to ask Mr Cram a very brief, specific question. In your report called Towards Tesco you refer to 72

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 the Office of Government Commerce as having shown first-class leadership in the drive for greater collaboration and higher standards of public sector procurement and, as you all know, the Coalition announced the merger of the Office of Government Commerce into a new group called the Efficiency and Reform Group. In your opinion, is that a positive step? If the OGC was a success, is it a good thing to have merged into something else and has any tangible improvement emerged as a result of the merger? Colin Cram: Yes and no, I think, is the answer. The Office of Government Commerce did show first-class leadership in encouraging collaboration. Collaboration, though, tends to be expensive and it delivers limited results. But nevertheless it was a big step forward on what had been happening previously. I think that what is happening in central Government now through the Efficiency and Reform Group—and I stress, in central Government—in tackling common categories in a “deep-dive way”, as they call it, is a very constructive way forward. But if you look at the total spend they’re attacking at the moment, it’s about £13 billion and there’s £200 billion out there. So I think, first of all, perhaps one unfortunate feature is that the Efficiency and Reform Group is looking at central Government and not at public sector purchase spend as a whole and there’s a huge commonality right across the public sector, not just central Government. I guess they can at least control central Government and I think that attacking those categories at least gives an opportunity to enforce innovation and to enforce sustainability that they haven’t been able to do before. So, yes, the Office of Government Commerce showed some good leadership. I was perhaps throwing a bouquet at them, because I’ve done some work with them. But I think we have to move forward to an integrated approach to procurement and not the disintegrated approach we’ve had up to now. Q116 Lord Rees of Ludlow: I was interested in Mr Wolstenholme’s comment that a long-term PFI contract like the hospital gave a slightly different incentive from just a construction one, because you are concerned with running costs and so on. I wonder if you would like to expand a bit on the extent to which the type of contract affects the incentives. Andrew Wolstenholme: Yes, thank you. I think if you boil the pot down as a client, there are probably two or three questions you have to ask. The client role is very difficult, and I can say that because I have been one and I made only a reasonable job of it. You have to be able to assemble a brief and a business case. You have to then be able to procure different risk types through a myriad of industry structures and supply chains. You have to create a model where it is worth people’s while to share their intellectual property. I’ve seen examples—indeed, I’ve worked with Alan on Terminal 5—where I think we’ve created an environment where to share those good ideas was to incentivise and to recognise and to reward. I’ve also worked on examples where you tend to look at cost simply as the measure of output as opposed to value and in the public sector this is value to the taxpayer. So how do you stimulate supply chains to come up with their best ideas, to give value to the taxpayer over a period of time as opposed to on the day that you hand the building over, which in a traditional low-cost model is the day that people walk away with their profits and their reputation either intact or not intact? Demonstrably for me, many of the innovations come around people and organisation, as well as process and designing and inventing things. And when you create an environment where people can openly collaborate and integrate together, then you create the best environment and the best possible opportunity for a longterm solution. 73

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Expecting a supply chain in a relatively short period of time to deliver innovations for one project at a time, when it is being measured reputationally on the cost he’s developing, is unlikely to provide sustained innovation in the future. Developing over a framework or to give him some skin in the game such that he can’t walk away with his profits on the day of handover but needs to live with the output of his work for a period of time is by far the best model that we can come up with to stimulate, as I say, the subject of this debate, which is around innovation. Q117 Lord Willis of Knaresborough: Very briefly, Mr Cram. The tenor of both your paper and your comments this morning indicates that it is need that stimulates innovation. We have an economic downturn. The Government is taking literally billions out of the public sector procurement budget. Won’t that, by definition, therefore, fulfil your objective of creating need and, therefore, innovation? Colin Cram: No. Q118 Lord Willis of Knaresborough: Why not? Colin Cram: I think all that happens is much of the public sector will just reduce the volume of purchases. We’re seeing that in local government. I’m afraid many local authorities seem to be into slash and burn rather than doing things differently, rather than doing things better. Some are, but generally one gets the impression it’s slash and burn. Q119 Lord Willis of Knaresborough: So this could be a real challenge, couldn’t it? This could be a real opportunity for innovation to come to the fore. Colin Cram: It’s a fantastic opportunity. But the mechanism, the structure and the organisation simply isn’t there and you’re not going to get major change—and we’re talking about major change here. Introducing real ‘innovation procurement’, as the academics would call it, for the first time in the public sector is a step change and you don’t get a step change by tinkering around with things, which is the tenor of my argument; that we need to restructure public sector procurement and often restructure the organisations that commission the public sector procurement. We talked about construction a few minutes ago and there are loads of construction organisations in the public sector, some of which are not very capable organisations at all. So if you want get big results you’ve got to make some big changes, and that is perhaps one of my key messages. Q120 Lord Cunningham of Felling: It seems, whether we are in good economic times or bad, that public procurement policy is not fit for purpose, from what you are all saying. Can you tell us, each of you in turn, what you think the three biggest obstacles or problems are with the current public procurement policy in respect of making it work better, in terms of not only value for money but driving innovative solutions to policy problems? Colin Cram: I’ll perhaps kick off. I think, first of all, as I’ve already indicated, it is the way public sector procurement is structured or unstructured. I think that is an absolutely major obstacle and that means, therefore, that the greatest expertise tends to be available only to the organisation in which it sits - and there are thousands of organisations - and not available to the public sector as a whole. I think that is one of the major obstacles. I would probably see it as the major obstacle. 74

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 I think that another obstacle I’ve already indicated are the structures that sit behind procurement, because procurement often is reactive. It reacts to demand; it reacts to the demands of those who hold the budgets, the commissioners, and, again, we have a very fragmented approach. So we have a very fragmented procurement sitting with a very fragmented group of commissioners; again, very varying expertise. I would see those as the two major problems that need to be addressed. Alan Powderham: Three? Lord Cunningham of Felling: You can give us five if you wish; I just thought three for the sake of— The Chairman: You are allowed to have the same ones as Mr Cram. Alan Powderham: I think the key is motivation and the time to do it and the art would be achieving that by delivering value. As I have indicated—and in fact I think it is in our DNA, as I said—we like to be creative. It’s our desire, but we’re often frustrated. So I wanted to explain the exciting differences I’ve encountered with different procurement methods and particularly in the United States, but I was rather expecting that might come under question four. The basis is that we need to change our behaviour. It would be wonderful if we could have a step change but I see that it is going to be incremental. And, frankly, most of the innovation that I’ve been fortunate enough to be involved with has been driven by crisis. So that’s a very uncomfortable way of innovating. Perhaps in answer to question five we could consider the opportunities of the crisis, which has just been referred to economically but I am there relating also to the climate change aspect. So we have to change the way we do projects. I have a suggestion there. Would you like me to elaborate at this stage or later? Q121 The Chairman: If you could just very succinctly because we have to keep moving on. I think the main obstacle you have described is motivation and time. Is that right? That is what you think is the main obstacle? Alan Powderham: For the practitioners. I think innovation needs to be looked at in a much more holistic and broader way. It’s often seen too much as the generation and creation of new ideas that enhance value, but it has three major parts and that’s just the first one. The next is the development and then the implementation, and the implementation needs to take us right through to decommissioning. So it’s the whole life cycle of the project. My colleagues here have been mentioning that. And procurement needs to be seen in that way, too. It needs to be integrated; so we need to get connectivity there. Andrew Wolstenholme: Let me try and outline three. I think the first one is probably the workload and visibility of what is coming on the horizon. We are a very large and peopleintensive industry that cannot turn too quickly on a sixpence, as it were. Therefore, I think the sense of having a national infrastructure plan is good for a number of reasons. Firstly, I think it gives a sense of priority as to where one should spend a limited resource of capital. Secondly, it gives the UK industry some sense as to where it should invest next in their own valuable resources. New nuclear is coming, for instance, we know it is coming—we hope it’s coming—for which we all need to make investments several years in advance to gain, once again, the resources and expertise that delivers that. So the first one is workflow and we’d rather have less work but at a more stable pace than we would a very lumpy, bumpy ride over two or three years. The second one, I think, is the sense still that value is derived from a low-cost solution as opposed to taxpayers being able to support a long-term value proposition that at the end of 75

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 the day will save money and make profits along the way. The procurement models that deal with this best and bring in the expertise for supply chains and create those environments for change will enjoy the most innovations. And this simply has to be a message that is demonstrably proven to be the case. The third one, I said, was the expertise around this. When at BAA we were able to take on board a number of very interesting and very experienced individuals. I look across the public sector and I equally see very experienced and professional individuals but my sense, I guess, is that there are probably not enough. Procuring capital works, procuring a portfolio of Ministry of Defence, procuring IT projects: these are very high-end technical projects that require a very high degree of professionalism in defining the needs and being able to manage change as those needs change over short horizons. I guess the constraint is there are not enough good, professional resources. There needs to be a strong client or a procurement team to be guardian of these complex, high-risk projects that all too often can either elongate in terms of programme or overrun in terms of cost. Q122 Lord Cunningham of Felling: For the benefit of the Committee, can any of you identify any one department or non-department or executive agency in this country that you could hold as an example of successful procurement policy? Alan Powderham: By intent, but not delivery. As I said, there are a lot of good intentions but the challenges is where it tends to fall down. There are some excellent examples in here on Highways Agency and London Underground pursuing and delivering innovation but, as Andrew and Colin said, it is very much about people as well: communication and collaboration. I have had the excitement of working in an environment that stimulated innovation, I mentioned with Andrew and BAA. But to sustain that is not very easy if you don’t have the continuity of purpose. It’s been said quite frequently that large corporations have no memory. Colin Cram: I think one obvious example is the London Olympics where there’s a real drive for innovation and that is because there is the purpose and, therefore— The Chairman: The ODA, the Olympic Delivery Authority? Colin Cram: Yes. But, nevertheless, there is a political drive for innovation there and they’ve resourced it properly. They’ve resourced procurement properly. They have brought in advisors on sustainability and so on. So they are really focusing on that. My concern is that all the lessons that will come out of that will just disappear because there are just so many public sector organisations that will be unable to apply those lessons. I think, therefore, we need to try to ensure that those lessons— The Chairman: You mean they cannot apply them or they will not apply them? Colin Cram: Mostly can’t, I would suggest, but also very often lack the real interest or understanding as to how to apply them. It’s a very prestigious project and, therefore, companies are going to want to engage with it and they’re going to want to talk innovation and sustainability and so on. So my concern is that we find ways of not losing all those lessons and try to ensure that some of those lessons are at least applied more generally. The Environment Agency is perhaps quite good on sustainability. As an example of an organisation that really is developing well, about nine years ago I created a joint procurement organisation for several of the research councils. That’s been built on now and is beginning to cover quite a lot of their institutions. And when that is really completed, and expanded to all the institutions, and perhaps to other bodies, we’ll have a very good vehicle for driving and supporting innovation. 76

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Andrew Wolstenholme: We shouldn’t get too depressed here because I could hold up examples of very, very good public sector procurement from probably almost every department. I think the difficulty here, and we shouldn’t forget, is that innovation sometimes is simply sharing and transferring good learning and practice from one department to the other. As a public sector client that represents anything between £40 billion in one year and maybe £60 billion of capital works the next year, this is a huge undertaking and, therefore, the conditions are needed to be able to share that knowledge well. The Highways Agency has made huge progressive steps by collaboratively working with their supply chains in developing different, innovative procurement models. The National Health Service has delivered procurement models that over time, cyclically delivering different types of value against different constraints; as with the Ministry of Defence and many other departments. One thing that I asked in my report was about observing the duration for which the Minister with a construction portfolio has stayed in office. The duration when Nick Raynsford was in office was a period of, I think, either three or four years where he really began to understand the sense of prize that could be won from even small savings across that huge capital budget. With the leadership that Nick was able to give, with Sir John Egan having written Rethinking Construction and the Government of the time really understanding that the reward and the prize of a 10% or 15% or even 20% saving in that sector, the alignment began to appear. The last Labour Construction Minister was excited by being on the chart until I said, “This is a chart to illustrate how short a tenure these Ministers have”. And I’m delighted that the Chief Construction Adviser seems to be representing the glue between the public sector departments. I would say that one of the constraints is the ability for Paul Morrell to be able to act seamlessly across the departments, to steal the good ideas with pride and to be able to pick off the really great public sector examples and to make sure that that is leveraged across others. And one, if I might cite— The Chairman: Sorry, could you just keep it short because— Andrew Wolstenholme: Yes. Innovation, very quickly, through something called BIM, which means building information modelling, that is doing what the car and the aeronautical industry did 20 and 30 years ago, which is to digitally model our infrastructure on computer ‘virtually’ before you come out into the field. And I think this is an outstanding initiative, which the public sector should be fully behind and should demand of the private sector the innovations that go with that. So there’s one example, I think. Q123 Lord Broers: This leads me into my question, which is somewhat of a follow-on of what Lord Rees opened up: timescales. Are the timescales long enough and do you really have the models that are capable of lifetime costings and lifetime benefit analyses? Clearly, superhighways and high-speed rail systems lose money for a long time, as it were, before they make a profit. Or is that long-term thinking so complicated that it’s like the weather and you can’t do it at all? And then my second question is: what about foreign ownership? Does that make it more difficult to carry out these plans if we sell our airports and our railways and everything to somebody else whose headquarters is overseas? Andrew Wolstenholme: I presume that was, in part, directed to me because, of course, in handing Terminal 5 over there was a change of ownership during that tenure. I have to say I received great support by the new owners whose investment in that particular infrastructure was over a long-term period. So I don’t necessarily see foreign ownership being an inhibitor 77

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 here. Provided the free flow of capital and the identification of assets that bring value to taxpayers or customers is the bedrock of the investment proposal, then that should give a return to shareholders and customers alike. I do think the period over which we develop innovations in this industry is a concern and I think that’s why, within Balfour Beatty, I am looking after innovation and knowledge transfer. And I think the free flow of knowledge transfer halfway through cycle of innovation to the next project is absolutely vital so that we don’t get these five-year waiting games between the output of one project becoming the input of another. So as, for instance, we look at High Speed 2, the planning constraints and the lessons learned through planning, the political system that supports it, all of these are onion skins that wrap around the complexity of our major transport systems here. So the free flow of the data between these projects and knowledge must help to accelerate the cycle through which these innovations are derived on one project and passed on to another. We do not typically in this industry wake up wanting to innovate or share knowledge, which is why passionately I’m a people person and, equally, this breeds industry leaders that go beyond their technical skills. These are complex change programmes. These are cultural programmes. Terminal 5 was about people and once you’ve created people and the environment then you can create the sort of state where people can innovate and transfer learning. So bring bigger people into the industry. And we’ll get on to my other hobby horse around education and training in a minute, but this also is a prerequisite to creating the sort of vibrant industry where people not only get their technical qualification but stay in the industry and aren’t, in a sense, led to other— The Chairman: Could we just keep the answers to the questions succinct and to the point? Mr Cram and Mr Powderham, do you have any direct answers to the point that Lord Broers raised? Colin Cram: If you’re asking for a direct answer on major infrastructure projects, the answer is no. I would just comment that on slightly smaller projects that local government or the NHS are responsible for, then I think to some extent there is some short-termism because of the way they’re funded. But the very best projects do look longer term and if we take some work being done, say, by Manchester City Council, then, when it comes to building schools, the construction team have been trying to educate the contractors to think long term and to recognise they’re not building schools, they’re building education. And that starts to create a very different mind-set and perhaps a much more innovative approach. Q124 The Chairman: What about on the foreign ownership, do you have any particular comments? Colin Cram: I haven’t any views on that. I don’t see why that should make a difference. Alan Powderham: Yes, I do believe we need more time, as already said, and there are procurement processes that will address that, which I’m going to enlarge upon if I get the chance in question four. It’s the QBS system—qualifications-based selection—that I encountered in the United States. I’ve been asked to talk on innovation around the world. They seem to have the same challenges. I’ve given talks to public bodies as well as universities and institutions; so the challenges are similar. I don’t see a dramatic difference in delivery on the whole, but there are some very interesting examples that we can learn from.

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Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Q125 Lord Broers: This is a question that Mr Cram covered in one of his reports here: does innovation in transport infrastructure come from small or large companies? You were inferring that it doesn’t come from small companies. Colin Cram: No, it can come from small companies. In fact, I can think of examples where it has. I think the major problem that organisations have, that small firms have or any firm with innovation has, is getting its ideas heard and what they tend to have to do is to respond to specifications that are anti-innovative. I have an awful lot of companies, small companies, approaching me and saying how do they get public sector business and the way the public sector goes about a lot of its procurement is it actually shuts out innovation. I talked about framework agreements. They last for four years. No new supplier can get in for that period and very often you don’t choose much innovation for these framework agreements either. So we shut out a lot of innovation and I think that’s probably one of the concerns that I have and we need to change our approach on that. Sometimes there’s real difficulty getting lessons transferred from one organisation to another. There’s a brilliant example: Tameside Council. The leader of the council, or former leader of the council, developed an approach for replacing street lighting. It may not sound much but there’s about £50 million a year spent nationally on this. They saved about 33% with various new practices but many other councils were reluctant to take on those lessons, more for personality reasons rather than anything else. Q126 Lord Broers: So do you think Government should provide more support for small companies to bid? That’s a classic problem, isn’t it? It was like some of the early EU framework stuff; that if you were a small entity, whether you were a small research group in a university or a small company, it was very difficult just to find the resource to submit the bid. Colin Cram: It is extremely difficult as a small company to find the resource to bid. So even though there have been Government initiatives to advertise tenders, firstly, who has the time to look through all of these long lists; secondly, who has the time to tender; and, thirdly, even if you know a very much better way of doing things, you have to respond to the specification. So what I’ve suggested is there is a different approach that one should use and I’m very disappointed that the public sector hasn’t used it so far. Firstly, one could, I think, support small companies by actually identifying those that are innovative and one can use an EU procedure that’s not really been used in this country: the Dynamic Purchasing System. I know we tend not to think of dynamism and the EU in one breath, but that could be operated in a very simple way. Small firms could bid with very little bureaucracy and very little effort and you could select firms on the basis of their innovative capability. That would be one approach. Another approach would be to expand the National Health Service Innovation Centre to the rest of the public sector and maybe provide a bit of support to small companies who have some innovative products and then provide some support to them to get public sector business. We don’t do that at the moment. We don’t have really good mechanisms for supporting small companies. Q127 Lord Broers: So we should have a research assessment exercise for a small company, should we? Colin Cram: Well, I wouldn’t say great— 79

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Lord Broers: Ranking them 4-star and 3-star might be a very good idea. Colin Cram: Well, you could do that and you could ask them to apply. But the point is once they’re on some sort of list, which you could get them on through a Dynamic Purchasing System, then you have a means of monitoring their usage. So you’ve identified a range of innovative organisations and you can say, “How much does the public sector use these innovative organisations?” I don’t know of any better way and that would be quite a good way of measuring innovation. Q128 The Chairman: Do either of our other two witnesses have comments about the relative contribution of small and large companies to innovation in transport? Alan Powderham: It’s a lot easier to innovate on a large project that has also a longer timescale, so that challenges small companies. But the reality is that innovation is going to come from motivated and qualified people. This qualifications-based selection procedure that I mentioned that’s operating in the United States was codified as the Brooks Act in 1972. So they’ve got nearly 40 years’ experience of that and it was to protect the interests of the taxpayers. But it has a whole raft of very attractive benefits that address many of the points that have been raised here, including that it does reduce the disadvantages that are faced by SMEs. So there’s a lot to be learnt. If you want to do some research, I’d strongly recommend a review of that process. It was very, very effective, in my own direct experience, in delivering major innovation and seeing small firms also contribute in that way. Andrew Wolstenholme: I just have a couple of points. If you go down into the layers of supply chain then you’ll come across companies of all different shapes and sizes. You’ll be surprised by how many SME organisations are there to support with good ideas, innovation and value. I think the constraint here is to create a project environment where you have open innovation through the vertical slots of the supply chain and to create the opportunity where those companies with good ideas can get to the surface, the things that Colin mentioned. Certainly in my experience of delivering the Heathrow Express programme to Heathrow and Terminal 5, there were no surprises by the amount of value generated by third, fourth or fifth-tier suppliers, whose IP is research and development and delivering product innovation. I’ve equally seen reflective layers of large delivery organisations not creating the vertical integration that will provide that see-through and not stimulating horizontal innovation that brings systems and sub-systems together to provide the innovation from the process side. I was with one of our senior programme directors from the West Coast of the States last week who has just got the directorship of the Los Angeles Transit System, a programme about half the scale of London’s Crossrail, and I was surprised to understand that in the early design development phase he has taken on 29 SME companies, some with only half a dozen people in and some of 50 and 60. And there somehow they seem to have a balance between getting the SME and the localism views with the experience and the innovation from large companies. This is a complexity. It is a difficult choice, but I do think that with the generation of open innovation then the ideas and the innovations from small companies should always be seen— many of the great inventions have come from SMEs with only half a dozen people. Q129 The Earl of Selborne: Mr Powderham has referred twice to the examples we could learn from the United States in successful public procurement for stimulating 80

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 innovation in the transport sector. We’ve also had a case study compilation and it’s interesting to see that there are quite a lot of examples there from Scandinavia and the Baltic States of innovative electronic ticketing systems, journey planners and much else. I wonder if you could tell us which of the countries and which parts of the world you think the United Kingdom has most to learn about public procurement stimulating innovation. Andrew Wolstenholme: Well, I think the answer is from both. In the same way that I think each of the public sector departments have great examples of good procurement practice, so too if you go to Scandinavia. I mentioned BIM; the building information management; it seems to be within their DNA. You would spend a lot longer in Japan or in Scandinavia designing and procuring a programme than you would as a proportion of time spent on site building it. In the States, interestingly, from an organisational perspective, I think the culture and the models that produce alliances or partnering are less well developed and over the next few days I will be bringing parts of my organisation from the States and UK and will be trying to combine the best bits of the States and the best bits of where UK come in. Australia, for instance, have the third generation of competitive alliance projects going on. So I think you could very clearly stand back and pick the best of what we like from the Northern European countries, certainly from North America; Japan, of course—the culture of how they stick to one job and innovate through a lifetime—versus Australia that tends to create a model where it induces the act of innovation much more regularly than others. So there are rich pickings from all of these countries, and I think what Egan tried to do, what I try to do in Never Waste a Good Crisis, and what perhaps the opportunity is here for this Select Committee is to remind ourselves where the best of those models come from and try, through things like the National Infrastructure Plan, to transition to a place where we can pick the real best of the best and expect to get more from our supply chain into the future. Colin Cram: Well, I haven’t worked abroad but I was at a conference in Scandinavia on innovation procurement about three years ago and I think the presentation that impressed me most was from Japan. Japan really does seem to be trying to drive innovation and sustainability through the public sector procurement processes and I felt they had left us quite a long way behind. Alan Powderham: Well, obviously I enjoyed the opportunity to outline the US experience I had but since we’ve raised Japan I’d like to draw the Committee’s attention to this report, which was is produced by the DTI. It’s Time for Real Improvement. We’re sitting here in 2011. This is 1994 and a lot of the ideas that I keep hearing are in this report. We wouldn’t want to pick on everything but Learning from Best Practice in Japanese Construction R&D is a very useful report that I still find today has not, as Andrew said, got into our DNA yet. And one of them, indeed, is the fact that, directly from experience, it’s a very different culture in Japan. Construction companies lead R&D much more strongly than institutions and universities. Q130 The Chairman: So, to the extent that this country—and I’m hearing from both you and Mr Cram—have not picked up the lessons from elsewhere, why is that? What’s the obstacle to us copying damn good ideas that have been developed in another country? Alan Powderham: Well, I think it’s sporadic. It peaks and then we don’t seem to be able to sustain it. I have a suggestion how that could be addressed by the low-hanging fruit I 81

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 mentioned early on. We have to change our behaviour. We have to get this into the DNA of our projects. Q131 The Chairman: That’s a very vague statement, “get it into the DNA of our projects”. It is not explaining why we haven’t done it in the past. That’s what we would like to achieve, but why has it not been achieved in the past? Alan Powderham: There’s a very useful vehicle that we’re already doing but we’re not getting very much value from. The two big drivers in our industry are winning work and delivering it. The other aspects become secondary quite easily because it’s dominated by those things and also obviously dominated by cost. But we have to do what’s known as project review. That’s usually associated with quite a lot of effort but not much benefit. So in association with the Institution of Structural Engineers, the Institution of Civil Engineers and the Health and Safety Executive and internally in my company we’ve been developing something of a metamorphosis of that process called Peer Assist, which I hope might have an extra resonance today. Basically, it’s focused on early integrated support, which would apply to any stakeholder in the project and also engaging the public, the owners, because to innovate you need to understand the implications of it and so you need to become appropriately informed. If the client isn’t sufficiently informed in the area of the opportunity, then they need to bring in appropriate advice. The Chairman: I’m still not convinced I’m getting an answer to my question, but perhaps Lord Rees or Lord Selborne would like to come in. Q132 The Earl of Selborne: Well, I’d just like to come back to the same question as you asked, my Lord Chairman. There’s something the Japanese do that we haven’t learnt how to do. We know there’s a culture difference. Is it perhaps that the Japanese don’t have the same preoccupation as we do with SMEs, which we seem to think are automatically more innovative but for which we have had no evidence? Colin Cram: Do you want me to perhaps comment? I certainly think we have had a preoccupation of SMEs in Government policies, wrongly. So we’ve focused on SMEs when we should have been focusing on innovation, because SMEs are possibly one vehicle for innovation. But I perhaps come back to my original point. I think that we have too many parts of the public sector where we don’t have the capability. We don’t have the capability to do the basics and if they can’t do the basics then how are they going to manage the more difficult stuff such as innovation? How are they going to have the time to do that? So I think there is a question of capability. That certainly is partly down to the structure because too much of it I still think of as chaotic and perhaps some people may think that’s an over-strong word but that’s the word that comes to me. And I think there’s the motivation. If you take the Olympic Delivery Authority, there is the motivation there to innovate; to come up with new ideas. It’s a political motivation but they have the capability and they have the purchasing power to do it. But that is very rare in the public sector. By and large, I would say the key success factors for innovation in much of the public sector are absent. Q133 Lord Rees of Ludlow: I just wondered to what extent the international differences are not so much structural but due to the people and the attractiveness of these careers because one thing we bemoan in universities is how many of even our best engineers eventually end up in the financial sector, not in either small or large companies and so on. I 82

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 just wonder if part of the problem of shortage of high quality people on either side of the contract negotiations is because not enough of the bright and motivated people are going into these fields as compared to what’s happening in some of our competitor countries. Andrew Wolstenholme: I think I’m disappointed personally at the number of my peers who went through university to study a technical or engineering degree who ended up still in it and it is no coincidence that a technical qualification is an outstandingly good platform from which to transverse into other industries. I was with Imperial College the other day speaking to 200 academics on this very subject: should, for instance, we acquire more business skills as you come up with an engineering degree to be able to tackle the industry challenges that there are—the change programmes that we’ve spoken about—and to retain those leaders who can get up to captains of industry and true leadership positions? So I think there is something there. I think creating that sense of strong leadership, you’re not going to import a national culture and indeed we wouldn’t want to. We need to maintain our composure here and do it in a very British way. But I would just go back to my point that I think what Paul Morrell is doing in terms of importing this digital technology is, in a sense, stealing things from the Scandinavian countries and the States because the GSA—Federal Department—do that there and that’s what the BIS Department is doing here. I think the models of competitive alliance appear to be creeping in now to the National Infrastructure Plan. So there is evidence of taking the best ideas. But certainly I would agree with you, sir, that it is people who have capabilities beyond technical who can become big leaders, who can see that open cultures provide the environment for innovation, who can start to tackle some of our long-term problems, is going to be the true answer. So keeping and retaining those technical resources in this industry for longer and even becoming MPs and even becoming Lords is a very good place for them to end up. Q134 Baroness Perry of Southwark: I was returning very much to the question that Lord Broers asked you earlier, which is the long-term thinking and innovation for 20, 30, 40 years ahead. The Government has things like foresight and horizon scanning initiatives. How can they be brought together with the procurement planning, particularly given the fact that in the public sector many things have to last an awful long time? When you build a school it’s going to last for 100 years. You build a train and it’s probably going to be in service for 40 or 50 years. You build an aeroplane, ditto; it’s going to be in service for a long time. How does industry get involved in innovative solutions to things, like climate change, which are going to be here for 30 or 40 years or probably longer? Alan Powderham: Well, climate change: that’s certainly a grand challenge and it embraces three huge areas for a start. First is the issue of just the global warming from anthropogenic activity. Then there’s adaptation including resilience, which addresses climate change that’s going to occur anyway, and then there’s sustainable energy. I’d recommend reviewing what Professor David MacKay, Chief Scientific Adviser to DECC in Sustainable Energy, without the hot air, has to say on that area. I’m not sure that there’s a seismic difference in a paradigm change, however, in the sense that Sir Alan Harris defined civil engineering as the art of making the world habitable. That’s a huge challenge. I think the difference is that we’re now facing a crisis, but I don’t get the sense at the moment on the ground of much addressing of that crisis. So we have got to make a change to “business as usual” and that’s that behavioural change that I referred to. 83

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 That use of Peer Assist: I can send some papers in on that but I think that’s a very personal way of taking it forward. The other area that we’re not very good in the industry is measurement, monitoring and data, which is very important to answer those long-term issues. There are some bright lights on the horizon, though. My contacts with Cambridge University and Imperial College highlight an encouraging development there. One I’d like to highlight is Cambridge University’s Innovation and Knowledge Centre initiative for smart infrastructure. That’s a very large R&D focus on answering those questions and taking it forward. Q135 The Chairman: Could you just give us an example of a transport infrastructure project over the long term, maybe Crossrail or HS2 or new roads, where the Government and the contractors are taking into account the fact that the climate in this country will be very different in 50 years’ time when this infrastructure is still in use. Can you give, just very briefly, a concrete example; not generalities but specifics? Alan Powderham: I can’t give an example of that. I don’t think we follow them up. The Chairman: There is not an example, did you say? Alan Powderham: Not that personally comes to mind. Q136 The Chairman: Do any of the other witnesses have an example that meets that requirement? Colin Cram: I certainly can’t think of an example where it is taking into account the potential impact of climate change in 50 years, no. Andrew Wolstenholme: On climate change, certainly when we model infrastructures we will model them in decade slices. So we will model them for 20, 30 and 40 years out and we will try and get the optimal solution knowing that their relationship with the environment will change. We look at industries being created— The Chairman: But I want an example, not a process. Andrew Wolstenholme: I could send you examples of schools that we’ve analysed that tries to— The Chairman: No, transport, sorry. Andrew Wolstenholme: Sorry, transport. No, not off the top of my head. The Chairman: That’s a bit worrying if three witnesses cannot confirm to us that this country is building its transport infrastructure to cope with the future that we know, in broad terms, is going to exist. We don’t know the specific details. That is a pretty worrying conclusion, so I just want to be sure that I’m right in understanding what you’re saying. Lord Crickhowell: The about-to-retire Chief Executive of Crossrail addressed Members in this House a week ago and he was asked a related question to this about the flood risk of Crossrail. And he said, “Well, I’m told that we are looking for a one-in-100-year event”, to which I’m afraid I observed, as the former Chairman of the National Rivers Authority, that in my experience the trouble about just planning on a one-in-100-year event is they usually happen a week later and probably two of them in three weeks. If we are planning on that basis, it’s not a very secure way of thinking simply, “Oh, well, it’s a rather rare event”, if it’s likely that we’re going to have an increased risk of flooding. 84

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Q137 Lord Wade of Chorlton: I have listened to the points that you’ve been making and the emphasis you’ve been putting really on the role of Government and procurement generally to stimulate innovation in the companies that are delivering, which is rather different than the issue that certainly I thought we were going to look more closely at: as to how Government itself will say, “This is a problem that I want solving”, and go to you to try and solve it. I’m not saying you particularly; I’m talking about a company. The sort of thing I’ve read recently and you may have read in The Economist, DARPA had a problem on the battlefield with having fractures that they couldn’t deal with until they went septic. So they went to a team of people at Texas University and said, “We want a solution. We want a hand-held product that our doctors can carry with them and deal with it quickly”. And they put together a team that was made up of biologists, of mathematicians, of nanotechnologists, and within two years they’d found a new product that solved that problem. Government paid for it. Government got an answer to a problem that it was dealing with. Climate change is a problem that we’re dealing with. There are a lot of other issues that Government knows are problems. What we’re looking for is examples of where Government has said, “I want a solution to this problem. I’m going to pay for it and I’m going to that group of people”—it might be a business, it might be a research group, it might be a university—“and I want a solution and I will pay for it”. Have you any examples of that? Alan Powderham: Well, I’ve been keeping my powder dry but I am bound to give you the example of the Boston Central Artery where— The Chairman: This is not UK Government? Alan Powderham: No. Lord Wade of Chorlton: I’m looking for an example of a UK one. Andrew Wolstenholme: Can I just— The Chairman: Well, while the others are thinking: a specific answer to a very specific question. Andrew Wolstenholme: I went to the Building Research Establishment, which is based just outside Watford, an organisation with whom I have great respect, and I took 30 of my own colleagues there to have a look and to see what had happened. And you can sit in that strange place near Watford, and you can see a code-6, a code-5 and a code-4 house and those codes relate to their relationship with zero carbon or not. There are houses sitting there that are zero carbon. They’ve been stimulated by interested parties who come together that want to, in a sense, sell their solution to a housing market that, at some stage, will provide the economic circumstances where there will be a market for that. Is the answer there in volume? No. Is the answer there technically? Yes, it is. So there in a housing market—forgive me, not transport—is an example where a solution is coming. There is a very good low carbon construction roadmap (IGT) for the UK construction industry that the Government have just issued. It will require careful co-ordination and funding to enable—what the car industry is doing on its own back, but UK construction industry needs some support from. So there’s a roadmap. There are examples, certainly, in housing. I can’t think of any offhand in terms of transport but certainly the energy industries that we are very heavily involved in, once you create an economic model—and if it is green energy then it is the price of carbon; if it is energy from waste then it is all the different economic models that derive the right solution—you will get combinations of people coming up with ways to innovate. If there is no stimulation to behave differently, then people won’t do it. 85

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Q138 The Chairman: Sorry, we’re not getting a concrete example. Can I ask the others? Alan Powderham: I’ll give you one in that case, which is in this report on Innovation at the Cutting Edge, which would be the London Underground’s concern about its ageing infrastructure. This was the London Underground earthworks. So they came to a group of companies to address this issue on that basis and it was delivered. It was recognised; it won awards; it was part of, as Andrew mentioned, Sir John Egan’s Movement for Innovation: Rethinking Construction. So it was recognised and established. So that is quite a strong example. Q139 Baroness Perry of Southwark: What was the actual problem that they identified? Alan Powderham: Well, our ageing infrastructure. When we built the railways it was— Baroness Perry of Southwark: Yes, I understand that but I mean— Alan Powderham: They weren’t built very well, so they keep failing. Baroness Perry of Southwark: They went to a group of companies and said, “Will you give us some new infrastructure”? Alan Powderham: “How can we maintain our earthworks so that they don’t fail with climate change issues?” A whole range of innovative processes were brought and they’re now operating as we sit here. So that was a very successful example of innovative-driven procurement by a public body in this country. Q140 The Chairman: That was Transport for London that did the procurement? Alan Powderham: I don’t think Transport for London quite—this was in the 1990s. It was London Underground. Q141 The Chairman: London Underground. Sorry, Mr Cram, do you want to succinctly add— Colin Cram: Yes. I’m struggling to think of an example. You talk about Government actually driving the change. I think individual Government organisations sometimes drive change through need and I think that’s where it happens. But in terms of overall Government policies I would say— Q142 The Chairman: Can you then give us an example of maybe an agency like the Highways Agency or a local authority, some public body that has stimulated procurement in the way that Lord Wade described in relation to transport? Colin Cram: I’m struggling in relation to transport, actually. Q143 Lord Willis of Knaresborough: Oyster Card? Colin Cram: Yes, Oyster Card. That is a good idea, yes. Thank you very much for that. The Chairman: Thank you, Lord Willis. Colin Cram: I can think of small examples but not major ones. 86

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Q144 Lord Wade of Chorlton: Well then, can I ask a further question, my Lord Chairman? Can you think of things that could be solved that way if Government were prepared to do it? We’ve all talked and we’re all aware of problems in society, whether it might be from social problems to practical problems, to roads, to weather, to everything. If you had the opportunity to say to Government, “I have £10 million that I will now give to that research department to solve that problem”, what would it be? Colin Cram: I’m not sure I’d necessarily go for a research problem. I think that— Lord Wade of Chorlton: Well, whatever it was. I’m not interested about that. Colin Cram: All right. If on transport, one thing I would love to sort out is local passenger transport of buses. So instead of everyone doing their own thing and buying in buses, specifying things, why can’t we have a real engagement, a national engagement with industry, where industry knows that they’re talking to people with the power of the spend behind them, with the authority to speak to them, and say, “Well, this is what we want to achieve over the next 25 years. How can you help us actually achieve this?” Then I think we could have real engagement. At the moment it’s very bitty. But what I’m pretty confident is that we could end up with much better services. We could end up with much cleaner transport; probably very different types of buses; a whole range of ways of doing things. But industry has to believe it is speaking to people with the authority to make things happen and, by and large, we don’t have that. That doesn’t exist at the moment and, therefore, there’s not too much chance of dialogue with industry over issues like that, in which case they will never make progress. We just rely on what industry offers rather than trying to drive things forward. The Chairman: Thank you very much. I think we’ve now run out of time, so I’d like to thank the three witnesses for their comments. Oh, sorry, did Lord Broers wish to— Lord Broers: I have just one. The Chairman: Just very, very briefly. Q145 Lord Broers: A brief idea to try on them. We talked about small companies versus large companies. The model that I would propose is that you should measure large companies, who need to be the companies that bid on large projects, on their utilisation of small companies. Would you agree with that? Andrew Wolstenholme: I think that has been proven to work overseas and I think that’s a good model. Q146 Lord Broers: So you could rate a large company on the extent to which they were effective in using small companies? Andrew Wolstenholme: Yes. I don’t think it’s a perfect solution but I think it’s one that if you balance it, the situation would work. Can I add one final comment? The Chairman: Only if you can do it in a minute. Andrew Wolstenholme: Just three things about transport. One is a capacity question. So there are examples where the Highways Agencies have managed motorways to increase the capacity of their motorway system; examples of Crossrail where you increase the capacity of the system in the same infrastructure. So capacity, intermodal solutions where these 87

Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 solutions support and act together and, from a transport policy in terms of car, the electrification of cars is going to be the answer in the next decade. The Chairman: Thank you very much. Well, I would like to thank all three of you for your time and for your comments to us. If there is anything you would like to add in writing to follow up, if you feel you haven’t been able to answer the questions because we haven’t given you enough time and you’d like to submit additional evidence, you’re welcome to do so. There will be a transcript of this session and you will have a chance to correct that before it becomes part of the formal record of the session. So thank you very much indeed for your time and if the Committee could stay here for a few minutes, we have an item of other business to deal with. Thank you very much.

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Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35)

Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35) Purpose of this Paper 1. The following document provides further comment on some of the issues raised at the House of Lords Science and Technology Select Committee hearing on 18 January 2011. Specifically it comments on: • • • • • •

Innovation through Procurement Office of Government Commerce Progress vs Efficiency and Reform Group Immediate Opportunities Measurement Local Passenger Transport Climate Change

Innovation through Procurement 2. Innovation through procurement (often called ‘Innovation Procurement’ by academics) needs to be defined. A pragmatic definition is below: ‘Innovation, created or driven by procurement, that is over and above what is required to deliver the needs of the organisation undertaking or requiring the procurement’. 3. Using this definition, very few UK public sector procurements could be called ‘innovation procurement’. There is nothing special about innovation that is driven by organisational needs – it should be done anyway. The purpose of the UK government’s policy (and that of other EU governments) to use the huge scale of public sector procurement to generate innovation is to be able to compete with other economies, particularly those in the Far East. It would be meaningless to have such a policy unless it was intended to deliver results over and above what one would get through competent procurement on behalf of the organisation for which it is being undertaken. 4. There are some procurements that could arguably be classed as ‘innovation procurement’ even though they may be driven by perceived needs. Examples would include the British Olympics and ‘Diamond’. Elements of the Millennium Dome were a good example of innovation, but not by UK suppliers. The Millennium Bridge over the Thames may be an example. The Highways Agency 4 years ago was quoted in European academic circles as having delivered ‘innovation procurement’ through a new approach for motorway electronic signs that allowed much greater flexibility in the messages that could be shown. Its business plan refers to this using the term ‘managed motorways’. It is involved in the British Olympics preparation. 5. ‘Innovation in the Department of Transport’ is arguably the best response of any government department to the requirement for innovation procurement plans. The Highways Agency has a procurement strategy that includes innovation and sustainability and the business plan includes references to sustainability and planning for climate change. 6. Local government spends nearly £4bn a year on capital transport works (mainly roads). It is not evident that innovation and sustainability are part of the conditions of 89

Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35) providing such funding or how such policies could be enforced. My knowledge of local government would suggest that a significant proportion of authorities might not have the capability. It is not evident that the Highways Agency is addressing this. 7. Smaller scale innovations by local government, such as the ‘Tameside slipper’, that enabled quick and very cheap replacement of street lights (estimated national spend on street light replacement in 2009/10 would have been of the order of £40m-£50m) was an excellent example of innovation, but illustrated also the obstacles to getting such innovations adopted more widely in that fragmented environment, even when the benefits were obvious and proven. Office of Government Commerce Progress vs Efficiency and Reform Group 8. The issue was raised that if the OGC was doing some excellent work, as stated in ‘Towards Tesco’, how does the ERG compare? For example, the OGC started to do some very good work on collaboration on common categories in both central government and the wider public sector. However, it did not have the power to mandate, its changes were therefore incremental and it was not able to apply the full purchasing power of the public sector. The ERG work on common categories builds on the work the OGC was doing. Its concern is with central government only and thus the spend being addressed amounts to £13bn – out of a total public sector procurement spend of over £200bn a year. The 25% savings target would thus equate to £2.6bn if achieved. However, this would represent a saving of little more than 1% of public sector purchase spend, which is well short of what is needed overall. 9. The above savings will be boosted by the negotiations with major suppliers to central government – suggestions are that this has been £0.9bn. However, many of those suppliers do greater business with the wider public sector, which has been ignored. The savings achieved through the negotiations with central government’s main suppliers would boost the total to 1.5% of public sector spend, still well short of what is needed overall. 10. The OGC also did some other useful work e.g. on project management and extended this to policy (e.g. ‘Starting Gate’), which is being continued by the ERG. 11. The progress and ambition of the ERG is beginning to look disappointing. It appears to be tackling some of the symptoms, rather than the disease. The disease is summarised in ‘Towards Tesco’ and the solution is proposed. Radical improvement will not be achieved through incremental and symptom change. Radical improvement might be no more difficult to sell than incremental change and the ‘symptoms’ would automatically be addressed. ‘Towards Tesco’ proposes how this might be achieved throughout the public sector and not just central government. Immediate Opportunity 12. Through its approach to try to manage common categories, the ERG has the opportunity to drive through sustainability requirements and make innovation through procurement a reality and a general rule, albeit for just 6% of public sector procurement spend. Sometimes, such as with managed print services replacing photocopier procurement, innovation can result in much lower costs and big reductions in CO2 emissions. Mandatory use of ‘innovation procurement’ agreements should enable measurement of the extent to which such innovation takes place. 90

Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35)

13. The government could also place a requirement on Buying Solutions (formerly OGC Buying Solutions and now part of the ERG) to drive innovation and only supply those products and services that are the ‘greenest’ on the market. Its public sector business of £7.5bn (which is mostly included in the £13bn being tackled by the ERG) would enable it to make an impact. Expenditure on ‘green’ products could be measured. 14. The procurement and use of cars for official purposes could illustrate what could be achieved if the public sector behaved in a coherent way. It is not unreasonable to suggest that use of cars by public sector personnel will equate to at least 50,000 cars at 10,000 miles each a year. (This seems a reasonably conservative figure given that there are about 6million public sector employees). Many of these cars will be privately owned. However, were the public sector to aggregate its total procurement spend on vehicles and ensure that official journeys were made in official vehicles, it should have enough purchasing power to influence innovation by manufacturers, particularly if it were to reduce choice to one or two of the most efficient vehicles and commit to volumes. Measurement 15. The suggestion was made that the use of smaller companies (SMEs) by contractors could be measured. This could be done fairly easily for the main contractors if there was a single public sector organisation responsible for all the procurement and contracts management with each contractor. However, some contractors serve several hundred (possibly several thousand) public sector organisations, most of which operate independently. Measurement would become impracticable. The difficulty is emphasised by there being many thousands of suppliers to the public sector. However, I am not aware that anyone has shown a correlation between the use of SMEs and innovation, so it is questionable whether any attempt at such measurement would have any value. 16. A practical approach to measuring innovation would be through the proposal in the paper I originally submitted to the select committee about the use of the Dynamic Purchasing System to create ‘approved lists’ of innovative suppliers. These suppliers would be able to report the value of their business with the public sector. (See also paragraph 13 above re Buying Solutions and paragraph 12 re the ERG). 17. The Small Business Research Initiative, overseen by the Technology Strategy Board, does support some innovation and it is measurable. However, 50% of its support has been for companies supplying to the MOD and 25% to the NHS. I am not sure that this bias was the intention behind the initiative. Only one initiative appears to relate to transport and this is a piece of research. The DWP, in its Procurement Innovation Plan refers to encouraging its category managers to use the SBRI. However, it does not appear to have placed any business so far. Local Passenger Transport 18. The Local Passenger Transport initiative, that I started in 2005 when Director of the North West Centre of Excellence (NWCE), illustrates the problems created by the lack of cohesion in Whitehall and the public sector generally. The work streams set up as part of this project are listed at the Appendix to this note. Further information can be provided if required. 91

Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35) 19. NWCE, one of 9 regional centres of excellence, set up by CLG in early 2005, existed to encourage and support 47 local authorities deliver savings, mainly through procurement and shared services. Each of the 9 regional centres of excellence also had a national lead and that for NWCE was Local Passenger Transport. Local government spends about £3bn a year on local passenger transport (excluding trains), including a large sum on taxis and transport for people with special needs and the elderly. See note below*. *Note: Government figures suggest that £0.9bn is spent by local government on local passenger transport. However, this excludes bus passes for the elderly and the very large amounts spent on taxis and other vehicles for school children – particularly special needs, the elderly and special needs adults. 20. A further £2bn a year is spent on parking for the general public (local government, NHS, universities etc), but was not addressed by this initiative. The NHS also spends money on local passenger transport, which would take the total public sector spend on local passenger transport close to £6bn a year. Roads maintenance and transport capital works managed by local government were excluded from the project and are not part of the above spend figures. 21. There are several hundred public sector organisations involved in managing local passenger transport. There are estimated to be about 1000 involved in public sector parking. 22. The potential benefits from the project were: • • • • • •

Savings of up to £200m pa Better public transport services Greener public transport Introduction of new technology Increased use of public transport Safer transport for children (too many of whom are transported in taxis whose drivers have no CRB checks) and other members of the public.

The project cost around £200K a year and was funded by NWCE. 23. Departments with an interest in it were DCLG, Department of Transport, Department for Education (DCSF at the time) and Department of Health. Both DfE and DH proved difficult to work with at times. 24. DCLG replaced the regional centres of excellence by the much better funded regional improvement and efficiency partnerships (RIEPs) in early 2008. However, oversight passed from DCLG to the Local Government Association, the emphasis temporarily changed to ‘improvement’ rather than ‘efficiency’ and all national work streams ceased. 25. There were some successes but, overall, this was a missed opportunity and much good work squandered. Although the Department of Transport had been supportive and was keen to see the work continue, it provided no funding to replace that which was lost, presumably seeing this as a DCLG issue. 92

Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35)

26. Had the project continued, it would have provided the opportunity for a single approach to the bus operators and manufacturers to create ‘greener’ and more suitable transport – thus driving innovation. Climate Change 27. Apart from the Department of Transport and the Environment Agency, I am aware of no public sector organisation that is planning for the likely impact of climate change. Possible reasons are: •

• •

Most public sector organisations are rooted in the present. For example, few local government organisations did much planning for the funding cuts they will experience from next year. Nor did they take advantage of efficiency opportunities, even though the cuts were seen as almost certain by most people. So the chances of planning for climate change will be slim. Funding of public sector organisations does not encourage forward planning for climate change. There remains much scepticism and indifference about whether climate change will happen and its possible impact. For example, delegates at the Local Government Association conference last summer were treated to a lecture by Nigel Lawson, much of which was about why local government should ignore possible climate change.

24 January 2011 Appendix: Passenger Transport Efficiency Project Work Streams 1. Disseminate good practice 2. Identify Benefits/Downsides from Integrated Transport Units (Report published and distributed) 3. Upgrade/introduce new IT and communications systems 4. Integrate with non-emergency NHS transport (Report published and distributed) 5. Introduce integrated social needs transport in metropolitan areas 6. Taxis 7. Reduce bus operating costs and stimulate passenger growth 8. Concessionary fares 9. The journey to school 10. Partnership in bus network development 11. Engaging the voluntary sector 93

Colin Cram, Marc1 Ltd—Supplementary written evidence (PP 35) 12. Vehicle procurement 13. Training 14. Good practice guidance on tendering and contract conditions A complete copy of the initial project document can be provided, which describes the workstreams and their objectives in greater detail

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Colin Cram, Marc 1 Ltd—Further supplementary written evidence (PP 36)

Colin Cram, Marc 1 Ltd—Further supplementary written evidence (PP 36) Purpose of the Paper 1. The procurement responsibilities and programme of the Efficiency and Reform Group may most usefully be seen as the latest stage in an evolutionary journey that started with the new Conservative government in 1979. The areas covered include common procurement categories, the central government estate, publications, ICT and project and programme management. This paper summarises the procurement ‘journey’ and explains the relationship and differences between the Office and Government Commerce and the Efficiency and Reform Group. It does not cover the non-procurement related ERG responsibilities. 2. The Efficiency and Reform Group is part of the Cabinet Office, whereas the OGC was part of the Treasury. The Cabinet Office has traditionally been responsible for management of the civil service, so the transfer of the functions makes sense in terms of improving the management of central government. However, the Treasury is better placed to drive through efficiencies in the wider public sector as a whole. A Brief History 3. There had been central government collaboration on procurement spend for decades – centuries for some products - through buying agencies. Until the late 1980s, stationery and publications all came through HMSO; ICT was all handled by the Central Communications and Telecommunications Agency; the Central Office of Information handled all publicity; the central government civil estate was owned by, and all contracting for it was done by, the Property Services Agency; the remaining commodities goods and services were handled by The Crown Suppliers. Use of these organisations was mandatory for central civil government departments. 4. These organisations were largely disbanded in the 1980s. It was argued that devolution to central government departments should ensure greater efficiency, accountability and responsiveness. However, the departments did not have the expertise and systems to handle their new responsibilities; the resulting inefficiencies were not evident and the finance and information systems were not capable of highlighting them. It was this devolution that led to the formation of duplicate ‘back-office’ functions in central government departments, including procurement, ICT and estates management, and widely differing ICT systems in central government for similar or identical functions. 5. The Office of Government Commerce was preceded by the Central Unit on Purchasing, which was set up in late 1985, in response to a report, to which Colin Cram was a major contributor, that central government was failing to obtain value for money from its civil procurement (then estimated to be £7bn a year). One aim was to encourage collaboration and another was to improve procurement expertise. It had to operate through influence and had limited impact. The shortcomings of this devolved approach were highlighted in the late 1990s and 2000s by various studies, including Gershon, the Operational Efficiency Programme (commissioned in 2008), reports in 2010 such as ‘Towards Tesco’ and that by Sir Philip Green. The Office of Government Commerce moved the agenda forward particularly in project management, collaboration on common categories and latterly on rationalising the government estate. It focused on improving procurement expertise in central government departments rather than rationalising the structure, for which it could justifiably be criticised. 95

Colin Cram, Marc 1 Ltd—Further supplementary written evidence (PP 36)

Common Procurement Categories 6. Common procurement categories continued to be addressed in the 1990s by The Buying Agency, a rump of The Crown Suppliers. Rather than letting contracts, because use of its agreements was not mandatory, it had to let framework agreements without any spend commitment, so it was difficult to secure best value. However, its influence and the scope of its agreements and services expanded considerably during that time. As a result of the first Gershon review, which led to the creation of the Office of Government Commerce in 2000, The Buying Agency was re-named OGC Buying Solutions in 2000 (and was re-named ‘Buying Solutions’ early in 2010) and it became an ‘arms length arm’ of the Office of Government Commerce. Its influence continued to expand, though the bulk of purchase spend continued to be through framework agreements. Also, it was allowed to expand into the wider public sector, which is increasingly using its agreements. In 2008, it took over about £3bn of NHS procurement from the NHS Purchasing and Supply Agency (PASA), which was disbanded. This has given Buying Solutions greater purchasing clout, which it has used increasingly on behalf of the public sector as a whole. 7. In 2005, the OGC started to create its own category teams and, under some excellent leadership, these started to deliver some good results and the benefits of collaboration were clearly evident. Consequently, these category teams started to rival Buying Solutions. They also started to engage with the wider public sector. The category teams could not mandate and had to operate through encouraging collaboration. Collaboration is expensive and lack of mandation meant that results were not as good and were delivered more slowly than might otherwise have been the case. However, there was a big increase in collaboration on common categories throughout central government and significant savings were achieved, thus demonstrating the potential of this approach. 8. The ERG is continuing the evolution of category work and building on that of the OGC. Mandation has been widely discussed as an option since about 2007, but required agreement from the Cabinet. The decision by the current government to go down this route provides the opportunity to use the full central government purchasing power to reduce the cost of goods and services in these categories (through the ‘deep dives’ i.e. detailed examination of central government’s supply and demand chains) and for effective engagement with industry. It provides the opportunity for much more innovation, though it appears that the present government may be seeing lowest cost as a higher priority and more innovation as a lower priority than before. (The two are not incompatible). However, being confined to central government, the common categories cover no more than 7% of public sector procurement spend and some of the goods and services within these categories may not prove quite so common as at first appears. 9. It seems almost certain that the former OGC category management groups will join Buying Solutions, which will therefore have a function for central government that was almost identical to that of The Crown Suppliers 30 years ago. With the additional oversight that now exists through the National Audit Office, this should be welcomed. It would not be surprising if it did not start to take on more contracting and procurement functions for some central government departments. My presumption is that Buying Solutions will take a more vigorous approach to cost reduction than in the past and that innovation will take a back seat. 10. Buying Solutions is funded through supplier rebates, so its effectiveness depends on the amount of business going through its purchasing agreements. It is, therefore, difficult to 96

Colin Cram, Marc 1 Ltd—Further supplementary written evidence (PP 36) imagine that Buying Solutions will lose its interest in the wider public sector, in particular the NHS, so it may be a route gradually to capture the wider public sector market. There seems no reason why Buying Solutions should remain part of the ERG. Projects 11. The ‘Gateway’ was introduced by Lord Gershon (then Peter Gershon) in 2000 and was ‘owned’ and promoted by the OGC. This was intended as a series of checks/reviews, using a traffic light system, at critical stages in the life of a project to prevent its proceeding to the next stage until outstanding issues had been satisfactorily addressed. For projects, the ‘Gateway’ became the norm for central government and increasingly throughout the wider public sector. Generally, project management by central government and many other parts of the public sector improved considerably. There were some notable project failures, e.g. the major NHS scheme for an integrated information system. However, such failures normally (possibly always) happened when project controls such as the ‘Gateway’ were ignored and where there was strong political pressure to implement. 12. The OGC also introduced ‘Starting Gate’ in 2009 for central government policies. This was not mandatory, but enabled scrutiny of a potential policy at its conception and whether it was likely to be realistic and deliver the objectives that were anticipated. It therefore enabled such potential policies to be re-examined and, if necessary, dropped. The proposed reorganisation of the NHS would be ideal for both ‘Starting Gate’ and the ‘Gateway’ to be applied rigorously as it is a project on an unprecedented scale. 13. The ERG is clearly going to continue the drive for improved project management and management of major contracts. It appears that significant projects will have to be approved by the ERG, which should improve chances of success and reduce the chances of ignoring the result of ‘Gateway’ reviews. It is to be hoped that it will press forward with ‘Starting Gate’ and that this will become mandatory for policy development. Almost all policies are projects in anything but name, but have not traditionally been regarded as such. ICT Procurement 14. It is not clear what will happen to ICT, but I suspect that we will have a central group whose functions are almost identical to those of CCTA 30 years ago, i.e. having responsibility both for procurement and technical ICT issues. It seems logical that, because of the importance of ICT to government efficiency, operations and policy delivery, that such a group would be part of the Cabinet Office, if not the ERG. Central Government Estate 15. The team responsible for trying to secure the more effective management of government property (particularly that of central government) has gone to BIS. It seems likely that centralised management of the central government estate akin to the Property Services Agency, disbanded in the 1980s, will be created. Negotiations with Major Suppliers 16. The OGC introduced tighter management of major suppliers. However, the ERG has taken this much further and more vigorously, with Sir Francis Maude leading the negotiations with the major suppliers to central government and achieving significant savings. Most of those suppliers have more business with the wider public sector than with central government and this has been ignored. Were there to be a single point for the high level management of these suppliers on behalf of the whole public sector, engagement with them 97

Colin Cram, Marc 1 Ltd—Further supplementary written evidence (PP 36) would be possible in a much more meaningful way and they would have much greater incentive to innovate. Purchase Spend Analysis 17. The OGC Category management group used published data to try to estimate the total value of public sector procurement spend and the value of spend in each common category. This was a useful initiative. The ERG appears to be proposing to build on this and is holding discussions with various organisations that can provide a purchase spend analysis service. Conclusion 18. The ERG is building on the work of the OGC, but taking a more radical approach for central government. The benefits for central government in terms of service and savings should be significant (approximately £3bn pa) through mandation of purchasing agreements and negotiations with main suppliers). However, central government is the tip of the iceberg and by withdrawing from the wider public sector, a huge – the main – opportunity is being lost. An integrated procurement structure along the lines proposed in ‘Towards Tesco’ would provide an ideal model for delivering much greater value for money and innovation and the ERG is in an ideal position to be able to oversee this. It is not impossible that this is the intention of some senior people in the ERG and statements about the limited aims of the ERG may reflect discretion in view of the government’s drive for devolution. 19. Central government organisations have a habit of continuing beyond their planned life. For instance, the Central Unit on Purchasing, created in 1985, had an original life of 3 years. This was extended to 5 years and then to 15. After 5 years it could be argued that it became part of the problem. The ERG role in procurement needs to have its objectives and life time defined – with no prospect of an extension. The objectives should be achieved within a limited timescale, say 1 year for the re-structuring of central government procurement and a further 18 months to 2 years if it tackles the wider public sector. 2 February 2011

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Cundall—Written evidence (PP 11)

Cundall—Written evidence (PP 11) Cundall believes that ‘Forward Commitment Procurement’ is an effective tool for stimulating innovation through procurement. We are currently bidding for a Forward Commitment Procurement (FCP) contract being conducted by Rotherham NHS Foundation Trust. Rotherham is in the process of a major refurbishment of their wards. This ‘Future Wards’ programme began in early 2009 and is expected to take around seven years to complete. Since the refurbishment programme was planned to last seven years, the Trust was keen to incorporate future technologies into the procurement. As a result, the procurement of lighting was isolated, and the Trust, with the support of BIS and the Department of Health, conducted the first Forward Commitment Procurement in the NHS. Rather than providing exact technical specifications for the lighting themselves, the procurement team at Rotherham explained the outcome they wanted achieved and left it to the supply chain to suggest the technical and operational specifications that could deliver that outcome. The outcome they requested was clear and simple: The Trust wish to achieve a step change in the patient experience; creating a patient centred environment, including the incorporation of highly efficient, smart lighting that can deliver economical carbon savings while at the same time contributing to a pleasant and healthy environment for both patients and staff. As engineering solutions specialists, we were delighted to read this. 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. Representatives from Cundall attended a ‘Market Sounding’ exercise in September 2008 and a Market Consultation Workshop in January 2009 where we discussed technical, operational and contractual considerations. We clubbed together with other members of the supply chain so that we could offer an optimal and innovative solution. We joined forces with architects Austin-Smith: Lord; off-site construction specialists Element Europe; lighting system makers Osram, and Fagerhult; and lighting controls manufacturer Ex-Or. Our innovative solution does not only promise the latest smart lighting technology, but also encourages the use of as much natural light as possible as well as a re-angling of the beds to promote faster healing times and boost privacy. Off site construction is key to the solution and delivers a modular, high quality, integrated interior finish with a reduced construction time. The solution is also future ready so that we must update the technology over the course of the seven-year refurbishment programme. We believe Forward Commitment Procurement 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. For our part, we are strongly-placed to win the Rotherham contract and have the potential to win many other contracts as well. Our innovative lighting solution is modular and can be 99

Cundall—Written evidence (PP 11) constructed off-site so that it can be installed in existing wards as well as new ones. In addition, major developers have also expressed interest in our lighting solution so other hospitals may not have to separate lighting from the procurement of the rest of the ward. Forward Commitment Procurement certainly stimulated innovation in this case, and it is our belief that this model should be used more widely across the public sector. The Rotherham UEL Cundall team members have made the following statements which support the commentary above. Cundall Light4 “Traditionally research in lighting and new lamps can take 5 to 10 years to be accepted into the technical guides and standards. In demanding innovation, FCP encourages the latest research and thinking in design, materials, and solutions to be examined and utilised in delivering real world solutions long before the guides catch up”. Fagerhult Lighting Ltd “FCP has allowed the team to invest/commit to an increased level of time and resources to specific product development. It has given us the invaluable opportunity to work in unity and without reserve with all the required fields of expertise and directly with the client team to develop a truly holistic solution”. Austin-Smith:Lord “FCP encourages collaboration between the supply chain members including architects, lighting designers, engineers and manufacturers. All of the team members are engaged in the process from the outset and contribute to the solution. There is a greater level of joint ownership and therefore commitment to deliver a successful solution”. EX-OR “FCP, with the focus on the outcome, allows us to start designing with a blank piece of paper and investigate and question every aspect of the clients requirements. It allows us to explore and expand the scope where we identify we can provide true benefits. We are not restricted to design to the codes and deliver yesterdays solution again”. Elements Europe “FCP gives us the confidence to invest and innovate as the process makes it clear that the client is looking forward and the best solution will be adopted. Traditionally lowest price and a companies past reputation often dominate the scoring and dictate who wins a contract, almost regardless of the quality of the proposed solution”. Fagerhult Lighting Ltd “Traditional procurement methods often involve a supply chain, up and down which information regarding client requirements and available solutions travel. Along the way details can be lost completely or lose their significance resulting in a watered down version of the original requirement. FCP allows direct communication between innovators and the Client (including the invaluable input from the expertise and experience of stake holders/hospital users) to provide clarity of specification and valuable insight into what constitutes a true, patient centric environment”. December 2010

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18)

Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) This paper has been prepared by the Department for Business, Innovation & Skills, Cabinet Office and Department for Transport, with input from other government departments, including Foreign Office and DEFRA. All departments were invited to contribute to the paper. Rationale 1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? All public procurement must achieve best value for money for Government and the taxpayer. That is why Government is reforming the way it buys, centralising the procurement of common goods and services and renegotiating with its major suppliers to get the very best deals for the Government’s buying power. The Government’s new approach is to simplify and streamline the procurement process in order to encourage efficiency and effectiveness. This fosters innovation by opening up the market to suppliers including SMEs that would previously have been put off by burdensome processes and high bid costs. Government is also moving towards an approach of outcome-based commissioning, as unnecessary and prescriptive criteria included during the procurement process can increase burdens for Government and suppliers, and can stifle innovative solutions. It will not always be appropriate for Government to seek innovative solutions, e.g. in the procurement of some common commodities, where untried and untested solutions are likely to add risk and cost to the taxpayer. Co-ordination of innovation and procurement policies 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? BIS leads on innovation policy and works closely with the Cabinet Office, who lead on public procurement policy, and Defra who lead on sustainability. It will not always be appropriate to mesh innovation policy objectives and procurement processes, as this may add unnecessary cost and risk to the taxpayer for little tangible benefit. Where an innovative solution is appropriate, the capability of the public sector to exploit it through procurement starts with their business strategy, well before the individual procurement, and applies through the procurement lifecycle until the termination of service contracts or the disposal of bought assets and any subsequent re-procurement. The greatest potential for innovation from suppliers arises from the earliest stages: • when policy is being formulated; • when programmes and projects are being shaped; and • in the formulation of procurement strategy. 101

Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) Where it is appropriate, the scope to accommodate innovative proposals may be limited by overly prescriptive criteria, which is why Government is taking steps to simplify and streamline the procurement process and encourage more outcome-based specifications. For example, invitations which specify a track record of delivery in particular products, services or industries in order to reduce risk can discourage fresh thinking. The Minister for the Cabinet Office has been leading a programme of negotiation with the government's top suppliers. This work was identified as a key element of the package of measures designed to deliver £6.2bn of savings during 2010/11, and involves discussions across the portfolio of contracts each supplier holds with central government. The first phase of this programme, which started in July this year, has involved discussions with 19 key suppliers across the portfolio of contracts the suppliers hold with central Government. The aim of discussions has been to conclude an overarching Memorandum of Understanding (MoU) with each of the suppliers, outlining proposals for guaranteed and conditional in-year and future savings. The first phase is now nearing conclusion and the vast majority of MoUs have been signed. The second phase of the programme, which involving a further 34 suppliers, is now underway. As a result of this programme, the quality of engagement with key suppliers has improved very substantially. In order to build on recent progress, Government is developing a model that will allow for strategic relationships to be maintained at senior levels with key suppliers (whether multi-nationals or SMEs). A team of senior commercial representatives will engage with departments and industry to ensure coherent commercial strategies and aligned project pipelines are used to buy services more cheaply and effectively, looking across all central government. These relationships will permit far more open dialogue about innovative approaches than have happened before. Mechanisms through which government procurement can stimulate innovation 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 4. How might public procurement more effectively stimulate innovation within industry? 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? Procurement mechanisms such as the Small Business Research Initiative (SBRI) and Forward Commitment Procurement (FCP) (see Annex A and B for more information about these schemes) have, in recent years, shown that the use of outcome-based specifications 34 in public sector procurement can help to stimulate the provision of innovative solutions. In addition, outcome-based specifications can stimulate innovation within the economy by enabling the market to respond to current and future public service needs. SBRI provides an efficient mechanism for public bodies to procure technology development to meet their policy or service delivery needs and, in doing so, it also encourages innovation in UK companies, particularly SMEs. An example of this is how the Department of Health used 34 The potential for finding an innovative solution is greatest when buyers specify what they want in terms of outputs or outcomes. A well constructed output specification identifies the outputs from, rather than the inputs to, a requirement. An outcome specification takes this one step further and specifies the end result to be achieved.

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) SBRI to procure a revolutionary hand hygiene technique: a non-thermal plasma hand sterilisation system. The Technology Strategy Board champions the SBRI scheme and is submitting evidence to the Committee. FCP involves being a demanding procurer, asking for what you want not what you think you can get; agreeing to purchase a product or service that is not currently available on the market; and actively creating the market conditions that stimulate and enable the supply chain to deliver at an agreed cost. The public sector can also help to drive innovation by setting policy frameworks that guide the development of markets and technologies. DfT has a Low Emission Vehicles Framework that aims to reduce carbon emissions from road transport vehicles in the UK in the medium to long-term, by accelerating the introduction of innovative, lower-carbon models onto the UK vehicle market. Where an innovative solution is appropriate, by talking to suppliers early in the design stages, departments can be more challenging customers. They can benefit from suppliers’ knowledge of markets and trends and obtain an understanding of the capability and capacity of suppliers before they develop their procurement strategy and requirements. One helpful initiative in this respect is Concept Viability; a service by IT industry body Intellect, to help the public sector understand the art of the possible by taking early market soundings and testing the practicability of different ideas and approaches. The Highways Agency (HA) incentivises its supply chain to be more innovative in a number of ways. The basic concept of using early supplier involvement and adoption of design and build through its major project and maintenance contract models is used as a catalyst to drive innovation at the earliest possible time in a project life-cycle. Early supplier involvement enables the key players in a project e.g. designer etc to be engaged early and have the maximum opportunity to innovate and take out cost. Appropriate use of standards in the procurement process can be used to stimulate innovation in areas such as sustainability; for example the UK is committed to an EU target for 50% of relevant tendering procedures across the public sector to be “green” 35. Standards are needed to provide a clear definition of what is “green”, giving confidence to both suppliers and providers, and good use of standards can ensure that innovative green processes and technologies are developed in the UK. DEFRA leads on the development of the Government Buying Standards (GBS) for the procurement of a range of sustainable products and services. These are divided into minimum mandatory (mandatory for central government) and voluntary best practice levels. For some products - currently focused on ICT – there is also a third, still higher level called class leader which is intended to be based on an outcome specification approach and there are plans to expand Class Leader across more products groups, starting with Construction to encourage more innovation Lessons from other countries The UK is engaged in the Lead Markets Initiative (LMI). BIS is the lead partner in a project aiming to reduce the carbon emissions and energy requirements of healthcare buildings – with the Department of Health also represented on the project. DEFRA is involved in the

35

Defra website, ‘sustainable public purchasing’ : ww2.defra.gov.uk/environment/economy/purchasing/

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) SCI-network project, a network to share experience across the EU on procurement of innovative sustainable construction. The UK is a member of a Pro-Inno Group which is looking at developing a model for an EU SBIR programme. Under this work the UK has engaged in a peer review process with the Dutch, who run the only other SBIR scheme in Europe, with a view to learning from each other to improve our own programmes, share learning with other EU Member States and exploring opportunities for collaboration. The procurement process 6. What incentives do those working within public sector organisations have to use procurement as an approach to stimulating innovation? Can we say more about early market engagement in a positive way? 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? o Do they have the appropriate expertise to identify innovative solutions to procurement needs? o How well do they identify when innovation could provide a solution to a procurement need? o How effective is the identification of and dialogue with appropriate potential suppliers? 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? Procurement officials will be incentivised to implement leaner and quicker procurements by making timescales more transparent and holding Departments to account for meeting those timescales. This will encourage more players to participate in Government markets as the bid participation costs to industry will be significantly reduced.

The procurement of R&D by central government is not all that common and hence budgets rarely exist for it. The SBRI programme is one tool to help departments manage the process.

A typical Department operates on the basis of devolved responsibility, with individual policy and operational units responsible for identifying and determining the business needs of their areas. Because these needs necessarily vary widely, the research and innovation needed to meet them similarly varies widely. Hence some ‘customers’ are more involved than others. The Department recognises this in giving appropriate central direction and support.

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) Obstacles Possible obstacles for the wider adoption of innovative solutions are outlined below: •

Overly prescriptive and burdensome procurement processes and poor preparation before advertising opportunities in the Official Journal of the European Community (OJEU) which are being addressed through a range of measures specifically to speed up procurement.

•

The organisational structure of a department and the relationship with its delivery bodies - for example, in respect of the wider roll out of the FCP prison mattresses project and the SBRI hand hygiene project which could be rolled out across the departments.

•

Public accounting norms (e.g. how budgets are allocated and the government spending review periods) can be seen as an obstacle in the procurement of innovation given the length of time that procurements can take. Spending on research for a potential better solution that may be procurable a few years down the line can be hard to justify if it means money is being moved from another policy area this financial year.

•

Sometimes procurement teams are engaged too late in the procurement process in order to allow innovation. They need to be involved much earlier so that innovative procurement mechanisms can be applied. There also needs to be better links between policy leads and procurement teams.

•

Committed budgets are not generally available to support innovative procurement mechanisms over the medium and long term, and this can restrict the ability to manage programmes effectively and to acquire the necessary skills and expertise to do this.

•

Lack of internal expertise can sometimes make it difficult to evaluate the benefit of innovative proposals, particularly where new or cutting-edge technology is concerned. There is also a lack of incentives to take risks.

•

Some research procurements should be risky (and therefore might ‘fail’ in the conventional sense). But our culture often does not encourage this, and accept that the failure of individual innovation or R&D projects is inevitable; what matters is that the overall programme achieves results.

•

There is a well recognised funding gap between initial exploration of ideas/development and manufacture/deployment. The latter requires a step change in funding which is best delivered through banks, business angels, venture capitalists and so on.

9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? Insufficient early involvement, time available, risk adversity and the perceived bureaucracy all contribute as obstacles. Suppliers often see the issues described above too and are disincentivised to provide innovative solutions. There is no separate set of issues for suppliers: innovation can and should come from multiple stakeholders and can only be successfully adopted by the close working of all parties involved.

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) Government is working to unlock barriers to SMEs and get a better deal for the taxpayer. ‘Backing Small Business’ outlines how Government will promote small business procurement to drive competition and innovation in markets. The package of improvements supports Government’s aspiration that 25% of government contracts will be awarded to SMEs and a number of steps to make it radically easier for smaller firms to compete for government contracts such as: a single standard Pre-Qualification Questionnaire 36 will shortly be mandated across all central departments and a free online facility for small businesses to find public sector procurement and sub contracting opportunities will be launched in April 2011. Government is also looking at ways to accelerate the procurement process and unlock framework agreements. The recently published Blueprint for Technology includes a commitment to use procurement as a lever to support innovation in new technologies by continuing investments through the Small Business Research Initiative (SBRI). The Big Society De-regulation Taskforce has been set up to build on previous research into burdens on small business to look at how government can encourage more people to work together to improve their communities and help one another. One of the areas to be looked at will be contractual arrangements when civil society organisations provide public services. December 2011 Annex A Background Note on Small Business Research Initiative (SBRI) Purpose of SBRI SBRI is a mechanism to enable innovation in products and services through the public procurement of R&D. It provides innovative solutions to Public Sector Challenges, a route to market for new ideas, and new business opportunities for Technology Companies. Benefits • Enables Public Sector to :o Use innovation and technology to deliver significant improvement in operational performance or in progress towards policy objectives; o Access new ideas and technologies that would not be reached through normal channels; and o Encourage innovation by defining and broadly exposing challenges and desired outcomes and then procuring and supporting the R&D effort. •

36

Supports innovative businesses by providing :o An intelligent lead customer to help validate and refine idea and provide a route towards market for new ideas and technologies; o R&D contracts to progress the idea (100% funded); o Credibility for follow-on investment from Private Sector; and o A simple means to engage with the Public Sector and a step on the procurement ladder.

The PQQ enables public sector purchasers to identify the most suitable suppliers to invite to tender for their contracts.

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) How SBRI Operates • A procurement process operating under pre-commercial procurement rules delivers 100% funded R&D contracts and does not involve state aid. • Challenge identified based on a significant need or issue for which available solutions are absent or not yet good enough and where innovation is needed. • Challenges are typically in the operational performance space (where Public Sector is customer for R&D and most likely also for resultant product) or in policy space (where Public Sector is customer for R&D but not necessarily for final product). • Challenge is broadly communicated through Technology Strategy Board channels to ensure that it is seen by companies beyond normal suppliers and discussion partners – seeking novel ideas from different market sectors and small innovative companies. • Ideas are assessed and contracts issued to procure the R&D necessary to move the idea through feasibility and prototype phases on route to final commercialisation. Progress As the new scheme was launched only in April 2009, and the development and implementation of new technologies is inevitably a long-term matter, it is not yet possible to put figures on the contribution of SBRI to public service delivery. However, in its early stages, SBRI has brought forward a significant number of ideas which promise to bring real improvements to public services in a number of areas; for instance: • Health; looking o for better means of detecting pathogens and improving hand hygiene in order to reduce the incidence of healthcare acquired infections such as MRSA. o to find ways to help manage the growing numbers of people with long-term health conditions, such as diabetes, coronary heart disease, high blood pressure o to combat obesity in children • MoD looking for major reduction in the 70 Kgs weight that soldiers have to carry into battle. • Home Office running competitions to find solutions to reduce mobile phone theft under the design out crime initiative • DEFRA running a competition to develop highly efficient lighting solutions with zero mercury under sustainability initiatives. • Transport to explore the use of synthetic environments for modelling and managing complex traffic situations on motorways, managing the road network more effectively. Annex B Background Note on Forward Commitment Procurement (FCP) Forward Commitment Procurement is a practical supply chain management tool that creates the conditions needed to deliver innovative, cost effective products and services. It provides a framework for purchasers to seek solutions to unmet needs, rather than specify required outputs; involves early engagement with business in order to identify potential ways of meeting the need; and seeks to go beyond the customary supply chain. The FCP approach enables the public sector to fulfil its role as a natural lead market for environmental products and services whilst delivering the cost effective solutions needed to address problems such as climate change and economic and social sustainability. It 107

Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) transforms the market for innovative and sustainable solutions, making new and emerging solutions more affordable and widely available, and providing a way for the public sector to manage the risk of procuring innovative products and services. FCP involves providing the market information of unmet needs and, critically, the incentive of a Forward Commitment: an agreement to purchase a product or service that currently may not exist, at a specified future date, providing it can be delivered to agreed performance levels and costs. Although designed to address the particular barriers to market faced by environmental innovations, the approach is also being used to support the procurement of innovative solutions in other markets, such as sustainable development, healthcare and construction. A number of organisations have already engaged in FCP, for example HM Prison Service used the model to develop a zero waste mattress and pillow solution with cost savings estimated to be in the region on £5 million over the life of the contract. In addition to savings for the individual organisation there is also the opportunity of adoption across the wider public sector, for example the mattress solution could be adapted for the Health Service. Another example is an individual NHS Foundation Trust developing Ultra Efficient Lighting solutions for their wards - a transferable option that could be applied across the whole of the NHS. Annex C – Department for Transport examples • •

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Low Emission Vehicles framework – Aims to reduce carbon emissions from road transport vehicles in the UK in the medium to long-term, by accelerating the introduction of innovative, lower-carbon models onto the UK vehicle market M25 (1b to 3) – Development of a Dynamic Road space Utilisation Manager (DRUM). This approach monitored traffic flows using existing on road loops in order to actively manage lane occupancy based on actual congestion during a lane closure. This enabled the supplier to actively minimise a closure duration or equally maximise the closure time during lower flow periods. This innovation resulted in savings of the order 20 weeks (£5M cost saving) to the contract delivery. Wolvercote Viaduct - Early Contractor Involvement enabled re-engineering of the original off-line replacement solution to an on-line replacement. This saved the need for land-take and a Public Inquiry and saved 20 weeks on programme and £3/4M in costs. Remotely monitoring gullies – Involves using a remote monitoring sensor in a gully that sends a signal to indicate when a gully is full. This is used to drive an intelligent maintenance regime, focussing on targeted interventions. In addition to reducing costs this reduces road worker time out on the network. M53 Bidston Moss - Early designer / contactor involvement was used to start critical weld works in advance of that which would have been achievable through a conventional procurement approach. This enabled early inspection access and the ability to rectify defects in advance of main strengthening works M1 Junctions 10-13 routing cables over gantries removing need for thrust boring, ie it is cheaper to utilise existing gantries to route cables than it is to bore new routes. The Highways Agency (HA) incentivises its supply chain to be more innovative in a number of ways. The basic concept of using early contract involvement and adoption of design and build through its major project and maintenance contract 108

Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18)

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models is used as a catalyst to drive innovation at the earliest possible time in a project life-cycle. Early contractor involvement enables the key players in a project e.g. designer etc to be engaged early and have the maximum opportunity to innovate and take out cost. HA contracts are designed on an open book costing approach that underpins a target cost approach which rewards suppliers who are able to innovate to take out cost and deliver a higher quality solution. Savings are shared between the Agency and the supplier. In addition to its procurement approach the Agency works with its supply chain community to drive innovation through both its maintenance regimes and its major projects.

Annex D – DEFRA examples In its own procurement activity, Defra has also shown that by demanding ambitious sustainability standards it drives innovation. •

Defra has launched a £1.2m SBRI (with the TSB) to encourage innovation and research into ultra-energy efficient lighting. Six companies were awarded up to £40,000 each to carry out work to show the technical feasibility of their proposed concepts. The feasibility studies have now been assessed and the two proposals with the most promising technologies will receive up to £450,000 to develop and evaluate prototypes or demonstration units, which will then be subjected to a vigorous 6month field trial.

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New buildings and refurbishments on the Defra estate meet the highest sustainability standards. For example, Lion House, in Alnwick, Northumberland is an ultra lowemissions office building that sets exemplary standards of sustainability and environmental performance. It was built to benchmark the benefits of embedding green and energy efficient technologies in the design, construction and operation of the new building. It was awarded the first ever BREEAM Outstanding award for sustainable office buildings.

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Defra’s food waste is collected and sent to Anaerobic Digestion (AD) plants or composting, diverting approximately 50,000 tonnes of food and organic waste from landfill. The service is carried out by a social enterprise that exists to support the development of local community food growing projects and healthy eating initiatives, using the resources generated from a sustainable food waste collection and processing service.

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The TSB’s new Sustainable Agriculture and Food Innovation Platform, co-funded with Defra and BBSRC, runs for the next four years. Defra’s sponsorship for projects let by competition under this programme uses funding released as current LINK projects terminate. Overall, the level of Defra applied research funding in partnership with industry will be maintained with an input of £30M into this TSB agri-food platform, alongside the additional £50M of new funding from the TSB which is available to the sector.

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Department for Business, Innovation & Skills (BIS), Cabinet Office and the Department for Transport—Written evidence (PP 18) Annex E – Design Council examples Design Bugs Out The Design Council worked with the Department of Health and the NHS Purchasing & Supply Agency in a groundbreaking “open innovation” initiative aimed at reducing Healthcare Associated Infections (HCAIs). An expert panel, including international experts in patient care, cross infection control, furniture manufacture and microbiology, was set up to act as specialist advisors. Research was conducted in a number of NHS hospitals to investigate the key issues, current design flaws and concerns of staff, patients, cleaners and other users. These user insights were then fed into design briefs and the Design Council, in partnership with the Design Business Association, launched a national competition for teams of designers and manufacturers to design and prototype new furniture, equipment or services for hospital wards. (Successful teams were awarded a £25,000 grant to develop their concepts). These were: • PearsonLloyd and Kirton Healthcare: Commode and Patient Chair • Hollington and Herman Miller: Bedside System • Kinneir Dufort and Bristol Maid: Bedside Cabinet • Minima and Vernacare: Porters Chair In addition, a team from the Royal College of Art (RCA) redesigned six everyday items of equipment that pose a hygiene risk: blood pressure Cuff, oximeter clip, intelligent mattress, curtain clip, cannula time tracker and patient pack. Full-size and fully working prototypes for the resulting new designs were produced (2009) and were showcased to healthcare staff, patients and the public at various healthcare conferences and events around the country. Almost every prototype is now making its way to the market. The cannula time tracker is already on the market and in use by the NHS. Intellectual property was retained by the Department of Health for the concepts developed by the RCA, but the industry teams where able to invest and commercially exploit their ideas. Although there have not been any clinical trials or fatigue testing to date of the new products, it is predicted that the products should have a positive effect through both a reduction in spend and in HCAIs. Patient Dignity The Department of Health asked the Design Council to bring designers, manufacturers and frontline NHS staff together to see if they could come up with new ideas that would help the NHS improve hospital environments and the experiences of patients. This applied not only to same-sex accommodation, but also to the whole patient experience while in hospital, including what patients wear and how they interact within the hospital. Six teams of designers and manufacturers, as well as healthcare design specialists from the Royal College of Art Helen Hamlyn Centre came up with innovative new designs that show how different privacy and dignity issues could be solved. The innovations included: An innovative patient gown, and a gown for ICU patients, multi-way retractable screens, Reclining Day Chair, Modular Bed Pod, mobile, pre-manufactured washroom pods. The prototypes are being tested and refined before being made available to hospitals. 110

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 Evidence Session No.1.

Heard in Public.

Members present Lord Krebs (Chairman) Lord Broers Lord Crickhowell Baroness Hilton of Eggardon Baroness Neuberger Lord Patel Baroness Perry of Southwark Lord Rees of Ludlow The Earl of Selborne Lord Warner Lord Willis of Knaresborough ________________ Examination of Witnesses Witnesses: Fergus Harradence, [Deputy Director, Innovation Policy, BIS], Sally Collier, [Executive Director, Procurement Policy and Capability, Efficiency and Reform Group, Cabinet Office], Mike Acheson, [Divisional Manager, Procurement Policy and Contracts, DfT], and Ginny Clarke, [Director of Network Services and Chief Highway Engineer, Highways Agency].

Q1 The Chairman: I would like to welcome our four witnesses and members of the public. I would like to inform you that the proceedings are being webcast, and I would like to draw the attention of the members of the public to the information note, which gives some background to the inquiry and lists Members’ interests. I would like to invite the witnesses in a moment to introduce themselves, and if any of you wish to make a brief opening statement please feel free to do so. I would particularly like to thank Ginny Clarke who has stood in for David Poole, who I gather is off sick. Thank you very much, Ginny, for coming to join us today to respond to our questions about the Highways Agency. So, without further ado, I would like to invite the four witnesses to introduce themselves, and if you want to make any brief opening statement please do so, but also please keep it brief. Fergus Harradence: I am Fergus Harradence, the Deputy Director for Innovation Policy in the Department for Business, Innovation and Skills. 111

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 Sally Collier: Good morning, I’m Sally Collier. I’m an Executive Director for Procurement Policy and Capability in the Efficiency and Reform Group in the Cabinet Office. Mike Acheson: Morning, my name is Mike Acheson. I am a Deputy Director in the Department for Transport, and my role is Head of Corporate Procurement. Ginny Clarke: Morning, I’m Ginny Clarke. I’m the Director of Network Services for the Highways Agency, and the reason for me stepping in is I have overall responsibility for procurement and for technical standards and specifications in the Highways Agency. Q2 The Chairman: Okay, so you don’t wish to make any other further statements at this point. Thank you very much. So I will kick off and, as a starting point, I want to refer back to the Innovation Nation White Paper, which stated that each Government department must have an innovation procurement plan setting out how departments and their subsidiary bodies drive innovation through procurement, and use innovative procurement practices. What I would like to hear from each of you—or whoever wishes to comment—is how these plans are being put into practice. Clearly, we will hear from the Department for Transport and the Highways Agency how they have put those plans into practice, and what evaluations are being made of the plans, how they are being co-ordinated, and how the Government is working to strengthen the quality of reporting between departments. So, perhaps, Fergus, would you like to lead off on that? Fergus Harradence: Certainly. Since the Innovation Nation White Paper was published in March 2008, we have moved into the implementation phase of the innovation procurement plans and, by the beginning of this year, all central government departments had produced and published an Innovation Procurement Plan. The process itself did take about two years to complete and involved my team in BIS working quite closely with other departments. We established an expert group of individuals in each department who were responsible for producing the plan for that department and the agencies and other public bodies that it sponsored. We also published a guidance document and produced what we called an Innovation Procurement Plan tool kit, which was a web-based resource that departments could access to work on for the preparation of their own plans. I think it would be fair to say that the quality of the plans was variable; some from those departments that had more experience of procuring innovative products and services, such as the Ministry of Defence, were relatively strong. I think others were relatively weak and were perhaps more focused on some of these distinct procurement mechanisms and activities that were under way, rather than being more forward-looking documents of the sort that we were trying to encourage departments to produce. We were in the process of working with departments and had established a peer group to share best practice on preparation of these. That work continued up until the time of the general election earlier this year, when obviously there was a change of administration and the new administration had some of their own ideas and priorities when it came to reorganising and reforming Government procurement, which has led us to question whether producing the kind of IPPs originally envisaged is still the model that we should follow. Q3 The Chairman: Do you have anything very brief to say about how the plans have been translated into practice, whether they have been evaluated and how departments coordinate? Very briefly, do you have any specific comments on those questions? Fergus Harradence: The only evaluation that was being done was an internal one on the quality of the plans themselves. We have not reached a point where I think we could meaningfully evaluate whether they have been translated into practice from procurement 112

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 decisions. This is not unusual, given the lead times involved in innovation. We found the same issue if we were looking at the various grant support programmes that the department— The Chairman: So you say it is early days yet to know how this is working. Fergus Harradence: It is quite, yes. The Chairman: Would any other witnesses like to comment? Mike Acheson: Yes. The Department for Transport has a slightly different view of this. We tend to think procurement is primarily about value for money, and our procurement staff are trained to think about value for money in the round. So it’s not just the cheapest for whatever somebody has said we want; it’s about having an open mind in the first place and then seeing if whatever it is we need to buy is sufficiently specified in such a way that we can then get innovative proposals—if that is what is appropriate for that particular requirement—rather than specifying in very fine detail we want exactly that. Then, of course that is what we get. So it is very much a question of stepping back and trying to encourage our procurement colleagues, which they do, to talk with various budget holders—of which there are many across the department—in terms of what it is they want to buy in output type terms so we can then see if there is some opportunity for innovation and better ways of doing it, rather than simply specifying something in fine detail. So it’s a holistic approach to innovation in this case, but it’s more about value for money with innovation as a part within that. Q4 The Chairman: One of the items of written evidence notes that the Department for Transport plan, IPP, “describes many challenges and activities, but gives no indication that it plans to commission companies to develop technology and innovative new technologies to meet its objectives”. Do you think that that is a fair criticism? Mike Acheson: I’m not sure I’m qualified to comment, but we have a number of examples where innovation does indeed come into the particular outcome. For example, with our low-emission vehicles, innovation is very much a part of that. I can talk about that more in a moment if you wish. Our Blue Badge scheme is the same kind of thing, and the Highways Agency have many examples of that kind of approach. Ginny Clarke: I think, if there is a fault in the way in which we do things, often this is fed back to us from our supply chain, in our case essentially the construction industry, although to be fair we deal with the technology industry as well in terms of a growing role for technology on managing the strategic road network. I think the big problem is: do we put it all in one place so that it’s clear for the supply chain the direction in which we’re driving it? Essentially, the way in which we’ve interpreted this is that we’ve produced a procurement strategy that tries to put in a strategic view of how procurement is driving the sorts of requirements for the Highways Agency, and seeks to have within it a section that looks at things like, for instance, sustainability. So it isn’t just about the contract form; it is about what the objectives are that we’re seeking to achieve in terms of what procurement is; it’s a tool to help us deliver. We would point people—and our supply chain, particularly—to that procurement strategy, supported then in terms of our business plan and our strategic plan as to what we’re seeking to deliver. Q5 Lord Willis of Knaresborough: I am just a little confused here. This is an inquiry that is looking at the way in which procurement drives innovation in order to meet global 113

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 objectives by Government itself and, clearly, by the Department for Transport with a specific view on this. Could any of you tell me: has there ever been a discussion in the department where people have been brought together to say, “How are we going to use procurement as an economic tool to drive forward innovation to innovate and incentivise the economy?” Do you ever have those discussions? Mike Acheson: Frequently. Lord Willis of Knaresborough: Frequently? Ginny Clarke: Yes. Q6 Lord Willis of Knaresborough: Does anything ever come out of it? Mike Acheson: As I say, if we start with innovation— Lord Willis of Knaresborough: I am not trying to be clever. You gave a classic civil service answer, which was, “We want best value for money. That’s what our masters want, right, and that is what procurement is.” I think what we are trying to say is: could procurement be something entirely different and do you have those discussions? Do you have the capability within the department to make that happen? Mike Acheson: I think we do because— Lord Willis of Knaresborough: You think you do? Mike Acheson: Yes. Lord Willis of Knaresborough: Right. Mike Acheson: Ginny wants to make a contribution. Let me expand a bit if I may. As I said, it is about making sure that our procurement staff are involved in the beginnings of a project to see how we can use procurement to drive innovation, value and all the rest of it, rather than simply waiting to be fed with a detailed specification that we then go out to tender for. The bid upfront is the important bit. If we get that right, if we make sure that it’s a sufficiently broadly based output, then procurement plays its part in then getting the market to respond to this particular requirement. So as I say, it is like the Blue Badge scheme: low carbon vehicles, lots of Highway Agency examples, and so on. Q7 Lord Warner: I could take you to a number of local authorities—including when I was in local government—where we met the supply chain suppliers on an annual basis to discuss how they were going to respond to our needs. Can the central departments and the Department for Transport people tell me whether that regularly goes on at a senior level in the supply chain in each department? Sally Collier: Shall I respond on behalf of the centre to start off with? One of the things that the new set of Ministers have initiated in respect to procurement is a strategic discussion with the major suppliers to Government, for the first time, with Government speaking with one voice. So we can begin to have that strategic discussion with the suppliers and their supply chains that says, “Can you meet Government’s unmet needs?” Speaking for the whole of Government, those discussions have commenced in the renegotiations that have been already commenced and will be going forward when those renegotiations are finished. So for the first time those discussions will happen on behalf of the whole of Government. That is not cutting across the specific discussions that need to go on in the department, so there is a lot of action in that space for the centre. 114

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 Q8 Lord Warner: That was not my question. That is helpful to know, but my question was: in the past, in each department, has there been any kind of regular meeting at senior level with the supply chain? That is the question. Mike Acheson: Certainly in the Department for Transport, we have done exactly that on a number of occasions where we’ve had the Secretary of State and the Permanent Secretary speak; we’ve had the Director-General speak to all of our major suppliers who have turned up on that particular day, and we’ve had perhaps 60 or 70 of them in the room. So we have done that from time to time. As we go down into individual bits of the supply chain—depending what the specific area is, then there may well be additional meetings with firms on a broad brush basis from time to time. It is not quite your local authority example, but maybe that is because DfT has a much bigger span of people we deal with. Lord Warner: No, it was because you do need to meet the supply chain on a regular basis, not from time to time. Q9 Lord Crickhowell: I think I have partly had the answer to the question I was going to ask about the Department for Transport, which is: at what level are these discussions held and are they attended by Ministers? You have indicated that there have been meetings attended by Ministers. Have they been looking really far ahead in the world of information technology and so on? Are they directing people to look ahead to the whole alternative ways in which we are going to communicate? Up the motorways now, every third of a mile, huge expensive gantries have been erected so that we can tell there is going to be a traffic jam or something ahead. Are people being directed to look much further ahead at the new ways in which we might use the modern technologies that are evolving and are those Minister-led? Ginny Clarke: May I take that question? We’re currently talking with our Minister, Mike Penning, who is the Minister for Roads, about setting up that discussion, and continuing discussion, but involving Ministers looking at exactly that point about: how do we move from—as you describe—a very heavy civil engineering-based support of technology through simple information, to the road user, to when we can talk directly from our control systems into the motor vehicle or the lorry using what’s called ITS, the Intelligent Transport System development. Part of that is pursuing a line that the department has for some while, about where the guidelines are regarding these intelligent transport systems and at what pace the development that we see, so sophisticated within cars, translates into cars communicating to the control systems that, at the moment, are these very visible signs on the network. So that is very much happening at the moment with ministerial involvement to set up the forwardlooking systems, beyond five or ten years and probably much longer on the horizon as well. The key thing for us is at what point we stop investing in the heavy civil engineering and these very obvious signs you are describing, big gantries, into saying, “When can industry provide the innovation that can be delivered to all road users?” because we can’t use them where it is only a 50:50 case. We need to be able to communicate potentially with every driver, whether it’s a lorry or a car. So, in that sense, there is quite a significant number of issues and innovation is a key part of understanding the pace of that as well. 115

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 Q10 Lord Rees of Ludlow: When you have these discussions with suppliers and contractors, do you feel handicapped if there aren’t enough people with engineering expertise in-house, or do you think you have enough people with the relevant expertise? Ginny Clarke: We have some people, and certainly the department has some as well and I think that is why we’ve always done it together. It isn’t the Highways Agency in isolation; it very much is with the department. We do rely quite a lot on a wide field of expertise, whether it’s from the academic field, whether it’s through the industry that develops the technology or a third sector that might be the industry that develops the information needs as distinct from the hard technology. That is a growing band of people who say, “We could use this data”. How do you provide the data, but how do you then use the data to use that technology more effectively? So it is quite a broad base of people. We recognise we don’t have all the knowledge to engage in that debate.

Q11 The Earl of Selborne: Yes, I would like to come back to exploring the structure of Government as to how we achieve what Ms Collier described rightly, I think, as the ultimate goal of Government speaking with one voice on public procurement. Around this table, we will all recognise that is a heroic target that is not easy to deliver on. But as I understand it, BIS leads on innovation policy and works closely with the Cabinet Office, who lead on public procurement policy. Defra lead on sustainability. Now, that’s fine so far as it goes but, if we are to have Government speaking with one voice, how ultimately are these different interests to be reconciled? We have already heard from the Department for Transport that they do have a different basis from other government departments in determining their procurement policy. So where does the responsibility ultimately lie for public procurement policy? Sally Collier: Francis Maude is the Minister for Procurement. Public procurement policy and the responsibility for it sits in the Cabinet Office. In previous administration it sat with the Treasury. There have always been a number of Government departments that have policies they wish to pursue, and some of those policies they wish to pursue through public procurement. In the past there have been sometimes up to 12 or 15 policies that we want to be pursued through procurement with more and more demands on public procurers to incorporate these policies. We ended up with a very cumbersome and burdensome process, a risk to value for money, and public procurers faced with an almost impossible task of trying to buy something that met all of the different policies from the different departments. So current Ministers are turning their attention to the range of policies that are sought to be pursued in this way. It’s fair to say that there is an absolute driver—there has been since the new administration—on using public procurement to seek value for money. And there has been a very important drive in a number of key priorities in pursuit of that over the last six months. The supplier initiative is one of them, and there have been others, but they are turning their attention to all of the other things that departments say they’d like to have pursued through public procurement. I’m sure you’ll be addressing that with ministerial colleagues. Q12 The Earl of Selborne: From that, do I understand that the proliferation of guidance, which as you say at the moment is often conflicting, and the responsibility for reconciling these or indeed removing guidance that is unhelpful for the overall scheme of things lies with the Cabinet Office? 116

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 Sally Collier: Yes. The Earl of Selborne: Thank you. Q13 The Chairman: One of the evidence statements we had says that the OGC estimate there are over 40,000 points of procurement across the public sector. There have been in the last ten years more than 20 documents, including guidance, strategies and white papers making the case for procurement. Then he goes on to say, “However, the problem lies in the implementation of all those intentions and report recommendations”. In other words, the classic disease of lots of talking, lots of initiatives, but not much doing. Are things going to change? Sally Collier: I think they will change if we get what is needed. As I’ve just described, the public procurer faces an almost impossible task trying to get through all of this guidance and direction. That needs to be rationalised, prioritised. Q14 The Chairman: Again quoting from another piece of evidence that we had about the Department for Transport’s procurement policy, “What appears to be missing is a focus on innovation through procurement at a high level. The DfT’s departmental strategic objectives do not appear to explicitly cover innovation and/or procurement, suggesting that high-level policy objectives do not mesh clearly with departmental strategic objectives at the moment”. Is that a fair comment about the DfT, a mismatch between innovation and procurement and overall strategic objectives? Mike Acheson: Possibly. Again, I would come back to my earlier statements that at individual procurement level, where a budget holder says, “I need to buy” whatever it is, then our procurement staff on the whole are well trained and well qualified and will then take that and make sure that innovative approaches, if they’re relevant and appropriate, are brought into that particular requirement. What may be missing though is the overarching strategic piece that says, “We need to look at innovation before we do anything else”, which is perhaps one of the key issues for this Committee. The fact that I’m struggling to pinpoint where that may be proves the point that perhaps we are not as hot on that as we could be. Q15 Lord Patel: The Government submission lists eight obstacles to the wider adoption of innovative solutions, such as prescriptive and burdensome procurement processes, organisational structures within the department and budget concerns. In the submission, the steps for solutions to tackle these obstacles are not quite clear. We would like to hear what steps the Government is taking to tackle these obstacles, and what evidence you are using to give you the confidence that the solutions you seek will be effective. Mike Acheson: The Cabinet Office is leading a number of Government-wide initiatives and perhaps Sally would like to talk to those. Sally Collier: I can talk about the burdensome and lengthy procurement process. We have last week concluded a very short study, which for the first time has given us some real evidence into the causes of delay in the procurement process, which of course add cost to Government and to industry. We have applied LEAN techniques from the manufacturing process to the procurement process and identified a range of recommendations to take significant amounts of time out of the complex procurement processes. These should encourage more suppliers to be able to bid for Government business, because they will not be in a procurement process for many years potentially, and also give much earlier warning 117

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 to suppliers if they drop out of the procurement process. We have far too many suppliers being kept in the process for too long. So there is a whole, vast range of recommendations that have come out of that. We are prioritising those and will be implementing a programme in the first quarter of the new year, selecting some complex individual procurements where we will ensure that the timescales are brought down with the right outcome for the process. Q16 Lord Patel: So are you systematically going through the list of obstacles you listed and finding solutions to that? Is that what you’re suggesting? Sally Collier: I can speak on behalf of the obstacle relating to the procurement process, and my colleagues can speak in terms of other obstacles. Fergus Harradence: Yes, I think the second obstacle that you referred to related to the organisational structure of departments and their relationship with delivery bodies. The simple truth of it is that there is no single type of this relationship. The relationship between the department and its delivery bodies varies according to a number of things. For example, in the case of the Department for Business, Innovation and Skills, the Research Councils that support science and the Technology Strategy Board that supports innovation are created as a result of Statute. They have responsibilities and functions that they discharge as a result of the statutory powers that the Secretary of State can exercise. This is fundamentally different to an organisation such as the UK Intellectual Property Office or the Export Credit Guarantee Department, which operate as trading funds and operate under a different set of rules and procedures. The relationship between the Department for Communities and Local Government and individual local authorities is different again. Similarly, within the health service, you have a different relationship between the Department of Health centrally and the individual hospitals and, within the cadre of hospitals, you have a different relationship between DoH and Foundations Trusts and other kinds of trusts. So I think it would be true to say that there are certain types of organisation where there are barriers that are in place by the structures and the rules that govern these relationships. In other cases, the culture is very much that central departments do not dictate what these subordinate bodies do. They do not tell them which particular goods or services to procure. That would be very much the case in, say, local government. Q17 Lord Patel: Are you not just listing more obstacles for us, rather than solutions? Fergus Harradence: There are solutions to these problems. There has been a lot of work that’s been done on collaborative procurement across local government and that’s been led by DCLG. It’s also being led by the local authorities themselves. The Department of Health has done a lot of work with us centrally on some of the innovative procurement activities that we’re engaged in through the Small Business Research Initiative and Forward Commitment Procurement to actually showcase some of the innovative products that we’ve developed in hospitals, so people will be able to actually see these and explore whether or not the technologies are working. Similarly, we’ve worked with Communities and Local Government to install more sustainable new technologies in social housing. Through one of our SBRI competitions, we’ve installed the technologies in over 100 individual housing units of various types and sizes. So yes, we are trying to overcome some of the obstacles and make the flow of information 118

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 between the departments and their delivery bodies work better than it does at present. I wouldn’t claim to have completely cracked the problem though. Q18 Lord Warner: One of the problems that people regularly provide excuses about in the public sector is that they can’t afford the new innovative product. When you look more closely, you often find two features. I’d like your views on whether you think these are common across Government and public procurement. One feature is that it’s very difficult to stop people buying things that are discredited and no longer work. The second one is that people won’t drive down the price of fairly routine products to make the space for the innovative product. Is there any evidence that there’s any work done on that across Government? There’s plenty of evidence, I know, in the health service. Sally Collier: If I can take your latter point: is there anything going on to drive down the prices of common goods and services? Yes, absolutely. Following Sir Philip Green’s review and building on work already under way, there is work in central Government to centralise the purchasing of common goods and services and for Government’s demand to be truly aggregated and committed in order to drive down the very best deals for those. So yes, work is going on in common spend. Q19 Lord Warner: We have heard that the most recent evaluation of the local government procurement agenda reported that nearly 50% of local authorities have either one or no procurement professionals and that few authorities, one out of five, have a proactive dialogue with suppliers. How will the move to the provision of local services at the local level affect procurement across Government? Do you think that localism in this area is going to pose some problems for effective procurement, particularly in the take-up of innovation? Sally Collier: Shall I start on that? We don’t have anybody here from local government today, but I think perhaps though that those statistics are a little misleading in that 50% of authorities only have one or two procurement people. My observation is that perhaps the 150 largest authorities undertake the most significant spending and would often have somewhere in the region of 30 to 50 procurement people for those major authorities, so I think it’s a little misleading of those statistics. There is also of course a lot of collaboration at the very smallest level with authorities joining together. I think that’s my observation on the statistics. What is clear is that central Government cannot mandate what is done in local government. Q20 The Chairman: Could I just ask a follow up on that to Ginny Clarke? When local authorities are repairing roads, do they benefit from the innovations in road technology that the Highways Agency has developed through procurement, and can you give us an example? Ginny Clarke: Yes, both, collaboration in terms of the actual procurement. We have all of our frameworks that we set up open to local authorities to use, and I know a lot of the central Government and OGC does as well. We have one particular example in the Midlands, which is called the Midlands Framework Contract, as it happens, where rather than just passively saying, “You can all use it”, we make it usable. We worked with a group of local authorities in the Midlands to make sure the specifications included within that procurement allowed them to do the sorts of things that are either done on a smaller scale, or done with different types of material, for instance if it’s road surfacing. So we worked with this group of local authorities to amend the specifications from being those that would 119

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 be purely related to the high speed road network, which are technically quite different in some areas, to have a much broader specification, so that it positively allowed them to use that. When their contracts came up for renewal for each independent authority, they then used our framework instead. There was a saving there in procurement activity, so we did the procurement activity with our considerably more significant resources because of the scale of our operation, and we also looked at including their specifications rather than those that were more specific to the Highways Agency. That has been in operation now for two or three years, and has been a feeder for variations of that in different parts of the country, where local authorities have wanted to combine in a different way with the Highways Agency. Q21 Lord Warner: I am still a bit puzzled. The figures that we were given by the local government procurement agenda did talk about procurement professionals, not just people around to do the procurement. So there is a gulf, according to their evidence, about the numbers of professionals who are around to cope with a localism agenda. I am also trying to understand where the policy is going, because from Sally Collier’s last answer, which seems to me perfectly sensible, you are trying to group very routine products into bigger and bigger bulk purchases, as I understand the strategy. But if that is for only the routine and not for the innovative products, and the agenda is localism, and there are not that many procurement professionals at the local level, where does that leave innovation, and using procurement for innovation? Is that all going to be down at the local level? There is a dispute over the figures, but we do not seem to have that many procurement professionals. Sally Collier: Clearly, we do not have CLG representation here today. There is a tension there, I would say, but I would also say there was a lot of work on innovative forms of procurement, and very complex large strategic procurements that are going on in central government: the whole public services reform, the inclusion of mutuals and co-operatives, all of those. The whole big society agenda will see, in central government, some very complex, innovative ways of procuring services. Mike Acheson: If I can just add to that answer, the centralising of commodity procurement, as Sally mentioned, covers a variety of goods and services that are obviously bought by all departments. So for example, in the Department for Transport, we spend in the order of £3.8 billion a year, including—obviously the Highways Agency is a major chunk of that— approximately half a billion that falls within the common goods and services bits. That chunk of our work we will buy via new Cabinet Office arrangements, but the rest of it we will buy as a department using innovation where it is appropriate to do so. So it is not everything that is going into the big new Government speaking once and so on. That is only for the commodity goods and services that, department by department, will obviously vary in terms of the proportion of the total spend. So for DfT it is a relatively small proportion; for other departments, it will be a high proportion. Q22 The Chairman: In a moment I am going to turn to Lord Willis to pick up the questioning, but just to follow through with Ginny Clarke on local authorities collaborating with, or learning from, the Highways Agency, one area that I am interested in is the impact of climate change, as the chairman of the Adaptation Subcommittee of the Climate Change Committee. Clearly, as we move forward in the future, we are going to have to build our roads out of different kinds of materials to withstand, for example, very much hotter summers. Is that something where you would advise local authorities on the materials that 120

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 they use in repairing and maintaining roads? How do you bring those long-term questions to bear with local authorities? Ginny Clarke: We have various fora with local authorities. They tend to be subject-based, for instance, a bridge subgroup, a pavement subgroup, so they are looking at distinct areas. It is co-ordinated through the department, under what is called the UK Roads Liaison Group. We use that forum for sharing knowledge, and I need to acknowledge, some local authorities have given us ideas; it is not always about the Highways Agency generating ideas. Looking at, particularly, challenges on climate change, I think is very much all of us looking for the best approach that can be identified however that is. So, for example, in adaptation, we have looked at things like drainage standards. How do we cope with excessive flooding? Those are things that we have shared very much with local authorities, so the learning that has come out of some very difficult examples in terms of—probably impacted more on local authorities than it has on the Highways Agency—scour of bridges, for example, is a very technical issue. But we have learnt from some of the things the local authorities have had to learn from. We have used what is called the UK Roads Liaison Group as a forum for that. That also has a link into research and procurement, so we do have the opportunities for the avenues for sharing this. Having shared it, how do you then implement it? This is, I think, the point that is being made about the experience that you then have, or the technical expertise, both in procurement as well as in technical subjects, to deliver against it. So I think the delivery of the sharing that is going on is probably the most difficult, depending on the scale of the operation. Fergus Harradence: I would not want to be overcritical of the involvement of local bodies of all sorts in the public sector in the procurement of innovation. In my experience, some of the best and most interesting stuff that we have done on innovation procurement has been in partnership with local authorities and with individual hospital trusts. It has involved people like clinicians at the front line. It has involved people who have experience dealing with the problems and the challenges, and have a deeper understanding of those than often policymakers do. They are also further away from the pressure of front line politics and ministerial demands to do things quickly, which can militate against long-term thinking and the effective procurement of innovation. The Chairman: Thank you. It might be helpful, if you wouldn’t mind, putting down in writing some concrete examples of that and feeding that in. That would be helpful to us. Q23 Lord Willis of Knaresborough: I do not think that was the criticism. I think the criticism was: where are the professionals in this field? I would suspect that many of the people you have spoken about are, in fact, professionals who have those skills in order to be able to use local procurement. So I do not think there is a contradiction. I certainly do not think Lord Warner was trying to be critical of that. Can I say, Ginny Clarke, I just love your enthusiasm. It really is quite fantastic to have a witness who is. The Highway Agency does not seem to me to be the most exciting organisation, but you have brought it to life today. Could I just ask you, are you an engineer by background? Ginny Clarke: I am a chartered civil engineer. Q24 Lord Willis of Knaresborough: Chartered civil engineer. I thought you must be. That was for Lord Broers’ benefit. We were particularly interested in the use of SBRI in terms of getting innovative procurement, and we are fascinated by the synthetic 121

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 environment for managed motorways, SBRI. I wondered if you could just, with great enthusiasm, tell us about this. Ginny Clarke: I wish I had brought the project sponsor with me. He is even more enthusiastic than I am. The department was working with the Technology Strategy Board about using this technique of synthetic environments. We were trying to build up a technique that would act as a training tool for our traffic officer service, both those who operate on the ground and those who operate in the control centres, that could simulate and represent some of the situations that occur in the very live environment, in our case, the strategic road network. The SBRI allowed us to look up, with the department and the Technology Strategy Board, to work with three companies to take forward three possible solutions for developing a training tool that would, both in terms of modelling and visualisation of the situations, represent some of those incidences that could happen in Managed Motorways. Managed Motorways is all about managing lanes and traffic on motorways. So potentially there were lots of different variables that would need to be simulated and that our traffic officers could use as a training tool. The project has gone forward. I think it has been running for about 18 months now, two years. Each of the three suppliers came up with solutions using the synthetic environment. What was different about it was that the innovation was able to look at all these variables within these situations and present those back in terms of modelling them in realistic situations. That was what the innovation was doing for us. We had control systems that could tell you different things and try and analyse them, but we needed something that visualised that. So whether it is a traffic officer on the ground, on the road network, or the control officers, they had the opportunity to test these without putting them in the live environment, where you have to do that in reality. Q25 Lord Willis of Knaresborough: This seems to me to be a remarkable move forward that is happening in all sorts of other areas. We have, in terms of this simulator technology, expertise that is ahead of the world, quite frankly. Have you used SBRI in other areas, or has the department used it in other areas? And has the Government—the Cabinet Office—used SBRI as, in fact, a vehicle in other areas? Excuse the pun about vehicles. Mike Acheson: I am not aware that we’ve used SBRI for anything as important as this one. Ginny Clarke: We have only used it in that one situation. Q26 Lord Willis of Knaresborough: Can I just move on then? I think this can move forward in terms of using academic expertise, and I wonder how much the department has, for instance, through its chief scientist and others, used the scientific environment to drive transport policies and therefore procurement. Mike Acheson: Yes is the single answer to that. Q27 Lord Willis of Knaresborough: You sounded very doubtful there. I am getting very worried about this. Mike Acheson: Again, I do not have any good examples to point to, but I distinctly remember a discussion with Professor Brian Collins, the DfT and BIS Chief Scientist, not that long ago, talking about trains and the need to get people on and off trains easily. Scientific research showed, quite obviously when you think about it, that if the train and the platform were exactly the same height, then people just move across very easily. If there is a 122

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 difference, particularly if it is a reasonable difference, but even a small difference, everybody, or virtually everybody, stops and pauses and thinks about it. Brian was saying this was a really useful—quite a simple, but nevertheless, nobody else looked at it—example of the scientific folk looking at problems in specific ways that then help make sure that, with new trains, the platform and the train are exactly the same. Q28 Lord Willis of Knaresborough: Let us move up a gear, then, because that is a good example. But looking at the grand challenges that the Government are involved in, clearly transport has a huge part to play in that. I am just wondering, can you give us any evidence that the procurement tools being used to drive that huge environmental agenda to start with? Electric vehicles is clearly one example, but are there other examples where the procurement tool is being used in that way? Mike Acheson: You have nicked my best example of the electric vehicles. Lord Willis of Knaresborough: You cannot live on electric vehicles. Is that it? Mike Acheson: I can’t think of any other major example, but Highways may have some. Q29 Lord Willis of Knaresborough: Can I just give you an example before you come in? We have just had snow, and that seems to be a great opportunity—where there are problems with inclement weather, for instance—to have intelligent transport systems to deal with that, as well as to be able to deal with it whether it is snow or water or whatever. Ginny Clarke: I was just going to say that the chief scientists, and Professor Collins in particular, have been trying to use the science. My example is going to be flooding again, because that probably was the most dominant science area, rather than winds, which have more recently been overtaken by that. He was bringing us in and working with a particular project Defra were leading on, looking at adaptation across providers, whether it is energy or transport or whatever. Professor Collins brought us in in a supporting role to look at the science, how we were using the science, the knowledge about flooding, and bring this knowledge actively into the plans that would then be used whether by the Highways Agency, energy providers or whatever, with the prediction models that Defra had about how we were planning our adaptation strategy. So I have certainly seen in the last two or three years in the department a much greater involvement, which is not just DfT-led but is seeking to work across, in this example, Defra and others, to use the science base that is found in each of these different departments to come together and bring these projects, in this case looking at adaptation techniques as well. Q30 Lord Willis of Knaresborough: Okay. Can I move to Fergus then and I’ll shut up at that point. We have, it seems to me, brilliant academics working across the innovation agenda. We also have the Technology Strategy Board that is putting out calls. The Technology Strategy Board is linked into academia through the Research Councils and it’s linked into business through its business partners. Where do the departments come into that? Where are, for instance, the calls for grand challenges coming from the departments through the TSB? Where does that link up? Fergus Harradence: Individual departments are very closely engaged with the TSB. In many cases they co-fund programmes. The Department for Transport is a co-funder of our Low Carbon Vehicles Innovation Platform, as were two of the Regional Development Agencies and the Engineering and Physical Sciences Research Council. We have several major projects 123

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 in place with the Department of Health, one in the area of assisted living where we’re looking at how we can support people with chronic medical conditions of one sort or another to live independently for longer. We’re also looking at the detection and identification of infectious diseases and we’ve just started a joint programme of work in the area of stratified medicine, that’s also involving the Scottish Executive. We’re working with the Department for Environment, Food and Rural Affairs on food production from agriculture right the way through to the food processing to see if it’s sustainable— Lord Willis of Knaresborough: I just really wanted you to have that opportunity but it would be really useful to have a note to say just what is happening, because I think it is a really good tale to tell. Q31 Lord Rees of Ludlow: Just to follow up, because we hadn’t talked about TSB very much up until now, I would just like to ask for any views on how the TSB might develop and the relative importance of the TSB and Government chief scientists and so on in ensuring that procurement is plugged into the grand challenges and the long-term questions. Fergus Harradence: We are in the process of restructuring the innovation system in this country. Over the last 12 years the RDAs have had an important role in innovation. Originally the central innovation support was provided by the Department for Trade and Industry. We now obviously are abolishing the RDAs and we have created the Technology Strategy Board. The Technology Strategy Board will assume the functions of the RDAs and will become, in effect, the innovation agency for the UK. It will not be the only public sector agency responsible for innovation, but it will be the only one with a cross-economy, entirely cross-sectoral remit, covering the whole United Kingdom. I see it playing an increasingly pivotal role within the innovation system. In terms of further development, yes, I think greater integration with procurement decisions taken by departments and the agencies they sponsor is going to be a key part of its activities in future. Q32 The Chairman: Thank you. We’re drawing close to the end of this session. I wonder if I could just come back onto snow, which Lord Willis of Knaresborough mentioned and it is very topical. Is there work going on under the aegis of the Department for Transport on innovative ways, thinking of new technologies, to deal with sudden snowfalls such as we’ve experienced in the last few weeks? Mike Acheson: What I can say is the Secretary of State has asked the Government’s Chief Scientific Advisor, Professor John Beddington, to look at this whole question and in particular, will there be more or less of these kind of extreme weather events? And if so then we need to start taking decisions on what we do about it, which isn’t quite answering your question. The Chairman: No, it’s not. Mike Acheson: No, but that’s the best I can get to at the moment. The next stage will almost certainly be, “So what do we do about it?” once we’re clearer as to what the problems are. Q33 Baroness Perry of Southwark: I really wanted to ask a question the other way around. We know that a lot of innovation does come from small businesses; they come up with ideas. What are the mechanisms within Government to respond to an innovation that 124

Department for Business, Innovation & Skills (BIS), Cabinet Office, Department for Transport and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010 you had not thought of yourselves? If you have not asked the question, “What do we do about X?” but somebody comes up and says, “Here is a problem you haven’t thought of, but we have come up with a solution to it”, what mechanisms and what funding or whatever do you have within Government to respond to that kind of self-generated innovation? Ginny Clarke: Could I give some examples? They are very practical examples, obviously, because of what we do. We often do get small businesses coming up with ideas, whether it’s about a new kerb drainage or it’s about a product, for instance salt. There’s been quite some innovation from companies in that area. We have a research and development budget from the department we use that to run trials, effectively. So we can offer the thing they can’t do. They can’t trial it on the road without us being involved, so our money usually goes into offering the trial opportunities for those sorts of things. That evidence is then shared within the industry; that is the rule we have to have. If we’re going to do it with one supplier, we need to share and they have to buy into sharing that knowledge. Then effectively that knowledge is passed back out into the supply chain and then it’s for the commercial activity to take over. Now, that sometimes works. It doesn’t always because the ambitions of the supplier are probably greater than the sorts of things we could deliver within our sector, so it might be that it develops in another sector rather than ours. But that’s essentially on a very practical level how it works for the Highways Agency. Q34 Lord Broers: All roads seem to lead to the TSB. I’ve just been reading through Research Council management papers, everything. The TSB is about a tenth the size of the science budget. It’s probably a twentieth of the size of the industrial base around the place. Is it appropriate that every one of these threads of innovation leads to the TSB? Do they have the capability to deliver across such a broad front? Fergus Harradence: They have been established and structured to have a broad capability. They do have technology experts, who are the majority of TSB staff, who have a very broad range of experience. The majority of these are recruited from the private sector. I think the TSB at last count had over 1,600 years’ worth of private sector experience in innovative businesses that it can draw on. Are we asking an awful lot of it in terms of the delivery of these programmes? Yes, I think we are. They are being asked to deliver a number of highprofile Government initiatives, such as the new technology and innovation centres, in addition to managing a very large portfolio of R&D projects with businesses, over 2,000 at last count. So it is certainly a concern that we have. We need to ensure that we equip the TSB with the wherewithal to deliver the programmes that we’re asking them to deliver for us. The Chairman: Thank you. I would like to thank our four witnesses for this very helpful session. Just to confirm to you, there will be a transcript that you will have a chance to comment on for correction and, if you wish to stay, you are obviously welcome to sit and listen to the second evidence session, but you may have other things to deal with this morning. So thank you all very much indeed for coming along.

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Department for Business, Innovation & Skills—Supplementary written evidence (PP 33)

Department for Business, Innovation & Skills—Supplementary written evidence (PP 33) Information provided by Fergus Harradence, Deputy Director, Innovation Policy, Department for Business, Innovation and Skills (BIS), as requested by the Committee during the Government officials’ oral evidence session on 21st December 2010. Local Delivery Bodies Involvement in Innovation There have been several innovation procurement projects in which local bodies have been engaged. For example, the Forward Commitment Procurement (FCP) Ultra Efficient Lighting (UEL) project is being led by the Rotherham NHS Foundation Trust and supported by BIS and the Department of Health. Work has included a Market Consultation Workshop facilitated by the UK Displays and Lighting Knowledge Transfer Network. The Trust is developing UEL solutions for their wards - a transferable option that could be applied across the whole of the NHS. Another FCP example is the use of the model by the HM Prison Service to develop a zero waste mattress and pillow solution with cost savings estimated to be in the region on £5 million over the life of the contract. In addition to savings for the individual organisation there is also the opportunity of adoption across the wider public sector, for example the mattress solution could be adapted for the Health Service. A more recent project is the requirement by Nottingham University Hospital for a cost effective, ultra low carbon energy solution to replace the existing coal fired boiler plant on the Trust’s city site. The Trust is aware that the goods and services needed to address its energy and carbon reduction needs are either not currently available on the market, are too costly or are unacceptable and that a ‘business as usual’ methodology will not deliver the requirements. It has therefore adopted the Forward Commitment Procurement approach to identify an optimal solution. There have been several Small Business Research Initiative (SBRI) competitions run by NHS Strategic Health Authorities. For example, the East of England Strategic Health Authority worked with the East of England Development Authority and the Technology Strategy Board (TSB) to run a competition to find new ways of improving patient care and to eradicate errors. The SBRI Retrofit for the Future competition was launched by the TSB with the support of the Department of Communities and Local Government, the Department of Energy and Climate Change and the Homes and Communities Agency as part of the Government’s target of saving 80% of CO2 emissions by 2050. In the ‘Design Bugs Out’ project the Design Council worked with the Department of Health and the NHS Purchasing & Supply Agency in a groundbreaking “open innovation” initiative aimed at reducing Healthcare Associated Infections (HCAIs). For the ‘Patient Dignity’ project the Department of Health asked the Design Council to bring designers, manufacturers and frontline NHS staff together to see if they could come up with new ideas that would help the NHS improve hospital environments and the experiences of patients. 126

Department for Business, Innovation & Skills—Supplementary written evidence (PP 33) Technology Strategy Board Collaborations with Other Public Bodies In the case of the Innovation Platforms the Technology Strategy Board works with public and private sector stakeholders and the Government Department that ‘owns’ the challenge to identify the levers to produce the desired response. Examples of current Innovation Platforms include Low Carbon Vehicles (in partnership with DfT and the EPSRC); Agri-Food (in partnership with Defra and the BBSRC) and Stratified Medicine (in partnership with the Department of Health, Scottish Executive, Wellcome Trust and the Medical Research Council). The Knowledge Transfer Partnerships (KTPs) scheme is a cross-Departmental activity led by the Technology Strategy Board with government organisations, including Research Councils, Devolved Administrations, Department of Health and DEFRA. KTPs are a tried and tested method of enabling companies to obtain knowledge, technology or skills which they consider to be of strategic competitive importance, from the further/higher education sector or from a research and technology organisation. The Technology Strategy Board (TSB) champions the SBRI scheme, promotes the programme to departments and their agencies and supports them in its usage. Support levels vary on a case by case basis but covers process support, problem definition and unpacking, communication of challenge, and administration of competition. Through its work on SBRI, the TSB works closely with the MoD’s Centre for Defence Enterprise (CDE). The CDE is the first point of contact open to anyone with a disruptive technology, new process or innovation that has a potential defence application. The TSB has also collaborated on SBRI with the Homes and Communities Agency (HCA, a DCLG sponsored body), DECC, the Home Office and DEFRA. January 2011

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David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT—Oral evidence (QQ 176-196), 25 January 2011 Evidence Session No. 7

Heard in Public.

Members present Lord Krebs (Chairman) Lord Broers Lord Crickhowell Baroness Hilton of Eggardon Baroness Neuberger Lord Patel Lord Rees of Ludlow The Earl of Selborne Lord Wade of Chorlton Lord Warner ________________

Examination of Witnesses Witnesses: David Willetts, [Minister of State for Universities and Science, Department for Business, Innovation and Skills], Francis Maude, [Minister for the Cabinet Office], and Mike Penning, [Parliamentary Under-Secretary of State, Department for Transport]. Q176 The Chairman: We will start without David Willetts and hope that he joins us very shortly. I thank both of you and, when he arrives, David, for coming to give evidence for us. We have in the region of an hour and, as you know, the purpose of our inquiry is to look at public procurement and innovation, particularly focusing on the transport sector; hence our interest in the Department for Transport. As you will be aware, the proceedings are webcast, so asides will be recorded for the public out there. With that I think I should invite you, for the record, to introduce yourselves. If you have any opening comments you wish to make please feel free to do so and then we will lead into the topics that you have been alerted to that we wish to discuss. So perhaps, Mike, you could kick off. Mike Penning: As I am Parliamentary Under-Secretary of State, I thought the Minister of State might. I’m the Parliamentary Under-Secretary of State at the Department for Transport. My portfolio is based around shipping and the major roads network and all the agencies that are affected, including freight and haulage. I am also Deregulation Minister for the department and, for the purposes of this Committee, the procurement side of the department and certainly innovation. 128

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 As you saw in our submission, I inherited quite a bit of innovation. I know in some of the evidence that has been given to the Committee by officials and by some of our scientists some of it is seen as innovation—I am not a scientist. I’m very much interested in outcomes and delivery. So I apologise if from a scientific point of view, my Lords, I’m not as up to scratch, perhaps, as some of the Committee. So I do apologise for that. As well as I think some of the innovation, some of the exciting things that I have at the moment, as we will touch on later I hope, is areas around the managed motorways and the innovations and technology we’re using on there now, moving on from the pilot on the M42 through to the eLoran work we are doing at the moment through the lights. Not a replacement for GPS but something that can run alongside it because of the whole problem around blocking of GPS and the reliance on GPS, particularly with shipping. We are working very much with other departments there. But the key from my point of view is procurement within central Government is driven by the Minister of State here in the Cabinet Office. So I kind of lean at this stage probably towards you, Francis, and say I can do as much as I can but of course the two things that are difficult is, one, I cannot make innovation happen. We can help and push. But also the cost of evaluating whether innovation has worked is a very difficult area as well. So, on that note I’ll hand over to Francis. Francis Maude: I’m Francis Maude. I’m the Minister for the Cabinet Office where responsibility for public procurement policy now resides. It was taken over from the Treasury soon after the change of Government last summer, along with responsibility for the Office of Government Commerce, which is now part of the Efficiency and Reform Group in the Cabinet Office. There is not a huge amount to add to what we said in our written evidence to your Committee but perhaps just to say that our approach on procurement is this: there has been a tendency for Governments to want to use procurement policy to support a number of wider policy objectives. Governments always seek what tools are at your disposal to promote very desirable objectives and one such tool is procurement. There is a tendency to use the approach to procurement as a sort of Christmas tree on which all sorts of desirable objectives are hung. I think when we did a review we found that there were no fewer than 13 different broader policy objectives, which we have been endeavouring to promote actively through the use of procurement policy. That has resulted in there being 6,000 pages of guidance to procurement authorities on how they should procure. We intend to reverse that process and to have an approach to procurement that is much simpler, where the overwhelming objective is to procure effectively and with an emphasis on value for money. The effect of this on innovation I would summarise in this way. The very process-heavy approach to procurement has resulted in massively highly specified tender documents with prequalification that has been very demanding. The other day I came across a prequalification questionnaire that ran to 79 pages. The result of this approach to procurement is effectively to exclude all but the most established providers and suppliers and is itself the enemy of innovation, because if you have highly specified tender documents that tend to be very prescriptive about how the task is to be performed, very input-oriented rather than output or outcome-oriented, the scope for innovation for providers, for suppliers, is by definition very limited. So I think the current approach or the approach we inherited, which I’ve just described, is inimical to innovation. An approach that will streamline procurement, that will move decisively, I hope, towards procurement and commissioning based on outcomes and outputs 129

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 will open the way to much more innovation. So the distinction, I think, is rather than using procurement actively to promote innovation we need to have an approach that allows it and encourages it, enables innovation to come through, rather than the current system that, as I say, militates very strongly against it. Q177 The Chairman: Thank you very much. Welcome, David. I’m sorry we started a few moments before you arrived, but if you would like to say for the record who you are and a few words of introduction. David Willetts: I am David Willetts, Minister for Universities and Science, and I’m sorry that I wasn’t here when you started. My responsibilities within BIS are, as well as science and universities, for innovation. So we look at this from the perspective of innovation but we very much agree with the points that Francis has just made that over-specification in procurement practices can itself be an enemy of innovation. Q178 The Chairman: Thank you very much. We have obviously been taking evidence, both oral and written, from a number of individuals, organisations and public agencies, public bodies, and what we have heard is that there is a lot of guidance from Government in how to encourage innovation through public procurement but so far at least—and this may be what you are indicating will change—we haven’t heard convincingly that there has been a culture change across central or local government to embed innovation in procurement. Therefore, perhaps to expand on the comments that Francis Maude made about switching from input to outcome, I wondered if you could elaborate for us a little bit about who provides the leadership in each department for ensuring that in procurement innovative solutions, where appropriate, are sought. You have mentioned one barrier, the bureaucracy of application for a Government contract, but we’ve heard of other barriers such as lack of expert knowledge in Government departments, lack of intelligent customers, fragmentation of procurement on big projects so that people aren’t able to take an innovative overview, and short-termism, in fact taking too short a time horizon and therefore not thinking about how innovation can help and perhaps save money in the long term. So we’re interested in who has the leadership, how the barriers that you identified in your own submission, and others have also identified for us, are being overcome? My third and final point in this introduction is that we heard from a number of people, notably Lord Sainsbury, who felt that the Office of Government Commerce had shown very strong leadership in the past in this area and we wondered why you had merged that into the Efficiency and Reform Group and what benefits that would deliver. So, there is a battery of questions to kick off with. Francis Maude: How long have you got? Who has responsibility? A general point is that there has been, I detect, a tendency once a project has been agreed as a matter of policy, for responsibility for procurement tends, in my experience, to default to a relatively junior level. I think there has been a marked lack of interest by senior officials and Ministers in what happens with a project after the decision to go with it has been made. There is a difference between announcing a policy and seeing it through to delivery. I think senior people, both Ministers and officials, need to reflect that and I think the boards, the new and stronger departmental boards that we’re currently putting in place, will help with that. We’re bringing in very senior experienced figures, leaders, mostly from the private commercial sector but not only from that sector, to support the senior leadership, both political and official, of 130

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 departments in making sure these things get done better. So I think more senior attention is important. You ask about whose job it is to make sure that innovation is an explicit part of a procurement. I’m not sure that it is nor should be anyone in particular, because there will be plenty of procurements where you’re not necessarily seeking innovation. We want innovation in the economy to be supported. That is kind of motherhood and apple pie. But there will be plenty of procurements where a completely well tried and tested approach is the right one where you don’t need or there may not be innovation available. I’ve partly identified some of the barriers in terms of the very process-heavy bureaucratic approach to procurement but there is also a risk-averse culture. Quite often there has been a tendency, in prequalification questionnaires particularly, for potential bidders to show that they have a track record of doing almost exactly what a particular procurement is about. So, unless you’ve shown that you’ve done almost exactly this kind of thing before in the public sector you don’t even get on to the bidding list. That is wrong, actually, because you will quite often have, particularly in the field of technology, new suppliers who don’t have a track record but who nonetheless may be the source of a very innovative, maybe groundbreaking solution that may take you quantum leaps ahead. So I think the culture is very risk averse. Procurers, commissioners, tend to default into a comfort zone of using only well established, experienced suppliers, which has tended in some sectors to create a sort of oligopoly, which is very difficult for new entrants to break into and, indeed, particularly difficult for smaller scale, indigenous, UK-based suppliers to break into. Some sectors are very dominated by multinational, well established suppliers. So I think the culture, the process, needs to change and I think boards will help here. I think what has tended to happen is that this whole input-oriented tender process tends to get supported by the audit culture we have here where accounting officers, when they are summoned before the Public Accounts Committee, want to be able to say, “Here is a very detailed specification. X was cheaper than Y. Nobody can criticise me for choosing the cheaper one”, but in the real world when you’re choosing a supplier it isn’t a simple arithmetic calculation. You are making a qualitative judgement about the overall value to the taxpayer and to the department or agency of what you’re buying. I think the new boards we’re creating will give accounting officers greater comfort in being able to say, “We made this qualitative judgement” and the board containing X and Y, previous chairmen, chief executives of major organisations, back that judgement. Q179 The Chairman: I’m sorry, I did fold three questions into one in a way. What about the final point about the OGC and its merger into the ERG—what benefits will that bring and why, if the OGC was seen by many as a successful stimulator of innovation through procurement, have you decided to reorganise the pieces on the chessboard? Francis Maude: I think it’s fair to say that it was not universally seen as a successful organisation. It has many merits and many strengths, but particularly in the field of technology there was the Office of the Government Chief Information Officer, which was based in the Cabinet Office, which had and should have a major role in supporting innovation in Government procurement and should be a huge part of the intelligent customer capability the Government has of scanning the market, looking for new suppliers and looking for new entrants and constantly assessing what there is available. But that was separate from the OGC, which had an important role in relation to procurement but which tended to be very much about process and guidance and had very little of a mandate. 131

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 I was surprised when I arrived in Government to find that the OGC didn’t have any central knowledge about how procurements were being conducted around government. In a naive way I had thought that was what it was there for, but they didn’t have that knowledge. They had no mandate. The previous chief executive described it as following an approach based on getting hearts and minds around central Government, let alone in the wider public sector. We’re taking a more mandatory approach where we think it isn’t acceptable simply to allow any bit of central Government to be what will quite often be a single one-time client or single one-time customer. There have been a number of experiences of agencies and departments learning on the job, frequently at the taxpayers’ expense, and that is not acceptable at all, particularly in the current fiscal climate. Q180 Lord Crickhowell: My question is exactly on the points you have been addressing. I welcome your reference to the intelligent customer. He hasn’t always been there in the past. At a relatively junior level I very much welcome the seniority and the new department boards. But to touch on the hub of my question, in my experience, and I have some experience at tendering for a contract at the heart of Government, of course it’s not usually just one board. There is always another player, the Treasury, and there may well be other departments. It takes two to tango but very often it’s more like a Highland reel where you have a foursome or an eightsome and they all have to be brought together. That takes us to what Lord Sainsbury recommended about the role of the Office of Commerce or the Cabinet Office: functional responsibility. I’m sure you have read what Lord Sainsbury said specifically about this. How far do you go along with him in the degree of authority that you give the reporting back to the permanent secretaries, the knowledge of what then happens and eventually the reference to the Public Accounts Committee about how the whole operation has gone? Francis Maude: Our approach has been to say that there needs to be what we call the loose-tight balance between what is controlled from the centre and what is pushed away from the centre. In any big complex organisation, a multinational corporation or a Government, which are very dispersed organisations, there are some things that in every case you would expect to be pretty tightly controlled from the centre, and they are some pretty obvious things. They definitely include commodity procurement, where the scale of the whole organisation enables you to drive volume discount and to drive price down: oversight of the big capital projects, which carry financial and operational and reputational risk; you would expect those to be fairly tightly controlled from the centre; ICT infrastructure, where you would not allow different parts of the organisation to build their own sort of different gauge railways; and HR operating standards you would expect to be controlled. Under the previous Government, without wishing to be partisan about it, there was a tendency to do things the other way round. There was a tendency to seek to micromanage frontline delivery from the centre but no one took much interest in a central common approach to these other things. So, the loose-tight balance was exactly the wrong way round and we sought to change that. In terms of how much central control there is over big procurements and big projects, there has to be much more central oversight. It isn’t enough any more simply to say the money has been voted, it’s entirely up to you and your department or agency or quango how you spend it. So there needs to be a higher degree of central control and that has been put in place. There will be controls that will be built into the departments, delegated authority letters from the Treasury, and that will include a greater ability to look at the way in which 132

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 procurements are done at a very early stage to try and challenge the input-heavy approach that has tended to dominate. There is a sensitivity about this. I was interrogated last week at the Public Accounts Committee—discovering slightly by chance that I was the first Minister, apparently, to give evidence to the Public Accounts Committee in its 150-year history—with the Permanent Secretary to the Treasury and the Cabinet Secretary and Lord Browne who is the Government’s senior non-exec. One of the concerns they had is that the approach we’re taking may dilute the direct accountability of the accounting officer. One has to be sensitive to that, but that there is a case for considerably stronger central oversight of the way in which procurements are done I think is now common ground. Q181 Lord Warner: I wanted to pursue this issue of whether the messages are understood. This is a question mainly for Francis Maude. You mentioned in your very helpful opening statement—which I have to say, as someone who has sat as a Minister in a large department, I have a considerable sympathy with—that you wanted to move to a system of procurement on the basis of procuring value for money. For those of us who have knocked around the public sector for a very long time there is a very real risk that many people will interpret that very honourable objective as meaning more efficiency, not necessarily more innovation. How are you going to ensure that the messages get through, that what you’re after is a mix of efficiency and innovation that will deliver value for money, and that people just don’t concentrate on driving down the price of outputs by cutting input costs or just basically delivering more for less, which takes you down a path of maintaining the existing expensive fixed assets rather than the kind of innovation that I think many people are looking for, which is more difficult to deliver because it involves cultural change? How are you going to get your messages through these bureaucracies, not just in central Government but down to local government through the NHS and so forth? Francis Maude: Two points. One is on your central theme of innovation versus value and the second is how do we promulgate into the wider public sector over which we may not and increasingly won’t have a mandate. On the first point, I suppose I contest your assumption that there is a conflict between innovation and efficiency. I would say precisely the reverse. We are going to need to drive better value and greater efficiency, and innovation is absolutely essential to that. The current approach, which I described, input-heavy, process-heavy, bureaucratic, excludes lots of smaller innovative suppliers and means that you will get very dependent on the usual suspects turning up delivering the same old thing, often not very effectively. Opening up procurement to newer suppliers, fleet of foot, more agile, more innovative, is absolutely essential to drive the efficiency, the quantum leaps and efficiency that we need. So, I don’t accept the premise that there is a conflict between the two. I think we exclude innovation in procurement solutions at the moment because the system is, as I say, inimical to it, and that means that we are less efficient and we get less value for money. So I think the two things are absolutely locked together, linked together. That is the first point. Q182 Lord Warner: Just to be clear, I wasn’t saying that they were inimical. I was saying that people might understand your messages differently from the way you intend and how are you going to get those messages through these departments? 133

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 Francis Maude: I think we will explain, as I have just tried to, that in order to drive the much better value for money that is essential in the current fiscal climate we need to enlist innovative solutions. That is kind of fundamental. I think it is the core problem with the way Government procures at the moment. The risk aversion, the process-heavy approach, the insistence on over-specified, highly prescriptive tenders that all feed off each other, has meant that we don’t get access to innovative solutions and thus support innovation in the marketplace. So I think that’s a kind of basic proposition that we have to articulate clearly much more vividly than we have done thus far. How do we get that across into local government? Well, we can just say it and promote it. We will not seek to mandate how local government procures. There has been far too much of that in the past. We will be quite mandatory about central Government, what lies within our control, within our ambit, we will be quite prescriptive about how procurement should be done, more than has been the case previously, but we will not seek to impose that on local government nor on the increasingly mixed economy in the NHS where increasingly there will be foundation trusts and other providers who are not part of a monolithic monopoly supplier.

Q183 Baroness Hilton of Eggardon: I think it’s particularly a question for the Department for Transport to ask you whether you have any actual examples of innovation. My other question, perhaps for all three of you, is whether you could give us a definition of what you mean by innovation. Do you just mean different ways of doing things or do you mean driving invention and scientific discovery and so on? That perhaps is particularly a question for David Willetts. But are there examples of innovation within the department? Mike Penning: I alluded to some earlier on but I think some have been brought in since the change of Government when the Coalition Government was formed. For instance, many of us have queued at the tolls at the Dartford River crossing for year after year after year to get your £1 or your £1.50 out, but by 2012 there will be no barriers there at all and vehicle recognition will be on the Dartford River crossing, which has been available for the last 10 years, even though it needed to be proven. And we’ll move on from there to the Severn River crossing and other tolled areas where we have control. I was told when I first said, “This is ludicrous and it’s a Soviet system where we’re asking people to queue to pay us some money to go and cross a crossing on the motorway network” that there was no other way of doing it, until I told them it had been in Malmo and Stockholm, “And by the way the congestion charge works very fine”. Innovation is—this relates to what Francis was saying—when you look at a contract, making them think out of the box. The traditional way of doing it is rock solid, certainly within my department, and it has been quite difficult I think, particularly which we haven’t touched on yet, for some of the agencies. We have some of the larger agencies under our portfolio, that have been at extreme arm’s length under the previous administration and to drag them back into a short arm rather than a long arm, if you know what I mean, has been very difficult for them because that is the way they have been managed for some considerable time and to look forward. I think some of the work we’re doing with rail, with the new Thameslink, with the new carriages, which will be designed for the customers, an outcome-base, which has made a lot of the companies completely rethink what a railway carriage needs to look like in the 21st century when it comes to maintenance. But on the other hand we have to be careful that we’re not creating innovation for the sake of it. So, if we’re looking at something like the HS2 with the new fast link to Birmingham and 134

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 then going up to the northeast and the northwest, the Japanese very politely said to me last week, “We have done the innovation. We have the fastest and safest trains in the world. Why are you thinking of innovating? Why aren’t you just buying ours?” Now, they have a very good point that we don’t expend a lot of money on scientific things that have already been done. We don’t need to reinvent the wheel on certain things. It has been very difficult to establish how we get away from the risk averse attitude—Francis alluded to that very well. It is much simpler to just do what you’ve always done. It has been a shock, I know in my own department with the Secretary of State and the other Ministers, to say, “Why? Why are we doing it that way, because there must be another way in the 21st century of doing it?” I will let David come on to more of the scientific side of it with his portfolio. David Willetts: You will be relieved to know the Department for Transport is not proposing to reinvent the wheel. I guess innovation is partly a matter of thinking about things differently and partly a matter of doing things differently. Indeed, if I may say so, there was a distinguished series of Reith lectures that drew the connection between scientific advances and technical and technological advances, and it’s very important that throughout the public sector we try to make that possible. Perhaps I could just make one wider point about the scientific background to all this. Francis spoke earlier about the Government procurement process after you’ve decided that you do need to procure something. I think one area where the scientific community can make a contribution to innovation is through exercises like the Foresight exercise, which comes much further upstream and does try to identify future needs, future challenges, areas where there are either grand challenges we need to respond to or perhaps technology is moving very fast and it’s a long time before a specific procurement decision but we do try to communicate with the business community. I think we had an example this week—you know far more as Chairman than I do—on the future global pattern of food needs and changes in food technology, which is not a procurement decision but certainly for the British food industry that type of long-term exercise helps them identify how far down the track things are going to change. Mike Penning: Could I come back to one area of innovation that is futuristic, which we are demanding? This is the whole area of drug driving. We have the technology now to pick up people who wrongly drink drive. We had no technology at roadside and only just about this week are getting type approval from the Home Office on in-station drug testing. As an exfireman, I can tell you I’ve been to more incidents on the road where I know someone is under the influence of something and they have been breathalysed by police and been perfectly clear. This is a real menace for us and at the moment we’re asking the scientific community to come forward and help with the type—that we’re working with the Home Office. It has been enormously difficult to say we will get there. In other words this is not 10 or 15 years off, we need to do this as fast as possible. Innovation needs to be brought forward and we must take away the roadblocks—I refer to, for instance, the legislation that will have to be changed; we know that. So everybody keeps coming up with the reasons why and yet Germany and Spain have it now and people are drug-alysed at the side of the road for the arrestable part and then tested in the station for the prosecution. I think that is an area where I have been pushing very hard for the smaller companies to be involved. It is, as Francis touched on earlier, very difficult sometimes for some of these companies with state 135

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 of the art innovation to get into the marketplace, to get to the right people, to get the procurement process working. Francis Maude: Part of Baroness Hilton’s question was what do we mean by innovation: is it simply looking for innovative solutions or something more than that? I do not think, and I’ll be very blunt about this, that it’s the function of procurement to give extra weight to a bid, a tender, because the supplier has a good record in innovation. I think you have to be quite hard headed about choosing what is the right solution. But if you have a system, an approach, which positively looks for innovative solutions, which is what we want—as I say not always appropriate but we do want things to be done better in general, and that’s kind of depending on innovation—then that will support innovative companies and it will support the research and development base in the country more broadly. But it is a consequence rather than an end in itself, I suppose is the way I put it. Q184 Lord Broers: I want to pursue what David Willetts said specifically for the Transport Department. Foresight needs to be accompanied with a disciplined process of creating roadmaps. Being a semiconductor technologist, which is a highly complex technology, just like transport systems are highly complex, I know that if you want innovation you have to lay it out rather specifically, very specifically in the immediate years and then becoming less specific. But if you have a roadmap that people work on to define, which is what happened in the semiconductor business, that enables small companies and large companies and everybody to join in in co-ordinated innovation. So my specific question is does the Department for Transport have adequate roadmaps? Mike Penning: No, we don’t, to be perfectly honest. I don’t think any department would— The Chairman: I hope they literally have roadmaps. Mike Penning: Well, with GPS these days perhaps not, but there we are. But I think we are very much getting there. It has been difficult with a new Government and, very often, a completely different attitude to procurement, but we’re aware that if we can set the parameters early so that the right people are bidding at the right times, it saves them an awful lot of money and it gives them the time and the ability to move forward so that we can, as you say, do the hard work early on and then keep an eye on it as it goes forward unless you want to change the specification, because that is where the cost implications come in. But the more difficult part, for instance on our department, is very often, apart from rail, that we don’t have any control over what runs on our system. So we create the roads and we create the technology, the managed motorways and so on, but technology within the cars or, if we’re talking about an airport, what lands on the runway, is out of our hands. Rail is different because we are very much in control, which is why we put it out so early on and started with changing the sort of outcomes we’re looking for for the customer and that will mean a lot of innovation, there’s no doubt about that. Q185 The Chairman: Could I maybe follow that a little bit and link back to the question about foresight that David Willetts raised? Are there particular examples in the Department for Transport where you have used the outputs of foresight to think very long term about challenges that are coming down to face you in 20, 50 or 100 years’ time? Mike Penning: I think there are two very diverse areas: the area, for instance, around emissions and the reliance on the car. The Secretary of State, Philip Hammond, has been 136

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 pushing, quite rightly, very extensively on the electric model. So we are incentivising and pushing forward with not only electric cars—and there are hybrid electric vehicles being used by the department now, for instance, to send the message about electric vehicles and cars—but also the facilities to charge them. The big problem at the moment is that we have the electric cars coming in but we don’t have the infrastructure in place. There was a lot of talk in the previous Government about getting the vehicles, but we don’t have anywhere to plug them in and there is a real issue to do with that. I suppose if we’re looking forward some 10 years on, eLoran is where we have invested a lot of time and concern, because shipping particularly is so reliant on GPS. The Straits of Dover in the English Channel would have mayhem should GPS not work and yet blocking and jamming of GPS is relatively simple. So there needs to be an alternative to back it up and eLoran, which has been worked through with the department and the likes, is something that we have worked on very hard and invested money in and we’re now pleased that other departments are working with us, particularly the Home Office, on technology that we know we’re going to need in the future, even if we don’t need them physically today. Q186 The Chairman: Some of the infrastructure that you are responsible for building will last, we hope, in the order of 100 years and within that time period many things will change: the population will change, the climate will change and so on. So, how in the procurement process does the department ensure that infrastructure is future proofed, or at least has the capability of being adapted in the future? Mike Penning: A degree of realism, in that even if we had only an 18%—I think it is at the present time—increase in the use of rail we would be full. So the need for the motor vehicle on the road, whether it be a type B or a type A or on the motorway, is going to be the obvious thing. As we move to electric, the argument that more cars are going to come off the road isn’t going to be there because electric vehicles are going to be there. The crude term is sweating the assets and you need technology to do that. I was very sceptical about the hard running on the M42 when it was piloted. Coming from a fire service background I’ve been to many incidents on hard shoulders where people had accidents and it’s the most dangerous part of the highway. When they were designed it was the rescue area, where you went in the hour of need. Now we do not need hard shoulders for two reasons. One is it’s the most dangerous part of the highway if you’re broken down on the hard shoulder and, secondly, people just don’t break down in the way that they used to break down when I first started to drive on the highways. So we’ve used technology, over elaborated for the M42 to prove the case, and then using TRL we’re bringing the amount of technology down as we sweat more assets. For instance, I think there are 11 new projects on motorway projects where we will be running the hard shoulder out of the, I think, 15 that we announced. So, technology going forward for us in hard infrastructure and it’s the certainly the way forward, which we are predicting the need. David Willetts: May I just come back to Lord Broers’ challenge, because although we don’t want, as Francis Maude said, to be too prescriptive at the moment of the procurement decision, one way we can provide the roadmap that Lord Broers was calling for is Forward Commitment Procurement? That is something that my department is very keen on, where you identify long enough in advance the kind of services that you may need, that you encourage innovation. There are some good examples. Local councils, who at some point in the future are going to have to procure a new set of street lighting and highway lighting and know they have commitments on reducing their carbon consumption, making it clear earlier on and talking to people who are in this market about what they’re likely to be procuring in 137

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 the future so that if there are companies that have innovative ways of delivering low energy lighting they know that there are some contracts coming up. Indeed, those parts of the public sector that may still be procuring vehicle fleets; they have to deliver low carbon. Perhaps they can look to those services being done with low carbon vehicles. So there are ways in which we’re encouraging Forward Commitment Procurement as a way of ensuring that innovation is encouraged by getting the information out there early enough. Q187 The Earl of Selborne: I would like to turn to the Technology Strategy Board and its evolving role in delivering innovation. It has a wide brief: delivering the new technology and innovation centres; it is responsible for the Small Business Research Initiative; it has a large portfolio of research and development projects. So the question I would ask is this: first of all, is the Small Business Research Initiative judged a success and if so by what criteria? Secondly, given that it is taking over the responsibilities of the Regional Development Agencies, will it have the resources, the tools and indeed the funding to take over these new responsibilities? David Willetts: The Technology Strategy Board does indeed have a lot on its plate but we think it is an effective body. It has the confidence of the business community. It has driven innovation and we believe it is up to the challenges that we are setting it. As regards to the SBRI in particular, it is rather early to be confident. It’s two years since the redesigned programme was launched. The TSB has run over 40 competitions within the framework of the SBRI and £35 million of contracts have been placed with SMEs. So we believe that it is working well. We will evaluate it as part of the quinquennial review of the TSB in 2012. Q188 The Earl of Selborne: Can you say something about assuming the responsibilities of the Regional Development Agencies? They clearly had a major role when they existed; it was geographically specific. Can the Technology Strategy Board be expected to take on all those initiatives and to deliver innovations through their existing resources? David Willetts: There may be some initiatives that, looking at the kind of inheritance in the RDAs, it concludes were not cost effective and worthwhile. So there’s not a guarantee that absolutely everything carries on unchanged but we believe that the TSB does have the capacity to deliver these programmes. Of course, when we have the quinquennial review in 2012 that will give us an opportunity to look at the performance of the SBRI, but we think it’s right that those are nationwide initiatives. Q189 The Earl of Selborne: Are you concerned about the future funding of the TSB? David Willetts: We will be releasing our grant letter to the TSB in the near future and it will break down the streams of funding between its ongoing programmes, its administrative costs and of course its new responsibilities for Technology and Innovation Centres, which will be a separate funding arm worth £200 million over four years. That will show how we believe the funding for the TSB matches the important work we want it to take on. Q190 Lord Broers: Are you content that sufficient research and development is going on in the private sector to satisfy us in terms of procurement, domestically? I’m being very local in this and UK-based. It troubles me that the Government is spending very well on the 138

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 science base. We have £3 billion or £4 billion being spent there. Typically in most complex industries 10 times that sum of money needs to be taken to develop what comes out of the science base. Clearly the money that the TSB has cannot even do anything but sow a few seeds there. Is the private sector in the UK spending enough on R&D or are we going to have to procure mostly from overseas in transport infrastructure? David Willetts: There is a big economic debate there. We realise that if you look at R&D spend, the input in Britain, private R&D spend, there are other countries that have a higher proportion of their GDP going on private R&D spend than we do. However, innovation is a much wider thing than R&D spend and when you look at evaluations, such as the evaluations that NESTA has done over the years, they suggest that British business is quite innovative and we seem to score quite well in international league tables on innovation, even though we don’t score so well in league tables on private R&D. So we are quite good at thinking about doing things differently. On your other point, I quite agree with you that taking ideas from the lab and applying them has always been one of our historic weaknesses, and that is why the Coalition has taken a deliberate decision to put this £200 million in our Technology and Innovation Centres that we hope will make it easier to move ideas from the university and the lab out into commercial application. Q191 The Chairman: I will just come to Lord Wade in a moment but I wonder if I could ask Mike Penning, going back to the TSB, are you aware of any examples where projects sponsored through the TSB have been of value to the Department for Transport? Is there a linkage that you’re aware of? Mike Penning: I’ll have to be honest, no, I can’t. If there is I will write to the Committee and let you know. Q192 The Chairman: Thank you very much. I would appreciate that. I don’t know whether, David Willetts, you have any thoughts about which particular departments that work sponsored by the TSB has most traction with. Is it spread evenly across departments? David Willetts: Even with the Department for Transport, and this may not be a specific example of Department for Transport spending, of course the TSB has had a programme of supporting low energy vehicles and innovation there. The TSB has supported some of the areas that the Minister referred to in trying to create the infrastructure for low carbon vehicles and encourage innovation in industry, in moving into that market. I think six car manufacturers have benefited through support like that. Mike Penning: To be fair, that tends to come under BIS, not the department, even though we are the sponsoring department. Q193 The Chairman: Perhaps this is for David Willetts. Again on the theme of the TSB and reflecting back on Francis Maude’s comment that in the future central Government will be less controlling over what goes on in local government. Local authorities obviously have an important procurement role, does the TSB have any role to inform or influence local authorities on potential innovative solutions in procurement? Would you see that as part of their remit?

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David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 David Willetts: I don’t think the TSB would be a prime sort of agency for communicating directly with local authorities. What the TSB can do is support innovation. As I say, there are in British universities some really smart ideas that involve low energy lighting and it’s an area that the TSB has supported. So when down the track a local authority is having to reach some procurement decisions on what kind of new highway and street lighting it buys, given that it probably also has obligations on the use of its carbon use, I hope, perhaps even without realising it, that it might find itself procuring products that are only available because five years or 10 years earlier there was an initiative by the TSB that in turn would have drawn on the work of the Foresight programmes led by the Government Office for Science. So the aim is, without it all being terribly sort of clunky, sometimes without the connections always being immediately obvious to people, Foresight work by the scientific community, technology support from the TSB, a system of procurement that particularly draws on forward commitment procurement, and then an actual procurement decision where Francis and his team at the Cabinet Office don’t have to have clunky requirements on innovation but because of the things we’ve already done, when you’re looking for the smart way of buying the kit, because of the work we’ve done upstream there are technologies, hopefully developed in Britain with British businesses, that meet the bill. Q194 Lord Wade of Chorlton: You made the point, which I agree with, that British industry is very innovative but the innovation is driven by its own requirements. Francis made the point earlier that in some circumstances the innovation may not be there. Putting those two points together, I think what we wanted to understand was how much Government itself would say, “We have a problem that we want to have a solution to” and we will encourage and go to a research team or to private businesses to say, “Can you find a solution to that problem?” That problem might be a medical problem, it might be a defence problem, it might be a problem in organisation. How much do you see the use of private industry to solve problems that you have but they might not yet have an innovation because nobody has asked them to do it? Francis Maude: That’s a very good question. I suppose I take the general view that businesses innovate not for their own purposes but to serve their customers. You want an innovative product, process, different way of providing services because that is what the customer wants. We are a big customer and we are hungry for innovative solutions. We want different, better ways of getting things done and taxpayers’ money being used to deliver public services to our citizens. So that is a huge driver. I don’t think Government will always know where there may be innovative solutions around. I think David is absolutely right that quite often it will happen that at different points in the chain, if you like, there will have been State intervention of one sort of another that has promoted innovation that may kind of randomly almost result in there being an innovative solution available in the market when the Government, as a customer, comes along and buys. I think what the State as an intelligent customer should be doing is constantly engaging with the supplier universe. You constantly want to be talking to the market about what your needs are going to be and getting the world of suppliers to be thinking about do they have shots in their locker that can be developed in order to meet future needs. I think we have to be very open about engaging in that way. There is a bit of an inhibition about this at the moment because there is a fear that if you are seen to engage in that way you may in some way prejudice future procurements. I don’t think that makes sense. I think intelligent customers are constantly engaging with their 140

David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office; and Mike Penning, Parliamentary Under-Secretary of State, DfT— Oral evidence (QQ 176-196), 25 January 2011 supplier universe. Big organisations that outsource their IT to outside providers will say that what they need to retain in-house is a relatively small but high quality capability, a big part of which is scanning the horizon, scanning the market, talking to suppliers, looking for new suppliers, looking for the innovation, looking for the spinouts from universities that are developing something groundbreaking. I think that is crucial. That is the very earliest stage. It is way pre-procurement and it is separate from what David’s department is doing in supporting the supply side. This is being a very intelligent and farsighted buy side. David Willetts: Can I just reinforce that. There is one specific initiative, the SBRI, which is directly aimed at this, which is smart procurement that is aimed at driving innovation. We will be happy to provide to the Committee, if it would be helpful, a note on how the SBRI works, the two main departments that have been using it, the Department of Health and the Ministry of Defence—I should, by the way, inform the Committee that I did chair a company in opposition that did secure SBRI funding in relation to the Department of Health. I think the general view is SBRI in Britain, rather like drawing on SBIR in the US, is a way in which you can drive innovation. I think there are some specific examples that we could list for the Committee in a note, if it would be helpful. As I said, we’re not going to get a proper evaluation for a little bit longer but initial indications are quite good. Lord Wade of Chorlton: Just following on, what we want is to be confident that the Government, although taking efficiency and knowledge of the matter is very important, at the same time would encourage a situation where Government problems could go to the open market and say, “Can you find a solution to that that we can make full use of?” That is the point. Q195 The Chairman: I think it would be helpful for us to have a note on the SBRI. Perhaps you could also comment on the size of it, because one of the pieces of evidence we had from an earlier witness was that the SBRI in scale is so small that it can’t have sufficient impact, but it would be useful to get a comment on that. Mike Penning: Just very quickly, I’ve looked at my roadmap. It’s 11 out of 14 new road projects, not 11 out 15, that are managed motorways. I just wanted to make sure the Committee was fully informed. Q196 The Chairman: I think we ought to draw this session to a close. Are there any final points you would like to make before we close the session, or do you feel that we have given you an opportunity to express your views and make comments as you wish to? Francis Maude: For my part, I think I’ve pretty much got it all off my chest. The Chairman: That is good to know. It has served a purpose in that case. So, thank you very much indeed for making time to come and give evidence to us and for your help. We will, as I’m sure you’re aware, be sending you a copy of the transcript, if you wish to make any corrections, and in due course when we’ve completed our report you will see the final report as it is submitted to the Government. So, thank you very much indeed. Francis Maude: Thank you, and apologies again for David and myself arriving late.

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Department for Business, Innovation and Skills—Supplementary written evidence (PP 37)

Department for Business, Innovation and Skills—Supplementary written evidence (PP 37) Information provided by David Willetts, Minister of State for Universities and Science, Department for Business, Innovation and Skills (BIS), as requested by the Committee during the Ministers’ oral evidence session on 25th January 2011. This paper gives an explanation of the Small Business Research Initiative programme and the Forward Commitment Procurement model and provides examples of how both of these procurement mechanisms are being used by the public sector. Small Business Research Initiative (SBRI) SBRI is a mechanism to enable innovation in products and services through the public procurement of R&D. It provides innovative solutions to public sector challenges, a route to market for new ideas, and new business opportunities for technology companies. SBRI stimulates the public sector to procure technology development to meet its future needs; provides a mechanism for competition; and involving early-stage companies who might otherwise not compete for government R&D contracts. Examples •

Engagement by the Department of Health and the NHS has led to a significant number of ideas which promise to bring real improvements to public services such as: o Better means of detecting pathogens and improving hand hygiene in order to reduce the incidence of healthcare acquired infections such as MRSA. o Finding ways to help manage the growing numbers of people with long-term health conditions, such as diabetes, coronary heart disease, and high blood pressure. o Combatting obesity in children. o Finding new ways to improve patient safety. o New ways to detect / screen for atrial fibrillation and support the rehabilitation of stroke patients. o Helping people with dementia to live independently for longer. o Identifying new technologies to reduce hospital admissions by 20%.

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One of the largest competitions to date has been 'Retrofit for the Future' - a competition launched by the Technology Strategy Board as part of the Government’s target of saving 80% of CO2 emissions by 2050. With the support of CLG, DECC and the Homes and Communities Agency, Phase 1, the feasibility and design phase, saw £3.5 million awarded to 180 organisations covering 193 separate projects. In Phase 2, the build phase, 87 projects were awarded contracts to build 'demonstrator' houses in 2010/11 with £13.5 million funding.

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The Department for Transport and the Highways Agency ran a competition through the SBRI programme to explore ways in which synthetic environments (i.e. virtual reality) could be applied in the transport industry. Nine viable competition 142

Department for Business, Innovation and Skills—Supplementary written evidence (PP 37) entries were received and three companies were awarded £100,000 contracts to develop a prototype model. •

The Home Office and the Design Council ran a competition to develop innovative and marketable solutions to make mobile phone handsets and the data stored on them, harder or less desirable to steal. A total of £400,000 was offered to winning teams of designers and technology specialists.

Recent Competitions •

The MoD, in conjunction with the MoD Weapons Technology Centre, has just launched a competition seeking applications that deliver novel and low-cost technologies for future complex weapons. Whilst proposals in any area of complex weaponry will be considered, two priority areas exist: o Electric power systems: Many missile systems rely on thermal batteries for electric power and whilst they combine adequate power levels with long shelf life they are often expensive and specific to individual applications. This is a particular challenge for any future lightweight, low cost weapons which will require innovative systems solutions to meet electric power requirements; and o Through-life risks / opportunities for increased use of composite materials in complex weapons: Advances in composite material technology could provide a major boost to the performance of future weapon systems. However, their application has been limited by lack of understanding and confidence associated with their use over the whole life of the system. The challenge is to understand innovative applications of emerging materials technology and the opportunities and risks they offer.

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DECC and the TSB are running a competition for the development of methods to measure the energy yield from the bio-based fraction of mixed waste. This follows on from the recent competition run in conjunction with Defra which focused on determining the biogenic energy content of a range of mixed waste streams prior to their use for energy recovery. In this competition we move the focus to measuring the renewable energy output from all wastes, especially mixed streams, that may be utilised across the whole range of energy conversion technologies listed in the Renewables Obligation Order 2009 (thus widening the focus from just combustion to all technologies, and concentrating on measuring the actual energy output from mixed wastes which is renewable, rather than the renewable content of the waste feedstock itself).

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The MoD launched a competition through its Centre for Defence Enterprise seeking novel technologies that reduce the requirement for manned distribution platforms and therefore lessen the likelihood of casualties. The supply, and re-supply of food, water, fuel, ammunition, etc to front line personnel is essential; this often occurs within a hostile environment. The challenges faced include: o Distributing different types of supply materiel (e.g. liquid, palletised); o Achieving mobility and manoeuvrability across difficult terrain (e.g. mountainous, desert, urban), extremes of climate and in all environmental conditions; and, o Travelling over distances of up to 750km. 143

Department for Business, Innovation and Skills—Supplementary written evidence (PP 37)

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BIS, supported by JISC TechDis (UK advisory service on accessibility and inclusion), are running a competition to produce a location and gesture-based communication system which enables learners to interact with mobile technology to produce text and/or audio output and execution of commands. If gestures can be easily learned, recognised and converted to digital data, a whole new world of opportunity is opened up. Gestures need not only be converted to text or audio output, they could equally be converted to electronic command signals so that learners with limited motor control could live more independently.

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BIS, supported by JISC TechDis, have launched a competition to allow access to navigable and personalisable digital information, independently, spontaneously, anytime, anywhere and in an effective and user-friendly way. Digitisation has opened up access to a mass of information for a vast number of people across the globe. In spite of this and the implementation of legislation, accessibility standards and guidelines, equality of access is still denied to millions of people in the UK. In many cases the end user finds digital information difficult to view, comprehend or to navigate successfully.

Value The development and implementation of new technologies is inevitably a long-term matter, therefore as the new SBRI scheme was launched only in April 2009, it is not yet possible to put figures on the contribution of SBRI to public service delivery. However, the initial indications are positive: since the redesigned programme was launched, the TSB has run over 45 competitions, which have led to contracts with a total value of over £35m being placed with SMEs, of which 75% are micro or small businesses (under 25 employees), typically the most difficult cadre of companies for the public sector to contract with. The SBRI programme will be evaluated as part of the Quinquennial Review of the TSB in 2012, which will review the impact of the TSB and all its programmes. In the longer term, the impact of SBRI will be assessed through a range of measures, including the size of the programme in financial terms, the number of contracts awarded, the number of projects successfully completed, and the number of products developed through the programme that have been successfully launched into the market and purchased by public or private sector procurers. The main factor determining the success of the SBRI programme is the quality of the competitions, which depends on technology knowledge, design and organisational capability, as well as adequate finance. Therefore simply increasing the size of the programme would not necessarily make it more effective. However, BIS believes that there is scope to expand the programme, and through the TSB is actively seeking to do this. Forward Commitment Procurement (FCP) Forward Commitment Procurement is a practical supply chain management tool that creates the conditions needed to deliver innovative, cost effective products and services. It provides a framework for purchasers to seek solutions to unmet needs, rather than specify required outputs; involves early engagement with business in order to identify potential ways of meeting the need; and seeks to go beyond the customary supply chain. 144

Department for Business, Innovation and Skills—Supplementary written evidence (PP 37)

The FCP approach enables the public sector to fulfil its role as a natural lead market for environmental products and services whilst delivering the cost effective solutions needed to address problems such as climate change and economic and social sustainability. It transforms the market for innovative and sustainable solutions, making new and emerging solutions more affordable and widely available, and providing a way for the public sector to manage the risk of procuring innovative products and services. FCP involves providing the market information of unmet needs and, critically, the incentive of a forward commitment: an agreement to purchase a product or service that currently may not exist, at a specified future date, providing it can be delivered to agreed performance levels and costs. Although designed to address the particular barriers to market faced by environmental innovations, the approach is also being used to support the procurement of innovative solutions in other markets, such as sustainable development, healthcare and construction. Examples •

The Ultra Efficient Lighting (UEL) project is being led by the Rotherham NHS Foundation Trust and supported by BIS and the Department of Health. Work has included a Market Consultation Workshop facilitated by the UK Displays and Lighting Knowledge Transfer Network. The Trust is developing UEL solutions for their wards - a transferable option that could be applied across the whole of the NHS.

•

HM Prison Service used FCP to develop a zero waste mattress and pillow solution with cost savings estimated to be in the region on £5 million over the life of the contract. In addition to savings for the individual organisation there is also the opportunity of adoption across the wider public sector, for example the mattress solution could be adapted for the Health Service.

•

A more recent project is the requirement by Nottingham University Hospital for a cost effective, ultra low carbon energy solution to replace the existing coal fired boiler plant on the Trust’s city site. The Trust is aware that the goods and services needed to address its energy and carbon reduction needs are either not currently available on the market, are too costly or are unacceptable and that a ‘business as usual’ methodology will not deliver the requirements. It has therefore adopted the Forward Commitment Procurement approach to identify an optimal solution.

January 2011

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Department for Business, Innovation and Skills—Supplementary written evidence (PP 37) Background Note on Small Business Research Initiative (SBRI) Purpose of SBRI SBRI is a mechanism to enable innovation in products and services through the public procurement of R&D. It provides innovative solutions to Public Sector Challenges, a route to market for new ideas, and new business opportunities for Technology Companies. Benefits • Enables Public Sector to :o Use innovation and technology to deliver significant improvement in operational performance or in progress towards policy objectives; o Access new ideas and technologies that would not be reached through normal channels; and o Encourage innovation by defining and broadly exposing challenges and desired outcomes and then procuring and supporting the R&D effort. •

Supports innovative businesses by providing :o An intelligent lead customer to help validate and refine idea and provide a route towards market for new ideas and technologies; o R&D contracts to progress the idea (100% funded); o Credibility for follow-on investment from Private Sector; and o A simple means to engage with the Public Sector and a step on the procurement ladder.

How SBRI Operates • A procurement process operating under pre-commercial procurement rules delivers 100% funded R&D contracts and does not involve state aid. • Challenge identified based on a significant need or issue for which available solutions are absent or not yet good enough and where innovation is needed. • Challenges are typically in the operational performance space (where Public Sector is customer for R&D and most likely also for resultant product) or in policy space (where Public Sector is customer for R&D but not necessarily for final product). • Challenge is broadly communicated through Technology Strategy Board channels to ensure that it is seen by companies beyond normal suppliers and discussion partners – seeking novel ideas from different market sectors and small innovative companies. • Ideas are assessed and contracts issued to procure the R&D necessary to move the idea through feasibility and prototype phases on route to final commercialisation.

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Department for Business, Innovation and Skills—Further supplementary written evidence (PP 41)

Department for Business, Innovation and Skills—Further supplementary written evidence (PP 41) Information provided by the Department for Business, Innovation and Skills (BIS), as requested by the Committee Clerk in preparation for publishing of the Committee’s Report. 1. What is the amount of money spent on Forward Commitment Procurement and on Competitive Dialogue Procedure? The SBRI is worth around £25 million a year, is this correct? SBRI: Since re-launch in April 2009 the SBRI has awarded 577 contracts with a value of over £39M. The rough breakdown by years is £28.5m in 2009/10 and £10.5m in 2010/11. At Budget 2011 the government committed £20m over the next two years to the SBRI, including £10m from the Department of Health on specific competitions to address healthcare challenges. FCP: To date FCP has been operating on a much smaller scale than SBRI with most projects yet to reach the procurement stage. The only completed FCP project is the HM Prison Service procurement of a fully managed Zero Waste Mattress system. It is difficult to identify a yearly figure for expenditure on FCP as other elements need to be taken into account. For example, with the prison mattress project the cost of supply and disposal was estimated to be in the region of £2.8 million per year. Use of FCP led to a fundamental shift in the procurement approach and, after trials, the procurement in March 2009 of a fully managed Zero Waste Mattress system, eliminating waste to landfill and leading to savings estimated to be nearly £5 million over the life of the contract (5 years). CDP: Cabinet Office estimates that 128 awards were made under the competitive dialogue procedure in 2009 with a total value of £21.1 billion. 2. What was the outcome of the following two SBRI competitions: a) The DfT and HA virtual motorways; and b) The Home Office and Design Council mobile phone security? Virtual Motorways The DfT and the HA ran a competition through the SBRI programme to explore ways in which synthetic environments (virtual reality) could be applied in the transport industry to model and manage complex traffic problems on motorways. Nine viable competition entries were received and three companies were each awarded £100,000 contracts to develop a prototype model. The environment selected for the competition was that of a “managed motorway”. The managed motorway approach has already been applied to a section of the M42 and has led to better traffic flow and air quality. Costs of implementation are around one-fifth as much as widening a road. This section of motorway was modelled for the project and the intention was to use the synthetic environments generated via this competition allow the Highways Agency to maximise the benefits of this approach. Three Competing Approaches: 147

Department for Business, Innovation and Skills—Further supplementary written evidence (PP 41) 1. Risk Solutions, created a simulator (VRSimm) by combining a traffic flow model of the 17km active traffic management section of the M42 with a state-of-the-art virtual reality version of the route. The behaviour of lorries, cars, vans and motorcycles are simulated for a range of scenarios including different weather conditions, lane closures, speed limits, road debris and accidents. 2. Ambient Performance created TRAF*MAN an immersive synthetic visual environment for modelling and managing incidents on Managed Motorways. The innovative aim of TRAF*MAN was to merge known network performance data with autonomous virtual ‘vehicle drivers’ whose dynamic decision-making is in response to real time triggers – signs, signals, tailbacks, lane closures, opening or closing of the hard shoulder – all presented in a virtual environment. 3. XPI used their experience of traffic flow simulation and visualisation, combined with human factors expertise form University of Southampton to build MAMOOSE. There was a detailed analysis of human behaviours in the control room. In addition to simulated traffic, the model included the facility for vehicles to be “driven” by human operators as well. All 3 projects completed their work by June 2010 and the Highways Agency indicated that there was valuable learning in each of them. In particular the Risk solutions prototype was identified as a practical and innovative solution with potential for further exploitation. Mobile Phone Security The Home Office and the Design Council ran a competition to develop innovative and marketable solutions to make mobile phone handsets and the data stored on them, harder or less desirable to steal. A total of £400,000 was offered to winning teams of designers and technology specialists to develop their products. Three different solutions have been found: innovative encryption systems; a key card associated to the mobile telephone to make payment transactions; and a blue tooth device that helps protect against physical loss of an electronic device. Three companies were successful in accepting contracts to develop technologies that address these issues. The competition encouraged an increase in the number of handset manufacturers who added near-field communications technology to mobile phone handsets. As a result of the competition Proxama, one of the successful companies, is now working closely with both MasterCard and Visa, who believe that the mobile phone will eventually be used as a wallet where multiple cards are kept. This has obvious security implications. The work with Visa also focuses on the forthcoming Olympics, where they are expanding the wallet concept, so that vouchers and tickets to events can be sent to mobile phones. Following their success through SBRI, Proxama is now developing tools for smart posters, which can be physically tapped to reveal further information. Applied to the Olympics, the tapping of posters could reveal details of an event, a map of a stadium or crucial security information. Proxama has grown from four to 12 people in the last year – which it attributes to the competition. This has also involved the recent takeover of a Cambridge based company working in a related technical area. This is excellent news as without the Design Out Crime 148

Department for Business, Innovation and Skills—Further supplementary written evidence (PP 41) competition the company does not believe it would exist today. The competition raised the profile of the company and allowed it the freedom to develop and demonstrate technology which could be freely discussed with others in the security, banking and marketing sectors. May 2011

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Department for Transport, Cabinet Office, Department for Business, Innovation & Skills (BIS) and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010

Department for Transport, Cabinet Office, Department for Business, Innovation & Skills (BIS) and Highways Agency—Oral evidence (QQ 1-34), 21 December 2010

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Mike Penning, Parliamentary Under-Secretary of State, DfT; David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office—Oral evidence (QQ 176-196), 25 January 2011

Mike Penning, Parliamentary Under-Secretary of State, DfT; David Willetts, Minister of State for Universities and Science, BIS; Francis Maude, Minister for the Cabinet Office—Oral evidence (QQ 176196), 25 January 2011 Please see page

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The Design Council—Written evidence (PP 29)

The Design Council—Written evidence (PP 29) 1. Introduction The Design Council welcomes the opportunity to respond to the House of Lords Science and Technology Committee inquiry into public procurement as a tool to stimulate innovation. The Design Council is the UK’s national strategic body for design and government advisor on design. The Design Council has led a range of initiatives promoting innovation in procurement, such as community-led regional initiative Designs of the Time 37; and the innovative procurement projects for the Department of Health 38 and Home Office 39. Our views are drawn from this experience, and we believe that innovation in procurement through design is a better costcutting option, not least by moving away from “salami-slicing” by incremental savings through competitions, to a more holistic, redesign approach to procurement, which is focussed on procurement for results rather than following existing processes. 2. Why design? Good public procurement recognises the needs of users. Design methods facilitate greater collaboration between procurers, suppliers and users before solutions are specified, leading to tested briefs which respond to service users’ needs. Recognising the needs of users Design tools and methods focus on the needs of individuals and would help the government procure solutions which deliver user-centred public services and provide value for money. For example, visually mapping the end-to-end patient journey allowed BUPA to improve on aspects of out-patient experience which had previously been neglected. 40 Employing this approach in the specification phase of procurement would ensure that services respond to user needs which have yet to be met. Strengthening stakeholder relationships The development of relationships between suppliers, clients and stakeholders has been acknowledged as a key driver of innovation. Design strengthens these relationships by adopting a more collaborative approach early in the procurement process: techniques such as visualisation and journey-mapping enable greater communication and clarification of vision among the parties involved. 41 Managing risk Design approaches such as visualising scenarios, prototyping and testing ideas with users can reduce the risk inherent in innovation by allowing projects to ‘fail early and cheap’, before significant public finances are committed. There is an important distinction between prototyping – the process of developing small scale ‘mock-ups’ in the research phase of a project – and piloting, where a larger-scale test version is rolled out over a longer period. 42 http://www.designcouncil.org.uk/our-work/challenges/Communities/ http://www.designcouncil.org.uk/our-work/challenges/Health 39 http://www.designcouncil.org.uk/our-work/challenges/Security 40 Parker, S., and Heapy, J. (2006) ‘Journey to the Interface: How public service design can connect users to reform.’ London: DEMOS 41 These techniques have been used successfully at Luton and Dunstable hospital, where designers facilitated workshops with managers, frontline staff and patients that resulted in solutions for longstanding service problems. For full details see Design Council Magazine issue 4: www.designcouncil.org.uk/dcm 42 For a discussion of design’s role in risk management in public services see: Jones, M., and Samalionis, F. ‘Radical service innovation.’ Business Week, 20 October 2008 37 38

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The Design Council—Written evidence (PP 29)

3. Lessons from our work The most advanced of our innovative procurement projects is in the field of infection control, where we have been seeking to reduce the multi-million pound cost of MRSA and cDefficile. The project, called Design Bugs Out, involved engaging frontline staff, policymakers and leading specialists to work with designers in researching and developing new ideas. These were then developed further through open competitions involving leading manufacturers and design teams. By bringing all the key decision-makers into a closed-loop system and passing IP from the Crown to the producer, we have been able to accelerate innovation and engage industry in the early-stage development of new healthcare products so reducing the costs to the taxpayer. Achievements include: - Rapid innovation: all the ideas were developed in under a year. Eighteen months on four out of eleven concepts are in production in the UK with orders globally. - NHS and industry support: high approval rates including staff, scientists, and patient groups based on the development of innovations to reduce infection that also exceed expectations on price, quality and productivity. - New Open Innovation model: the procurement and innovation approach has been recognised as successful by the NHS and is currently being applied more broadly. Earlier this year, the NHS launched showcase wards fully kitted out with new Design Bugs Out products. These included the re-designed easy-to-clean Commode which will hand back many hours of nursing time back into the system. Designed by Pearson Lloyd, who designed the Virgin Atlantic Sleepseat, the Commode and the new bedside chair were also on display at the Design Museum as exemplars of ergonomics. 500 Commode units are sold in the first 4 months of production, serving over seven NHS Trusts across the UK with export sales immanent. Design Bugs Out is one of a number of similar projects that Design Council is running with NHS, other government departments and private sector partners, including: Design for Patient Dignity – The Design Council and the Department of Health, worked in partnership worked in partnership to bring together leading UK designers and manufacturers with frontline healthcare staff and patients to help improve patient privacy and dignity in NHS hospitals. In this project, six teams of designers and manufacturers, as well as healthcare design specialists from the Royal College of Art Helen Hamlyn Centre, came up with innovative new designs that show how different privacy and dignity issues could be solved. These initial design concepts and prototypes will be tested and refined before being made available to hospitals, but what they demonstrate is how designers, working closely with patients and healthcare experts, can bring new thinking to real and important challenges and come up with creative new solutions. Five out of ten initial concepts are due to enter production this fiscal year with orders already confirmed by NHS Supply Chain. Design Crime Out – a partnership between the Design Council and the Home Office, demonstrating how designers can stimulate innovation and provide solutions to big problems such as crime in our homes, schools and businesses and to hot product and alcohol related 153

The Design Council—Written evidence (PP 29) crime. Some of the project outcomes include launching new prototypes with the brewing and pub industries to help reduce alcohol-related crime. Leading glassware manufacturer, Arc International, has begun trials of what is being called a ‘next generation’ pint glass, which uses a unique design and special production technique to create a safer glass. They all share similar principles that could be applied across different sectors: • A challenge model with a national competition which paired designers with manufacturers to develop innovative products and solutions for solving complex issues facing hospitals; with small seed money of £25, 000 awarded to winning teams. • An ‘open innovation’ approach throughout the procurement process, with expert panels, advisory boards, front line staff, manufacturers, designers and researchers all involved in the process of researching and developing design briefs. This process was coordinated by the designers. • In some cases, designers retained intellectual property rights to their designs, rather than this reverting back to the government department, thereby allowing them to exploit the commercial potential of their ideas. 4. Recommendations: Our practical experience has shown how design-led public procurement can effectively encourage innovation within industry, deliver new products and services, and secure costreduction as well as service improvements. We therefore recommend the following principles to be embedded across government procurement: 4.1 Ensure greater collaboration with suppliers to frame briefs A pre-specification phase should be built in to the procurement process – to define the problem, develop innovative ideas and solutions and to appropriately frame subsequent briefs in collaboration with suppliers and users. 4.2 Provide incentives to suppliers to encourage innovation Allowing suppliers to acquire intellectual property rights can encourage greater innovation by providing sufficient incentives. This clearly needs to be done while balancing the need for value for money for the taxpayer. The Department of Health should be commended for its innovative approach to procurement when it partnered with the Design Council to reduce hospital acquired infections. 4.3 Use design methods to identify user needs Use design methods and tools to identify user needs by prototyping ideas, testing them with users and modifying and adapting further to meet latent and expressed user needs. 4.4 Encourage smaller innovative companies to bid for public sector contracts Harness the creative power of the UK design sector and encourage more small and medium design companies to bid for government contracts. 4.5 Include design as part of the R&D definition in the Small Business Research Initiative We would be happy to provide further information on any of the items above and/or other areas of the Design Council work and share knowledge on design tools and methodologies that could be effectively applied to drive innovation across public procurement. December 2010 154

East of England Strategic Health Authority—Written evidence (PP 9)

East of England Strategic Health Authority—Written evidence (PP 9) 1. INTRODUCTION 1.1 The east of England Strategic Health Authority is the regional NHS centre for the six counties of Hertfordshire, Bedfordshire, Cambridgeshire, Norfolk, Suffolk and Essex. It represents over 7.5 percent of the regional economy, spending over £8.5 billion of public funds. 2. INNOVATION 2.1 The Strategic Health Authorities were charged with a statutory duty to promote Innovation by the then Health Minister, Lord Ara Darzi, in 2008. 2.2 In the east of England an Innovation Council was formed – bringing together industry, education, clinical and service managers alongside entrepreneurs’ to support the development of a strategic approach to promoting and supporting innovation. 2.3 The Innovation Council has focussed on all three aspects of the innovation cycle: • Invention of new technologies and processes • Adoption of new ideas • Diffusion to spend what has been proven to work. 2.4 To support this work the NHS east of England formulated and launched a regional Small Business Research Initiative (SBRI). 3 SMALL BUSINESS RESEARCH INITIATIVE 3.1 The SBRI-East was launched in spring 2008. The objectives were: • To find innovative solutions to identify often intractable problems and to promote innovation and links across the healthcare and business sectors. • To develop partnerships with regional economic agencies, businesses and the science and industry sector to evidence support for the regional economy during the recession. • To use the power of public procurement to secure bespoke R&D technology development that was specific to NHS need. 3.2 The programme secured £2.8m from four key partners – SHA £1m; Technology Strategy Board (TSB) £800k; East England Development agency (EEDA) £200k; European Regional Development Fund (ERDF) 800k. 3.3 A defined call in the areas of long-term conditions, patient safety and keeping children active was launched to the business community. Appendix 1 is the call in the area of long term conditions - it set out the nature of the challenge, the size of the potential market for products and services and the known technological advances already identified. 3.4 The call for innovative ideas was targeted at Small to Medium Sized Enterprises (SMEs). 177 applications were received. From these a careful assessment by clinicians, business and health managers and technology experts led to 11 successful SMEs who were awarded approx. £100k each to develop the feasibility of their proposal. Attached in Annex 2 is a summary of each of the 11 projects. 155

East of England Strategic Health Authority—Written evidence (PP 9)

3.5 A further assessment at the end of 6 months of feasibility testing led to four companies being funded to develop their products ready for market. The successful four are earmarked in Appendix 1. 3.6 The rational for the SBRI-East programme was to address identified healthcare problems. Our procurement budget tends to rely on known solutions. It can be difficult to establish opportunities for new product due to the complex national, regional and local purchasing environment. 3.7 The SBRI programme enabled us to set out the nature of the problem and invite ideas. It also enables us as the lead customer to develop the product together with the manufacturer or developer. This should enable bespoke solutions where the environment of use is so varied. 3.8 The NHS has limited or no mechanisms for engaging with business to develop better solutions through innovative new ideas and technologies. The research and development is geared towards pharmaceutical trials rather than devices. 3.9 The evidence of innovation is in the business approach and in the examples of products that come forward. The product concepts were often not new to commercial or nonhealth environments, but were innovative for healthcare and/or the NHS. 3.10 For example, one company’s solution to detecting asthma in racehorses offered the opportunity of early detection of asthma in babies and the frail elderly – current detection requires a forced exhalation which can not always be achieved in the young or frail. 3.11 The value of the SBRI approach is that it enables an open dialogue with the business sector rather that a pure procurement call. SBRI is a mechanism to achieve closer problem definition and greater understanding of the new technology and innovation market place would benefit healthcare procurement. 3.12 The cross government mechanism used in this instance was to have a shared identification of problems (support SMEs and the economy, develop new technology and innovation and find solutions to healthcare problems) and seek to join funding into a ‘pooled’ pot to fund solutions. 3.13 This activity was supported by the engagement of clinicians in the problem definition stage and the assessment of bidding companies. The enthusiasm and engagement of clinicians in this process was particularly gratifying. The process of open competition offered the opportunity for clinicians to engage in conversations with commercial partners without the concerns of obligation and/or commercial advantage. This helped to challenge the culture among clinical leaders who understood the opportunity of this new approach. 4. CONCLUSIONS 4.1 The SBRI process brought cross departmental working together with resources and commitment. It leveraged the power of public procurement to stimulate the SME market place and hopefully the outcomes will see at least four new products sold into the NHS which will save millions of pounds of public money and thousands of lives. 156

East of England Strategic Health Authority—Written evidence (PP 9)

4.2 This approach was adopted as currently we have no mechanisms for a dialogue with industry that can support the development of innovative solutions. The process saw the development of the intelligent customer in the clinicians and health service manager as well as de-risking the development of innovative technology to tackle health care problems. 4.3 Specific benefits have shown: • A £1million investment by the SHA was leveraged by the TSB, EEDA and ERDF funding making a total pot of £2.8m •

This investment enabled 11 companies to develop the feasibility of their products. From this 11 four have been selected to receive phase two funding that will take their products from feasibility to final production and where necessary clinical trial.

4.3i Cambridge Design Partnership is developing new technology to reduce the occurrence of Ventilator Associated Pneumonia (VAP) in the Intensive Care Unit. VAP is the most prevalent infection in the ICU, with a 10-15% incidence rate. Thousands of people die unnecessarily of VAP every year in the UK, and the cost to the NHS of treating the condition runs into hundreds of millions of pounds. The new technology aims to fully humidify the breathing air while preventing the colonisation of bacteria. Benefits to partnership: • Potential saving – 2,000 lives per year across the NHS • Potential saving - £175m per year to the NHS through reducing bed-days and diagnostic tests and CO2 emissions • Ready for trial in 18 months • New company in the East of England will create hi-tech jobs in medical sector 4.3ii Eykona Technologies have identified a substantial and recognised unmet need in the objective measurement and characterisation of wounds such as diabetic ulcers. It is proposing to meet this need through the use of a patented 3D imaging medical device based on cutting edge technology developed in the University of Oxford and consisting of a proprietary camera and software package. The project will deliver hand-held 3D imaging hardware suitable for initial evaluation by clinicians. Benefits to partnership: • Improved monitoring of wounds leading to potentially better clinical decisions and shorter healing times – eg for 38,000 patients with diabetic ulcers, leg and pressure ulcers. • Ready for trial in 6 months • Completed a £1.19m investment round led by VCs on the back of the phase II contract. • Remote monitoring will reduce need for patient and healthcare professionals travel thereby reducing CO2 4.3iii Oxford BioSignals’ - Unique integrated system for continuous non-invasive assessment of a patient’s five vital signs, including those that are ambulatory: body temperature, blood pressure, heart rate, oxygen saturation and respiration rate. This technology is founded on evidence-based intelligent algorithms. Applications include patient health monitoring and cardiac safety. The Visensia patient monitoring systems fuse vital signs to deliver a proven predictive assessment of patients’ health. At University of Pittsburgh 157

East of England Strategic Health Authority—Written evidence (PP 9) Medical Centre in the 18 months prior to deployment in a step-down ward, there were more than 50 unexpected fatal cardiac arrests; in the 18 months since Visensia was introduced there has been none. The project aims to exploit wireless technology to make Visensia’s life saving, real-time monitoring widely available as a low-cost, unobtrusive tool for nurses. Benefits to partnership: • Up to six hours’ early warning of patient deterioration in high dependency units • The trial held at the University of Pittsburgh demonstrated a reduction in the length of stay of 8.7%. • Ready for trial in 12 months. 4.3iv Sonovia Ltd has developed a novel ultrasonic patch technology for use in therapeutic and drug delivery applications for patients with chronic musculoskeletal conditions. The patch approach allows problem areas to be targeted to provide direct therapy from the passage of ultrasound combined with enhanced penetration of active substances such as antiinflammatories and analgesics. The thin flexible patch will allow simple, safe and effective devices to be used in the comfort of patients’ own homes. Benefits to partnership: • This novel ultrasound device allows for better treatment at home of osteoarthritis on the knee - Arthritis accounts for 2% of the long term conditions in the UK. 80% of the population over 60 years has some degree of osteoarthritis. • Ready for trial in 9 months • Company established in the East of England and will create hi-tech jobs in medical sector • Treatment at home reduces costs and CO2 emissions. 2 December 2010

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Professor Jakob Edler, Professor Luke Georghiou and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16)

Professor Jakob Edler, Professor Luke Georghiou and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) Please see page 159

Professor Jakob Edler, University of Manchester; David Connell, University of Cambridge; Professor Luke Georghiou, University of Manchester—Oral evidence (QQ 35-51), 21 December 2010 Please see page 44

Jakob Edler and Luke Georghiou—Supplementary written evidence (PP 32) Please see page 169

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Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16)

Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) 1) What is the rationale for using public procurement as innovation tool to stimulate innovation within the industries on which government relies? What evidence is there to support its use as an innovation tool? Rationale The justification for using public procurement of goods and services to drive innovation is a combination of two considerations (Edler/Georghiou 2007, Georghiou 2007). The first is that procurement of innovative products and services makes public services more effective and more efficient, and thus society more innovative and creative. The current austerity budgets may at first sight go against this rationale, as the entry cost of innovations tend to be higher than when procuring an established product or service. However, as with any investment, it is a combination of life-cycle costing and enhanced benefit (long term costbenefit) that is the basis of public purchasing decisions. The second consideration is that public demand for innovation incentivises industry to invest in innovation, with potentially substantial spillover effects. In general, it sends a signal to industry that the UK is a location in which market novelties can be introduced and diffused, it can give suppliers in the UK a leading edge and – depending on the nature of the product or service – potentially initiates further private demand. As public needs are similar in many other countries (transport, health, sustainability, efficiency more generally etc.), innovation procurement can also trigger export opportunities (the UK as a Lead Market). Thus, because of the market creation potential of the initial purchase of innovation, and because of the potential size of public demand for an innovation (e.g. car fleet for an agency, IT services for city region etc.) there is an additional, social benefit which provides a justification for the public buyer to invest in innovation. Finally in this category there is a particular benefit for innovative start-ups. Such firms often struggle to find the first customer to begin their ‘reference list’. A public purchase overcomes this credibility gap and is worth far more than a grant. The use of procurement to drive innovation is not new but in the past it was associated with mission oriented technology policies to pursue national strategic goals such as defence, aerospace, and health. In recent years the emphasis has broadened to support innovation more generally, and has been linked with public sector reform and with the pursuit of additional policy goals such as sustainability. This rationale is gaining force across the OECD members currently, with most countries designing explicit demand based strategies (the authors have attended OECD committee meetings and presented to those countries on various occasions). It is the result of an increasing understanding that it is not enough to create knowledge and new technologies and services, but that the uptake and application of innovation is crucial. Yet, this is often hampered by a range of market and system failures such as lack of information about innovation, lack of user-producer interaction, high learning and switching costs for potential users, and high costs of the first batch of innovations. An intelligent public buyer – or an intelligent procurement system – can help to overcome those failures. For a variety of reasons, public procurement may remedy those market and system failures and lead to the generation and/or better diffusion of innovations (see also Geroski 1990; Dalpé et al. 1992; Dalpé 1994, Edquist 1998). In contrast to R&D subsidies, a concrete state demand for innovations leads not only to technological capacities, but also to increased production capacities for innovations (Geroski 1990, p. 189). Finally, the state – supported 160

Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) by its purchasing power – may help to create meaningful standards, with convergence on a standard allowing firms to internalise spillovers and hence to increase the incentive to invest in R&D. Those standards further contribute to trust building for innovative products. Evidence Evidence to support the active use of procurement as tool of general innovation policy is patchy. Some early studies have confirmed the importance and leverage of public procurement for innovation. For example, these works showed that the procurement of innovation through public bodies in the US after the WWII triggered more innovation in the market place than did supply side measures such as technology programmes and other kinds of subsidies (Rothwell 1984, p. 330, Rothwell and Zegveld (1981) and, in consequence, that procurement policy "is a far more efficient instrument to use in stimulating innovation than any of a wide range of frequently used R&D subsidies" (Geroski 1990, p. 183). Dalpé et al. have empirically shown that in satisfying new societal needs and providing infrastructure and public service, the state very often has been more demanding than private consumers. In achieving its mission, in improving its function, the state very often acts as a lead user (Dalpé et al. 1992, p. 258 ff). In a survey of more than 1000 firms and 125 industry federations, over 50% of respondents indicated that new requirements and demand are the main source of innovations, while new technological developments within companies are the major driver for innovations in only 12% of firms (BDL 2003). Moreover, the authors of this submission have conducted (e.g. Edler et al 2005, Uyarra 2010) and collected a broad range of international ad-hoc case studies as identified in research reports and policy documents. Those cases are demonstrative of good practice and illustrative of how procurement processes indeed can lead to innovative activities of firms and create markets. While the authors of this submission believe that there is clear evidence to support the potential of public procurement of innovation, it is clear that further systematic understanding is needed. The evidence we have to date does not provide a comprehensive assessment of the extent to which innovation was actively pursued through procurement and of the innovation impacts of procurement practices. The evidence on the basis of case studies is also partial as examples tend to relate to product and technological innovations, paying less attention to more ‘ordinary’ forms of innovation that may occur through the recombination of existing goods or services, innovation in the delivery of existing services, or certain process innovations (Uyarra and Flanagan, 2010). Evidence tends also to be limited to the direct purchase of innovations, at the expense of the indirect impacts of procurement on the wider supply chain. Knowledge on the nature of supply chains resulting from public procurement contracts, and the spatial and environmental ‘footprint’ of those supply chains, is limited. 43 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? The procurement landscape in the UK is fragmented and complex. The OGC estimates that there are over 40,000 points of procurement across the public sector, with complex layers of policy, regulation, best practice and partnerships, as well as a multitude of buying organisations and consortia that seem to compete with each other over similar geographies or service offerings. 43 All three authors are currently conducting the empirical study UNDERPINN financed by ESRC/BIS/NESTA/TSB on the issue addressed by this report. The project includes a supplier survey and in/depth case studies (www.underpin.portals.mbs.ac.uk).

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Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) There has been a strong interest by the UK Government in the potential of procurement to drive innovation. In the last 10 years the Government has published more than 20 documents, including guidance, strategies, and White Papers, making the case for procurement driving innovation. In parallel, procurement has been used to address additional policy agendas such as regeneration, support to SMEs, sustainability, skills and equality, as reflected in the ‘Policy through Procurement Action Plan’ (OGC, 2010), announced in the 2009 Pre-Budget Report. Innovation and market shaping was the focus of the Kelly review, which focused on the mechanisms that could be adopted to increase competition and encourage better long-term capacity planning in markets where the Government has significant purchasing power. Similarly, the Cox Review (HM Treasury, 2005) of creativity examined ways in which UK business productivity could be enhanced by drawing on its creative capabilities. The former Department for Trade and Industry’s own innovation reports highlighted the innovation potential of public procurement and the need to make Government a more ‘intelligent customer’. The Innovation Nation White Paper (DIUS, 2008) proposed that each Government Department should develop an Innovation Procurement Plan (IPP) as part of its commercial strategy (see below, question 3). However, the problem lies in the implementation of all those intentions and report recommendations. The complex and changing procurement landscape and the ‘overcrowding’ of the ‘policy through procurement’ agenda has, over time, resulted in a proliferation of guidance and reports which can be confusing, even contradictory, to procurers. It is unclear how they should weight different policy priorities with value for money considerations. Public procurers struggle to meet multiple policy objectives and make sense of the many overlapping efficiency programmes, improvement initiatives, collaborative buying and other regional and national initiatives. The innovation and procurement agenda risks not receiving sufficient attention and commitment as new and more urgent policy goals emerge. The procurement of innovation agenda also runs the risk of being too diffuse and vague to have much impact, especially as it lacks diffusion of practical guidelines and concrete support for the average procurer to enable implementation (see below, question 6 and 7). Difficulties for procurers also arise in defining what constitutes innovation in procurement terms, and in relation to measuring the extent and impact of such innovations. Some efforts were made in the context of the IPP initiative launched by DIUS . However, there several key challenges to producing an effective measurement framework: •

At a basic level there is no accepted measurement system for innovation in public services – projects in the Innovation Index project led by NESTA have struggled to make clear progress;

•

For the private sector the OECD Oslo manual has set out a framework for innovation indicators which underpins the Community Innovation Survey but this barely touches upon procurement, including only the suggestion that whether or not a firm participates in government procurement is a useful indication of funding sources for innovation;

•

The UK innovation survey does not mention procurement (the only demand side incentive to innovate mentioned is regulation),government is treated as a separate category from clients or customers in terms of providing information for innovators; and funding from government specifically excludes innovation activities conducted under contract.

•

The UK is pioneering measurement in this area at Departmental level. However, there are instances of measuring particular types of procurement – either to target 162

Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) types of firm – the US Federal Government 23% set-aside for small firms and various (mainly survey based) efforts to measure green procurement requirements. Given the early stages of using this policy instrument, measurement itself should be seen as experimental. The co-evolution of practice and measurement is likely to lead to more stable indicators in 2-3 years time – a similar process took place in the 1980s with the measurement of collaborative R&D. The authors have developed policy evaluation frameworks for innovation procurement and for the EU’s Lead Market Initiative but these have only been tested under pilot conditions. 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? There are in principle two streams of implementation, (1) an intended shift of behaviour of procurers and commissioners across the board of the public sector and (2) dedicated schemes that are specifically designed to bring innovation into public procurement. (1) Intended shift of public procurement across all public bodies There are a range of activities to inspire more innovation in public procurement in general. For example, the innovation procurement plans mentioned above are a high level, strategic attempt detailing how departments at national level will embed innovation in their procurement practices and seek to use ‘innovation procurement’ mechanisms. Albeit uneven in the quality of reporting, detail and strategic remit, and policy priorities, the IPPs are a mechanism to increase awareness of about the issue of public procurement and to strengthen the case for innovation in departments’ procurement strategies and procedures. There is anecdotal evidence that the reports, through demanding an explicit justification of activities, help to strengthen the innovation case. In both central and local government, there has been a substantial drive to improve standards and corporate procurement capacity in England by the RIEPs and the OGC. Guidance documents have been produced targeted at specialist procurement staff on how to manage innovative procurement (e.g. OGC, 2007), how to best make use of outcome-based commissioning and procurement (DH/CLG/DCSF, 2007), and how to enhance innovation through better integrating SMEs and voluntary organisations in procurement (e.g. OGC, 2007). (2) Specific schemes dedicated for innovation procurement The specific dedicated schemes (2) include the Forward Commitment Procurement (FCP) initiative that was launched five years ago in a pilot scheme to spur sustainable innovation procurement (involved: DIUS/OGC/DEFRA). It essentially defines and broadly and proactively communicates specific needs and a concrete, binding willingness to buy solutions that meet clearly defined criteria and analyses market response (“market sounding”). It thus reduces risks and information asymmetries and mobilises suppliers and supply chain in a broader discourse that does not violate EU regulations. One frequently cited successful example is the purchase of mattresses for HM prisons service, there are further examples, a formal evaluation of those pilot schemes does - to our knowledge - not yet exist, and the scheme is not rolled out broadly yet. A second scheme is the Small Business Research Initiative (SBRI) that is implemented by the Technology Strategy Board. It is essentially a pre-commercial procurement scheme 44, having 44 SBIR type schemes fall into the category of pre-commercial procurement. They differ from ‘standard’ procurement in that the purchase is of R&D rather than goods and services. This has advantages, for example the fact of being regulated by the State Aid framework rather than procurement directives means that is is much easier to target benefits on a national or

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Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) a dedicated budget to finance R&D that promises to produce solutions for concrete public needs. The supplier of the R&D is fully financed, and there are various options in place to make the successful producer in effect re-pay some of this “grant” once his solution is taken up and rolled out in the market. One challenge is that the uptake of the prototype through the administration that had the need originally is not guaranteed, the idea, of course, is to maximise the number of SBIR initiatives that lead to such an uptake. A second challenge is that SBIR schemes, in general, risk de-coupling potential users (those who have the need) and the producers. The scheme has been described in a report by NESTA and highly praised there, however, this report is not an evaluation. In the health sector there is a range of further, still very small scale schemes tackle different kinds of procurement failures that could be exemplary. For example, the Manchester Integrating Medicine and Innovative Technology (MIMIT) actively scan clinics for specific unmet needs and organise a targeted discourse between supply and demand. The National Innovation Centre runs a pro-active, five step scheme starting with support to formulate concrete needs through to design and prototype support (on the basis of public tenders), demonstration of benefits and support in dissemination of solutions. The National Institute for Health and Clinical Excellence started a programme to certify technologies with high benefit and saving potential, allowing for better informed markets. The Department of Health PICD Division has started to screen industry for promising technologies and set in motion a process to actively support evidence gathering for and dissemination of those technologies. All those initiatives tackle the lack of brokerage between demand and supply to reduce information costs and thus make risk manageable. Finally, the National Technology Adoption Centre supports concrete procurement and adoption processes and formulates technology specific adoption guides, again reducing transaction and learning costs – and thus risks. This is essential, as a key challenge of innovation procurement lies in the foreseen adoption and change management hindrances. Overall, the main challenge, it seems, is to link the two dimensions, to roll out dedicated support schemes that systematically allow procurers and potential users to make the shift to innovation procurement. At the same time innovation procurement cannot be “outsourced” to special agencies and schemes only, there must be new forms of innovation procurement coordination between general procurement and dedicated actors along the procurement cycle. The Technology Strategy Board (TSB) Innovation Platforms are another means of action which in the context of broader coordination around societal challenges seeks to link research to market through procurement opportunities. 4. How might public procurement more effectively stimulate innovation within industry? Parts of the answer to this question are given in that for the previous one: industry needs a clear communication of needs and commitment, an understanding of some risk-taking (or active risk-management) in public bodies and the ability to actually adopt and use the innovation produced. Suppliers and the supply chain will adapt to the signals of public demand and respond with innovative solutions if they see the public sector as a demanding and intelligent customer. Public procurement can stimulate innovation with existing suppliers through relationship management. Engaging suppliers early, managing their expectations and increasing the transparency and accessibility of the process could lead to more innovations. Further, bundling of demand increases the incentive to invest in (risky) innovation, but must regional basis, but is a much smaller scale activity. Ultimately the real challenge is to unlock the potential in the 16% or so of GDP that is involved in the procurement of goods and services.

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Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) avoid formulating innovation needs at the lowest common denominator among those bundling their demand. Bundles must allow some disaggregation such that lots are available for innovative SMEs to bid for. Moreover, incentives rise if needs are formulated in areas with a potential spill over to private and-or foreign markets and if measures are taken to support this spill over (e.g. catalytic procurement, demonstration projects, awareness measures, innovation-inspiring regulations, standardisation support). Further, the public sector should much more systematically collect and allow for pro-active unsolicited proposals, i.e. firms that approach the public sector with an innovative idea (one example being the ‘right to bid’ in DWP). The general principle is that all procurement should be innovation friendly and that normal procurement should be carried out in such a way that innovative solutions are not excluded or disadvantaged. 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? The evidence of “success” in other countries is as sketchy as for the UK. As mentioned above, many countries claim to implement demand based strategies; none actually have systematic evidence of their impact yet. In Germany, for example, the High Tech strategy, which focuses supply and demand measures on a set of technologies, has incorporated public procurement, but in a workshop on public procurement organised by the responsible German Ministry the consensus was that innovation procurement is in its infancies. This is confirmed by a recent empirical study surveying German procurers (Lorenz et al. 2010). Out of the range of good individual cases (see the ERAPRISM project’s best practices repository for some initial examples http://www.eraprism.eu/page.asp?id=3 ). One example of a true “lead market through procurement” case is the Estonian X-road system which makes all government databases compatible and has now been exported to other countries. Another highlight of international procurement activities have been the Swedish successful attempts of market transformation in the 1990s which combined bundling of private and public demand with a range of other demand measures (awarenesss, standards, labels, marketing etc.) to catalyse the diffusion of innovation (rather than the generation). Finally, the American SBRI scheme, often cited as procurement success, indeed has been successful over the years in delivering R&D based solutions to agencies and departments, albeit the rate of uptake of those solutions into market innovations is variable. 6. What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? The answer formulates the single biggest challenge for procurers. There risk-reward balance for procurers is uneven. Furthermore, those bearing the risks are often not those reaping the reward should an innovation be successfully procured and adopted. Procurers are assessed against cost savings and delivery. Risk-taking and high entry cost, even if they represent high value for money as discussed above, are potentially detrimental to procurer careers. Political commitment and strong interaction between procurers, commissioners and final users are scarce, the division of labour often not appropriate. Audit reports including those of the National Audit Office, rarely if ever suggest that too little risk was taken and tend to penalise levels that would be normal in the private sector. Thus the public sector is cut off from the potential benefits. 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? Do they have the appropriate 165

Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) expertise to identify innovative solutions to procurement needs? How well do they identify when innovation could provide a solution to a procurement need? How effective is the identification of and dialogue with appropriate potential suppliers? This answer complements problems identified in earlier answers above (especially 6). High expectations as regards the ability of procurement to deliver on a number of policy areas can be contrasted with the relatively low status, lack of influence, and limited capacity of many procurement professionals. Procurement has a low profile in many public sector organisations, particularly at the local government level, limiting the ability of procurers to make strategic decisions, engage with the market and ensure compliance with guidelines and strategic decisions within their organisations. Decentralised procurement settings are characteristic of many parts of the public sector, meaning that many procurement decisions are taken without involvement or even knowledge of the procurement professionals. Besides a poor use of procurement skills which could be employed to promote innovation, additional shortcomings include poor internal communication, lack of compliance and inconsistent standards. In many parts of the public sector, we cannot speak of reliable customers, let alone intelligent customers. The capacity and capability to shape markets is therefore limited in many instances. The most recent evaluation of the Local Government Procurement Agenda reported that nearly 50% local authorities have either one or no procurement professionals and that few (1 out of 5) have a proactive dialogue with suppliers. Procurement activities often lack connections with corporate strategy, and with service delivery. Procurers tend to engage with peripheral purchasing (non-strategic goods and services) that can be best purchased jointly or outsourced, rather than with procurement of goods and services that are strategic to the organisation, where they could have the knowledge and the leverage to shape the market. This leads to unnecessary tendering, higher management costs, and large price variations. Despite increasing use of external collaborative framework contracts, at least in the case of local government these tend to represent a very low proportion of the total procurement spend, which would suggest a disproportionate involvement of procurers in non-core purchasing. Finally, poor data on procurement (what is procured and from whom) hinders strategic decision making and creates a problem of asymmetric information vis-à-vis suppliers. The public sector cannot act as an intelligent customer if reliable procurement data is not there to support decision making. Improvement in data collection and product coding is enabling more adequate spend analysis across public sector, with some departments such as HMRC, the Home Office and the Ministry of Justice leading the way in procurement spend management. At the other extreme, there is evidence to suggest that some local authorities are still not able to accurately estimate their total procurement spend, or to differentiate their expenditure between private (including SMEs) and voluntary sector suppliers. 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? Policy reviews and reports on innovation and procurement have repeatedly identified the following main barriers: (1) corporate capacity constraints, skills shortages (or lack of combination of internal skills), a lack of commercial skills and expertise to understand and engage early with suppliers, (2) risk aversion, lack of risk management and (3) a resulting tendency towards overspecification. (1) The capabilities problem is not trivial, there is a lot of expertise in the public sector, but the functional differentiation within administration means that the legal and financial case 166

Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) (accountancy) drives procurement, while the internal use and the market knowledge is not fully mobilised. The technological, market, commercial and procurement skills need to be brought together, be it in new internal arrangements or with the systematic link to external support. (2) The risk aversion has to do with political priorities, internal incentive systems (see above) and often the lack of political leadership and backbone to stand up for failure should it occur. Focus on budget constraints add to it. Risk management procedures and skills are needed across the board. (3) Specifications can be too rigid and narrow, rather than being based on outputs or outcomes. Rigid specifications restrict the ability of suppliers to propose innovative ways of delivering those outcomes. Different and over-specified requirements are often made for identical services and purposes. While there is an increasing awareness of the importance of outcome specifications (and procurers are increasingly incorporating them in their tenders) inertia (relying on the way things have been done in the past) still holds back their wider use. Risk aversion often prevents the taking up of a new idea or the adoption of a solution that has worked well elsewhere. 9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? In addition to the barriers mentioned above (Q8), barriers include transparency and availability of contract opportunities, complexity and cost of bidding. These are particularly pressing for SMEs, as pointed out by the Glover report (HM Treasury, 2008). That report suggested that opportunities should be transparent, the process as simple as possible, and that a strategic approach to procurement should encourage innovation and give SMEs a fair deal when they are sub-contractors. A tendency towards larger and longer contracts, and a rationalisation in the number of suppliers makes it generally more difficult for SMEs to bid for contracts. The cost of bidding can be exceedingly high for SMEs, which may not be able to accommodate those costs or have the skills necessary to put the bids in. In some cases firms need to demonstrate previous work for the public sector in order to win contracts. This can stifle opportunities for innovative firms to bring in new ideas to the public sector. Despite existing OGC guidance on these issues, contracting authorities tend to lack the more sophisticated approach to supply chain management which could promote innovation. Again, this is specially pertinent for SMEs, which tend to suffer unfavourable terms and conditions when operating within the supply chain (Glover). The existing framework contracts also limit the flexibility (e.g. to design business models that exceed a certain time limitation). Suppliers and the supply chain will adapt to the signals of public demand and respond with innovative solutions if they see the public sector as a demanding and intelligent customer. Engaging suppliers early, managing their expectations and increasing the transparency and accessibility of the process are more likely to lead to innovations.

Cited References BDL 2003. The Power of Customers to Drive Innovation, Report to the European Commission, Brussels. 167

Professor Luke Georghiou, Professor Jakob Edler and Dr. Elvira Uyarra, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) Dalpé, R., 1994. Effects of Government Procurement on Industrial Innovation. Technology in Society 16 (1), 65-83. Dalpé, R., DeBresson, C., Ciaoping, H., 1992. The public sector as first user of innovations. Research Policy 21(3), S. 251–263. DH/CLG/DCSF (2007) Guidance on Joint Strategic Needs Assessment. DIUS (2008) ‘Innovation Nation.’ White Paper. London: DIUS. Edler, J., Edquist, C., Georghiou, L., Hommen, L. Hafner, S., Papadakou, M., Rigby, J., Rolfstam, M., Ruhland, S., Tsipouri, L., 2005. Innovation and Public Procurement. Review of Issues at Stake, final report, Brussels [ftp://ftp.cordis.lu/pub/innovation-policy/studies/full_study.pdf)]. Edler, J., Georghiou, L. "Public procurement and innovation—Resurrecting the demand side." Research Policy 36, no. 7 (2007): 949-963. Edquist, C., 1998. The ISE Final Report: Scientific Findings and Policy Implications of the »Innovation Systems and European Integration«, (ISE). Research Project, European Commission. Georghiou L, 2007, Demanding Innovation: lead markets, public procurement and innovation, NESTA Provocation 02: February 2007, London NESTA http://www.nesta.org.uk/assets/pdf/demanding_innovation_provocation_NESTA.pdf Geroski, P.A. 1990. Procurement policy as a tool of industrial policy. In: International Review of Applied Economics 4(2), S. 182–198. HM Treasury (2005) ‘Creativity in Business: Building on the UK’s Strengths.’ Cox Review. London: TSO. HM Treasury (2008) ‘Accelerating the SME economic engine: through transparent, simple and strategic procurement.’ Glover Report. London: TSO. Lorenz O, Blind, Krohn, W., Lange, M., Weber, M. K (2010): The “Purchasing State” as a Driver of Innovation Development potential and necessities relative to more innovative procurement in Germany's public procurement sector; Berlin. OGC (2007) Finding and procuring innovative solutions. London: OGC http://www.ogc.gov.uk/documents/Finding_and_Procuring_Innovative_Solutions_(3).pdf OGC (2007) Smaller Supplier, Better value. London: OGC OGC (2010) ‘Policy through Procurement (PtP) Action Plan.’ London: OGC. Rothwell, R., 1984. Technology based small firms and regional innovation potential: the role of public procurement. Journal of Public Policy (4) 4, 307-332. Rothwell, R., Zegveld, W. 1981. Government regulations and innovation - Industrial Innovation and Public Policy, London: Rothwell, R./Zegveld, W. (Ed.), Industrial Innovation and Public Policy, 116-147. London. Uyarra, E. (2010) Opportunities for innovation through local government procurement A case study of Greater Manchester. NESTA research report, May 2010. http://www.nesta.org.uk/library/documents/opportunities-for-innovation18May2010.pdf December 2010

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Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester; and David Connell, University of Cambridge—Oral evidence (QQ 35-51), 21 December 2010

Professor Luke Georghiou, University of Manchester; Professor Jakob Edler, University of Manchester; and David Connell, University of Cambridge—Oral evidence (QQ 35-51), 21 December 2010 Please see page 43

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Luke Georghiou and Jakob Edler—Supplementary written evidence (PP 32)

Luke Georghiou and Jakob Edler—Supplementary written evidence (PP 32) Response to Follow up Questions by House of Lords Select Committee on Science and Technology 1. Evaluation of SBRI and FCP In our evidence we indicated that there was a need for rigorous evaluation of the SBRI because much of the present debate was founded upon anecdote and vignettes. In the intervening period we have learned that BIS is envisaging such an evaluation (and also of Forward Commitment Procurement) circa 2012 when effects are likely to be clearly evident. However we will still indicate some of the issues that should be addressed. An important starting point is to address the capacity of the SBRI to affect the UK’s innovation performance in terms of its scale. The issue here is that with the most optimistic budget forecasts it will still be a small effort, particularly when compared with the enormous scale of procurement of goods and services. At current budget levels if it were scaled up to the US SBIR level the cost would be 0.14% of the general procurement budget. The rewards for getting even 5% of procurement of goods and services to support innovation are clearly much greater. At the level of wider economic impact employment effects could also be considered – these have not been detected in the US version. Beyond these considerations of appropriateness, the evaluation would need to address the classical issues of efficiency of implementation, effectiveness and impact. A comparative dimension to assess support and impact across ministries and technical areas would be useful. An indication of regional benefit and profiling the type of firm benefitting would also be helpful. As with other evaluations the broader issues of additionality need to be considered: • •

•

Input additionality – does the Initiative lead to an increase in spending commensurate with its cost and considering displacement and deadweight? Output additionality – what results in terms of new products, processes or services have been attained and in particular what has been the track record of putting these into commercial application in government or beyond? Behavioural additionality – has the scheme instituted new routines either among customers in government or in the participating firms that leads to permanent changes in the propensity to innovate – beyond the specific action?

The evaluation would have to be designed in order to capture both the impact of the actions within SBRI and the learning effects beyond the scheme. Given the limited budgets, the real added value would come from spillovers into the wider system of procurement so that learning occurs more broadly and SBRI is seen as seed money. Evaluation of FCP and of other general innovation procurement initiatives will be methodologically even more challenging, particularly in the present absence of metrics. For FCP, as for SBRI above, the evaluation would need to address impact and efficiency for the specific actions and, in addition, the dynamics of FCP and FCP like activities spreading across the public administrations. 170

Luke Georghiou and Jakob Edler—Supplementary written evidence (PP 32) As for evaluation of general innovation procurement we refer the Committee to two of our publications on this topic: The final chapter of the “Wilkinson Report” Wilkinson R, Georghiou L et al (including Edler J), (2005) Public Procurement for Research and Innovation, EUR 21793 EN, European Commission from which we attach a tale of evaluation issues and approaches; and Edler J, Georghiou L et al, Monitoring and Evaluation Methodology for the EU Lead Market Initiative - A Concept Development – report to European Commission DG Enterprise, February 2009 Table 1 – Structuring Evaluation Design

2. Examples of Innovation Procurement We attach the current draft of our collation of examples of innovation procurement, supported by the ESRC/NESTA/TSB/BIS project Underpinn and the EU OMC-NET ERAPRISM. This is a work in progress and will be converted into a searchable database in the near future. January 2011

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Happold Consulting—Written evidence (PP 14)

Happold Consulting—Written evidence (PP 14)

Formed in 1976 on the principles of care, value, integrity, Buro Happold is committed to working for the public good. We are driven by the needs of our clients and work with professional and technical expertise, in highly challenging environments, Happold Consulting, Buro Happold’s strategic consulting division, is founded on the ethos of providing innovative, focused and objective advice that adds value to our clients by directly contributing to the effectiveness, efficiency and economy that clients are trying to achieve. We focus our advice on the following areas; improvement and efficiency, strategic commissioning and construction investment. Rationale 1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? Answer 1.1. Public procurement brings with it new skills and capabilities from private sector providers. These providers often work across more than one industry sector and in some instances in an international arena which leads to lessons learned in other areas being applied into new ways to improve performance and deliver increased value. 1.2. Depending on the procurement route chosen, innovation during this important phase is either limited or maximised. Through engaging with the market during procurement (use of Competitive Dialogue) more information around the client’s requirements can be generated which in turn feeds into the identification of an optimum solution. 1.3. Plymouth City Council Example - The council wanted to procure highways maintenance services as the current contract was coming to an end. The service provided by the incumbent contractor was failing and there was a large backlog of repairs yet to be completed. As one of the first councils to use Competitive Dialogue (CD) with suppliers, the council were able to identify a solution which was tailored to their specific requirements. 1.4. The following benefits were realised at the end of this Competitive Dialogue: a. Optimum scope agreed to reflect requirements of the Council and generate highest levels of competition from the private sector b. Optimum duration agreed to reflect requirements of the Council and generate highest levels of competition from the private sector c. Mix of payment mechanisms used to drive best value for money solutions d. Payment linked to performance e. Contract embraces the principle of Latham and Egan 1.5. Though these benefits have been listed as those specifically related to Plymouth City Council’s CD example, similar benefits are being realised and embedded across a wider number of our CD delivery projects. 172

Happold Consulting—Written evidence (PP 14)

Co-ordination of innovation and procurement policies 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? Answer: 2.1. Innovation in public procurement is echoed throughout the OGC procurement guidance, such as the Innovation in public procurement document. This guidance identifies mechanisms for driving innovation, for example through Contractual incentives. Public sector Procurement strategies also seem to be focusing more on innovation though procurement mechanisms, for example the strategy for Dft and the Highways Agency echo the importance of driving innovation to improve the service offering. 2.2. However, what appears to be missing is a focus on innovation through procurement at the high level. The DfT’s departmental strategic objectives do not appear to explicitly cover innovation and/or procurement suggesting that high level policy objectives do not mesh clearly with departmental strategic objectives at the moment. Addressing this issue and making innovation/procurement part of their strategic objectives would put the issue at the forefront of public sector procurement, which would be cascaded to the operational level (e.g. Local Authorities). 2.3. In terms of cross governmental mechanisms the amalgamation of the Regional Improvement and Efficiency Partnerships (RIEPs) into the National Improvement and Efficiency Partnership (NIEP) provides sufficient mechanisms to allow innovation to be shared. REIPs also state that their collective priority for 2010/11 includes “Increasing support for collaborative and innovative improvement”, however, at the moment this does not appear to be reflected in their Efficiency Case Book. The case book outlines the support available to councils; there does not appear to be a specific reference to encouraging innovation via procurement. 2.4. Collaborative procurement, where more than one local authority partners up with another to procure the same service together to drive economies of scale, is a key activity that was identified some years ago as an initiative that should result in savings. Current policy objectives are not sufficiently strong enough to encourage departments to jointly procure services. The Local Enterprise Partnerships could be the vehicle used to maximise collaborative procurement. : Mechanisms through which government procurement can stimulate innovation 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? Answer: 3.1. Competitive Dialogue (CD) is an innovative public procurement mechanism which has been implemented effectively relatively recently. Applications of CD, in its infancy, resulted in varying outputs and as such its reputation was compromised. Since then the development of mechanisms which ensure the proper application of 173

Happold Consulting—Written evidence (PP 14) this procurement technique have resulted in innovation and savings for local authorities. Oxfordshire, Southampton Kent, Hertfordshire and Cheshire East are all good examples where CD has been used effectively and efficiently to minimise procurement durations and maximise value for money solutions from the private sector. 3.2. Another approach which put the onus of innovation on the supply chain was adopted when South Gloucestershire Council procured recreational facilities for their parks. The council faced the initial challenge of not having a detailed specification to provide the bidders and could therefore not ascertain what a bid which was good value for money would look like. In this procurement exercise a financial cap was set for each recreational facility and the bidders were asked to develop solutions which were within the cap. As the end price was known to the bidders the competition was based around the quality of the product delivered with the contract being awarded to the supplier who offered the best value for money. 3.3. Measures of success against original benchmarks have not yet been assessed in full due to timescales. Short term benefits have however been achieved and are being embedded within the contracts. 4. How might public procurement more effectively stimulate innovation within industry? Answer: 4.1. Currently procurement only engages with the principal supplier with whom the client will enter into the contract. However, a great deal of service is delivered by the supply chain and much of the innovation is driven by these specialists sub contractors. If these lower tier suppliers were actively engaged in Competitive Dialogue from an earlier stage in the process then more innovative solutions can be brought out and incorporated into the contract. The current view of local authorities is that innovation comes with risk and by the time something is tried and tested to an extent that the local authorities are comfortable with, it is no longer innovative. 4.2. A more proactive approach which encourages local government departments and authorities to explore innovative procurement methodologies, that are more engaging with all the tiers of the supply chain, is required to stimulate more innovation within industry. 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? Answer: 5.1. Innovation as defined within the ‘tangible industries’ (such as Building, Civil and other engineering) in terms of attaining savings in time and cost to delivery can be easily associated with procurement as the needs of a client can be understood and formalised before a contract is awarded. Comparatively, innovations as defined within technology and software development industries relate more to client needs and must be assessed during the development of requirements. Due to this technology industry innovations are difficult to bind to the procurement process.

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Happold Consulting—Written evidence (PP 14) 5.2. In terms of procurement and innovation within the ‘tangible industry’, the United Kingdom are leading the field with regards to procurement processes. Procurement processes from other ‘tangible industries’ (e.g. the water, aerospace, utilities) could be used to inform and improve existing processes to stimulate innovation within industry. 5.3. Internationally, Private procurement in the US is tied up to a thorough and arduous legal process which involves lawyers during the process. The procurement process 6. What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? Answer: 6.1. The greatest incentive for local government to drive innovative procurement is the push to reduce budgets as a result of the comprehensive spending review. Previously such pressure did not exist so good examples of using procurement to drive these innovations are not yet manifest. 6.2. With constantly changing circumstances in terms of the ongoing reduction in public sector budgets coupled with the increased expectations of the public, there is a strong belief that the private sector can provide services more effectively and that through greater use of joined up approaches these public sector organisations can deliver the required level of services in austere times. 6.3. Procurement can be used to drive innovation through the intelligent design of the tender process where the bidders approach to demonstrating innovation can be a basis for assessing part of the bid. Further to this, the contract by which suppliers are appointed at the end of the procurement process can contain performance measurement metrics which track innovation and any associated risks and opportunities. 6.4. To further incentivise this, the government could consider the introduction of a new fund to split between those authorities who achieve greater cost effectiveness through procurement. 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? A. Do they have the appropriate expertise to identify innovative solutions to procurement needs? B. How well do they identify when innovation could provide a solution to a procurement need? C. How effective is the identification of and dialogue with appropriate potential suppliers? Answer: 7.1. Customer intelligence in terms awareness and knowledge of, and, innovations within, the services being procured can be quite limited. Corporate procurement groups do not always understand the detailed workings of the service which is being procured. Stronger links and better communication at a very early stage between corporate procurement and the service areas results in a contracts being more aligned to the local authorities needs as opposed to being forced into a generic, restrictive agreement. 175

Happold Consulting—Written evidence (PP 14)

7.2. In one example it was clear that suppliers were leading the Employer on what was to be purchased by the employer due to toxic relationships in which the needs of the employer were defined by the suppliers. Though this was a unique example it is worth mention as it demonstrates that in an environment where the customers lack “intelligence” in terms of an intimate understanding of the service being procured, they can be led by suppliers to purchasing services which may not be required. In this instant the suppliers provided the solution to the employer and then justified the need for the solution where there was none. 7.3. A) Customers are generally unintelligent in terms of the services being procured. When procuring technological solutions to enhance the performance of a service, which was previously provided by civil engineering contractors on large PFI’s clear gaps appeared within the employers knowledge which the supply chain then targeted in terms of services. 7.4. B) Changing the specification of something to prevent the need for procurement in future – in the case of the Improving Traffic Technology Procurement, contracts were amalgamated into frameworks from which items could be called off to prevent the need for further procurement and to reduce the number of contract managers. 7.5. C) Unable to provide evidence on this topic. 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? Answer: 8.1. Obstacles include : 8.1.1. Political environment – cost effectiveness of collaborative solutions (economies of scale) vs local provision and control of services. 8.1.2. Employers being risk averse in nature. 8.1.3. Insufficient time given to procurement process to define the right sort of innovation rather than innovation for the sake of innovation. 8.1.4. Disconnect between the service area specialists and corporate procurement teams which leads to the application of procurement policies in areas in which the procurement specialists have little knowledge. 8.1.5. The lack of client side skill in deciding on whether solutions will work or not suppresses any innovation throughout the duration of the appointment. 8.1.6. These issues can be tackled by having a common agreed strategy and buy in from political aspects of local authorities, allowing for more time to the procurement process (making it proactive rather than its current reactive nature), allowing for mechanisms for sharing risks more effectively in terms of innovation. 9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? Answer: 176

Happold Consulting—Written evidence (PP 14) 9.1. Existing procurement processes are heavily evidence based in their approach to allow employers a degree of confidence in terms of the service being procured. Evidence based procurement results in solutions which are innovative being rejected on the grounds that they have not been tried and tested and sufficiently backed up with evidence. 9.2. Within the private sector there is a reluctance to offer up innovations up front during a contract as it allows for contractors to always hold onto options should the sudden and unexpected need arise to save on time or cost during delivery. As a result improvements in process and product are incremental rather than innovations being bought into and the whole benefit being realised from the start of the contract. 9.3. Contract durations can stifle any innovation as contractors may not see the net benefit of investing in research into innovation or initiatives to drive innovation being realised within the duration of the contract. 9.4. The risk adverse nature of certain employers results in output specifications being so specific that there is little room or reward for any real innovation. In these instances the investment into innovation and risks associated with innovation 9.5. Tackled by: 9.5.1. Evidence based approach – allowing some dispensation for innovations to be tried on new appointments for the first time. December 2010

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Professor Chris Hendry—Written evidence (PP 4)

Professor Chris Hendry—Written evidence (PP 4) 1. I welcome the initiative of the Science and Technology Select Committee on using public procurement to stimulate innovation, as this has long been an area of weakness and neglect in UK innovation policy. My comments stem from projects undertaken during the last two decades on innovation in low carbon technologies (fuel cells, wind and solar photovoltaics), opto-electronics/photonics, and other high-tech sectors. The most recent (for the ESRC/Advanced Institute of Management Research) was concerned with the role of demonstration projects and field trials in facilitating innovation (see ‘The Uncertain Middle: Innovation lessons for low carbon energy technology from demonstration projects and trials’, www.cass.city.ac.uk/centive publications/index.html, and http://www.aimresearch.org/the-uncertain--middle/. “The industries on which government relies” are many, but energy generation is certainly one. 2. The problem for high-tech innovating firms, as we know, is the amount of work to be done from establishing an initial ‘proof of concept’, developing a prototype, perfecting the technology, to getting costs down to commercially realistic levels. This takes time and money, and success is uncertain – hence, ‘the uncertain middle’. This particularly affects small start-up firms that lack the capital of larger ones, but is also an issue for large firms that still have to justify internally the use of resources over long periods before real markets are established. 3. When a technology moves out of the laboratory into an applications phase, there are two key steps towards commercialisation. First, there is a ‘learning’ phase to improve the product to get it nearer to a competitive entry price. This requires testing applications in real operational settings. This may be possible by identifying early niches where the new technology can match or improve on the cost and performance of alternatives for specialist (premium) users, before moving on to mainstream volume markets that are more price-sensitive. More likely, though, for energy technologies this ‘learning’ phase will require publicly sponsored demonstration projects and trials (DTs). Public DTs fulfil many purposes, but include creating access to users and sites, and generating early production volumes for testing. The second key step is achieving ‘increasing returns to scale’ as quasi-sales from DTs lead on to pre-commercial sales and then onto meaningful sales, which establish the innovation’s commercial viability. Increasing volumes in turn stimulate long-term learning and cost reduction through specialisation in a host of areas (components, system design, production, installation, distribution, network externalities, etc), which we refer to as the ‘experience curve’. 4. Public procurement is normally taken to mean the stage beyond DTs when all technical issues have been resolved. However, I dwell on DTs because they involve a form of public procurement (the use of public money and purchase decisions), which fulfils a number of similar purposes, and thus highlight what benefits we should expect from procurement. Both provide contracts with real customers, who need to be committed to their own learning and to aid the learning of the supplier. Both provide revenues, which can be a significant lifeline for small start-ups. And through the visibility of government purchasing (‘credentialing’), both send a signal and give credibility to other potential customers, to investors, and to firms in the supply chain that it is worth committing to the new technology/products. An important aspect of this is the setting of standards for the wider market via product specification, which in turn need to be derived from the work of approved agencies (such as national testing centres). 178

Professor Chris Hendry—Written evidence (PP 4) 5. Notwithstanding often relatively small volumes, DTs can exert high leverage, especially for SMEs where low volume early sales can have a disproportionate impact on their innovation efforts, financial viability, and market visibility. On the other hand, there are DT programmes that have been of substantial scale. The Japanese Large-Scale Stationary Fuel Cell Demonstration Programme (2005-08) tested 3307 residential installations; Japan’s Residential PV System Demonstration Programme (1997-2001 installed over 115,000 units; while the German 1,000 Roofs Solar Power Programme (1990-95) and 100,00 Roofs Solar Power Programme (1999-) both exceeded their planned targets. While not public procurement in the sense of governmental use, these programmes show what targeted government funding can do, propelling Germany and Japan into leading positions in these industries. 6. DTs and extended public procurement should therefore be seen as opportunities for coordinated, staged development, the one building on the other towards progressive adoption and dissemination, with both stimulating innovation through learning and increasing scale. Too often, UK governments have stimulated adoption of new technologies without regard to the readiness of UK firms to respond, or preparing the ground so that innovation is supported. 7. The government estate in many areas is substantial (e.g. fleet vehicles), through governmental and public organisations at national, regional and local level. This creates many opportunities for pioneering, staged and coordinated procurement. Since new industries and firms begin with limited capacity, it is essential that procurement to stimulate innovation is applied strategically across this diversity in order not to produce boom and bust through ‘lumpy’ ordering. The State of California’s support for both wind turbines and solar photovoltaics on occasion has had disruptive effects of this kind on firms, alongside other undoubted benefits in promoting adoption. 8. Equally, DT programmes and public purchase schemes that are diffuse and ‘thin’ in terms of timescale and customers (too many ordering too few products each) can fail to have significant impact in stimulating either learning or markets (see US fuel cell manufacturers criticisms of the Climate Change Rebate Programme, 1999-2005). 9. Two further practical problems stand out in using public procurement effectively. The first involves complexity in responding to regulatory requirements. Approval processes to show conformance with environmental regulations, for example, have been a major disincentive and stumbling block in the US (as, of course, has the planning process in the UK for wind power). This disadvantages SMEs particularly. 10. The second is the requirement to achieve ‘value for money’ in public purchasing decisions, which means government and civil servants will always favour the cheaper option, which will also inevitably be the one nearest to market regardless of innovation potential or need. This effect is likely to be even more marked outside central government, as a result of Treasury controls. Under austerity conditions, the pressure of such rules and controls is unlikely to lessen without explicit mechanisms to compensate procurement above ‘least cost’. This evidence is submitted in a personal capacity 16 November 2010

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Highways Agency, Department for Transport, Cabinet Office, and Department for Business, Innovation & Skills (BIS)—Oral evidence (QQ 1-34), 21 December 2010

Highways Agency, Department for Transport, Cabinet Office, and Department for Business, Innovation & Skills (BIS)—Oral evidence (QQ 1-34), 21 December 2010 Please see page 111

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The Institute of Engineering and Technology (IET)—Written evidence (PP 24)

The Institute of Engineering and Technology (IET)—Written evidence (PP 24) 1. The role of public procurement as a tool for stimulating commercially valuable innovation within industry 1.1. The government intends to “rebalance” the economy, by which it means, inter alia, expanding the manufacturing and technology sectors.1 In these sectors the UK can compete most effectively internationally at the high end of the value chain, so the key to rebalancing the economy is encouraging and enabling technological innovation.1 One way of achieving this would be to increase public funding in relevant areas, such as education and science, but such a move has been ruled out for the foreseeable future. Thus the government must look for other approaches to encouraging innovation, for example introducing reforms which make existing public investment more effective. Whilst there may be some scope for continuing to improve the effectiveness of government investment in areas directly associated with innovation, incremental changes to a relatively small proportion of total government spending are unlikely to bring about a step change in the UK economy as a whole. Rather, if the government is serious about rebalancing the economy, it must seek to harness the £220 billion1 currently deployed in public procurement. 1.2. It is worth noting that stimulating innovation through procurement would create two main benefits. The first, reinvigorating the manufacturing and technology sectors, appears to be the focus of the Select Committee. However, the second, improving public services at reduced long term costs, provides an equally compelling argument for bringing about change. 1.3. There are three main categories of public procurement:1 1.3.1. Public procurement of goods and services. For these types of procurement, the procurers can, where appropriate, stimulate innovation by specifying levels of performance that are not achievable with “off-the-shelf” solutions and hence require an innovative approach from suppliers. For this to be effective procurers must set outcome based purchasing specifications; that is, they must give potential suppliers the freedom to develop new means of meeting the desired end. Contrary to the common view, European Union procurement directives to do not preclude such an approach to public procurement.1 1.3.2. Pre-commercial procurement. This is procurement of research and development (R&D) towards the creation of new goods and services required by the private sector; it is procurement where the principal purpose is innovation. Typically, pre-commercial procurement will take place in a number of stages. The procurer will fund developers through a particular stage (for example exploration and feasibility) and if that is successful provide additional funding for the next stage (for example prototyping). Each party benefits: the procurer stimulates development of products and services in which they are interested whilst the developer gets crucial access to funds and an intelligent lead customer to guide and validate the product development. 1.3.3. Catalytic procurement. This is where the government stimulates private demand by acting as launch customer for goods or products which are intended to be used more widely. This can be important for meeting national challenges which 181

The Institute of Engineering and Technology (IET)—Written evidence (PP 24) require changes across the economy, including in the private sector, for example the challenge of reducing carbon emissions. An example of a catalytic procurement in this area is the government’s recent “retrofit the future” procurement1, under which contractors designed and installed low carbon retrofits to social housing. The innovations developed through this procurement will later be available for use in other private sector projects. 2. The successes and failures of current public procurement processes, mechanisms and tools in stimulating innovation within industry 2.1. Public procurement of goods and services. The Office of Government Commerce (OGC) has put in place a number of services to help procurers operate best practice. For example, the OGC’s Policy and Standards Framework is an online portal to guide public sector workers through the principles and processes of procurement. However, despite these efforts, public procurement of goods and services is not yet being used effectively to stimulate innovation. The National Audit Office reports that “government organisations are not systematically taking the opportunity to use suppliers to generate innovative ideas.”1 2.2. Government procurers tend to buy well-tried, “off-the-shelf” products and services. They often base decisions on initial price, when they should be considering wholelife costs.1 Procuring innovation requires government to be an “intelligent customer” with requisite technical expertise, but very often procurers do not possess technical expertise themselves nor do they have ready access to it.1 Procurers in the public sector operate under a system whereby they face heavy criticism for procurements which end badly but gain little or no recognition for procurements which, through innovation, turn out better than would otherwise have been expected. This makes them risk averse.1 Public procurers often buy new products and services wholesale, rather than understanding what they have already and how it can be maintained or updated by smaller, innovative procurements. 2.3. There are particular problems around access to public contracts for SMEs. Problems include SMEs not knowing where to find out what opportunities are available and, if they do, finding they do not meet the necessary requirements to put in a bid. In 2005/6 only 16% of the total value of central government contracts was won by SMEs.1 As SMEs tend to be particularly innovative, the barriers to their participation in public procurement are of great concern. 2.4. Pre-commercial and catalytic procurement. The UK’s main vehicle for pre-commercial and catalytic procurement is the Small Business Research Initiative (SBRI), set up in 2001 with a view to fulfilling a similar role to the extremely successful SBIR programme in the United States. SBIR has been in place since the early 1980s and has had a huge impact. For example, SBIR schemes administered by the National Institutes of Health between 1992 and 2001 resulted in 666 new patents, 453 new copyrights and 322 new trademarks. Companies involved in SBIR schemes administered by the National Science Foundation generated cumulative total sales of $2.2 billion directly attributable to their involvement in SBIR, with another $6.9 billion indirectly related to SBIR research. It has been estimated that, as a source of early stage finance, SBIR is at least as important as venture capital to American companies.1 182

The Institute of Engineering and Technology (IET)—Written evidence (PP 24) 2.5. For a long time after its introduction in 2001, SBRI was ineffective, with few departments participating and the majority of grants going to policy studies or research grants rather than technology development. However, following recommendations by Lord Sainsbury, SBRI was reformed in 2008.1 SBRI schemes now operate under a four stage process: 2.5.1. Government departments or agencies identify an operational or policy problem for which there may be a technological solution 2.5.2. After an open tender, companies with promising solutions are awarded R&D contracts to test the feasibility of their solutions 2.5.3. Companies which successfully demonstrate feasibility are then awarded further contracts to develop working prototypes 2.5.4. The public sector either procures the resultant technology (pre-commercial procurement) or the technology enters the open market (catalytic procurement) 2.6. Government departments and agencies are not required by statute to utilise SBRI, whereas US departments and agencies are required, by Act of Congress, to run SBIR schemes. SBRI therefore does not operate on the same scale as SBIR. Nonetheless, since the reform of SBRI the schemes which are being run have proved successful. In June 2010, a Nesta evaluation of the reformed SBRI was positive. The procuring departments and agencies say that many of the ideas that SBRI is generating have the potential to improve services. Companies that had secured contracts through SBRI say that the opportunity to work under contract to a customer with a clear idea of what they want aids the R&D process considerably.1 2.7. Alongside SBRI, Forward Commitment Procurement (FCP) is small in scale but has proved effective. Through FCP, government has created a credible procurement process to develop and buy innovative products and services which will reduce the negative environmental impact of various government programmes. The “zero mattress solution for prisons” is a good example of what can be achieved through FCP.1 2.8. International comparisons. Innovation is notoriously difficult to measure, and hence it is difficult to make international comparisons of how effectively public procurement is used to stimulate innovation. However, Nesta has attempted to do so using evidence from the Global Competitive Report published by the World Economic Forum (WEF). Respondents to WEF’s Executive Opinion Survey reported to what extent they thought procurement decisions by their government resulted in technological innovation. The UK scored worse than the United States, Finland, Sweden, South Korea, Canada and the Netherlands, but slightly better than France and Germany.1 3. Potential mechanisms and processes for stimulating innovation in industry through public procurement 3.1. The great opportunity provided by public procurement derives from the fact that procurements take place across the whole of the public sector and the sums of 183

The Institute of Engineering and Technology (IET)—Written evidence (PP 24) money are so large. This, however, is also the reason why bringing about change will be such a challenge: responsibility lies not just with the department and agencies with direct responsibility for innovation, but with civil servants across government, for most of whom innovation is not their primary concern. 3.2. If badly managed, the current imperative to reduce public spending could be very damaging to the innovation agenda. The focus on reducing waste could make procurers even more risk averse than they have been in the past. They could come under more pressure to opt for contractors offering lowest initial price, rather than contractors offering lowest whole-life cost. However, if managed effectively, current policy imperatives could aid the innovation agenda. Civil servants must see their challenge as maintaining the quality of services at the same time as making long term cost savings. When the aim of policy is construed in this way, best practice procurement and innovation becomes, rather than a hindrance, a powerful tool. The Office of Government Commerce must make clear that best practice procurement is that which creates opportunities for innovation. To incentivise adoption of best practice, the government could create a central “invest to save” fund, managed by BIS or the TSB, which departments and agencies could apply to for additional funding for innovative procurements which will make long term savings. 3.3. Leadership from very senior levels of government will be important. The coalition government has set an “aspiration” to increase the proportion of government contracts that go to SMEs to 25%.1 This is to welcome, but the aspiration will only make a difference if its importance is continually reemphasised over a period of years. The Minister for Universities and Science will have an important role leading, enabling and advocating change, but it might be beneficial if a Minister in each department was given responsibility for ensuring - where possible - procurements within their department’s remit serve to encourage innovation. 3.4. Specific actions are required to increase technical knowledge in the civil service and to reduce risk aversion amongst government procurers. More trained and experienced engineers should be recruited into all levels of the civil service, with the Engineering Fast Stream expanded and refined. Government should make full use of the expertise offered by the professional engineering community through Engineering the Future.1 3.5. SBRI has potential but it will only grow if government departments and agencies make use of the programme. If departments are looking to make minor reductions in immediate costs, they will be deterred from engaging with SBRI. However, if they are looking to make more dramatic savings in the medium and long terms, while at the same time improving services, engaging with SBRI will be extremely beneficial. Options for increasing the extent to which SBRI is utilised include ring fencing a proportion of departments’ budget for investment in SBRI schemes and providing the TSB with a small additional fund of money so that it can co-fund SBRI competitions alongside the sponsoring department or agency. 3.6. For SBRI to grow, key procuring departments must engage with the programme, including the Department for Health (DH), Ministry of Defence (MoD) and Department for Transport (DfT). Since SBRI was reformed, a high proportion of the competitions which it has run have concerned public health, with Strategic Health Authorities, often working alongside Regional Development Agencies, serving as 184

The Institute of Engineering and Technology (IET)—Written evidence (PP 24) sponsors. The abolition of regional bodies could therefore damage SBRI, and the Department of Health must ensure that, following reorganisation, the NHS continues to engage with the programme. The Ministry of Defence has also made much use of SBRI and this must continue, as must the MoD’s other effective procurement schemes such as the Centre for Defence Enterprise. 3.7. There are strong arguments for using EU investment, including Framework Programme 8, to support pre-commercial procurement programmes such as SBRI. The European Union’s recent communication, Innovation Union, focused strongly on pre-commercial procurement. The communication stated: “Because public procurement markets remain fragmented across Europe, procurements often fail to achieve the critical scale needed to trigger innovative investments…[the Commission will] use the ongoing general evaluation of the current directives to examine the opportunity to introduce additional rules to make cross border joint procurements easier.” BIS and the TSB should engage in this process.1 Engineering the Future: Engineering the Future is a broad alliance of the engineering institutions and bodies which represent the UK’s 450,000 professional engineers. We provide independent expert advice and promote understanding of the contribution that engineering makes to the economy, society and to the development and delivery of national policy. This response has been led by the Institution of Engineering and Technology (IET) and is endorsed by: EngineeringUK Engineering Council Institute of Physics (IoP) Institution of Chemical Engineers (IChemE) Institution of Mechanical Engineers (IMechE) Royal Academy of Engineering December 2010

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Intellect—Written evidence (PP 19)

Intellect—Written evidence (PP 19) Introduction 1. Intellect is the trade association for the IT, telecoms and electronics industries in the UK, representing nearly 800 member companies. Our members account for over 80% of these markets and include blue-chip multinationals as well as early stage technology companies. These industries together generate around 10% of UK GDP and 15% of UK trade. Intellect is a not-for-profit and technology-neutral organisation that provides a collective voice for members and drives connections with government and business to create a commercial environment in which they can thrive. 2. The technology industry is at the forefront of innovation and will be a key means of driving down cost in government and reforming public services. There is the potential, however, that reduced budgets could lead to more risk-averse approaches to procurement in government that do not take full advantage of the innovation on offer or stimulate the market to innovate. 3. Our response to this consultation briefly summarises the views of suppliers to government on the procurement process as is and makes suggestions for improvements. This draws on our industry’s direct experience and the work we have done in conjunction with HM Treasury, Cabinet Office, OGC and others over many years to support improved procurement.1 Current approaches 4. It is important to first differentiate between public procurements that are specifically designed to develop innovation and procurements that may be seeking innovation in the solution, service or approach. Examples of the former usually fall under the banner of research and development, such as the INSTINCT demonstrator programme, or initiatives under the Technology Strategy Board or MOD’s Centre for Defence Enterprise1. The latter encompasses the vast majority of public procurements, and is the focus of this submission. 5. We feel that those working in public sector organisations currently have little incentive to use procurement to stimulate innovation. Government customers operate in a rigid environment that allows little provision for risk, where there is an increasing prevalence of legal challenge, and where they are encouraged only to meet the aims of their respective departments. Innovation is often stifled by the model of fixed prices, contractual constraints, and a lack of focus on outcomes. 6. The procurement process is lengthy and cumbersome, which can be especially counterproductive when procuring technology due to its rapid evolution. In the Netherlands, for example, adherence to EU procurement directives is less strict, allowing greater flexibility and speed of procurement. In the UK, there are more concerns about decisions being subject to legal challenge. This has resulted in a more anodyne procurement process that stifles the opportunity for suppliers and the end customer to shape solutions, and in which suppliers do not expose much innovation through the Q&A process to protect their competitive advantage. 7. Strategic departmental objectives are well linked with procurements, but crossgovernment policies have long been paid only the minimum amount of attention necessary. Cross-government framework agreements are designed to categorise and 186

Intellect—Written evidence (PP 19) centralise solutions to common needs, but these have at times served as barriers to new entrants to the market and hindered the ability of providers to innovate. 8. In general new supplier entrants feel that breaking into the public sector market is very difficult due to a lack of clarity and the obstacles thrown up by the EU-regulated procurement process. Suggestions for improvements 9. The general aim of procurement should be to enable government to attract the best service providers and to be able to choose on a cost and effectiveness basis. At present the decision-making process is driven purely on cost with little room to justify alternate benefits and advantages. This can lead to a decision that may not always select the most appropriate and qualified resources or suitable service and solution. The government’s budgets cuts, while necessary, have the potential to perpetuate the status quo. 10. To stimulate innovation, a less-prescriptive approach that focuses on outcomes is essential. If government customers and their suppliers have a committed stake in the delivery of citizen/business outcomes, a true partnership can form in which innovation develops naturally. To ensure that the desired outcomes are clear at an early stage and that a procurement is ready to proceed, we recommend that the best practice PreQualification Tool (which was developed by government in conjunction with industry) be embedded across government.1 11. Key decisions on the suppliers/solutions that are best placed to deliver a project or programme should be made by the end customer that is accountable for its delivery. The role of procurement professionals should be to manage and support the procurement process. This is not only general best practice, but the increased clarity for bidders on what is required enables them to submit innovative ideas in a more targeted fashion. 12. In line with this is the need for early engagement between suppliers and government customers, both before and during the procurement cycle. Industry briefings and regular publications are helpful – as an example, in its early days the IMPACT programme was very good at regular communications. This provides longer lead times for suppliers to accurately put together propositions and form partnerships, and allows government customers to ensure their procurements are well designed. The ‘Concept Viability’ process is an example of a means by which this can be achieved.1 13. It would also be helpful to be clear on the role and importance of innovation in procurement. For example, are bidders encouraged to submit a separate, more creative approach or will innovation within a primary proposal score additional marks? 14. Additional benefits could be derived via different attitudes and approaches to risk in government. In the US, an IDIQ (indefinite delivery / indefinite quantity) approach has been used in which a prime contractor is chosen and empowered to hold subcompetitions. Minimum and maximum amounts of spend can be set, and this model can offer flexibility to the government customer. 15. Closer to the R&D end of the innovation spectrum, it is possible to run iterative, incremental procurements to prove and pilot ideas. Once proven these can be scaled up and rolled out more widely. Other mechanisms used in the private sector include the ‘fees at risk’ or ‘pay as you go’ approaches. The government is looking at these and other commercial vehicles for procuring technology as part of the developing ICT strategy, and we are keen to see this work accelerated. 187

Intellect—Written evidence (PP 19) 16. The US also has various quotas for using SMEs in government procurements. Our SME members (in accordance with the results of the Glover Review) have stated that they prefer to not have such market distortions and simply desire a level playing field on which to compete. The UK government therefore needs to ensure clarity of information and opportunities and make the procurement process as fast and cheap as possible. Closing The above is a short summary of our industry’s views and experiences. If the Committee would like expansion on any of these points, we would be happy to provide further information and/or arrange a conversation with senior representatives from a range of our member companies. 13 December 2010

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The Intelligent Transport Society (ITS)—Written evidence (PP 17)

The Intelligent Transport Society (ITS)—Written evidence (PP 17) 1.

The Intelligent Transport Society for the United Kingdom, known as ITS (UK), is a ‘not for profit’ association of some 160 organisations in the transport field who are working to promote the use of Intelligent Transport Systems (ITS). These are combinations of sensors, communications and mobile Information Technology designed to assist all modes of transport. ITS (UK) is fortunate in having membership from across the UK and beyond, drawn from the public and private sectors and from academia. ITS (UK) is funded entirely from member subscriptions and can therefore independently represent the interests of the whole membership spectrum in this rapidly developing field.

2.

The Department of Transport (DfT) (and hence its agencies, particularly the Highways Agency) and some local Authorities are active members of ITS (UK); many ITS (UK) members provide ITS products or services to the public sector.

3.

Many of the innovative solutions for DfT and its Agencies have been directly funded by the Department. Members also self-fund innovative products and solutions.

4.

In our experience, the elements of Government procurement that stimulate successful innovation include: •

Continuity of purpose - maintaining focus over time on the desired outcome rather than specific methods, etc.

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Continuity of funding. Developing innovative solutions can take several years (with stages including reviewing existing needs / technology, testing alternatives, developing prototypes, etc). Continuous funding is required for the supplier(s) to be able to develop and maintain expertise.

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Consideration of medium / long-term benefits. Focusing solely on short-term benefits generally leads to established rather than innovative solutions.

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Having an “intelligent customer” who understands the issues, can evaluate progress and is willing to consider alternatives. Encouraging competitive dialogue during procurement activities builds on the innovation from bidders to further the current and future requirements of clients.

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Building open long-term relationships between the Government Department and its suppliers, where the customer and supplier(s) willingly share information on requirements, technology, etc. An example is where multi-year Framework contracts are used.

5.

A number of these issues are addressed by the Highways Agency’s Knowledge Programme. Between April and August 2008 HA reviewed its Research and Development processes with support from its framework supplier community (including members of ITS(UK)). This led to revised processes improving the links between the Agency’s needs, the research programme, the production of standards and guidance and implementation.

6.

In addition, the Highways Agency’s Procurement Strategy 2009 includes: •

“To stimulate supply chain best practice and innovation, we will support and encourage the introduction of ideas and proposals that deliver project objectives and 189

The Intelligent Transport Society (ITS)—Written evidence (PP 17)

•

support developing standard ways of working.” “We will work with them to develop innovative and lean ways of working, making use of technology and improving performances”

7. The Department for Transport also from time to time commissions research on potential new ways to gain benefit from the use of Intelligent Transport Systems technologies. In our opinion, it would stimulate innovation if the results of these research projects were routinely made public. It is rare for this to be impossible due to reasons of commercial confidentiality. 10 December 2010

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Ivensys Rail—Written evidence (PP 26)

Ivensys Rail—Written evidence (PP 26) SUMMARY 1. Invensys Rail welcomes the opportunity to make a submission to the House of Lords Science and Technology Committee’s inquiry into public procurement as a tool to stimulate innovation. We are the UK’s leading manufacturer and supplier of state of the art rail signalling, control centre, rail automation and automatic train control products to Network Rail and London Underground, with offices across England and Scotland and with a manufacturing facility in Chippenham. 2. Invensys Rail is also a leading international supplier, meeting the needs of high speed, mainline and mass transit customers in over 30 countries encompassing North America, Spain, India, Latin America and the Asia Pacific region, including China and Australia. We have, for example, designed, manufactured, installed and commissioned the train control and communications technology for seven of the last eight high speed lines in Spain and for the Spanish metro, and nine of the twelve Beijing metro lines. We employ over 4,000 people worldwide, including around 700 people in the UK. 3. Our submission is focused specifically on investment and procurement in the rail industry given our particular role in this part of the transport sector. Direct procurement by the Department for Transport only represents a small part of the overall picture in respect of the railways when the roles of Network Rail and London Underground are also taken into account. We comment on our experiences as a supplier to these organisations given the Committee’s focused on the Department for Transport’s related bodies, as well as the Department itself. 4. The key points of our submission are: •

A smart approach to investment and procurement is central to addressing some of the key capacity and cost-related challenges currently facing the railways. This should be founded on development of longer-term and more strategic relationships between key suppliers and procuring authorities, guided by clear long-term objectives for the railways.

•

A shift away from a transactional, contract-by-contract approach to procurement and towards a longer-term approach will give suppliers greater certainty over their future order book. This will ensure a stronger and more financially healthy supply chain, and suppliers will be encouraged to invest with more confidence in the R&D necessary to develop and bring to market new and innovative signalling technologies.

•

This, in turn, will help to address a number of major challenges facing the railways. Technological advances are being made in railway signalling and train control systems that are central to delivering the greater capacity that is required to meet rising passenger demand. Importantly in the context of deficit reduction, this technology will also help to drive more value through the railways.

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Railway signalling technologies also lie at the heart of improving the performance of the railways though wider non-safety critical operational benefits in areas such as reduced fuel burn, better asset management and improved passenger information. 191

Ivensys Rail—Written evidence (PP 26)

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These advances, if harnessed by the Department for Transport and its related bodies, can make a material contribution to achieving the Department’s strategic priority of making the railways more sustainable and to create more capacity for improved services.

RAIL INDUSTRY INVESTMENT AND PROCUREMENT: THE IMPORTANCE OF PROCURER-SUPPLIER PARTNERSHIP AND LONG-TERM PLANNING 5. Historically, the relationship between suppliers and the owners of railway infrastructure has been very transactional in nature. There have often been good reasons for this. For example, when Network Rail took over from Railtrack it needed a strong transactional relationship with suppliers in order to regain control over the railways. Now that this has been achieved, there is a strong case for developing a more strategic relationship with key suppliers based on partnership. 6. Such a strategic relationship would enable chosen suppliers to develop more innovative technology and funding solutions since they would have greater certainty over the long term size and value of the order book. The current transactional based approach, with its contract-by-contract emphasis, does not facilitate this and increases the inherent risk to a supplier’s order book. 7. It can also be argued that, at present, there are too many suppliers in certain sectors of the railway industry chasing too few orders. There is a danger that the number of suppliers chasing a small number of orders encourages some to cut costs at bid stage simply to secure a contract, only to see costs escalate as the project is delivered. Reducing prices at the point of bid may appear to be a good thing, and is hard to argue against, except that it risks weakening the financial health of the supply chain, to the ultimate disbenefit of the industry, and, indeed, the government. 8. It is fully recognised that there needs to be a competitive tension in the procurement of goods and services, but this needs to be balanced by a need to ensure a strong, financially healthy supply chain. Further consideration needs to be given to how these potentially conflicting issues can be reconciled. 9. In addition to the development of a strategic relationship between procurers and suppliers, we believe the adoption of a well-defined long-term strategy for the railways is essential. This will help to ensure that the rail industry and its suppliers have a clear vision of how the railway will be expected to develop over the next few decades (rather than the next few years) by articulating the infrastructure and technological development that will be required and the long-term public and private investment that would be needed to pay for it. 10. The Periodic Review conducted by the Office of the Rail Regulator, and the DfT’s High Level Output Specification (HLOS) and Statement of Funds Available (SOFA) structures, undoubtedly help the railway industry to plan on a longer-term basis than was the case prior to rail privatisation. However, these planning structures remain transactional in nature and short-term in focus. 11. The length of time required to upgrade key parts of the railway and develop new technological solutions to meet future challenges require a planning structure that looks 192

Ivensys Rail—Written evidence (PP 26) further into the future and better matches the relatively long asset life of many parts of the rail infrastructure. 12. A long-term strategy, perhaps taking the form of a strategic 30-year Control Period that sets out in high-level terms a clear developmental path for the railways, would help to guide future funding requirements, investment decisions, and product and service developments, and would provide a ‘blueprint’ against which specific investments and procurement processes could be calibrated and sequenced. 13. Taking a long-term perspective is vital for the rail supply chain, especially those at the high technology end of the industry such as Invensys Rail. The greater certainty of order book it would create will give suppliers the confidence to invest in research and development programmes, and to recruit and train skilled engineers. Such a long-term Control Period would in our view need to overlay the existing 5-year Control Period structure, guiding the specific investments that take place within each of these five-year blocks. 14. While the lack of long-term planning is not a barrier, as such, to delivering new signalling and train control systems, it does nonetheless result in a sub-optimal approach to research and development, and to a pricing strategy which may offer less value for money than would be the case if suppliers had greater certainty over their longer term order books. 15. Greater partnership between suppliers and procurers, and the adoption of a long-term planning approach for the railways, would give the Department for Transport, HM Treasury, the ORR, train and freight operators, rolling stock owners, and the rail industry supply base a clearer understanding of what is required for the railway’s development, by when, and the likely associated costs. It would provide a means for the Government to see its strategic priorities for the railways reflected in a more high-level, strategic framework than the existing operational 5-year planning periods, and would help to stimulate and support technological innovation by the supply chain in a much more cost-efficient, forward-looking and timely way MEETING DFT’S STRATEGIC OBJECTIVES FOR THE RAILWAY: A LONGTERM APPROACH TO INVESTMENT AND PROCUREMENT IS VITAL 16. Considerable pressure is being placed on the rail network by rising passenger demand, a trend that is set to continue despite the tough economic conditions. Clearly, safety must underpin every aspect of the investment strategy for the railway, and cost-effective investment has to be an overarching consideration given the Government’s programme of fiscal consolidation. Two other primary objectives for rail investment must be to improve performance and increase capacity. 17. These objectives are largely reflected in the Department for Transport’s Business Plan, published in November 2010. One of the five structural reform priorities it contains is to secure the UK’s railways for the future. To this end, according to the plan, the DfT will: ‘Secure the sustainability of the railway and create capacity for improvement of services, by addressing the high cost of the UK railway compared with other railways and comparable industries; continue to invest in Crossrail and Tube upgrades in the capital’. 193

Ivensys Rail—Written evidence (PP 26) 18. While rail spending was relatively protected in the Coalition Government’s Comprehensive Spending Review, a tough settlement for the railways is expected for Control Period 5. The McNulty Review, which reports to the DfT next spring, is looking closely at how greater value for money can be driven through the rail industry. It is vital that, moving forward, every pound of taxpayers’ money devoted to the railways is invested to greatest effect. 19. Choosing to invest in aspects of the railway that deliver the widest benefits to the industry as a whole and its passengers in the most cost-effective way is clearly critical in this regard. Independent research undertaken for Invensys Rail demonstrates that investment in signalling and train control systems provides the greatest increase in capacity on a pound for pound basis, along with train lengthening (which itself is not always an option), compared to all other forms of transport investment, including road widening. 20. In the last railway Control Period, Invensys Rail reduced the cost of its signalling systems by some 30% and further cost reductions are possible. Major technological advances are being made which will result in further increases in rail capacity by enabling trains to be run more frequently and closer together on the existing network, as well as costs coming down further, potentially significantly. In addition, these developments will provide wider operational, non-safety critical benefits in respect of fuel efficiency, asset tracking and passenger information. 21. All too often, however, public policy discussions over rail investment focus on the procurement of new rolling stock without a full appreciation of the importance of investment in new signalling technology as a pre-requisite. There is little point in investing in new trains unless the signalling system is first upgraded to maximise the performance of that stock. 22. This clearly points to the need for better prioritisation of rail related investment and procurement. This would be assisted greatly by the adoption of the kind of long-term planning and partnership approach to procurement outlined above. New signalling, train control and communications systems must be a key priority, especially over the next decade, in order to optimise the benefits of other rail investments. BENEFITS TO THE RAILWAYS OF INNOVATION IN RAIL SIGNALLING AND TRAIN CONTROL TECHNOLOGY 23. Technological advances are being made that are central to delivering greater capacity and, importantly in the context of deficit reduction, driving more value through the railways. As noted above, long-term planning framework and greater partnership between procurers and suppliers will assist in bringing these technologies to the UK market in a cost-efficient and timely way. 24. At present, the railway has a mixture of technologies and approaches to train protection and control. Some of the signalling systems in place use mechanical systems and designs dating back at least a century. While they rarely go wrong and are still safe, these systems are difficult to maintain and change, and require significant manpower to operate them.

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Ivensys Rail—Written evidence (PP 26) 25. Two areas of innovation that could bring particular benefits to the UK railways – ERTMS and modular signalling – are considered briefly below. European Railway Traffic Management System (ERTMS) 26. Network capacity can be increased through the use of train control technology based on the European Railway Traffic Management System (ERTMS) standards. This technology, which is being developed by Invensys Rail and a number of other rail industry suppliers in close cooperation with the European Union, will facilitate the transfer of rail signalling systems from track side to in-cab, enable much greater interoperability across the European rail network, and provide a considerable opportunity to reduce signalling system maintenance costs. 27. ERTMS train control systems can substantially increase rail capacity essentially by enabling more trains to be driven closer together on existing track. The amount of additional capacity realised depends on the particular nature of the railway. UNIFE, the European rail industry association, has indicated that increases of 15% increases on already optimised lines are typical and this can be increased to around 25% on lines with mixed traffic – as is the case in the UK. Some estimates have put the potential capacity enhancements generated as high as 40% on mainline railways. 28. The computing power of this emerging in-cab signalling and control technology is such that it can import significant operational functions into a train that substantially enhance its performance and reduce the costs of operation. ERTMS can, for example, enable a train to be driven at its optimal speed relative to other trains around it, significantly reducing fuel burn and wear and tear on the track. 29. The major challenge associated with the deployment of ERTMS train control systems is not the reliability of the technology. Rather, it is the management of the benefits accruing across the various industry stakeholders, determining how the costs and benefits should be shared and, critically in respect of the Committee’s focus in this inquiry, to what extent the roll out of the new infrastructure should be driven by the DfT, Network Rail or future rail franchise contracts (given the presence of much of the technology onboard the train and the wider public policy benefits of such technology). 30. More clarity is needed in respect of precisely who the investing and procuring bodies will be for this technology as it is rolled out across the UK rail network, in order to give key suppliers of ERTMS train control systems greater confidence and certainty when investing in and developing technology aimed at the UK market. Modular signalling 31. Modular signalling is a major initiative that the UK rail industry has been driving forward in recent years. Originally seen as a means of providing a business case for the upgrade of secondary lines, particularly those with mechanical technology, the benefits of this approach are now becoming clear for many signalling systems. Modular signalling seeks to adopt the ‘plug and play’ approaches of industries such as telecommunications, and offers much greater flexibility in how train control is provided compared to existing signalling systems.

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Ivensys Rail—Written evidence (PP 26) 32. Invensys Rail’s modular signalling solution is constructed from a small number of standardised units that contain all of the equipment necessary to carry out a particular function. Much of the testing of these units is carried out off-site and they can be installed very quickly by a small team without excessive equipment. The system will bring typically 40% to 45% reductions in the cost of providing signalling for secondary lines. This alone represents a potential saving to the railway of around £150 million per year. 33. These savings are generated not just from the changes in design, testing, installation, standardisation and modularisation of equipment but also from significantly reduced project durations, reduced time on-site and reduced needs for civil work, heating, lighting and environmental control equipment. Such modular systems can also be compatible with ERTMS (as is the case with our own modular solution). CONCLUSION 34. The Coalition’s commitment to reducing the budget deficit means there is significant pressure on the Department for Transport to deliver on its strategic priority of putting the railways more sustainable footing. Significant reforms to railway infrastructure management and rail franchising are widely expected, and regarded as important to meeting this challenge. 35. But the fundamental role of the rail supply chain in delivering a more efficient, better value railway must be at the heart of any future reforms. Procurement by rail infrastructure owners has the potential to be a major driver of innovation in signalling and train control technology that could drive costs out of the industry while increasing capacity and improving performance. 36. However, the real benefits of ongoing research and development being undertaken by rail suppliers in this area, as well as of some of the innovative technologies that are now emerging and in some cases (such as ERTMS) already having a positive impact on the railways in other countries, will only be realised in the UK if the industry comes together to agree a long-term pathway for the railways. 37. For a long-term approach to planning to be most effective, it would need to be underpinned by the development of strategic relationships between rail infrastructure owners and their key suppliers. A genuine partnership approach would help to nurture a stronger supply chain, bring about closer alignment on the practical actions required to meet long-term as well as near-term objectives for the railways, and ensure that procurement exercises relating to specific rail upgrade works or investments are organised and run with both sets of objectives clearly in mind. December 2010

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Johnson Matthey PLC—Written evidence (PP 10)

Johnson Matthey PLC—Written evidence (PP 10) Questions answered: 1, 3 & 4 1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? 1. Johnson Matthey believes that there is a strong case for the government to support low-carbon innovation through procurement. 2. The Government has committed the UK to ambitious climate change targets, such as an 80% reduction on 1990 CO2 levels by 2050. We will not be able to meet these targets without low carbon innovation. 3. However, in many cases low-carbon technologies are seeking to replace mature technologies at higher cost. Unless environmental impacts are valued by the market, rational customers will always choose the cheaper, higher-carbon option. The Government should use regulation and fiscal measures to favour low-carbon innovation. 4. Johnson Matthey believes that the Government should use procurement to create lead markets for low carbon technologies. As demand grows, costs will come down and these technologies have a better chance of becoming competitive. 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 5. The Department for Business Innovation and Skills is currently trialling Forward Commitment Procurement (FCP). Johnson Matthey believes FCP is an effective tool for stimulating low carbon innovation within industry. Government should encourage more public sector organisations to procure innovation using this model. 6. FCP trials have been conducted by HM Prison Service and the Rotherham NHS Foundation Trust. The HM Prison Service successfully delivered a zero waste prison mattress service and we understand that the Rotherham NHS Foundation Trust is soon to procure an innovative, energy-efficient lighting solution. It is striking that these innovations required no public funding to develop and will be cost effective on a whole life basis. 4. How might public procurement more effectively stimulate innovation within industry? 7. Johnson Matthey believes that expanding the use of Forward Commitment Procurements across the public sector will more effectively stimulate innovation within industry than conventional procurement approaches. December 2010 197

Juice Technology Limited—Written evidence (PP 3)

Juice Technology Limited—Written evidence (PP 3) 1. As a company Juice operates significantly in the US providing innovative solutions to major manufacturers in the LED lighting industry. It has made good progress but is at a disadvantage against its US competitors who receive both subsidies and government contracts to develop and supply new technologies. These contracts are often for significant sums and provide the US companies with a major opportunity to extend their capabilities. This has particularly been the case with defence contractors for a long while but is now prevalent among those in the CleanTech space. The process is encouraged by the US Venture Capital community who have close links with the US government departments. 2. The recent move in the UK towards contracting in specific technology areas has been a welcome move in the same direction for domestic companies, adding substantially to the established R&D grant scheme and enabling improved scale of operations and a clustering of expertise. This is particularly important for early stage pre-revenue companies where investment funding has proven to be very difficult in the last few years. There are almost no pre-revenue Venture Capital deals happening currently. 3. Until recently there has been little coordination in innovation policy within the UK. The advent of the Technology Strategy Board (TSB) has provided a single point of contact for both government departments and innovative companies. Juice’s experience is that the initiative focused on SME’s, the Small Business Research Initiative (SBRI), has amplified this effect and shows what can be achieved by bringing all the stakeholders together in one place. 4. The use of competitive contracting, setting world class targets for technical innovation and providing sufficient resources to enable that within one or two organisations, when properly organised, can provide a winning solution for the contracting company that it can sell on a global basis while delivering cost effective and efficient products and services to government. 5. In the current financial environment all organisations are looking for more cost effective solutions to their operations while also enabling and encouraging a more sustainable country. A simple support structure will assist the organisations to achieve these aims through innovative approaches and technologies and the TSB has made a step change improvement in this ambition. 6. The experience that Juice has had through the Ultra Efficient Lighting Competition, organised by the SBRI on behalf of DEFRA, has shown that gathering appropriate teams together, often through the Knowledge Transfer Networks, can bring the necessary expertise to set effective technical standards. 7. In the particular example we have been involved with the technical specification required is world leading but broadly achievable so has been judged well. It will provide a significant improvement in both operating costs and energy efficiency over the existing provision. The award of the contract has led the company to be able to start negotiations with a number of major global lighting companies with a view to distributing the developed products. 8. This shows that the use of competitive bidding, focusing on innovative approaches rather than pure financial terms, within the procurement process can drive industry forward and identify the most promising suppliers i.e. backing winners. 9. It is well recognised that small companies struggle to supply large organisations with government being the largest of all. This is often simply due to the difficulty the 198

Juice Technology Limited—Written evidence (PP 3) companies have with identifying appropriate contact points. The SMEs do not generally have the resources to spend time working through layers of organisations and building the necessary relationships that their larger competitors do. Smaller suppliers are also constrained by the need to meet certain qualification standards that are a requirement of contracts. 10. Providing consistent central points of contact that understand the issues of small innovative companies simplifies the task of engagement with government and allows ongoing discussion to help overcome qualification issues. RDA’s made some steps towards this aim but did not have the internal expertise or networks to be really effective – the centralisation of their innovation function within the TSB has already shown improvement and will move further over the coming years. 10 November 2010

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Rayner Mayer—Written evidence (PP 28)

Rayner Mayer—Written evidence (PP 28) Rationale 1. Under the Science and Technology Act of 1965, the UK has provided research and development grants which have helped innovative products to be developed and demonstrated. However many of these ideas have not been commercialised in the UK but abroad as the UK has never had, outside the defense sector, a strategy for ensuring that such products can achieve market acceptance and entry in the UK initially. Thus manufacture has gone abroad and the UK has had to import products which were designed in the UK, but manufactured elsewhere. The rationale for public procurement as a tool to simulate innovation is that it provides a need and a market opportunity for innovative products which have been taken through the R & D phase. This is the key step in bringing such products from the proof of concept through the pre-production to volume phase. 2. Suitable public procurement policies should also be used to meet our obligations as the guardians of this biosphere for succeeding generations. This includes UK obligations under the Kyoto convention of greenhouse gas emissions to limit the impact of global warming and the Montreal convention on phasing out chlorinated hydrocarbons Effective procurement leading to innovative products 3. Public procurement has been successfully used for more than 30 years to stimulate the innovation process. The oil ‘crisis’ of 1978/80 when OPEC quadrupled the price per barrel for $10 to $40/barrel triggered a public procurement process for energy efficient and renewable energy products which has continued to the present day. This crisis resulted in development of many energy efficient products which only now are being commercialised due to the oil price approaching the equivalent 1978 oil price of $100/barrel. An example of such a technology is transient energy storage which if it had been the subject of public procurement at any time in the intervening 30 years would be a have a mass market today and result in much more efficient drive lines buses and container cranes. 4. One of the most effective procurement strategies was the competition run by the Swedish Energy Administration in 1995 for two new models of ground source heat pumps which would raise their efficiency (coefficient of performance) by 30%. The two successful designs formed the basis of stimulating the entire European heat pump industry where output has grown by a factor of 15. The industry is now poised to enter the mass market dominated by fossil fuel boilers. It should be noted that the market is currently dominated by European, American and Japanese designs with only nominal UK contribution. EU directives 5. The European Union (EU) has used this policy instrument as one of the basic requirements in formulating both the public procurement and energy services directives. So there is a requirement on public authorities to consider sustainability when specifying or tendering for products which could impact on material supply, energy resource or the environment. It would be very desirable for the UK to survey how these directives have influenced public procurement policies by central, regional and local authorities in this country since these directives came into force. 200

Rayner Mayer—Written evidence (PP 28)

Public-private partnerships 6. The coordination of innovation and procurement policies, which have generally crossgovernment objectives, should be undertaken by public/private partnerships in areas which can be identified as having a clear societal need (like reduced environmental pollution) and a strong incentive for industry to supply (like the low carbon addition to the bus service operators grant 7. The most visible and successful example of public procurement by this method is that of low carbon transport where the then Department of Trade and Industry and Department of Transport set up in 2004 and part financed the Low Carbon Vehicle Partnership. This has resulted in public procurement of a number of low carbon vehicles including the requirement for low carbon buses. This in turn has led Transport for London, which operates the largest diesel bus fleet in Europe, to specify from 2012 onwards that only low carbon buses will be purchased. 8. An example where public procurement and innovation should be combined is the Retrofit for the Future housing competition currently being funded by the Technology Strategy Board. Whilst more than 80 contracts have been placed and intensive monitoring of these retro-fitted social housing will be undertaken, there is no clear vision of how to apply such innovative technologies to the 20 million dwellings in need of such refurbishment. If a public/private partnership equivalent to the LCVP was set up then this would create the opportunity for a wide range of products to be supplied to retrofit social housing and so enable private sector housing also to be retrofitted. Obstacles - procurement 9. The barriers that public procurement should address and overcome include – • identifying essential societal needs such as ‘warm’ housing in winter • taking decisions based on first time costs because innovative products tend to have higher initial and lower lifetime costs • gaining market entry for new products where low production runs will result in higher initial costs rather than competing systems with a lower initial cost which are likely to be less efficient • winning public acceptance/approval of new technologies which are beneficial for society and encourage social cohesion by wide scale deploying and demonstration • lack of any incentive to early adopters • reducing the uncertainty in the pricing and availability of energy sources like fossil fuels in the energy and transport sectors Obstacles – supply 10. The obstacles that suppliers will face in responding to public procurement requirements include • lack of coherent and clear objectives and policies which will enable industry to make long term investment decisions • access to low interest finance where the risks are still perceived by financial institutions such as banks, venture capitalists to be too high • perception that the public procurement processes are not coordinated and so a fragmented markets will emerge Low interest finance 201

Rayner Mayer—Written evidence (PP 28) 11. By far the greatest supply side obstacle is access to low interest, long term finance. Designs or proof of concept is not generally for a purchaser or seller to gain finance necessary to stimulate market entry. Demonstrations are required in sufficient quantity to establish efficiency, reliability, maintainability in a cost effective manner. So there is a clear need for a ‘Green’ Investment Bank as successive administrations have proposed but not yet created. However, its success can only be assured if it is aligned with a clear remit inter alia to finance innovation to meet public procurement requirements. This Bank will need to have access to sufficient capital and must be willing to accept the risk that some innovative ‘green’ products will fail and so some investments will not succeed. Also the Bank should align itself with and enter a relationship with the European Investment Bank and its risk sharing facility as an intermediary in order to provde access to European finance. Building schools for the future 12. One of the key programmes that the present Government scrapped on taking office was the ‘Building Schools for the Future’ programme. Whilst this will have an immediate short term benefit on balancing the public finances, it does not answer the question how our 1950’s and 1960’s schools will be replaced and when. From a public procurement viewpoint, this programme with its emphasis on low or zero carbon emissions would have resulted in public procurement on such a scale that new energy efficient and renewable generation products would have entered the market. Implications of post peak oil supply 13. There is a presumption up to and including cabinet level that hydrocarbon resources will always be available even though the price may rise. This ignores scientific evidence about that the world’s oil supply is close to or has peaked and this will be followed by a peak in the world’s gas supply. As we have pointed out in evidence to the HOL Select Committee on Energy Security in 2001, sufficient oil (and later gas) might not be available at any price in the future and so energy may need to be rationed. 14. Unlike global warming where the initial impacts may be too small to observe or require mitigation, post peak oil will result in a decline of between 2 – 3 million barrels of oil each and every year thus leading to massive societal dislocation and dramatic increases in oil prices (up to $200 bbl) into the indefinite future. Neither industry, commercial nor residential sectors will be able to respond and/or adapt quickly enough. The role of public procurement should therefore be to accelerate the introduction of technologies to reduce the dependency on fossil fuels and gain significant market entry for energy efficient and renewable energy technologies to promote a sustainable energy future. Motivation of public sector employees 15. The only motivation for employees in this sector to pursue procurement as an approach to stimulating innovation is that of ‘public good’ as the barriers described above will often preclude orders being placed for such products. Determination, perseverance and a successful outcome should be considered when awarding increments in pay Intelligent customers 16. There has to be an informed dialogue between purchaser and seller in order for any innovative product to be purchased. This purchaser needs to be aware of societal needs and how these could be met through innovative procurement whilst the seller has to be aware of the risk that initial purchaser may carry if the product is not fit for purpose. 202

Rayner Mayer—Written evidence (PP 28) The current risk averse nature of our society mitigates against using public procurement as an innovation tool. Society ultimately has to decide which risk is greater – maintaining a lifestyle which may not be sustainable even during their lifetime or the risk that some innovative products may not ultimately deliver the benefits that have been put forward. References Written and oral evidence to the HOL Select Committee on Energy Security Monday 29 October 2001 by Roger Bentley and Rayner Mayer 14th HOL report 2001/2 p39-48 The Role of Electricity: A new Path to Secure and Competitive Energy in a CarbonConstrained World. Eurelectric Brussels (2007). Global oil depletion: an assessment of the evidence for near term peak in global oil production UK Energy Research Centre (2009) Electrical heating and cooling of residential dwellings, a study on transforming the market for energy efficient electrical heating/cooling appliances, Sciotech Report to DG Energy (1998) Economics of bus drive lines, survey for Department of Transport by R Mayer and T Davies (2003) Rayner Mayer is a Senior Visiting Research Fellow at the University of Reading, Foundation Chair of the European Heat Pump Association 2000-2006 and former Chair of Bus Working Group (Low Carbon Vehicle Partnership). He is director of three SME’s which are developing innovative products which promote the more sustainable use of energy. December 2010

203

The Ministry of Defence—Written evidence (PP 27)

The Ministry of Defence—Written evidence (PP 27) This paper has been prepared by the Ministry of Defence and is closely aligned to the “Equipment, Support and Technology for UK Defence and Security: A Consultation paper” Green Paper published on 20 Dec 2010. Questions: The Committee invite submissions on the following points: Rationale 1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? It is important that, like any other Government Department, we maximise the benefit that we obtain from the resources provided at the Spending Review as announced on 20 October. We express our main operating principles in the Core Policy Section of the Green Paper (section 1.2.2 paragraphs 15-20). Specifically, we explore our wish to access truly innovative research and encourage the commercialisation and pull-through of research noting that enabling SMEs to fulfil their potential can also help meet our national security requirements, in the Government and its Suppliers section (section 1.2.3) particularly paragraphs 26-28. Co-ordination of innovation and procurement policies 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? We explore the Departmental approach to cross-cutting issues in Part 2 of the Green Paper. Paragraph 97 describes the Centre for Defence Enterprise and paragraph 98, some of the work of the Defence Science and Technology Laboratory, both of which deliver output to other departments. Mechanisms through which government procurement can stimulate innovation 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 4. How might public procurement more effectively stimulate innovation within industry? 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? We explore the scope and success of the procurement mechanisms throughout the Green Paper, and are seeking wide feedback through the formal consultation process. Our major procurement processes are detailed in Section 3.1 Defence, but there is greater exploration 204

The Ministry of Defence—Written evidence (PP 27) of innovation issues in section 2.3.2 on Small and Medium-Sized Enterprises (SMEs), specifically at paragraphs 147 and 148. The procurement process 6. What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? o Do they have the appropriate expertise to identify innovative solutions to procurement needs? o How well do they identify when innovation could provide a solution to a procurement need? o How effective is the identification of and dialogue with appropriate potential suppliers? We detail the issues of “intelligent customer” in Section 2.3.3 “Working with our Suppliers” where we also examine how to increase the dialogue with potential suppliers (paragraph 154-156). 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? This is a key element of the Green Paper explored in the “Delivering our science and technology priorities through the wider supplier base” Section (section 2.2.3 specifically paragraphs 94, 97 and 98. 9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? The green paper is aimed at stimulating a wide ranging consultation particularly from potential suppliers of innovation. Formal questions are posed and some are particularly relevant to stimulating innovation: Questions 16, 17, 18, 20, 21 and 25. 20 December 2010

205

NESTA—Written evidence (PP 7)

NESTA—Written evidence (PP 7) Summary 1. NESTA is the UK’s foremost independent expert on how innovation can solve some of the country’s major economic and social challenges. Its work is enabled by an endowment, funded by the National Lottery, and it operates at no cost to the government or taxpayer. NESTA is a world leader in its field and carries out its work through a blend of experimental programmes, analytical research and investment in early-stage companies. 2. As the need to generate sustainable long term growth becomes ever more pressing, the importance of innovation is becoming clearer. Public procurement can play a major role in aiding this. 3. The UK, and Europe as a whole, fails to fully exploit the opportunity of using public procurement to drive innovation. The US public sector spends around 20 times as much as Europe on procuring R&D, a factor that accounts for around half the overall gap in R&D investment between the US and Europe. 4. Based on NESTA’s research on the Small Business Research Initiative (SBRI) 45, this submission mainly focuses on how this mechanism has played a vital role in stimulating innovation in the procurement process. The background and growth of the Small Business Research Initiative 5. The Small Business Research Initiative, established in the UK in 2001, was modelled on the highly successful Small Business Innovation Research (SBIR) programme that was created during the Reagan administration. The SBRI is a model designed to help public sector bodies to procure R&D from small businesses. However, the first iteration of the UK SBRI was a pale imitation of the US SBIR. The scheme was hampered by limited public sector take up and where SME contracts were awarded less than 1 per cent of them were for research and development. 6. In April 2009 a renewed UK SBRI was launched. This model was far more successful: it had a clear model process to help public sector bodies work with innovative SMEs and a strong focus on technological R&D. NESTA’s research has shown that the vital signs of the SBRI are good. Our research from June 2010 found that 13 public sector bodies are engaged, 28 competitions are underway with 425 confirmed contracts amounting to a combined value of £27 million. Furthermore, for the companies interviewed, it is filling a funding gap for innovation. On the public sector side, departments and agencies are learning how to communicate their needs more effectively to the private sector with genuinely interesting solutions going to market that would not have been reached by other means. 7. NESTA research suggests that the SBRI will be most effective as part of a comprehensive framework for leveraging demand for innovation to pull new technology to market. An open data policy that enables rigorous analysis of economic 45 Bound, K. and Puttick, R. (2010) Buying Power? Is the Small Business Research Initiative for procuring R&D driving innovation in the UK, London: NESTA

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NESTA—Written evidence (PP 7) impact is critical, in combination with user networks that help support the major cultural shift required in the public sector. Scaling up the SBRI requires no ‘new’ R&D money, rather a redistribution of existing resources. However, it would require a new way to incentivise participation from public departments and agencies, especially at a time of constrained budgets. Nonetheless, a push for austerity should not mean a loss in momentum on achievements so far in using procurement to drive innovation. The Importance of the SBRI 8. The SBRI is a model designed to help public sector bodies to procure R&D from small businesses. The process has four broad stages. Firstly, government departments or public sector organisations identify a serious operational or policy problem and work out the clearest way to communicate their need to business. Secondly, an open competition is run. Those companies with promising solutions are awarded R&D contracts to test the feasibility of their solutions (Phase 1 funding). Thirdly, those companies who pass the feasibility test apply for further funding to develop a working prototype (Phase 2 funding). Finally, the public sector procures the resultant technology or it enters the open market. 9. The benefit of the SBRI, as compared to other R&D projects, is that it provides 100 per cent funded development contracts where government is the customer. Phase 1 contracts for feasibility testing are valued at up to £100,000 and last for six months. Phase 2 contracts for prototype development are worth up to £1 million over two years. While the public sector has the right to license the resultant technology, its intellectual property remains with the company. 10. NESTA’s analysis has indicated that the SBRI can uncover new and innovative solutions to operational challenges through accessing a larger range of suppliers from varied marker sectors. It can also be used to address policy challenges when a departmental lead customer can test solutions. More than this, the SBRI competition management process comes with an ethos of procurement that is not only focusing on outcomes, but on helping to identify and communicate challenges. Adopted and applied to appropriate problems, the SBRI could help transform the public sector approach to procurement. Indeed, the SBRI can help departments target new groups of companies where they believe likely solutions will be found – for instance the Department of Transport used SBRI to access video games developers’ 3D imaging skills to model synthetic environments to help improve motorway management. Improving the SBRI 11. The SBRI is an appealing concept because of the three-way benefits it promises: the ability to improve the quality and costs effectiveness of public services, the filling of a damaging gap in innovation financing and the support it can provide for the growth of small innovative companies who contribute strongly to economic growth. 12. To ensure benefits are maximised we make three recommendations: a. The scheme should be scaled up to optimise its impact on public bodies, and to reach many more promising small companies. There are two main ways to increase public sector take up of the SBRI: incentivising participation or mandating it. Mandates have been ineffective in the past and risk damaging the perceptions of the SBRI. While expenditure on SBIR is mandated in the US, 207

NESTA—Written evidence (PP 7) research has suggested that incentives are likely to be far more effective. Early successes of the scheme will help sell the idea to other departments and further increase the take up of SBRI to untapped areas of the public sector. b. There has to be a focus on quality as the numbers of competitions are increased. This will ensure that the SBRI remains an effective source of genuine innovation. Although a certain degree of flexibility in the SBRI is important, for a successful roll-out of the SBRI an essential set of core principles must be retained. Maintaining the Technology Strategy Board’s ‘stewardship’ role is a crucial part of this. Ensuring an open data policy is also essential, as the future success of the SBRI depends on transparency and a rigorous means of performance evaluation. Developing peer learning networks will aid collaboration and information-sharing between public sector competitions and clients, and will become even more beneficial as the SBRI concept and practice become embedded. Sharing success stories could be particularly valuable in helping to transform practices around procurement of innovation. c. The SBRI must be recognised as a powerful tool in a wider system of demandside policy levers for driving innovation. These should not be overlooked or watered down to focus solely on short-term efficiency rather than long-term innovative capacity. NESTA’s research has indicated that the SBRI is more likely to be effective if it is one of a spectrum of ways to support the use and development of innovative technology. The UK doesn’t fail to reach its potential for innovation because of a lack of ideas. Instead, this happens because those ideas get ‘marooned’ in an innovation system that doesn’t offer enough avenues to translate them into viable commercial products. We need to ensure the end results of SBRI competitions do not suffer this fate. Mainstream procurement contracts should be one of several integrated routes for technology development in the public sector that include demonstration platforms (such as showcase hospitals) and targeted schemes to maximise technology pull from universities. November 2010

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NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Evidence Session No. 3.

Heard in Public.

Members present Lord Krebs (Chairman) Lord Crickhowell Baroness Perry of Southwark Lord Rees of Ludlow Lord Wade of Chorlton Lord Willis of Knaresborough Lord Winston ________________ Examination of Witnesses Witnesses: Stian Westlake, [Executive Director of Policy and Research (NESTA)], Iain Gray, [Chief Executive, Technology Strategy Board], and Brian Collins, [Chief Scientific Adviser, DfT & BIS].

Q52 The Chairman: I would like to welcome our three witnesses and members of the public. I would like to inform you that the proceedings are being webcast and, for the members of the audience, I’d like to draw your attention to the information note providing some background on the inquiry and a list of Members’ interests. So we have about an hour for this session and we are hoping to get through quite a few questions with you. So I would urge you to be succinct and informative in your responses and not occupy too much broadcasting space so that we keep moving forward. But we are, of course, very keen to hear your views and are very grateful to you for coming along. May I, first of all, invite you to introduce yourselves for the record and if you wish to make any brief opening statement, please feel free to do so at this stage? So if I can start with Iain Gray. Iain Gray: Thank you very much for the opportunity. Iain Gray; I’m the Chief Executive of the Technology Strategy Board and, very briefly, the Technology Strategy Board is responsible for the exploitation of technology-enabled innovation for UK business benefit. I think the primary reason that we’re here today is the Technology Strategy Board has responsibility for the central support and deployment of the SBRI mechanism. Brian Collins: Good morning, everybody. My name is Professor Brian Collins. I’m the Chief Scientific Adviser in two central Government departments: the Department for Business 209

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Innovation and Skills and the Department for Transport. The only opening statement I’d like to make is that this is an inquiry on public procurement and we all represent—or at least I represent—central Government departments. But public procurement happens in a lot of different scales in the public sector and certainly within transport I will be making some comments with regard to that factor. Stian Westlake: My name is Stian Westlake. I’m Executive Director of Policy and Research at NESTA, the National Endowment for Science, Technology and the Arts. We are a public endowment devoted to the ambitious task of trying to help make the UK a more innovative place. I think one of the reasons why we have something to offer today is we have been doing some work—too early to call it an evaluation but perhaps a health check—on the performance of the SBRI to date, the Small Business Research Initiative, and some wider policy work on the role of procurement and encouraging innovation. Thank you very much for the chance to be here today. Q53 The Chairman: Thank you all very much indeed. I’d like to kick off with the questioning. I want to start at a very general level and ask each of you whether in fact you think the Government is doing enough to foster innovation through procurement. As I understand it from the figures that the TSB submitted, the SBRI—as one engine of innovation—is a very small proportion of the total Government procurement budget. So I would be interested in your views about the scale and, even outside the SBRI, whether enough is being done to foster innovation. Also, perhaps you could comment on the barriers that were highlighted in the submission from Government. They listed no fewer than eight barriers and many of the other submissions we have received have agreed with those barriers. So I’d like to hear from each of you how you think those barriers could be overcome and what is being done to overcome them, rather than just talking about it. So perhaps Iain Gray would like to kick off. Iain Gray: Is procurement being used effectively across Government as a tool for innovation? It’s very mixed picture. It’s a patchy picture. If you look at the sums of money involved, £225 billion, then I believe there is a lot more that could be done to stimulate innovation. You can look at it in two different regards: there is procurement in the context of technologies that already exist, that are perhaps new to the public sector, and then there is procurement related to new technologies, or new ideas, where challenges are known to exist but known solutions don’t yet exist. It is really that second area where the SBRI tool has a role to play. In terms of the first rule, we’ve had a lot of debate around budgets—the science budget, the innovation budget—but if you put that into context over £225 billion then a lot more could be done. My personal feeling is there isn’t a department that exists that couldn’t be doing something with regard to stimulating innovation around procurement. Our particular focus, and the role of the Technology Strategy Board, has been around those areas where technologies don’t yet exist and it’s bridging the gap between the science base and the research base. Just to make a point, it is a relatively small amount of money but it perhaps misses the point when we talk about it as a relatively small amount of money, because it is the starting point in terms of the development of new ideas to meet challenges. We’re trying to identify ideas and challenges that can grow into big long term solutions, and we’re trying to draw into the Government procurement process small companies who perhaps haven’t had the opportunity to be on a Government supplier list before, or to be 210

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 involved in big procurement solutions, and help develop them and grow them to become the businesses of the future that can be involved in larger scale procurement. So, in terms of SBRI, I think it’s very important right at the outset to say that while we note it is a relatively small amount of money I think that underplays the importance that it has in growing the economy, both in terms of ideas and companies. Brian Collins: I’d like to take a more holistic view across Government in answering the question because it does seem to me that the use of the word “procurement” begs the question of what one is procuring. In one of the contexts I work in it could be we’re procuring a new bridge over a motorway. Now, “What is the scope for innovation in that?” has a certain quality that is very specific to that particular piece of systems acquisition within the transport infrastructure. By contrast there could be procurement of enabling capability that allows, through technology or through systems acquisition, new ways of delivering a whole range of different things; particularly in IT, which is probably where that type of activity is more likely to occur. Then there is innovation in the procurement process itself; doing the procurement process in an innovative way. I think one of the dangers that we fall into in advising Government is not to be clear in what—and I have just used three categories, I think there are more but for the sake of brevity I won’t illustrate further—exactly you mean by procurement in the public sector. As I indicated in my opening remark, there is also the question of scale; that what a local government organisation might do, or a city might do, will be a very different thing from what a central Government organisation might do and, very importantly, what a private sector deliverer of public sector procurement-by-proxy will do. Regulated industries, who provide a lot of the infrastructure work that I’m particularly engaged with, do public procurement but they do it as a proxy for the Government. There the market forces are much more important and the risk management of innovation is an important issue. To come back to your core question: what should Government do? I think it should be clearer in describing exactly what is meant by the various natures of procurement that could exist and what the expectations of outcome would be, in terms of upside benefit and downside risk management, of incorporating innovation in whatever it is that one is attempting to acquire through a procurement process. Stian Westlake: To take the first question, first of all: is Government doing enough? It is right to say that SBRI, for example, is small. It’s about 100th of one percentage point of the total Government procurement spend we spend on SBRI. But I think it’s important to think about its size in relation to other forms of Government finance for the smallest, potentially most dynamic, start-up businesses, which are some of the people who benefit most from SBRI. The £20 million to £30 million that is going on SBRI per year at the moment is not wildly incomparable to the amount of money that Government, for example, recently put into the venture capital sector through the Innovation Investment Fund, which was a £125 million investment. So we are within an order of magnitude of the kind of thing that, in other areas of supporting the most innovative businesses, moves the needle. So I think it’s important to see some of these things not so much as “it’s a very small part of the whole pie”, but it’s something that, in the context of other interventions, is at least getting close to the right scale. In answer to the second question: how can these barriers be overcome? I think you mentioned eight barriers. But broadly speaking I would categorise the kind of barriers we’re looking at as barriers of skill: the ability of people within Government to do this kind of 211

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 procurement; and barriers of incentives: the thing that affects their desire, a simplistic framework. If I might use an analogy, we can look at another example of how procurement practice was changed throughout Government to get an idea of the kind of challenge this presents and how it was overcome. The analogy I would like to use—drifting slightly away from science and technology—is the private finance initiative and the moves that were made in the last 20 years to move Government capital procurement to a longer-term project finance basis. You can disagree with it but it was a very big shift. What we saw there is that, to achieve the kind of change in Government capital procurement that we might want to see in innovation, we basically required significant pressure from the Treasury to achieve the kind of ends we were looking at; fairly hefty rules on the way Government departments spent their money and a very significant focus on skills in individual departments, partly through the setting up of groups to support skills, like Partnerships UK, and partly through a process where people within departments became used to doing a complex task over a period of five or even 10 years. I say that not because I hold any particular candle for PFI but because it’s probably the one example that I can think of in the last 20 years where we very significantly changed the way, across Government, we procure something, and it was pretty tough. Q54 The Chairman: Thank you very much. Before moving on to Lord Rees, I just wonder if any of you would like to comment on—in reference both to Stian Westlake’s last comment and the others—whether in your view things are getting better, in terms of procurement and innovation, or is the picture essentially static if you look over the last five to 10 years? Just a very brief comment. Iain Gray: If I could make a comment: I fully agree with Stian’s comments and I think one of the issues around the professionalism and skills side of it is the whole issue of the understanding of risk and aversion to risk. I think in the climate that we operate in at the moment there is an increasing aversion to risk and, in terms of using procurement as a tool to drive innovation, I think people’s understanding of risk—how risk as a process works, the understanding of the community’s needs that are out there—is a very important aspect. So my view is: in the last 12 months we have probably seen an increased aversion to risk and, therefore, that is probably having a detrimental effect in terms of people’s approach. Brian Collins: Yes. I would tend to agree with that. I think the other factor, which perhaps we’ll come on to in later questioning, is to do with perception, that more procurement will happen at a local level than at a central level and whether there are the professional skills. The Chairman: Yes, we will come back to that in a moment. Brian Collins: I will park that issue. Stian Westlake: I absolutely agree with the points about risk in the current climate. I think if we stretch our view slightly back, perhaps over a five or 10 year horizon, there is another force, which in itself is good but perhaps does make encouraging innovation more complex, and that is the important need to raise variable performance up to best practice. If we look at health care, for example; if we look at commissioning in the NHS, which certainly is often described in the same kind of language, quite rightly there has been a focus on raising the quality of service and the commissioning service up to at least the benchmark. The kind of language that that has required the Department of Health to talk and the NHS to talk is, in some ways, a different one from the innovation language. I think in some cases it is very much one has to make a case-by-case judgement on which of those two discourses to make a priority. 212

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Q55 Lord Rees of Ludlow: I’d like to follow up on the question of the impediments to efficient procurement. In the TSB’s submission the Government was described as a “poor lead customer”, and the submission went on to say that public sector organisations rarely have the in-house expertise to be able to keep abreast of the latest technologies and innovation or to reach beyond the normal supplier base. Also, in another submission we had, Birmingham City Council emphasised the obstacle that came from national and local government being split into a series of standard silos, as they put it, and they emphasised that one needed a stronger steer on behalf of the national Government in order to ensure that public procurement is considered as a valuable tool to enhance local economic development. Brian Collins has already alluded to some of these points but I wonder if you would care to expand on these general impediments to efficient procurement. Brian Collins: Yes. It’s interesting you pick on Birmingham. I clearly have some delicacy here in that my new Permanent Secretary, who joined the Department for Transport yesterday, used to be the Chief Executive of Birmingham City Council—used to be many years ago; so just to note. I think there is a need for a significant debate around that shift, which is clearly being driven by the current Government, to ensure that the shift itself doesn’t induce further risks of either silo thinking or lack of expertise being available to deliver what is expected to be a sensible outcome. I would suggest the evidence is there that a better solution for certain procurement of certain services is more likely to be effective and efficient, and to be able to take on board innovative solutions at a smaller scale than we have done in the past, but it is not a panacea for everything. I think there are still some things that should be done at a national level and some things should be done at an even smaller level than perhaps is being asserted right now. So for me there is an interesting question of: procurement at what scale? That needs to be established, and where are the mechanisms in our further education system, as opposed to higher education system, that will deliver the appropriate professional expertise to enable those procurement processes to deliver the benefits at an appropriate level of risk? I think the third thing I would say is to do with: what innovation potential exists when it is seen to be managed by bodies such as the one that Iain is Chief Executive of, although of course there are others, that tend to operate at a national level. So there is another issue to do with propagation of knowledge about what innovation potential is available to local organisations so that they can exploit it. How do they find out about possibilities? Certainly we are discovering in our transport domain that is quite difficult. There are all sorts of cultural obstacles to get over as well as just straightforward administrative process. So I think it is quite a difficult issue to understand, and I’m not sure that we have processes in place in central Government at the moment that will help us get to a better position than the one we’re leaving behind. Q56 Lord Wade of Chorlton: I’d just like to follow on from that because you used a phrase a number of times there: “Something should be done”. Who should be doing it? Brian Collins: The difficulty with answering that question is that a number of Government departments are engaged in thinking about that problem, and the normal practice in Whitehall at the moment is to appoint a lead department to look after such an issue. The difficulty we have with a city—and a city is probably a good example—is a city is impacted by five or six central Government departments and no one of them would want to stand up 213

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 and be the lead department and yet, if no one does stand up to it, we don’t end up with a sensible solution. I think we need to re-examine the governance issue in a political sense—I don’t mean in a party political sense—of how we manage the balance between national, regional, local and city, because cities are different. I can’t remember the exact number, but 60% or 70% of the GDP of the country comes from about 10 to 15 urban conurbations. So they’re very important to us; that we understand how to govern those and I don’t mean that in a government sense; I mean in a governance of the administrative process sense. I don’t believe we have a mechanism; we don’t have a forum where we can have that debate. So I’m generalising away from procurement but I think the procurement activity is a very important element of how we do that. Q57 Lord Wade of Chorlton: I would say to all of you, the point is that when we take evidence on this it is terribly easy to say that something is wrong and it isn’t doing as well as it should do, but if we’re going to give a sensible report we have to put a solution. So we need to hear from you experts what it is you would do if you were in charge of this responsibility. Brian Collins: I guess what I’m alluding to in my response is to say a suggestion— Q58 Lord Wade of Chorlton: It is somebody else’s fault? Brian Collins: No, I’m not saying it’s a fault at all. What I’m saying is we need to put in place an open debate about how we construct a different governance mechanism from the one we have at the moment, which allows more innovation to be more likely to occur. It is a debate we need support to achieve success because at the moment the default option is to regress to normal habitual practice, which doesn’t help. Q59 The Chairman: Would either of the other two witnesses like to follow up on that question about what you would do if you were in charge? Iain Gray: If I could make a comment. First of all, comments about Government in the role of a lead customer. If I could draw on my own business analogies and being involved in supply chain change programmes, long term change programmes, and it’s about behaviours. I would say the principal change, in terms of a business or Government acting as a good lead customer, is moving away from a solutions-defined type of role to a challenge to find the product and work with the supply chain to develop solutions. So from a Government role acting as a lead customer, I think if you look at the major challenges that we have as a society—and we look at it in terms of ageing population/low carbon/health care type debates—what I think would enable the Government to act in a much smarter role as a lead customer would be to help in defining what the challenges are that work in partnership with business, with the communities, to help develop the solutions. I believe that, while it’s a very small part financially, where SBRI can play a very big multiplier part in that is: it is changing the whole behaviour in terms of not defining solutions but Government defining challenges and problems and having a mechanism. SBRI matches Government challenges with small businesses that have solutions. If we can take that and work on that at a much bigger scale, if we take the big societal challenges and work with business, introduce behaviours like design, getting design involved quite early on to help articulate what the problem is. None of us are particularly good at describing what problems 214

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 and challenges are, and the real skill in Government acting as a lead customer is to be able to define challenges in a way that engages the community and engages business to come up with good solutions. I think that is the principal difference in behaviour. The Chairman: Did you have anything brief to add? Stian Westlake: Very briefly. I subscribe to what Iain said about challenges but I would say in answer to your question: who should do this? It is better to fight small battles one by one than to try and change the culture of entire departments or—God forbid—the entire Government. So the idea of setting up more extensions of SBRI or more things like SBRI within departments, small pools of money, but have an explicit role to be innovative and have the skills to do that. I think for the success of SBRI, that is more likely to work than to try and effect a sea change across the whole Government in one go. Q60 Lord Rees of Ludlow: What about at local levels? Stian Westlake: Thinking of some of the things that we’ve seen in some local councils; so Aberdeen City Council have been fairly good at this. I’ve seen some interesting things at Camden Council. Setting up teams specifically dedicated to this does seem to have worked. I don’t have quantitative evidence for this, this is anecdotal, but the case studies suggest that that’s a way of achieving change quicker than trying to change across the board. Q61 Lord Crickhowell: I’m having real difficulty based on my own experience, I suppose, in Government some time ago. You would find challenges and change and all these very desirable things, but what happens in one’s department is one is faced with the immediate need to procure something and Brian Collins started with the simple, small example of a bridge. Well, with a colleague, I was responsible for deciding to build the Second Severn Crossing. I decided to build the first submerged tunnel in the country at Conwy, and what one is confronted with there, one is to get an immediate project through with a budget, which one is probably going to grab, reduce some expenditure elsewhere, and a Treasury attitude. If I take the road project particularly, we were tormented with something called COBRA, Cost, Operational Benefit and Requirements Analysis, in which you would never have ever built anything in hilly country; all our roads would have had to be constructed on the flat plains and you would never have done anything difficult or unusual. What I am finding difficult is thinking how you get away from it. Yes, we all have these small groups thinking of innovative challenges, but even if you want to do something rather unusual—like a submerged tunnel—and use the experience that had been developed in Holland to do something new, you are faced at once with an immediate block: Treasury; current financial crisis; the need to get value for money in this financial year. What I am finding so difficult is how you get these innovative, desirable things going against the immediate departmental block, because I want to build a new road or a new tunnel or a new “what” and I have a limited amount of money to do it and the Treasury producing a whole set of rules that discourage innovation. The Chairman: Is there a brief answer to that, Mr Collins? Lord Willis of Knaresborough: Just say, “Yes”. Lord Crickhowell: How do we get through this? Brian Collins: This may sound like a very administrative answer, but the Treasury are reexamining their rule book to see to what extent they can incorporate much more flexibility for the inducement for innovation in the way in which procurements occur. So I think they 215

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 are getting out of the silo that you describe them as being in stereotypically. How quickly they’re going to get themselves out of that in the current situation, of course, I wouldn’t want to comment on. But I still come back to the point. Roads are a bad example in one sense in that that is the example where public money is spent; in almost all the other infrastructure the money is largely private and it’s moving in that direction. So my concern is that Government’s influence over innovation is going to be influencing markets to consider why they should innovate, and that goes through regulatory mechanisms, franchise agreements, and all sorts of other much more hands-off approaches. They are much less specific. That is exactly why I would tend to agree with what Iain said about the challenges, if we don’t articulate the challenge of what we want to try and achieve the market won’t respond to it. You could nudge it with regulatory coercion but I think it’s dangerous, perhaps, to use roads as an example. I agree with you about the roads, but roads are an unusual piece of large-scale public procurement compared with others now. Q62 Baroness Perry of Southwark: Lord Crickhowell has asked part of my question but I’d like to press on it a little further. It is good news that the Treasury is looking at its rules to try and encourage more flexibility, but is there anything being done—from BIS or from the Cabinet Office—to push with individual Government departments as to the take up of SBRI and to encourage them to do more? Perhaps tied to that, would putting more money into SBRI make a difference? Would it encourage departments further? Iain Gray: Could I perhaps answer that first of all? A little bit of background on SBRI because I think it’s important in this context: SBRI was trialled quite a few years ago. It was very much viewed across Government departments as a taxonomy on their budgets and departments didn’t really subscribe to it. We re-launched SBRI back in 2009 and we’ve had a very big selling job to get people to understand this is not a taxonomy. This is providing innovative ideas from business to challenges that do exist in Government departments. Like everything else in life, there needs to be some kind of incentive and some kind of showcasing to show people what the benefits really are. The current situation on SBRI is we have 19 different Government departments involved in the SBRI programme. One of the mechanisms that we have done to act as an incentive in other Government departments is to provide some matched funding, which effectively has come through the Technology Strategy Board and through BIS, and that helps to reduce the financial risk in difficult budgetary situations to other Government departments. Q63 Baroness Perry of Southwark: I think that is based on the American model as well, isn’t it? Iain Gray: It is based on the American model. Could we use more money? My view is that what SBRI has achieved today is: it is an embedded process across Government; it’s a process that works; it’s a process that is delivering real value and benefit, but it’s now at a point where it needs to be scaled up. To scale up and to provide the incentives that will work across Government departments I believe there does need to be a fund made available, an innovate-to-save type fund that can be accessed by other Government departments. So a central fund, accessed by other Government departments that provides an incentive for them to get engaged in SBRI. The key benefit in many regards—and I’ll take the Ministry of Defence as a classic example— is to demonstrate to a department that solutions to their challenges can exist from 216

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 completely unexpected quarters. So, for example, when people have been looking at new lightweight battle armour, or something like that, then suddenly solutions that have come from a sportswear manufacturer outside of the normal conventional route provides a terrific solution. So something that incentivises the department to accept a higher level of risk, essentially, by looking in quarters they might not previously have looked at. I believe now is the time to scale up and now is the time to provide some sort of central fund to help facilitate that. Q64 Baroness Perry of Southwark: I don’t know whether the other two want to respond to that directly. But part of my query, from what has been said, is that we really don’t have an overall evaluation of how the programme has gone and before we scale up should we not have some proper evaluation? You have anecdotal evidence, 19 Government departments and some interesting things they’ve done, and so on, but should there be a proper evaluation before any scaling up is recommended? Stian Westlake: Perhaps if I can speak to that. We looked at SBRI about six months ago and how the programme had gone since 2009. Because of the work of these 19 Government departments—very few of these projects have finished yet, many of them have recently been started—our view was that it was too early to evaluate in a formal evaluation sense. The report that we put together, which we’ll make available to the Committee, was what we felt was the most that could be done at the moment, which is case studies of all the projects that are not secret, effectively. Again, with that, it’s possible to build an anecdotal evidence base that things seem to be going well. For the most part, Government departments are happy with the results that have been generated. The process has gone largely to plan. The problems that dogged the first iteration of the SBRI set up in 2001 have largely been ironed out and things seem to be working responsively. We’ve been discussing with the TSB what further data we would need to do a more rigorous evaluation. Our view is that we’ll be in a position to start doing that in around six to 12 months. But I think our view would be, based on the fact that the signs so far are as good as one would expect, a cautious expansion is absolutely the right choice. Iain Gray: Could I make one further remark to that. While I fully agree with Stian’s perspective from a UK point of view, we shouldn’t overlook that there is an intentional benchmark out there, which is the US SBRI scheme, which has been operating for 28 years and is delivering and is hugely successful. So it’s not that there isn’t evidence to support this type of approach. To my mind, the other thing that is quite interesting is that across other European countries people are now looking at the UK as very much taking a lead in this precommercial procurement area of SBRI. So while we are still in those early days we have something that we can look on and aspire to from the US and we have others looking in with great envy at what we’ve introduced into the UK. So I believe now is exactly the right time to scale up. Q65 Lord Willis of Knaresborough: Professor Collins, I wonder if I could come to you, first of all, on the input of the departmental Chief Scientific Adviser in this whole business of innovation. At an earlier session I asked the Head of Corporate Procurement whether in fact the department, through its chief scientists and others, use the scientific environment for transport policies and, therefore, procurement, and his answer to me was, “I don’t have any examples but I distinctly remember a discussion with Professor Brian Collins about trains and the need to get people on and off trains easily”. 217

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Brian Collins: Yes. Lord Willis of Knaresborough: I thought, “If that’s the level of our ambition then we’re pretty desperate”. So my first question to you is: how much influence do you have as the departmental Chief Scientific Adviser in BIS? Quoting from your response that BIS leads on innovation policy, therefore, do you have a key role in that? And how often do you meet with the other departmental chief scientific advisers as a cohort to drive this link between science and implementation? Brian Collins: If I may, let me answer the last question first. All the chief scientific advisers of the core central departments meet weekly for breakfast on a Wednesday morning, at 7.45; very occasionally with the Minister of State for Universities and Science, David Willetts. So we meet weekly and we discuss topics of common interest. We also meet with the chief executives of the research councils and Iain, about once every six weeks or something like that, to talk about areas which are common between departments, research councils and the Technology Strategy Board. That has been running as a pattern for about 18 months and it’s very successful in flushing out those areas that are of common interest across departments, so that we don’t trip over each other and we can add weight to the arguments that go to our Ministers in our own departments to produce a coherent view, with regard to the exploitation of science and technology and engineering evidence in making packages of policies across departments work in a more coherent way. So that’s the first point to your last question. I’m going to answer them in reverse order, if I may. As you’re well aware, there’s been a major restructuring in BIS over the last few months, culminating in Sir Adrian Smith’s appointment as Director General of Knowledge and Innovation. In fact, the trauma that BERR and BIS have gone through over the last two years has made it extremely difficult for a coherent continuous process of directing innovation policy, from what was initially in BIS to where we are now, to be sustained and managed. I don’t think we have done as good a job as we could have done, due to all those machinery of Government changes and a general election about which of course we couldn’t do much either. So I think the last two years has been pretty traumatic with regard to managing that sustained input. What I do see now already is considerable momentum gathering around a much more coherent direction of the innovation policy out of BIS, not only the SBRI scheme but all the other aspects of innovation coming together. So I think over the next few months we will start seeing a much more coherent process. And am I engaged? Yes. I’ve had long conversations already with Sir Adrian and also with the new Chief Economist who joined the department on Monday. Just to indicate how traumatic these changes are, if you change all your leadership structure you do tend to lose the corporate memory of some of these things. So that’s the second point, if I may. The Chief Scientific Advisers and, therefore, the network are quite heavily engaged in this process. To come back to your first question, that was not an issue that was raised in the Department for Business. That was an issue in the Department for Transport. It is interesting that you see whether or not passengers can get on and off trains as something relatively minor. It did turn out to be an evidence base that was sadly lacking.If you think how quickly can passengers get on and off trains determines how many get on and off trains and, therefore, how many trains run in say one hour and what the resulting revenue stream is. When you talk about that in a London context, which is what this particular example was, the business case was either viable or not viable, depending upon how many people you got on and off trains. The engineering of the train platform interface was the critical factor. Lord Willis of Knaresborough: Right, I stand to be corrected on that. 218

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Brian Collins: So it was a crucial thing that no one had bothered to look at for three decades. Q66 Lord Willis of Knaresborough: Yes. I think my central point here, Brian, is that we’ve invested—and the previous Government invested, I think, very well—in having department chief scientific advisers. I want to know how influential are you as a group? Are you there just as sops to the system or are you really driving this? Because you say in BIS that’s your role; BIS leads on innovation policy and I can understand you having a role there. But then the Cabinet Office leads on procurement policy. So how do you mesh into that? I think it comes back to Lord Wade’s absolutely pertinent question about who drives all this. Because if Stian’s remark is right and this is going to be incremental, it’s going to be like the reform of the House of Lords. In 200 years we’ll still not be moving along. Brian Collins: Which is exactly why I said earlier that I believe we need to re-examine the governance, because I don’t believe the governance addresses the issue that you very aptly describe. Q67 Lord Willis of Knaresborough: Who is going to do that? Brian Collins: There isn’t any one person who describes all the systems that make up the innovative procurement of new capability to modernise the country and take forward— Q68 The Chairman: Is there a Minister with responsibility to do that? Brian Collins: No. Not a single Minister, no. Q69 Lord Willis of Knaresborough: Should there be? Brian Collins: You could argue that that— Lord Willis of Knaresborough: No. Should there be? Brian Collins: Yes. I’m sorry if this sounds a parody but you will remember the TV series Yes, Minister and there was a Ministry for Infrastructure as being, “Well, that’s the lowest of the low”. Actually it’s what makes a developed country, as you and I have discussed in other quarters. Without such a ministry that makes sure the country continues to work effectively through public procurement and other mechanisms, then you will tend to go in the wrong direction. So I would tend to agree with you, we do need to have someone who looks after the wellbeing of the operation of the country and everything that flows from that, which is procurement, innovation and growth in that sense, not economic growth in a trade sense; although that is important, too. Q70 Lord Willis of Knaresborough: So are you able to identify a champion within the Department for Transport, for instance, that brings together innovation and procurement? Brian Collins: No. Q71 Lord Willis of Knaresborough: Could you in any other department? Surely you could do in the Ministry of Defence? 219

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Brian Collins: Yes, you could. Yes, that’s exactly the one that does, but that’s why I said— Q72 Lord Willis of Knaresborough: But that’s the only one? Brian Collins: I think it’s the one department that has maintained its own internal mechanism for procuring most of its capability. Most other departments have outsourced their procurement, either through agencies or right into the market, for what capability provides the wherewithal for the service that is derived. We don’t influence the aircraft that British Airways buy and yet you and I, as travellers, experience the service that an airline operator delivers. So when you say “who is ‘they?’”, most people say, “Why don’t they do something about it”. Well, “they” in this case is British Airways. It’s not the Government. Q73 Lord Willis of Knaresborough: I know I’m taking up too much time. This is my last point and then I’ll shut up for the rest of the morning. I’m hugely impressed with what happens in terms of the military in the States. That drives innovation and procurement more than anything else because of the huge pulling power. You talked earlier about the private sector being the main driver here because it is the purchaser. Well, the Government spends £160 billion to £180 billion in buying and procuring services. It is a huge power. In the United States it drives innovation. What is the barrier to stopping us doing it here? Brian Collins: I think there are a number, one of which is cultural; second is scale. The American defence machinery is huge by comparison with our defence machinery and they have maintained an indigenous capability for manufacture in a way that we haven’t. Now, you could argue whether or not we should but we haven’t. That is also true of a considerable fraction of other public procurement. We buy from wherever on the planet it is seen as cost effective to buy. We have not taken a protectionist approach to looking after our own industry as a matter of policy over many decades. So our own intrinsic spinout capability, and cross-fertilisation capability, I believe to have been diluted as a result of that policy. Now, we have reaped the benefits of lower cost. We’ve reaped the dis-benefits of not having that holistic cross-fertilisation of ideas between sectors. But to come back to your thesis of: could we do a lot better? Yes, I’m sure we could. And one of the things, to come back to your question about chief scientific adviser networks, is exactly that, we share ideas and examples of where things are being done from health, from infrastructure, to communities and local government, transport and defence. But there are only so many of us and we have lots of other things to do. Should we have a bigger network that enables that to happen? You could argue that we should, yes. Q74 The Chairman: Thank you very much, Lord Willis. Before turning to Lord Crickhowell, if I could very briefly touch upon this intriguing point about people getting on and off trains. Like Lord Willis, I thought that was a relatively trivial issue but you have persuaded us that it is rather important. But if we take that as an example—in fact a rather nice example of innovative thinking—my question has two parts: one is what has happened as a result of that piece of innovative thinking; and, secondly, if you look at the Department for Transport as a whole, is there a replication of that kind of process where you and others look in the department? What are the big issues that would make our transport system more efficient and serve the nation better? They may not be obvious and require some outof-the-box thinking. Is that kind of process cloned in roads and in other aspects of rail infrastructure, like signalling and so on? If it is, is it carried through to delivery? 220

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Brian Collins: There is a lot in that question. Let me be as succinct as I can. One of the things I believe I have to do as a chief scientific adviser is to be a critical friend. It’s not acceptable just to be critical. You have to come up with an answer to the problem you have posed. As it happened, a piece of research that had been funded by the Research Councils to develop a facility that allowed movement of people on and off pavements—and, of course, a train and a platform is essentially a pavement with a kerb that you can dynamically reassemble—was already sitting there as a piece of experimental capability funded by the EPSRC in UCL, and we immediately spent £250,000. This was a £3.5 billion transport problem. We spent £250,000 solving the problem on the back of £2.5 million that the EPSRC had put in. It was a good example of where enabling research by EPSRC enabled us to solve a problem in a particular transport example, and they re-examined the infrastructure that was going to be built on that particular project and changed everything so it came out to be a satisfactory answer with regards to the value-for-money proposition. That was then incorporated into Crossrail; it was incorporated into the Olympics, and it has gone around other rail transport communities. So that piece of work has now informed a lot of other big investment processes. So the answer is “Yes”, that was a really good example. To what extent is that now being used as a modus operandi? I think maybe I became somewhat renowned for asking the nasty questions early. So I do get asked more now, to answer those challenge questions early, which is where I think the most value can come. So in that sense, yes, that episode has caused more of that to happen in transport where it is relevant for that to happen but the difficulty with transport is it is so devolved and diversified. So I don’t get asked about schemes in cities in Manchester. I don’t get asked about schemes for rural road improvements in Cornwall, because that is devolved all the way down, and there is no mechanism by which innovative knowledge that is created in the middle of Government—such as the one I’ve just described—is available other than through publication and the web and all those sorts of mechanisms, and let alone that being used elsewhere. So I use platforms such as this and others to stand up and talk about these things in order to propagate that knowledge—it’s part of what I do—and, indeed, the Technology Strategy Board Transport Knowledge Transfer Network, and one of your colleagues, who is not here today, of course, is helping me with that and helping Iain with that. So that’s extremely useful that we do have those mechanisms. But it’s serendipitous, it’s not institutionalised and the whole idea of innovation around this type of activity is not institutionalised I think at a scale that would allow it to deliver against the aspirations that I sense is needed. Iain Gray: What you have described is a perfect example of open innovation where the role of Government as a lead customer is not to define the solution. It is to work with the community to help define: what is the problem we’re trying to solve, and to bring in the design community, the social scientists, the research community and business. Open innovation says the solution doesn’t necessarily lie within the department that has that challenge. It is: bring in that broader community, and that is exactly where SBRI is playing, albeit at a different end of the spectrum. Q75 Lord Crickhowell: We got a good way to answering or part answering the two questions that I am prompted to ask. One was: are the Government using the SBRI for procurement mechanisms appropriately, and we heard about re-launching and showing people the benefits and scaling up. The second question was about structures to anticipate the needs of Government departments in five, 10 or 15 years and meeting the grand challenges. We’ve had some very interesting comments from Professor Collins about the structures that we all took keen note of. 221

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 But, again, going back to my non-scientific experience, but when I first left Trinity College Cambridge—a very long time ago—and went to work in the City the calculator I used was a thing on my desk that I did that with and the firm that I worked for was putting in its first computer systems, which occupied space the size of this room. The scale of the technological development is simply staggering and it’s accelerating the whole time. So I suppose the first part of my follow-up question is: in view of the scale and pace of the whole process, how do we anticipate the five, 10 and 15-year progress? Again, coming right back to the procurement exercise—the Government is a huge spender, the Government’s own car fleet, and so on—surely there is a scope there for driving forward the kind of technological changes that are happening to the motor car, which have been prompted in part by legislative demands in California, and so on. Secondly, the grand challenge. We’ve had interesting comments about America, but one of the features of the American thing is the demonstration aspect, which I think Iain Gray referred to; using demonstration projects. So could you take us into this vast accelerating area of change and how procurement—which very often is an immediate problem for a Government department—can look far forward and take the big challenges forward? Brian Collins: There is a concept that has been developed over the last two or three years, which is called an Innovation and Growth Team, which consists of Government, academia and industry sitting around the table and talking about what the roadmap will be for their product or service over the next 30 to 40 years, saying, “What are the critical things that need to happen in order for us to get to where we want to get to?—which may be meet a 2015 low carbon target; it may mean maybe other sorts of ambitions that other people have—and what are the critical factors that need to have occurred?” some of which, on some of the more facetious examples, say, ‘Magic happens here’”. In other words we’ve invented some battery that is 100th the size of what we currently have but still holds the same charge; that sort of stuff, particularly pertinent to vehicles. So that has happened in the automotive industry; it has happened in the industrial biotechnology industry; it has happened in the space industry, and we’re about to do one in the construction industry. How do we make sure that what we have are technology innovations programmes, research programmes, which are iterative and cyclical, that deliver against that plan? Of course, some people say that’s national planning but it isn’t actually national planning because we have industry, we have academia and we have Government all playing their part as appropriate but in a collaborative way. And the word that Iain didn’t utter, which I think is crucial to what we’re talking about here, is collaboration of all the players in a way that allows capability to be available to the procurers to draw from, and it is visible to the procurers to draw from, whether they’re Government or private sector or in partnership, to deliver against those long term ambitions. I’ve broken out of the workshop that I’m running for Infrastructure UK, for the Treasury, on how to modernise national infrastructure and that’s exactly what we’re asking: what is the roadmap for modernising transport, waste water, ICT and energy in a coherent sense over the next 40 years? And what are the critical things that we need to invent, innovate, or discover, in order to allow us to be where we want to be in 2050, still keeping the lights on, low carbon, economic growth, social values, and adapting to climate change? So I think that’s a mechanism, which has been tested already and we could do a lot more with it, to take forward the sort of example you’ve just described.

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NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Q76 Lord Crickhowell: The American example: if we take the Ministry of Defence, we haven’t been very clever about how we were ordering equipment with old-fashioned valves, when the Americans were already thinking of entirely different systems of the kind that we now take for granted. Is there a big trend happening in these departments and are these demonstration projects that have been so important in the United States really being developed over here? Brian Collins: I’ll be very brief and then Iain should say more. There has been talk of a civilian version of a UK DARPA and DARPA, as you’re well aware, has been the mechanism that the United States have used for doing those large-scale demonstrators. They have started talking about a civilian version of DARPA, particularly around low carbon, post President Obama’s election. Certainly that is something we have talked about but it won’t be done with pure public money. It has to be done, because it’s only affordable if we do it as a partnership between public and private money and the Energy Technologies Institute, and some of what you do in other parts of the Technology Strategy Board. It’s exactly in that space. Q77 The Chairman: Do you want to add anything, Iain, before I turn to Lord Wade for a final question? Iain Gray: Very briefly, just to say procurement is just one of a number of different levers of innovation here: there’s procurement; there’s regulation, there’s standards. The Technology Strategy Board is looking at a number of these different levers. Demonstration is an important part of that toolkit. If we look at demonstrators we’ve anticipated in the field of electric vehicles and assisted living, just two prime examples; buildings: low carbon buildings, low impact buildings, setting a code for sustainable homes, new-build, 2016 to 2018 onwards. That sets a standard that then drives the sector. It defines a market. You’re now starting to see technologies, such as new LED lighting, new hydrogen fuel cell domestic boilers in the home, all being applied through demonstration into homes as a result of thinking far enough ahead that we set targets on those. So, from my perspective, procurement has an important role to play. It’s just one of the levers. It’s the focus we’ve talked about today. But procurement, regulation, standards: seeing them all as part of a set of levers in innovation is very important. Q78 Lord Wade of Chorlton: Very briefly, because you’ve discussed a lot of this but again it’s for Mr Gray. Do you believe that you are the right body that could be expanded to take a much greater role than you now do and how would you do that? Secondly, just looking further, in your present role—or do you think that would need to change—can you look more specifically at these future opportunities? Iain Gray: I unambiguously think the Technology Strategy Board is the right organisation to drive innovation. I would see one of the things that is hugely important is that we see these different tools and different levers as part of an integrated approach to innovation. So to think that you could maybe take one tool and have that operated in one place and another tool operated in another place, to me actually takes away from the fact that when you have a tool kit—and procurement and SBRI is part of that toolkit—you need to know when to apply that particular tool. So the organisation, the Technology Strategy Board does see procurement, particularly SBRI, now being at a crossroads where we can make a big difference by scaling up, having some form of innovate-to-save fund. I think some central 223

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 fund that can help act as a stimulus for SBRI would be something that is very important to us. In terms of the type of organisation we are, what is also very important is when we were set up we were set up as an organisation that was business led and had currency in business, and it is very important that, as we evolve as an organisation, we continue to maintain that business currency. That is an important part of the dynamics and cultural behaviours of the organisation. But I unambiguously think the organisation is the right place. Q79 Lord Wade of Chorlton: You obviously have a board of which you are the Chief Executive, I take it? Iain Gray: Yes. Q80 Lord Wade of Chorlton: Who are the members of that board as you exist now? Who are your fellow members of that board? Iain Gray: We have an independent governing board with a chairman. That chairman is Graham Spittle, who is Chief Technology Officer of IBM Europe. I think we currently have 10 members of the board. I say “think” because we are going through a process this year of bringing in new members on to that independent governing board. There are representatives from academia; there are two vice-chancellors; representatives from different business sectors. Underneath that governing board there is an executive management team. I am the Chief Executive, and then there is an organisation of around 130 people, predominantly recruited from business. Our champion in Government is David Willetts. Q81 Lord Wade of Chorlton: Just a further question. Suppose you were to be given the opportunity to take that lead, and become much more important in development of procurement across Government, how would you do it? Can you do it sensibly; do you have the right relationships with other realistic partners so you could influence them, or would you have to have your own little group within each department? Do you have a view on that, how that might work in practice? Iain Gray: I think if I take SBRI as the example: we have a relatively small team working SBRI. What is hugely important for me is that within each Government department there is a Minister that has that as part of his responsibility, and there is a focal point that can act on our behalf within a department. What we don’t want is to build a huge offline team that doesn’t have that connectivity. So it’s about getting the departments themselves to operate and work in an effective way, giving us the accountability for setting the process up, setting the procedures up, giving us a budget that allows us to incentivise doing that, working with business. We can make some terrific matches from unexpected quarters, businesses in one sector that have never talked to a Government department in another sector and have come up with some terrific innovative ideas. That is the role that the Technology Strategy Board can play together with its knowledge transfer networks. But what I think we need in each Government department is a key focal point and a ministerial sponsorship. Q82 Lord Winston: If I can just come back to that point. In your first feasibility phase you offer up to a £100,000 grant and then if there is further investment you might go up to £1 million. How do you arrive at these sums and do you think that they are appropriate? 224

NESTA, Technology Strategy Board and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Iain Gray: In very broad terms the way we set about doing that was to use the US scheme as a benchmark, the BIS operated phased scheme. The first feasibility studies are around about—it is just over—£100,000. I can’t remember the specific numbers but it is a similar order, similar kind of timeframe. The second phase, again, is reasonably similar to our approach so I think we have that about right. The big thing that the US scheme offers that we now need to work on, other than the scaling up that I’ve already talked about, is in the US scheme there is a step that can then take you from that second phase, and a number of companies that then go on to full scale major multi-million pound procurement programmes. So making that linkage between the early phases of SBRI and the opportunity for full blown procurement, I think, is the important link that we need to make. But the scoping of £100,000 being about the right level for the initial feasibility studies, I believe to be right. Business is telling us it’s about right. We have really strong interest from business in that. Q83 Lord Winston: If I may, very briefly, how many second phases do you have in train at the moment? Iain Gray: I would have to come back and give you a specific answer. The Chairman: Could you do that, please? Iain Gray: Yes, I will give you a specific number. The Chairman: I’m afraid I do have to draw the session to a close now. But in closing I would like to thank our three witnesses for some very helpful comments. I’d also like to ask Professor Collins if he could follow up in writing with some specific examples of how the forward commitment procurement process is being used in either DfT and/or other departments, because we did not have time to go into that, but if you could give us some concrete examples, that would be useful. Brian Collins: Sure. Yes. The Chairman: So thank you very much for your time this morning. You will receive copies of the transcript for correction before they become part of the public record, and if you wish to stay for the second half of this morning’s session you are very welcome to join the audience in the back row, but otherwise you will get back to your other jobs and thank you very much for coming.

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Olswang LLP—Written evidence (PP 20) Rationale Question 1: What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? 1. Arguably, in many cases public purchases are market opening in that, by necessity, the size, complexity and innovative nature of the project demands a public sector client. This may be due to the level of co-ordination needed between public bodies, the regulatory/legislative framework, the predicted cost/risk level and source of demand (e.g. local citizens). For example, in the transport sector a Local Transport Authority may well need to be the first to try local tolling of roads via a procurement process, to stimulate the market nationwide. 2. Generally, the public procurement procedure does not restrict what the government buys, it does however prevent discrimination (between Member States' offerings) when defining the specification. However, where many public bodies (so-called contracting authorities) fall down when trying to use a public procurement exercise to drive innovation in a specific area is that they fail to adopt a clear, firm policy line and secure associated funding. A clear marker needs to be set down at the start of the process – for the benefit of the public body, its staff and advisers as well as the (potential) market – indicating that this procurement is not going to be about buying the same old service and/or product but seeks to innovate around certain areas. That clarity and transparency of purpose should then be fed into all of the procurement documents, the output/technical specification and the method of assessment (usually, fleshing out what is meant by the 'most economically advantageous tender' since this is not the domain of lowest price tendering). 3. All too often public procurements are commenced with insufficient public sector preparation in terms of testing the existing market, assembling the procurement team, establishing the pricing envelope, devising methods of assessment and so on which means that the purchase is being driven by the process and its deadlines as opposed to truly testing the innovations which companies could produce if given a better prepared process. There is also the ability to split procurements into different stages, for instance if it is a design competition or the procurement of a pilot project prior to launching the full procurement exercise (provided that this is possible, i.e. there are no IPR which prevent this). Such pilots are an excellent way in which to test not only the possible parameters of what the market place can offer but also the user experience and receptiveness to various innovations – which can be particularly important if the final contract is to take the form of a concession or otherwise be dependant on revenue from third parties. They should also assist the public body in terms of affordability and devising a sensible procurement process. Of course, if the public body is prepared sufficiently to run a pilot prior to the full procurement, that bodes well in terms of the efficacy of the procurement and eventual contract to be delivered. 4. A key element of any procurement or market testing exercise is to ensure that the 'provider' is obliged to release the information received and produced as a result of the pilot so as to ensure that there is no perception of, or actual, unequal treatment of eventual bidders. Such exercises should be market opening – to ensure maximum innovation – as opposed to market closing. 226

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Co-ordination of innovation and procurement policies Question 2: To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and coordination is in place to help to facilitate this? 5. We are not in a position to answer this question. However, as a comment on the question, it may also be helpful to consider the interaction between national innovation policies with those of the EU, which obviously plays a significant role in devising the procurement process (the UK system largely implements the underlying 2004 EU procurement Directives) and enforcing procurement law (via European Commission infraction cases against Member States). We know from first hand experience that there can often be tension within the European institutions, including the Commission, between various so-called 'horizontal' policies such as how environmental, social and ethical elements play out, if at all, in the public procurement process. By way of example, the DirectorateGeneral of Enterprise and Industry seems to be active in relation to optimising innovation by utilising public procurement. 6. Further, there are various efforts being made to achieve more consistent procurement strategies on an international level. The Single Market Act proposed by the European Commission amongst other things seeks to make public procurement more innovative. Also, the ability to achieve economies of scale by testing trans-national public tendering involving more than one Member State will be studied. The Agreement on Government Procurement (GPA) between some of the WTO Member States is another example of efforts being made to harmonise and enhance international trade within public procurement markets with benefits for domestic and foreign stakeholders in terms of increased competition. Mechanisms through which government procurement can stimulate innovation Question 3: What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 7. In terms of the legal "mechanisms" which are open to public bodies, the arrival of the competitive dialogue procedure on the face of the UK's procurement Regulations has provided some welcome clarity in terms of the public body's ability to hold sensible discussions around the solutions being proposed by the bidders (pre-submission of final bids). This allows the public body's expectations to be aligned with the potential suppliers' solutions via iterative bidding but it does require a confident, robust procurement team public sector side. For certain projects, the concession structure (works/services) should be considered which has the advantage of, at present, being subject to limited EU procurement regulation. 8. Alternatively, procurement mechanisms like framework agreements and e-auctions are not really appropriate when trying to drive innovation through public procurement as they are controlled by specific procurement rules and have a distinct framework which needs to be respected. Arguably, they are designed for simple, fast transactions which do not involve a great deal of discussion with bidders. 227

Olswang LLP—Written evidence (PP 20) Question 4: How might public procurement more effectively stimulate innovation within industry? 9.

No comment.

Question 5: What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? 10. It has been proven successfully in various European countries such as Germany, Austria and Denmark that innovation within industry can be stimulated through a procurement strategy which entitles the contracting authority to enter into any form of negotiations or dialogue with bidders. We have gained specific experience and knowledge in these countries with respect to public procurement procedures in relation to infrastructure projects and high technology-based road pricing systems. 11. A key procurement strategy used in the above cases has been to seek to isolate the suppliers whose overall solutions are best able to meet the required criteria and to provide best value for money. In particular with respect to large innovative projects with a significant technology element, it has been proven successfully that requirements and tender selection criteria must not only ensure capability to be currently state-of-the-art, but also enable adaptation and scalability for future schemes. Requirements and tender selection criteria have been used to ensure that technology-based solutions can be upgraded and compliant with future schemes. 12. The lessons learnt through these recent procurement procedures also illustrate that it is important to implement a strategy which provides low risk, short timescales and is familiar to the parties involved. Suppliers will only be willing to invest in innovative technology within public procurements if there is a constant, confidential and trustworthy information flow between the contracting authority and the bidders which the latter can rely upon. It has been proven successfully that the procurement strategy should consist of three stages – (i) preparation, (ii) pre-qualification and (iii) tendering and evaluation which either includes a dialogue or negotiations with the bidders. 13. In recent procurement procedures in Germany with respect to the implementation of a road tolling system for heavy goods vehicles and large public-private-partnership infrastructure projects, we have found that the negotiated procedure is a suitable tool to stimulate innovation. It can also be combined with a functional description of the performance levels required to provide bidders with more flexibility regarding preferred solutions. With respect to the procedure itself, it has been advantageous that certain procedural steps have been standardised to ensure bidder confidence in the mechanics of the procurement strategy. In Germany, our experience is that contracting authorities as well as suppliers are still reluctant with respect to use of the competitive dialogue although it is apparent that this procedure does provide more flexibility to discuss solutions with potential bidders prior to producing final tenders. Accordingly, we are advising contracting authorities to enrich the negotiated procedure with elements of the competitive dialogue procedure. The competitive element can also be strengthened by having various transparent rounds of negotiations which result in a "BAFO phase" in which the Best and Final Offers are provided following the negotiations regarding the best means to meet the authority's needs. 14. Contrary to the predominant use of the negotiated procedure in Germany, we have seen recently – also with respect to the implementation of a road tolling system – that the 228

Olswang LLP—Written evidence (PP 20) relevant contracting authority in Denmark has a preference for either the restricted procedure or the competitive dialogue procedure. It has been proposed to maintain a constant flow of information with the bidders through all stages of the procurement. Following the issue of the EU Prior Information Notice, a conference with the bidders will be held to introduce the prospectus providing the vision and strategy for the scheme and enable potential bidders to ask questions in a public and open forum. The prequalification phase shall comprise of information meetings and a hearing phase in which draft contract documents will be issued to the bidders. They will be asked to comment on parts of the tender materials, providing input for adjusting the final tender material which is an innovative development of the - originally rather inflexible – restricted procedure. This version of the restricted procedure aims to encourage innovation particularly regarding the required technology. Following this phase, it is envisaged that the contracting authority should be able to prepare a full or partial solution prototype. In addition, as another element to stimulate innovative technology and alternative schemes, areas shall be identified where bidders will be asked to offer alternative possibilities and models. 15. In general, these procurement strategies have proven successfully that elements of certain procurement procedures can be used to enrich other procurement procedures. It may well be an advantage of the negotiated procedure which has been tested in many European countries that negotiations are allowed after the submission of bids providing the contracting authority as well as the bidders with maximum flexibility. On the other hand, if the contracting authority is still uncertain about the product or the technology to be used and/or intends to stimulate new technology through a dialogue with leading market players prior to producing the tender documentation, innovative results could be achieved by way of the competitive dialogue procedure. 16. In the event of using the competitive dialogue procedure, it is crucial to have clear and specific rules to deal with the intellectual property rights of bidders and confidentiality issues. The success of open exchange to stimulate innovation from market players will often be subject to having clear rules in place so that they have confidence in the protection of their intellectual property rights and business and trade secrets. The procurement process Question 6: What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? 17.

No comment.

Question 7: To what extent are those responsible for public procurement of research and development "intelligent customers"? 18. In many areas, albeit not necessarily transport, the purchasing authority will have a committee of experts which it relies upon to assist with the assessment stage of the procurement. This is vital when it comes to the purchase of specialist R&D in order to ensure that the best solution is chosen at the end of the procurement process and that the contract, once signed, can be easily managed by, probably, non-specialists. Unless the authority has such experts on board then certain players may, having completed due diligence on the project, decide to invest their money on tenders for other public authorities in the UK or abroad. 229

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Do they have the appropriate expertise to identify innovative solutions to procurement needs?

19. As touched upon elsewhere, the public purchaser needs to understand the basic parameters of innovation in the particular case from a pre-market testing exercise if there is ever to be a sensible procurement process which allows innovative solutions to be considered by the public authority. All too often, procurements are run by the general, nonspecialist purchasing staff in a public body and the experts are not brought on board until the end stage of the procurement (i.e. assessment of bids). For complex, innovative areas, it would be sensible to bring sector specialists on board at a far earlier stage to ensure that the process is targeting the correct suppliers and communicates clear, confident messages to the market. •

How well do they identify when innovation could provide a solution to a procurement need?

20. Again, this demands a certain degree of sector knowledge which is unlikely to be found in Procurement teams. This is where the policy people within a public sector body need to be thinking about the authority's purchasing and assisting the non-specialists when it comes to the decision whether to procure, what to procure, the appointment of external project advisers and so on. • How effective is the identification of and dialogue with appropriate potential suppliers? 21. As mentioned elsewhere, sensible dialogue with the potential supplier community is essential for complicated, innovative procurements to ensure that the procurement is well planned and has a number of tenderers fighting over the opportunity. We have seen some such procurements where there has been no engagement with our client prior to the publication of the OJEU advert which is a real lost opportunity. It is far better for potential suppliers to air any concerns they have about a proposed procurement with the authority pre-procurement since, once the advert has been published, no one wants to bite the hand that feeds and point out weaknesses in the public sector's requirement or procurement process. In general, authorities are not bad at approaching potential suppliers in addition to releasing the OJEU advert, so as to increase the suppliers responding to the OJEU advert. However, the supplier pool would arguably more encouraged and possibly larger still had there been formal pre-procurement market testing which resulted in strong project briefing documents to go out with the procurement documents. 22. In terms of the efficacy of the dialogue with the bidders, this is often far too rigid due to equal treatment concerns (discussed in more detail below in response to question 9). Caution should also be exercised in relation to the use of e-procurement systems by the public sector which allow authorities to release information and receive questions and comments from bidders. At times it seems as if these systems, which certainly assist in terms of transparency and the auditing of procurement processes, are used as a shield behind which the authority can hide. Even though bidders are in a competitive dialogue process, it is not uncommon for bidders to have to submit to an e-portal all of their questions/issues for discussion just prior to the dialogue meeting with the authority. Whilst this does allow both parties to have thinking time and prepare for the meeting, it can also stifle true dialogue and make the meetings with the public authority seem more like an interview than a true attempt to develop the bidder's particular solution and promote innovation. 230

Olswang LLP—Written evidence (PP 20) 23. That said, e-procurement systems are great in terms of promoting equal treatment in that they allow for the capture of bidders' questions which can then, subject to confidentiality issues, be shared quickly with all of the competing bidders together with the authority's response. However, a balance needs to be struck between equal treatment and achieving best value for money. Question 8: What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? 24.

We are not in a position to respond to this question.

Question 9: What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? 25. The key disadvantage of the public procurement process from a supplier's perspective, particularly one which is seeking to offer an innovative solution, is that the procurement has been badly planned and is too inflexible to allow the market to innovate. The inflexibility stems partly from the issues raised above – the lack of work prior to OJEU advert publication in terms of market testing, piloting and planning the procurement process – and partly through a desire to achieve "equal treatment" in perception as well as reality. 26. If the procurement is not well planned, it is likely to run into problems in relation to the technical specifications (normally drafted as output specifications in such circumstances) being too prescriptive or not wide enough to accommodate the subsequent tenders which emerge. The public body should reserve itself the ability, at its absolute discretion, to consider variations from bidders, which will normally be in addition to the submission of a "standard bid" which allows the comparison of like for like from all bidders. It will be for the authority to decide whether such variants are subject to minimum conditions and whether they will be accepted for assessment. If they are assessed, the assessment must be on the same basis as the standard bids and thus the assessment criteria (so-called award criteria) must be sufficiently wide to allow for such variants to be appropriately scored. Preprocurement market testing can allow the public body to gauge the likely parameters of the market's response which should feed into the procurement planning. 27. Whilst it is important to plan the procurement timetable and to maintain momentum, it is also important that sufficient time is available to pursue all solutions which appear attractive to the public sector. All too often the principle of "equal treatment" is read in a dogmatic way by the public sector with a set process established in advance which grants each bidder, say, 4 meetings with the purchaser each 3 hours long. Whilst it is true that there needs to be some defensiveness in terms of not breaching this EU Treaty principle, it should not be interpreted in such a way as to prevent sensible purchasing. If one bidder submits, for example, a variant bid then it may well be sensible to hold further discussions with that bidder to establish further details and thus determine whether the variant is of interest and likely to be taken through to the assessment stage. Unless the process allows for such give, the innovations may well be seen by suppliers as an expensive risk which will not get a fair hearing and thus the public sector will not get true innovation. 13 December 2010

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Mr Charles Penny BSc CEng FICE FIHT FCMI MIGEM—Written evidence (PP 22)

Mr Charles Penny BSc CEng FICE FIHT FCMI MIGEM—Written evidence (PP 22) This report relates to delivery of step change in cost and time through the Innovation enabled by the procurement process. I have worked for many years as an Engineering Director in a very large Construction Company. This has involved responsibility for identifying and delivering many significant cost and time savings through Value Management and Innovation. My task has been to provide cost reduction through step change. I have experienced almost every form of blocking mechanism in the Highway, the railway, the airport and the power industries. I have felt the pain and learned how to succeed against the odds. In the UK the culture works against innovation and the Procurement contract needs to compensate for that. The lessons learnt are:Innovation is most effective and most successful when delivering savings. Savings require change. People do not like change They like their current comfort zone. The bigger the saving sought the bigger the change necessary and the more likely it is to be rejected. Rejection takes place by personal whim at any point up the long approval tree. The rejected changes are often the very changes we needed to adopt. (Refer Frank Whittle and his Gas Turbine or British Rail and the Tilting Train). I focus on rejected changes, they have generally the best saving potential. The need for innovation to succeed is to provide the right environment and in particular to the opportunities provided by public procurement to obviate or reverse these rejections. Motivation drives the inspiration for, and the delivery of, innovation benefits. Every party affecting the outcome needs to be positively motivated. Supply Chains, Clients, Universities, Designers, Manufacturers and Inventors. The needs and motivation of each individual who can influence the outcome for better or worse needs to be addressed. The Highways Agency Area 2 EMAC contract is the most enlightened and potentially the most effective that I have seen to date. Savings of hundreds of millions of pounds could emanate nationally. This contract form may shortly be abandoned because the central government gives it no support. This submission relates only to the contribution that the procurement contract can make to the provision of an environment which enables the fruits of step change innovation to be harvested. Proposed innovation elements of a public procurement contract should be:a) If the innovation is provided by a link in the supply chain who will not sell more of his product. An innovation clause giving the supplier 30% of the net saving (after design, development and testing costs) for 5 years after implementation and 5% reducing to 1% of the annual saving nationally over the next 5 years. A right to the supplier to propose time and or cost step change in under the clause.

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Mr Charles Penny BSc CEng FICE FIHT FCMI MIGEM—Written evidence (PP 22) No rejection of Innovation proposals without causes and the opportunity to resubmit. A requirement for the supplier to pass the same incentives and benefits pro rata down the chain to the original innovator. b) If the innovation is introduced by a link in the supply chain, who will benefit in significant increase in sales then no innovation award is made. The Client is obliged to provide the support and prompt / timely approval of the Innovation Where demonstrable value for money and demonstrable significant savings are proposed, a summary of the submission should be registered with the audit office and be in the public domain after one year. This will discourage casual rejection and mobilize public pressure to avoid waste of good innovations and to applaud adopted ones. FUNDING AND SUPPORT / INCENTIVE FOR RESEARCH AND DEVELOPMENT Many non tunnel people, not least in government, think that the private sector will invest in products in order to sell them. Whereas this is sometimes true for small items it is not generally the case for the significant cost saving Innovations described above. Profit making companies regrettably are under such pressure to provide immediate returns to shareholders that companies are reluctant to make the necessary significant inventions? In ideas unless they have a clear confirmation from the Client that if they deliver a successful product they will be given an order or at least a chance to bid in a far and competitive environment. It is naive to think that without the prospect of work that the largest and most economically able companies will not make major investment in R&D. The current tax breaks for Innovation are ineffective as initiators of innovation. Procurement contracts should include 0.5% in the bid price to be spent on step change innovation with the Clients approval. 5% of the Innovation savings (before distribution) should be returned to the Innovation initiator to provide a fund for further demonstrable Innovation. If not used it is to be returned to the Client. Only in this way will Innovation become self funding. The devil is in the detail. Tax. There should be an increasing level of tax breaks to encourage higher innovation and R&D. LIFE CYCLE COSTS Calculations on the Value for Money of any particular Innovation should be based on Whole Life Costing (WLC). This will inevitably require a low initial/installed cost due to the cost of money. Only solutions that are affordable will in any event be adopted. 233

Mr Charles Penny BSc CEng FICE FIHT FCMI MIGEM—Written evidence (PP 22) Innovations which eliminate avoidable costs of “heavy” maintenance or renewal should benefit from this WLC. In the UK we are currently burdened with such a “heavy maintenance” cost on the railways and highways due to the decisions of our predecessors to select the lowest first cost that we have insufficient funds to put in place those “innovative” solutions which would eliminate maintenance all together. The classic example is the replacement of ballasted rail track with concrete track (as the Japanese, Dutch, Germans, Spanish, Taiwanese, Chinese etc have done) The inability of the railways to convert to concrete track and in particular the Innovative British Embedded Rail Track, is the supreme current day example of the Gas Turbine disaster. Our culture of resistance to change is costing the country its future. Public procurement needs to insist on best value WLC solutions with open book submissions and rejections and freedom to submit ANY alternative in a competitive bid. The biggest transport disaster of our current generation will be if we build a CrossRail tunnel through London which has no provision for later installation of double deck trains due to lack of current adoption of Innovation in power, track and tunnels. .Typically this contract has been divided up so that it is no longer possible for any one bidder in the supply chain jto propose an Innovation benefiting the whole project. 13 December 2010

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Alan Powderham, Mott MacDonald; Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty—Oral evidence (QQ 105-146), 18 January 2011

Alan Powderham, Mott MacDonald; Colin Cram, Marc1 Ltd; Andrew Wolstenholme, Balfour Beatty—Oral evidence (QQ 105-146), 18 January 2011 Please see page 66

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Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30)

Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30) Public procurement as a tool to stimulate innovation: Additional Evidence – Examples Examples of innovation in transportation infrastructure are provided below. Many of these were mentioned in my oral evidence and I now include key details. The following points should be noted: •

All projects are selected from my direct experience which I have either led or advised on. I would be pleased to provide further background to any of them if required.

•

Those below are in addition to the three other UK transportation projects (Heathrow Express, LU Earthworks, and Newbury Bypass) which are comprehensively described in the CIRIA report ‘Innovation at the cutting edge’ that I tabled during oral evidence.

•

All projects selected demonstrate successful innovation achieved in collaboration with Government and / or its agencies. While this success is encouraging, it should not be viewed as a ringing endorsement of “Public procurement as a tool to stimulate innovation”. The ‘stimulation’ ranged from overt at the beginning of procurement to seemingly reluctant and late support in the face of crisis.

•

I have focussed on the positive and avoided examples where innovation was either hindered or even rejected. In part because it may be misleading to try to prove a negative and also since I do not know all of the factors that may inhibit innovation on such large and complex projects. However, we could certainly do much better.

•

While innovation may be characterised by ‘concrete’ examples or products, the importance of process is not fully realised or appreciated. In my experience this applies to both engineers and laymen. The interdependence of process and technical innovation is highlighted in the report ‘Innovation at the cutting edge’. (Ref: ‘Safety and Risk: The Right Balance’, DFI 2010).

•

Stimulating innovation is not a new challenge but, as I stated in oral evidence, there are excellent and, so far, significantly under-exploited opportunities to pursue.

Recommendations:  Government procurement through Qualifications Based Selection (QBS) in the USA should be reviewed and the transferable benefits adopted. (See attached).  Apply Independent Review through Peer Assist. (See attached).  The synergy of QBS and Peer Assist could transform projects. This is not theory. It has been strongly demonstrated in my own experience.

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Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30) Selected Projects: 1. Channel Tunnel (1986 – 1990) •

Wide range of technical innovation supported by government (IGC), for example novel use of sprayed concrete linings for UK crossover tunnels.

•

Holywell: Railways Inspectorate (RI) consulted designer on problem of ‘floating’ box structures carrying high speed trains. Concern re tight tolerances and potential for ongoing settlement. RI initially proposed deep foundations to bed rock. As the designer, I explained that the bed rock was so deep that such a solution would be very expensive, time consuming and moreover would still involve movement. Our collaboration identified a cost effective novel solution which has exceeded expectations in practice.

2. Limehouse Link, London UK (1991) • Project in crisis – high cost and programme over-runs. • In collaboration with DoT and LDDC innovative change introduced to contract through creation of a Value Engineering (VE) clause. • VE innovations saved over £5m in materials with project completed 6 months ahead of schedule setting new benchmarks for excellence. 3. Docklands Light Railway – Protection of Mansion House, UK (1989 – 90) •

Crisis – tunnelling stopped because of perceived unacceptable risk to Mansion House.

•

London Underground seeking solution presented challenge to my company.

•

Solved by innovative use of leading edge telemetry and Observation Method.

• Savings amounted to around £15m and 18 months reduced programme. 4. Irlam Railway Bridge, Manchester, UK (1997-8) •

Aging infrastructure with deficient foundations in contaminated ground.

• Working with Network Rail led to innovation of world’s largest polystyrene embankment and a first for the UK solving a syndrome of conflicting challenges. 5. Piccadilly Line - safeguarding service at Terminal 5 Heathrow Airport, UK (2002) •

Risk of unacceptable movement to Piccadilly Line from construction at Terminal 5.

•

Collaboration with London Underground supported novel use of structural concrete.

•

Comprehensively and safely solved with major savings in materials and time.

• Ongoing Government support through funding PhD research (EPSRC) at Imperial College to extend potential of this innovation. 237

Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30)

6. Boston Central Artery Tunnel Jacking, USA (1991- 2001) • Most cogent example of overt and sustained stimulation of innovation through public procurement. Enabled by USA Government Qualifications Based Selection (QBS). • Close collaboration with both local and federal government delivered innovation leading to over $300m savings as well as major programme benefits and enhanced safety. • Such successful innovation would be highly unlikely through other forms procurement. 7. SMART (Stormwater Management and Road Tunnel) Kuala Lumpur, Malaysia (2002-07) • Initiated by Federal Government to address increasingly severe flooding in the city. • Unique solution incorporates 3km section of double deck motorway tunnel which simultaneously provides both flood relief and alleviates traffic congestion in centre of KL. • Excellent example of Government stimulated innovation to tackle long-term climate change. Independent Review through Peer Assist Is your project adequately assisted? What value did review bring to your last project? Was it timely? Could it have been better? Peer Assist is widely becoming the review process of choice within Mott MacDonald and can readily bring benefits to any project. Those that have adopted Peer Assist heartily endorse this. Quotes include: “The process provides an excellent forum to test design assumptions and always proves very stimulating for younger members of the team to be able to participate in critical assessment in a constructive setting". “Initiating Peer Assist at the bid stage and early in the concept design can provide the greatest value to our customers and differentiate us from our competitors.” “Peer Assist is fundamental to risk management.” “Peer Assist is a key process in delivery of cradle to grave professional excellence. It promotes innovation” Peer Assist is applicable to any project and any scope of review and is particularly effective for complex or challenging projects. It is very flexible and can focus review on a specific aspect in a timely way, be it safety, technical, or commercial. This of course does not remove the need for an overall project review – which can also be undertaken through Peer Assist. Peer Assist has highlighted extra benefits including: • Communication: Stimulating greater awareness and interaction within the project team and with the customer. • Catalyst: The interaction encouraged by Peer Assist has provoked re-evaluation of initial assumptions and helped misconceptions to be addressed early and effectively. Examples have included clarifying the brief and deliverables, duty to warn, and a wide range of innovation. 238

Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30) •

•

Mentoring: Because Peer Assist is so direct and wide ranging, a strong communication between the reviewer(s) and project team is rapidly established. It has proved particularly helpful to the younger members of the team in creating access to experienced staff and tapping into wider knowledge and experience. Stimulates Innovation: Enhances the balance between risk management and creativity.

The focus that Peer Assist brings to risk management and safety has led to its endorsement by the ICE, IStructE and the HSE through its promotion by SCOSS. A Guidance Note and Model Form of Agreement for Independent Review through Peer Assist are now published on the SCOSS website: www.scoss.org.uk . Can your project afford not to be assisted? Federal Procurement of Architectural and Engineering Services Qualifications-Based Selection (QBS) is a procurement process established by the United States Congress as a part of the Brooks Act (1972) to protect the interests of the taxpayers. Background: • Creative services cannot be fairly priced before the creative process has taken place. • Studies in the USA show that over the life of a project, engineering services account for less than 0.5% of total costs. Yet these services play a major role in determining the other 99.5% of the project’s life cycle costs, as well as the quality of the completed project. • Lowest cost is widely recognized as the poorest criterion for service selection when quality and professional creativity are sought. • Most individuals would not seek important medical or legal services on a low-bid basis. Key Benefits of QBS: • • • • • • • •

Competition among best performers – not low bidders Life cycle costing Team building and collaboration Reduced changes Flexible contract approaches Reduces disadvantages to SMEs Safeguards public interest - value and safety. Stimulates Innovation

The above criteria were very successfully met for the innovation of the tunnel jacking on the Boston Central Artery – a project described as open heart surgery on a city. So the analogy of avoiding low- bid selection for medical services has particular resonance for this example of QBS procurement. It provided the motivation for innovation and the time to develop it. It would have been highly unlikely with other forms of procurement. Key Steps in QBS Procurement: • Owner establishes general scope and programme – the base case. • Request for Qualifications (RFQ). 239

Mr Alan Powderham, Mott MacDonald—Supplementary written evidence (PP 30) • • • • •

Shortlist of qualified firms to be interviewed. Highest ranked firm invited to assist owner in defining detailed scope. Fee proposal submitted for review and agreement. If not, negotiations initiated with second highest ranked firm. Final fee subject to audit.

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Rotherham NHS Foundation Trust—Written evidence (PP 15)

Rotherham NHS Foundation Trust—Written evidence (PP 15) Rotherham NHS Foundation Trust was the first NHS organisation to procure innovation using Forward Commitment Procurement. We are currently undergoing a seven-year refurbishment of our wards and wanted to trial Forward Commitment Procurement on the lighting for these wards. This was made possible by support from BIS and DH through the Innovation for Sustainability programme, though which we received FCP Know How training. Forward Commitment Procurement allowed us to really think about what outcomes we wanted to achieve and stretched the lighting supply chain to deliver innovative responses. We were delighted by the response we received and would never have known some of them existed without engaging in this process. Although the procurement of innovation often carries risk, we have been able to manage this using Forward Commitment Procurement. We are only obliged to buy the solution if it can be delivered on time and in budget. We are in the process of finalising the procurement and believe that we will be able to deliver economical carbon savings and an improvement in patient care. FCP has proved to be a valuable tool and now we have the know how, one that we will embed in further procurements. 10 December 2010

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Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 Evidence Session No. 4.

Heard in Public.

Members present Lord Krebs (Chairman) Lord Crickhowell Baroness Perry of Southwark Lord Rees of Ludlow Lord Wade of Chorlton Lord Willis of Knaresborough Lord Winston ________________ Examination of Witness Witness: Lord Sainsbury of Turville.

Q84 The Chairman: I would like to welcome our witness for the second half of this session, Lord Sainsbury of Turville. Thank you very much for coming, David, and we very much appreciate your time joining us this morning. I would like to reiterate my welcome to members of the audience, and remind them that a note is available describing the purpose of the inquiry and the declaration of relevant interests of Members of the Committee. You would have heard the tail end of the previous half of this morning’s session, David, and you are aware that we have been focusing on the Department for Transport particularly but we’re interested more generally in the process of stimulating innovation through procurement. Of course, you wrote a very influential report three years ago, The Race to the Top, and I would like to kick off, if I may, by asking you to give us your view as to whether the Government has improved its performance in stimulating innovation through procurement since your 2007 review, and what the state of play is at the moment. Lord Sainsbury of Turville: Can I start by making a rather obvious point, which is that, of course, I am no longer closely involved in these issues so what I have to say is mainly impressionistic, on the basis of published documents and obviously my past experience. I always think that I was probably the only Labour Minister who had ever run a purchasing department, although it did largely consist of buying supermarket trolleys, but I have run a procurement department.

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Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 Q85 The Chairman: Does that count as transport? Lord Sainsbury of Turville: Yes, that is probably right. As far as your question is concerned, I think some rather good work has been done since I left Government—as far as I can make out—in terms of trying to raise the capability of procurement departments. I think, at last, through this capability review process, some quite good work has been done in improving the capability of departments. I also think some very good work has now been done on the SBRI, after a very long time of getting it started. It is now working, and I think there are some quite nice projects still in the pipeline, like the one on the dismounted soldier and the one on retrofitting social housing to make it more energy efficient. So there are some projects coming through now. Also I would have liked to have seen rather more public evidence about to what extent these things are working. Are we seeing reduction in costs of all improvements in effectiveness coming out of this new work? I think that takes me to the second point I want to make, which is: it does take an enormous amount of time to move these things forward. You cannot just overnight get a real change in performance. To illustrate that point, I think I started trying to get an SBRI scheme in this country in 2001. We had one go then, which got nowhere because it was entirely voluntary. We then had another scheme in 2003 where we made it mandatory, and then in my report, The Race to the Top, we suggested it would be changed and the Technology Strategy Board would come in. It was only at that point that we began to make any progress. So I think the issue here is that one doesn’t want new schemes. There may be slight alterations to the SBRI scheme, which was being talked about earlier in this session, but the main thing is to keep the pressure up on departments to really implement these particular changes. Again, you heard just now about innovation and growth teams, which again was something started about five years ago. I think it has worked extremely well and I think it is very important to try and keep that going. Equally in America you have DARPA but you also have ARPA, which has been a very politically sensitive issue. But I think it has some things to its credit, including of course—I think it was—ARPA, rather than DARPA, which started the internet work. The TSB can take up anything that comes under the category of what ARPA or DARPA does. It wouldn’t be done exactly the same way but, rather than trying to have a new initiative, if there was money available I would give it to the TSB and slightly improve what it does but very much take Iain Gray’s point of view: don’t take procurement away from departments. That is where it has to take place. I would have two suggestions on how you could keep up the pressure and move this forward. The first one is: I saw in one of the procurement capability reviews that the Office of Government Commerce is now sitting on the appointment boards of the procurement managers in different departments, and they are also advising Permanent Secretaries about objectives for procurement departments. I would very much like to see that formalised so that the Office of Government Commerce has a real right to monitor and try and push forward procurement departments, not to just have to do it all by suggestion and be nice to them but have the power to say, “These are the methods you use and your performance will be monitored from the centre”. Secondly, I would like to see a procurement report on Government procurement—how well it is being done; examples of good practice; examples of reducing—produced each year by the Office of Government Procurement across the whole of Government and for that report then to be reviewed by the Public Accounts Committee to put real pressure on departments to take this subject seriously.

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Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 Q86 Baroness Perry of Southwark: We heard from the Cabinet Office at the start of our inquiry about the new Efficiency Reform Group that has been set up there. It is chaired by Francis Maude and Danny Alexander, so fairly high powered chairmanship, but the main objective, as was described to us, seems to be to increase efficiency, to speed up the process, to go for outcomes rather than process, and so on, and that is very understandable in the current climate that that is top priority. But I think there is some concern, which we share, that this emphasis on efficiency and speed might mitigate against any interest in the rather risk-taking activity of encouraging innovation. What is your response to that? Lord Sainsbury of Turville: I think it is very difficult to say anything without knowing exactly how they’re going to operate. If the way they’re going to operate is to orchestrate efforts across Government to improve efficiency, I think that would be wholly good and desirable. But in practical terms if they say, “We want to have a review by the Office of Government Commerce of the staffing of procurement departments to see if they could be improved, or you could streamline the procurement process”, and then on the basis of that they would take action, that would probably seem to me desirable. What I think would be very unfortunate—and you can’t always rule out in politics—is that decisions are made on rather poor evidence about particular cost areas and then there is a slash and burn process across Government. In my experience that does more harm than good. So I think it very much depends on the way they do it. The second point I make is that, like you, I would hesitate before making the assumption that better procurement requires fewer people. In my experience the cheapest way and least staff intensive way to do procurement is you do it on an out-of-date specification and then you just accept the lowest cost tender. That’s probably the cheapest way to do procurement. It’s probably the least effective way to do it if you want to improve the procurement of goods and services, either in terms of cheapness or effectiveness. So I would very much hesitate to say that you are going to get improvement on procurement. On the trade-off between slightly fewer procurement officers and getting better procurement on even a very few small items, there is no question that it is more important to go for the better procurement rather than fewer procurement officers. Q87 Baroness Perry of Southwark: Indeed, and innovative procurement. I think we’ve been very much searching for a person who would take responsibility within Government— both at ministerial level and below that at Civil Service level—who would pull together the various initiatives that encourage innovation, not just the SBRI but other initiatives within departments. There is a danger, is there not, when you have something rather high powered in the Cabinet Office, shared by two senior Ministers, which is driving in one direction that you will lose the scientific initiative of driving innovation as well. As a personal opinion, it does seem that you want somebody who is a science Minister, who is focused on the science, to co-ordinate what is going on. Apparently procurement at the moment can be a very long two year process and a lot of companies rather lose heart in the stages. So it is perfectly proper to try and streamline it. But I think at the same time, overriding that, if there is to be innovation, and if we’re to use procurement to encourage new business and new innovation, then surely it should be a science Minister and perhaps the Government’s chief scientist who are concerned with co-ordination. What is your response to that? Lord Sainsbury of Turville: I think, in fact, you now have in place all the people and systems basically to drive innovation. I think it would be a great mistake to say the way you achieve this is you have an innovation Minister who is somehow the Tsar over the whole area. That 244

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 as a whole doesn’t work. I say that as someone who quietly changed my title in Government from Minister of Science to Minister of Science and Innovation. All the tools you need to drive this are already in place, and the way to drive innovation and procurement is to give greater authority to the Chief Executive of the Office of Government Commerce to have authority about the way this is done across procurement in departments, and then for him to produce a report that says. “This is how well we’ve done on procurement”. Of course one of the biggest objectives we set for procurement departments is to drive innovation. So you have it in place, you just have to make certain that the Chief Executive of the Office of Government Commerce has it clearly as one of his objectives to drive innovation and, in my world, gets paid bonuses and salaries on how well he does it. Q88 The Chairman: When you were Minister of Science did the departmental chief scientific advisers have an influential role in the thinking about innovative procurement? We heard some quite impressive stories from Brian Collins about his role in the Department for Transport and I wondered how widespread that was in your day? Lord Sainsbury of Turville: I think the answer to that is it just varied from department to department. As there was no very clear and specific role for what chief scientific advisers did in departments, they tended to do what they were encouraged to do or wanted to do. So there was no pattern to it. I must say, if there was a project that you were looking to do it would be on: what is the role of chief scientific advisers in departments and how are they integrated into the structures of departments? Are they part of the management board of departments? What role do they play in setting the R&D objectives for departments, and what is the process for setting R&D objectives in departments? All of that—I think you would find the nicest way to say—is very fluid. Q89 Lord Rees of Ludlow: Just following up on this, you mentioned that in departments the easy way of doing procurement was to do the same as last time and, therefore, this needs more expertise. I would like to ask more generally about how one builds up the necessary expertise in the departments, I guess, or in places like the TSB, and how does one also incentivise the people involved to take the necessary risks, bearing in mind the very long timescale that is often involved in some of these projects coming to fruition? But certainly one needs the expertise in the department or in the TSB. Lord Sainsbury of Turville: I think the answer to that is, in a sense, very simple: it is to do what they started to do, which is proper studies on capabilities of departments as to how then you build into those departments real expertise. I think they’re beginning to do that. I think what people don’t understand is that procurement does require people to know their product areas very well. It is not good enough just to be someone who does the mechanics. You need to know—whether it is aircraft or supermarket trolley—about the technology: what are the performance standards and so on. You will only get there if Government departments and Permanent Secretaries see building up a proper, capable procurement department as one of the things that they will be measured on. That is why I come back to giving the authority to the Office of Government Commerce. It should play a part in recruiting people to do it and then commenting on performance, in a way that would then feed back into how well Permanent Secretaries, and indeed heads of procurement departments, are paid. That is the only way that you’ll get this changed in the end. This is a problem across the whole of Whitehall, which is that the centre of Government, in terms of these specialist departments, has virtually no authority. Whereas in any multi-divisional 245

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 company the functional experts would have considerable authority over the functional departments of different divisions, in terms of the way they do their job and how well they’re doing it; that is, a finance director of a multi-divisional company would have functional responsibility over the finance managers in different divisions and would be able to drive forward their performance, the measurement of it and the appointment of them. Nothing like that happens in Whitehall. That is a very deficient part of Government. Q90 Lord Rees of Ludlow: Do you think there is a way of ensuring you get the right people in Government? To take an example, video graphics and computer games is a very important technology. How do you get people in Government or in the TSB who are really savvy and up-to-date in these technologies? You won’t get them full-time, I guess, so you have to— Lord Sainsbury of Turville: I think you would find in the TSB—and Iain Gray didn’t make enough of the fact that he has a very strong board of senior industrialists, and you can get him to give you the experience of the people in the TSB—and this is very crude, obviously, but the amount of business experience within his team of people is very high indeed. If it isn’t good enough then the way you get it is to make it clear that we want better people in there. But my impression is that they have some very good people in there now. Q91 Lord Rees of Ludlow: And you think it is better to get them in the TSB than in the ministries? Lord Sainsbury of Turville: Yes, the reason for setting up the TSB independently was partly we wanted to make it independent, but of course it’s the only way you can get the kind of high powered technological people into it. Trying to get that into a Government department, well, it doesn’t work like that. The TSB, when it was within Government was staffed by civil servants, very few of whom had either business or technological experience. Outside Government they have now really recruited people properly to do that. Q92 Lord Willis of Knaresborough: I’m sure we’d say Iain Gray himself was an incredibly successful Chief Executive of Airbus and did an enormous amount of work there, but can I just take you back to this. You seem to be putting a lot of stake on the Office of Government Commerce having a major role here and yet in the department’s response to us it makes clear that BIS has a lead on innovation policy; the Cabinet Office has the lead on procurement and Defra lead on sustainability. Is there a real conflict between what you’re saying and the organisation that is set up now and should we, as a Committee, be making a suggestion that that should change? Lord Sainsbury of Turville: No, if people perform their function in the right way I don’t think there is any conflict. I think BIS should be clear that its job is to look at the overall innovation policy and that is involved with: what does the TSB do? What is done through procurement and the SBRI scheme? And so on. But when it comes to delivering innovation in procurement it should be done through the procurement route and that is the Office of Government Commerce. I noticed, for example, that BIS have issued some instructions about innovation and procurement. I thought that was the wrong way to do it. They should have talked to the head of the Office of Government Procurement and worked through him to produce instructions to the departments. That would be the way I would have done it anyway. 246

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Q93 Lord Wade of Chorlton: Clearly you have indicated—in what you have said already—that you believe TSB could become much more a lead department in all these issues. How do you see the small business research initiative working in that role? Do you see a bigger role for that as well under the TSB to deliver that thing? Could you just explain that relationship as you would see that evolving? Lord Sainsbury of Turville: I thought Iain Gray put it absolutely right. It must be departments who are the people who manage SBRI. The whole point of it is that it is schemed to meet the needs of departments, and if they don’t take ownership of it it simply won’t work. So I think they have to have ownership of it. I think the TSB can provide a very useful service to them, as well as monitoring what they are doing and so on. But they have to have ownership and I think it’s basically again for them to bring the TSB in. I think the TSB run the competitions and we set that up to make certain it did happen, so I think that is a good relationship. But, as I understand it, that is all working pretty well. Q94 Lord Wade of Chorlton: From what Mr Gray was saying, he sees there could be a much better role for TSB to be more effective in this area. But are you satisfied that the relationship that they can have with the departments would be sufficiently strong for them to influence the departments to do what they should be doing? Lord Sainsbury of Turville: I think they can perfectly well play the role that they should play. I think the way that you influence departments is, as I say, through the Office of Government Commerce and the Permanent Secretaries because that is where, in the end, the initiative has to come from. Q95 Lord Wade of Chorlton: So you see each department acting as the company, the business that is responsible for their own procurement and the chief executive is the senior man in that department? Lord Sainsbury of Turville: Yes. Q96 Lord Wade of Chorlton: Because coming back to the answer to your previous question when you were talking about how the decisions are made, clearly if you’re the chief executive of a company and you’re making decisions on how you will relate a new investment, do you take a risk and go for advanced technology or do you use the standard and accepted method? That is a decision the chief executive takes after taking advice from the science department that it’s commercial. Does that happen properly in a Civil Service process and a Civil Service mentality? Lord Sainsbury of Turville: I don’t think it does work as well as it should and the reason for that is the one I made, which is it is a key issue of how you organise Government. The issue is that the centre of Government does not have enough authority, in my view, over departments, either in determining what they do or in terms of monitoring performance and rewarding the people in the departments for good or bad performance. That goes back to a constitutional problem we have, which is basically the head of the Civil Service does not run the Civil Service. This is an illusion you have when you come into Government, but actually he doesn’t. At most he is sort of primus inter pares and has to do everything by persuasion and you do have a series of baronies, which are the departments, whose reporting 247

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 relationship is entirely to the Government Minister. This means it’s very difficult for the centre to deliver on things through the Government machine. But I think there is now a move in these particular specialist areas at least to give more authority to the people at the centre to say, “This is how you should do procurement. This is how you should do your management accounts”, and so on. I think that is greatly to be encouraged. But that is the only way you will ever do it, by adding clearer targets for departments so that a Permanent Secretary knows that his performance will be judged, among other things, on how well he does procurement. That is slightly a long away around but it took me eight years in Government to realise that there is this particular problem. Q97 Lord Wade of Chorlton: Just one further question: how do you see the TSB relating into foresight? At the moment they seem to have a certain remit but clearly the foresight programme is looking at new technologies, new innovations into the future, can you see them playing a more focused role in those two issues? Lord Sainsbury of Turville: I think one of their roles is to translate foresight and horizon scanning work into practical projects. Of course, I have always thought it is very important that they do play their part in looking at and doing their own work on emerging technologies. They now do have a committee that looks at emerging technologies. I think there is quite a lot of very interesting work to be done, which they should do, on monitoring what is happening on emerging technologies. It probably is monitoring what is happening and then pushing it forward. It is work that is done by NIST in America, which is their Standards and Technology Board. I think there was in my report, Race to the Top, a recommendation that TSB should have an emerging industries group, in order that they know where these emerging industries are occurring and you can then do all the things, which it’s very important to do at the beginning of new technologies, both in supporting them but also providing standards, looking at regulations, and so on, to push those forward. Q98 Lord Rees of Ludlow: Going back to the issue of relationships between departments, the one external influence on all departments, which is very strong presumably, is that from the Treasury. Is there some way in which that influence could be rather more helpful towards the innovation agenda than it probably is now? Lord Sainsbury of Turville: I think it is always said that the Treasury and the public accounts committees are the villains of the piece and are always the people who hinder the innovation. I’m not certain that is in any case correct but it did seem to be one of the advantages of having a procurement report and having it looked at by the Public Accounts Committee, I think that they would understand that getting innovation and better procurement of innovative projects is something that they should be thinking about. If you have them pushing, because they were reviewing the procurement report, then that might finally disabuse everyone of this view and the word get around that the Public Accounts Committee were rather in favour of better procurement and innovation. Q99 Lord Winston: I think it was just before you came into the room we heard Brian Collins say that what local Government might do would be very different compared to central Government, when it came to things with regard to procurement. He raised a particular example that, say, building a local bridge would have particular problems of innovation that might be quite different from generic issues regarding IT. I wonder if you 248

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 would just give us your view about how the provision of services increasing at local level will affect procurement across Government, and what role should local and central Government play in stimulating innovation in this context? Lord Sainsbury of Turville: Yes, I think it’s a very interesting question. My experience in Government was—and I think this applied to both civil servants and Ministers—there was a very crude view about delegation or decentralisation. The general view was: either you do it in the centre and you are responsible or you effectively throw it overboard to someone else and they are responsible. There was never any understanding that if you delegated things it was usually within a framework, you would delegate certain decisions but it is within a framework. Also there can be a role in the centre helping the decentralised bodies to do the problem. Let me give you an example of this in procurement. I think I’m right on this still, and it was always something I thought one should try and tackle in Government but there were so many other issues with DFES that I never got around to it. But obviously you had a lot of procurement in schools, and you have that now. The way that the Department for Education deals with this is to have some help that it can give to schools about procurement. It always seemed to me there was an enormous opportunity to do this differently, without taking away what was highly desirable, which is that schools essentially order the equipment they want. If I had been in that position what I would have done is produce a catalogue. I would have found out what are the main things that schools want, in terms of computers, lab equipment, and so on. I would have then gone to the big suppliers of these products and I would have said, “If you give me a very good price on this I will put you in a catalogue that I will send to all schools and suggest they order from it”. I think we would have got an obviously good price for that from the suppliers, very nice competition between three or four bigger suppliers. You then have a catalogue and you say, “These are the prices, all you have to do is order them from these people”. Firstly, it would help schools enormously because there is no way they’re going to be good at procurement; and, secondly, you could get them a much cheaper price and you don’t take away their right to order whatever equipment they want. I would say, “You don’t have to order from this catalogue, what you do have to do is explain to your governing body if you buy something that is 20% more expensive”. It seemed to me that way you could get all the benefits from centralised bulk buying, together with the local initiative of being able to select exactly what equipment they wanted. I don’t know what the position of local government is. I would suspect there is some joint buying arrangement anyway, but I would look at whether you could improve that and make it more efficient, but I think with education I’m right in saying there is no centralised buying, except that I think Becta, which has now been abolished, did do some buying on the computer side, or at least suggesting what should be bought. Maybe now that has been brought back in the department there is an opportunity to rethink how purchasing should be done for schools. Q100 Lord Crickhowell: You have given an example of education, which is very interesting. Do you know how far it is done already or is it changing in the Health Service? We are now going even more down into the commission route, but even in the present or previous structure of the Health Service there must have been some central structure of them ordering more locally. Is there an example there that could be followed or are there lessons to be learned? 249

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 Lord Sainsbury of Turville: I think you would have to look at that. My impression was that there was an organisation set up to do some of the purchasing for hospitals. I think there is then quite a big problem about every doctor wanting his own particular bit of equipment, but I think you can get around this by saying, “This is voluntary”. But you would have to ask. I don’t know where that all got to. I think that would be a classic example where economies of scale that you could get on the buying side would be fantastic. Q101 Lord Willis of Knaresborough: Clearly there are examples within education of companies like Yorkshire Purchasing Organisation that do supply virtually the whole of the north of England, so I think that is already in the domain. It is perhaps in other areas like police forces, where you have police forces ordering their own equipment, their own vans and everything. But all that drives us towards a conclusion that procurement is about driving down cost, and that the cost is the key thing rather than innovative solutions that deliver a better product. I think there is a real challenge there. You obviously drew from Race to the Top a lot of inspiration from the United States, in terms of the way they do things and I think that we’ve adopted some of that. SBRI is clearly an example. Can you think of anywhere else, either in Europe or indeed in the US, where there are really good examples of where procurement by Government is well directed, is well thought out, or is everybody in the same boat really? Lord Sainsbury of Turville: I am not certain I can really comment on that. My impression always is that America is the interesting place to look at in these particular areas, mainly because they do so much more of this kind of work. As you say, the SBRI was taken directly as a copy of their SBIR scheme. I suspect other Governments are not much different from us. I remember discussing the SBRI scheme with a German Minster and he said he had seen that we had done this, and they had got everyone together and said, “We have to do this as well”, then when they looked at it two years later absolutely nothing had happened. So I suspect that they are very much in the same situation as we are on this. I don’t know of anywhere else—either by hearsay or in the literature—where they say they are particularly good at this. Q102 Lord Willis of Knaresborough: We heard from one of the witnesses a few weeks ago about an example in Estonia where the Government itself had gone through all seven processes, from innovation to delivery, in terms of integrating all the databases that the Government uses in all its departments. Something like that would be quite remarkable if we could do it here. Do you know of any other examples where Government itself has used innovation to drive a process that has benefited Government? Lord Sainsbury of Turville: I don’t know. Again, this would be something that I would look to the Office of Government Commerce to be looking—for the whole of Government—at what other countries do. This is why I think this centralised expertise, it’s not doing it but it is keeping it in touch with where is best practice in the world and then introducing it. As, for example, in IT we should have a much stronger central IT team, not to do projects in departments but to keep up-to-date with the latest technology and be able to advise and help departments. It is something that the Office of Government Commerce should be tasked to do. For example, e-purchasing has been a big thing in some companies in America, where you simply put up a specification on a computer and people can put their bids in and you go on from there. Does that have relevance to particular Government departments? That is the sort of thing the Office of Government Commerce should be up-to-date on and have the ability to influence departments to put in. 250

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Q103 The Chairman: If I may, I just wanted to go back to your 2007 report and one of your recommendations was that Government departments should consider using “outcomebased specifications as part of forward procurement programmes like the Grand Challenge and the Competition of Ideas to stimulate innovation”. I just wondered if in your look at what has happened since 2007 you think the Government has made sufficient use of this Grand Challenge approach in innovative procurement, and in particular whether the forward commitment procurement as part of that has been adopted by Government departments. Lord Sainsbury of Turville: I think the answer to that is: I simply don’t know. I don’t know enough detail of what departments do. I think the important issue is if you want to drive innovation then everyone is agreed that the most important thing is that when you go out to tender essentially, or with competitions to people, you go out on the basis of an outcomebased specification that does not prejudge the technology that should be used. So I think that is the key issue. Of course, that is what SBRI does, and if you have prizes and competitions then they all should be based on output specifications. Whether you use SBRI, whether you use competitions, whether you use grand challenges, I think depends on the nature of the particular problem that you have. If I can illustrate that with a particular example, take what I think everyone would agree is a grand challenge, which is how you deal with the spread of infectious diseases in the current world. Should you make that a grand challenge or not? Should you use an SBRI scheme to do part of it? I remember David King, when he was Chief Scientific Adviser, was very concerned about this issue and believed that the most important thing you could do was to have a small device that would enable you to test animals very quickly as to whether they had a particular disease. I can’t remember where he got to on it all, but that seemed to me a very good example of where a competition or an SBRI scheme would come in absolutely right. This would be enormously helpful. Having a grand challenge on that case for the spread of infectious diseases I don’t think would be the right thing, because I don’t think there would be one big solution to this. There will be a lot of different bits of technology, and so having competition for bits of technology is a much better way forward. So how you use those different mechanisms I think depends on the nature of what you see as the challenge. Q104 Lord Wade of Chorlton: I was wondering if you could suggest one particular recommendation that you think our report should include. Lord Sainsbury of Turville: Yes, I thought I had given you a clue to that. Lord Wade of Chorlton: You did. Lord Sainsbury of Turville: I think it is a very boring kind of administrative one but of huge significance: you should recommend that the Office of Government Commerce has functional responsibility for the work of procurement departments; it sits on the appointment board of the procurement officers; it sets targets for procurement departments with the Permanent Secretary, and will report back to each Permanent Secretary on the performance of a procurement department. That would be my first recommendation. The second recommendation would be that a procurement report is produced by the Head of the Office of Government Commerce, in which he will set out the facts and figures about Government procurement; actions taken; performance of each department, and that report would then be reviewed by the Public Accounts Committee each year as to whether it is 251

Lord Sainsbury of Turville—Oral evidence (Q 84-104), 11 January 2011 achieving better products, or more effective products, and also reducing the costs of those products. I think if you did those two things you would find it would have quite a remarkable effect on people because, in the end, I think people respond to what are the incentives and the reports that come of it. Lord Wade of Chorlton: I think those are excellent and I can agree with you wholeheartedly. The Chairman: Thank you very much indeed for those very clear steers for us, and thank you, David, for coming to give us such a helpful session of evidence. As you know, there will be a transcript that will be sent to you for correction before it becomes part of the public record. With that, I would like to draw this session to as close and thank you again.

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Technology Strategy Board—Written evidence (PP 21)

Technology Strategy Board—Written evidence (PP 21) Executive summary i.

The Technology Strategy Board is responsible for the central support and deployment of SBRI (Small Business Research Initiative). Since April 2009 it has generated over 500 innovative ideas to public sector challenges and resulted in R&D contracts to a value of more than £36m.

ii.

The Government spends around £225 billion pounds each year on procuring products and services. At present, most of that procurement is focused on purchasing proven solutions, or is spent with existing “proven” suppliers. Even a small percentage of that spend, if used to buy more innovative products and services, could have a big impact on the innovative capability of UK businesses.

iii.

Government procurement can stimulate innovation in two main ways – o Being open to the procurement of existing solutions which are new to the public sector; o By stimulating the creation of novel innovative solutions through engaging with business as an intelligent lead customer.

iv.

Government is the single largest customer in the UK and how it behaves towards its suppliers can do much to foster and support innovation. When government behaves as an intelligent lead customer, it can not only generate more effective and efficient solutions to its own issues, but it can also support economic growth.

v.

The SBRI scheme is a mechanism for enabling Government to act more as an intelligent lead customer allowing the public sector to engage with potential suppliers and encouraging the development of innovative ideas. SBRI provides 100% funding in the form of a public sector contract to enable businesses to develop novel solutions to address public sector challenges (which will deliver cost savings in the public sector in the longer-term) and at the same time get on the first step of the procurement ladder. SBRI supports activities that are not usually supported by private sector investors, either banks or venture capitalists.

vi.

The two main obstacles faced by public sector organisations in the use of procurement as a tool to stimulate innovation are availability of budget to invest for the longer-term and willingness to take the risk of investing in unproven solutions. There is significant pressure for public sector organisations to reduce costs. The focus for procurement is therefore increasingly on cost reduction rather than investment in more innovative solutions to deliver greater savings in the longer-term. Greater recognition and incentives are required that reward investment for longer-term benefit.

vii.

The evidence we have submitted below explains ways to overcome some of the problems faced in the use of public procurement as a tool to stimulate innovation, including the need for a central ‘Innovate to Save’ approach to reduce the financial and technical risk faced by public sector organisations.

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Technology Strategy Board—Written evidence (PP 21) Technology Strategy Board response to the House of Lords Science and Technology Committee inquiry into Public Procurement as a Tool to Stimulate Innovation 1. The Technology Strategy Board is a business-led organisation with a leadership role to stimulate technology development and innovation in the areas which offer the greatest potential for boosting UK growth and productivity. We promote, support and invest in technology development and innovation for the benefit of UK business. We spread knowledge, bringing people together to solve problems or make new advances. The Technology Strategy Board is the prime channel through which the Government incentivises business-led technology innovation. 2. The Technology Strategy Board is responsible for the central support and deployment of SBRI (Small Business Research Initiative). Since the Technology Strategy Board launched the reformed SBRI in April 2009, there have been 42 competitions across 19 public sector bodies 46. These have generated over 500 innovative ideas to public sector challenges and resulted in R&D contracts to a value of more than £36m – the vast majority going to entrepreneurial SMEs. 3. We welcome the opportunity to respond to this inquiry and have set out our response below against the questions set by the Committee. Rationale 1. What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? 4. The Government spends around £225 billion pounds each year on procuring products and services. At present, most of that procurement is focused on purchasing proven solutions, or is spent with existing “proven” suppliers. Even a small percentage of that spend, if used to buy more innovative products and services, could have a big impact on the innovative capability of UK businesses and at the same time provide better public services with the ability to save costs in the longer-term. The spend on innovation across the public sector is facing a significant reduction, particularly with the abolition of the RDAs and a reduction in Government department budgets, it is therefore important that the Government uses its procurement budget more effectively to stimulate innovation in business. 5. Government procurement can stimulate innovation in two main ways – •

Being open to the procurement of existing solutions which are new to the public sector;

•

By stimulating the creation of novel innovative solutions through engaging with business as an intelligent lead customer.

Department of Health - National Institute for Health Research; Ministry of Defence; East of England Strategic Health Authority; East of England Development Agency; Design Council; Technology Strategy Board; Department for Communities and Local Government - Homes and Communities Agency; Home Office; Department for Transport; Highways Agency; NHS National Innovation Centre; Department for Environment, Food and Rural Affairs; Department for Energy and Climate Change; South East Coast Strategic Health Authority; South Central Strategic Health Authority; Home Office Scientific Development Branch; Food Standards Agency; Department of Enterprise Trade and Investment, Northern Ireland; Northern Ireland Tourist Board.

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Technology Strategy Board—Written evidence (PP 21) 6. The Technology Strategy Board’s focus is on stimulating and supporting business innovation and therefore our interest and evidence relates primarily to the second case above – stimulating innovation to create new and better solutions through Government acting as an intelligent lead customer and the important role that SBRI can play. 7. The importance of intelligent lead customers: Intelligent lead customers are important to any innovation driven product provider. Companies use lead customers to de-risk the product creation process by guiding the specification, supporting the development process and testing and validating prototypes. Lead customers can be particularly important to early stage companies that often have a good idea and interesting technology, but lack the scale to have extensive marketing, test and validation teams. For the small entrepreneurial company, the lead customer brings the market requirements and plays a key role in exploratory development. Intel developed its first microprocessor under a development contract from the Nippon Calculating Corporation and in the UK CSR was founded by a team who developed their CMOS wireless design expertise under R&D contracts placed with Cambridge Consultants. The value of having an intelligent lead customer is so high that companies will often move R&D effort to be close to the location of lead customers. 8. Government as an intelligent lead customer: Government is the single largest customer in the UK and how it behaves towards its suppliers can do much to foster and support innovation. When government behaves as an intelligent lead customer, engaging with business in the pre-commercial stages of product development, it can not only generate more effective and efficient solutions to its own issues, but can also support economic growth, working with business to develop globally competitive products and services. In an ideal situation, Government acting as an intelligent lead customer, would engage with business, widely articulating unmet and emerging needs, specifying challenges at a system level and focusing on desired outcomes rather than specific products. Government would also be willing and able to engage in the product creation process providing input, guidance, test and validation of the solution and ultimately be part of the market, or an enabler of the market. 9. Evidence on public procurement as an innovation tool - impact of US SBIR scheme. The US SBIR scheme is generally considered to be the leading model for innovative procurement. It has been running for 28 years and issues some $2 billion worth of contracts annually. Since its inception, the SBIR programme has involved more than 15,000 firms, developed more than $21 billion worth of research and over 45,000 patents. SBIR companies employ more than 400,000 scientists and engineers. This group of “SBIR alumni” represents the largest concentration of scientific and engineering talent in the United States. 10. Qualcomm and Symantec are two often quoted SBIR success stories. Qualcomm has some 16,000 employees with sales revenue in excess of $10 billion and a market capitalisation in excess of $60 billion, Symantec employees 17,000 people with sales revenues in excess of $6 billion and a market capitalisation in excess of $13 billion. The US Innovation Development Institute estimates that SBIR delivers a multiplier of 5-7 in terms of economic benefit accrued.

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Technology Strategy Board—Written evidence (PP 21) 11. The assessment by the US National Research Council in 2008 47 concluded that ‘the SBIR program is sound in concept and effective in practice’ and that the programme – • • • •

Stimulated technological innovation; Increased private sector commercialisation of innovations; Used small businesses to meet Federal research and development needs; Provided widely distributed support for innovation activity.

12. The assessment surveyed Businesses engaged with SBIR and found – • • • • •

>20% of companies were founded solely or partly on basis of SBIR award; >66% of SBIR projects would not have taken place without SBIR funding; Just under 50% of projects that achieve phase 2 funding make it to the marketplace; >33% reported academic involvement in the project; >25% of projects receive at least one patent.

13. The impact of SBRI in the UK is discussed below under questions 3-5. Co-ordination of innovation and procurement policies 2. To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? 14. There are few areas where strategic departmental and cross-government policy objectives are meshed with procurement and innovation policies. The Technology Strategy Board, through the use of SBRI, works with public sector organisations on the policy challenges they face and how they could be more effectively addressed through developing innovative solutions. We use our knowledge of technology and business to support public sector organisations in turning the policy challenge into a challenge which businesses can address through the use of SBRI. The Technology Strategy Board also uses its unique position in the innovation system and its networks and knowledge of business to bring new innovative companies, new ideas and new technologies to the challenges faced, supporting the public sector organisation through the whole process. 15. The MoD has recognised the need to act as an intelligent lead customer and has installed mechanisms to engage with business and run regular SBRI competitions (themed calls). The MoD has created the Centre for Defence Enterprise, which works with internal MoD directorates to identify appropriate challenges and then works with the Technology Strategy Board to engage with a broad range of innovative businesses, often from outside the normal defence community, to seek better solutions. 16. Similar structures in other parts of central government might remove some of the fragmentation and lack of ownership that exists in some areas. For Departments that lack the scale to justify such an approach, a central structure aggregating demand could be put in place and could be a possible role for the Technology Strategy Board.

47 Committee for Capitalizing on Science, Technology, and Innovation: An Assessment of the Small Business Innovation Research Program – National Research Council 2008

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Technology Strategy Board—Written evidence (PP 21) 3. What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 4. How might public procurement more effectively stimulate innovation within industry? 5. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry? 17. The main recognised public procurement mechanisms currently used in the UK to stimulate innovation within industry are SBRI and Forward Commitment Procurement. They operate in a slightly different space with Forward Commitment Procurement focusing more on the better use of existing technologies or more innovative ways of doing procurement and SBRI more focused on the development of new technologies leading to new products or services. Given the Technology Strategy Board has responsibility for SBRI we have focused our following response on that mechanism. 18. SBRI enabling Government to be an intelligent lead customer: The SBRI scheme is a mechanism for enabling Government to act more as an intelligent lead customer whilst operating within the procurement regulations. SBRI enables the public sector organisation to engage with potential suppliers encouraging the development of innovative ideas closely aligned to the defined needs of the public sector organisation. The public sector often has the ability to create the market or give a longer term of future needs providing some certainty for businesses to invest. 19. Provenance of SBRI: SBRI is closely modelled on the US SBIR scheme which is designed to encourage small business to develop new processes and products and to produce quality research in support of the many missions of the US Government. It was introduced in the US in 1982 as part of a reaction to a number of factors •

Concerns about the nation’s ability to compete economically in the face of Japanese performance in automotive, steel and semiconductors.

•

Failure to translate research prowess into commercial advantage

•

A declining share of federal R&D going to small business and difficulties amongst innovative small businesses in raising capital. In the US, technology based small businesses employ nearly 40% of the science and engineering workforce and SMEs account for 60-80% of net new jobs created annually.

20. SBIR is seen as playing a catalytic role at an early stage in the technology development cycle, by encouraging the development of the product and the establishment of the company, and by providing an income stream at a point when the company might struggle to raise private capital on reasonable terms. It also enables the firm to generate and retain valuable IPR, which helps to attract investment. 21. SBIR provides 100% funding in the form of a public sector contract for activities that are not usually supported by private sector investors, either banks or venture capitalists. It also does not require repayment (as loans would) or require the dilution of ownership or control of the company, as VC funding would. 257

Technology Strategy Board—Written evidence (PP 21) 22. SBIR complements private sector markets through acting as a quality filter for investors. The process provides due diligence on both the technology and the market potential of the innovation. This plays a valuable role in correcting information asymmetries, a classic market failure in the area of innovation. 23. Status of SBRI in the UK. Since the launch of the reformed SBRI scheme in April 2009 there have been 42 competitions across 19 public sector organisations. These have generated over 500 contracts to a value of more than £36m. Over 80% of contracts go to SMEs (up to 250 employees) and over 40% to micro companies (less than 10 employees). Topics range across a wide spectrum with most falling in the area of operational effectiveness such as the Department of Health looking for better means of detecting pathogens and improving hand hygiene to combat MRSA or the MoD looking for a major reduction in the 70Kgs of weight that soldiers have to carry into battle. There are also a number of policy related competitions such as the Home Office running competitions to find solutions to reduce mobile phone theft under the ‘Design Out Crime’ initiative or Defra running a competition to develop highly efficient lighting solutions with zero mercury under sustainability initiatives. 24. Goals of SBRI • The use of SBRI – o Enables public sector organisations to drive innovation from the demand side, taking the initiative to access innovation to improve operational efficiency and effectiveness including longer-term cost savings, as well as tackling policy objectives; o Stimulates economic growth by supporting innovative SMEs in the exploitation of new ideas and technology providing financing and a route to market. 25. Benefits of SBRI • Enables Public Sector Bodies to – o Use innovation and technology to deliver significant improvements in operational performance or in progress towards policy objectives; o Access new ideas and technologies that would not be reached through normal channels; o Encourage innovation by defining and broadly exposing challenges and desired outcomes and then procuring and supporting the R&D effort. •

Supports innovative businesses by providing – o An intelligent lead customer to help validate and refine the idea and provide a route towards market for new ideas; o Finance for R&D through contracts to progress the idea (100% funded); o Credibility for follow-on investment from private sector; o Simple means of engaging with the public sector and a step on the procurement ladder; 258

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o Publicity to raise the profile of the company and increase the visibility to private investors. 26. Operational basis: The procurement regulations are met by having an open competition for ideas that result in competitively awarded R&D contracts. Once the contracts are awarded, the public sector organisation is free to work with, and support, the contracted companies. Furthermore, R&D services operate under a less onerous set of procurement regulations (16(f) of directive 2004/18/EC) which means that simpler procedures (rules, formats, timings) can be used, enabling a simpler, faster and more SME friendly process to be developed. 27. Impact of SBRI in the UK. The scheme is still within 18 months of deployment and as a R&D driven process final products will not emerge for another one to two years. There has however been extremely encouraging results from competitions to date both in terms of finding and progressing novel ideas and in generating extremely positive response from business. At least three SBRI winners have reported that having the Government SBRI contract has helped them to raise private capital and on more favourable terms. From a Government perspective, SBRI has enabled a wider range of companies to be reached, often from outside of the normal supplier base of the public sector body, and the projects supported have generated some very novel ideas for the public sector organisations. Ideas include: •

The Respiratory Rate Counter developed by small company Anaxsys Technology which automatically and continuously monitors a patient’s respiratory rate which is the best indicator of a worsening medical condition.

•

The retrofitting of 87 homes to increase energy efficiency and to exceed the competition’s 80% CO2 reduction target.

•

New technology being researched by Bath-based Creo Medical which promises to boost cleanliness in hospitals and combating MRSA by providing swift, thorough, hand sterilisation without the need for scrubbing with soaps or gels.

•

A single key card developed by Norwich based Proxama to make contactless cash transactions more convenient and more secure as part of a competition to design a ‘crime proof’ mobile phone.

28. EU plans for SBRI: The EC communication “Innovation Union” states – ‘Public procurement accounts for some 17% of the EU's GDP. It represents an important market, particularly in areas such as health, transport and energy. So, Europe has an enormous and overlooked opportunity to spur innovation using procurement’. In the EU, the UK is seen as being in the lead in implementing the SBIR model, referred to by the European Commission as Pre-Commercial Procurement. This is allowing us, as part of the European PRO-INNO project, a position of influence in the discussions around EU implementation and European Commission support. The procurement process What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? 259

Technology Strategy Board—Written evidence (PP 21) 29. There is significant pressure, particularly in the current tight financial climate, for public sector organisations to reduce costs. The focus for procurement is therefore increasingly on cost reduction rather than investment in more innovative solutions to deliver greater savings in the longer-term. Spending now to deliver disproportionate benefits in the longer-term (perhaps 3 years) can be a tough sale internally, especially as innovation and R&D often have unpredictable outcomes. Focus on short term targets and delivering financial savings limits the ability to deliver breakthrough innovations. There is little incentive currently for people in the public sector to take risks and the culture tends to be conservative. Greater recognition and incentives are required that reward investment for longer-term benefit. 7. To what extent are those responsible for public procurement of research and development “intelligent customers”? Do they have the appropriate expertise to identify innovative solutions to procurement needs? How well do they identify when innovation could provide a solution to a procurement need? How effective is the identification of and dialogue with appropriate potential suppliers? 30. The need to thrive and survive in competitive markets naturally forces businesses to work with their suppliers to seek competitive advantage. Government, whilst driven by a desire to improve its efficiency and effectiveness does not face the same competitive pressures and also has to operate within the EU and WTO regulatory systems governing public procurement. These regulations mean that public sector bodies cannot enter into relationships with suppliers in the same way that private enterprises do, having to always be seen to have a level competitive playing field. Public sector organisations also rarely have the in-house expertise to be able to keep abreast of the latest technologies and innovations or the reach beyond the normal supplier base. Often the most innovative ideas come from areas outside the normal supplier base. When you couple this with complex and often bureaucratic processes, particularly for small companies, and a lack of mechanisms for seeking innovative solutions, Government on the whole is currently a poor lead customer. 31. Government as an intelligent lead customer – where it is working. The SBRI scheme is a mechanism for enabling Government to act more as an intelligent lead customer whilst operating within the procurement regulations. SBRI enables the public sector organisation to engage with potential suppliers encouraging the development of innovative ideas closely aligned to the defined needs of the public sector organisation. 32. As mentioned previously, the MoD has recognised the need to act as an intelligent lead customer and has created the Centre for Defence Enterprise, which works with internal MoD directorates to identify appropriate challenges and then works with the Technology Strategy Board to engage with a broad range of innovative businesses. Similar structures in other parts of central government might remove some of the fragmentation and lack of ownership such as seen in areas such as health. For Departments that lack the scale to justify such an approach, a central structure aggregating demand could be put in place and could be a possible role for the Technology Strategy Board. 260

Technology Strategy Board—Written evidence (PP 21) 8. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? 33. The two main obstacles faced by public sector organisations in the use of procurement as a tool to stimulate innovation are availability of budget to invest for the longer-term and willingness to take the risk of investing in unproven solutions. Most procurement (and the budget for that procurement) is for the “here and now”. The success of SBRI to date has been because it has largely access the R&D budgets of public sector organisations where the expectation from the outset is for longer-term benefit, rather than procurement budgets which are to address more immediate needs. With the likely reduction in R&D budgets across the public sector, SBRI could see a reduction in use by the public sector. Those responsible for undertaking the procurement and the policy budget holder for the product or service to be procured are usually different. There needs to be acceptance from both before undertaking a more innovative approach is possible. 34. Innovate to save - reducing public sector costs and delivering economic growth. At a time when there is a big drive to reduce government costs and also stimulate economic growth, SBRI is a way to address both issues through a single action delivering innovative solutions and longer-term cost savings and at the same time helping SMEs to generate economic growth. 35. The treatment of MRSA costs on average £9,000 per patient, and the total cost nationally is over £1 billion a year. The Technology Strategy Board, working with the National Institute for Health Research (NIHR), ran a £2m SBRI competition in October 2008 to develop new innovations to tackle the problem of Healthcare Associated Infections such as MRSA. The competition awarded contracts to 13 SMEs to develop their ideas, with the NIHR seeing more immediate results compared to previous procurement exercises that had taken up to seven years. The £2m investment is generating a range of new solutions for tackling Healthcare Associated Infections leading to potential savings in the health budget. At the same time the £2m investment is providing the SMEs the opportunity to develop their ideas further with the potential to sell to a global market and so generating economic growth. 36. However, with the reduction in spending across central Government and the wider public sector, there is a danger that the success to date of SBRI could stall as the funding for SBRI, which comes from Government Departments and other public sector organisations, is no longer available. The reduction in budgets is likely to focus public sector spend on the short-term, with organisations becoming more risk adverse and therefore not investing for the longer-term and in more innovative solutions. The potential cost savings which could be achieved through SBRI and the economic benefit delivered through the growth of the SMEs, could be at risk. 37. To overcome this issue, a central ‘Innovate to Save’ fund could be created to which central government departments and the wider public sector could bid for funding on a 50% matched basis to offset the risk of investing in more innovative solutions which will provide longer-term benefit. The money from the central fund would provide 50% of the funding of an SBRI competition, with the Government Department or public sector organisation with the challenge to be addressed, providing the other 50%. The 261

Technology Strategy Board—Written evidence (PP 21) Technology Strategy Board would use its knowledge to help define the challenge and scope and help to deliver the competition. 38. There is potentially a huge range of challenges across central government and the wider public sector which could be addresses through SBRI, delivering cost savings, and at the same time generating economic growth through supporting the development of new products and services. 9. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? 39. The bid process can be complex and time consuming especially for SMEs and the selection criteria and due diligence can often count against SMEs. These aspects are tackled by the SBRI process where R&D services are exempted from the procurement policy under 16(f) of directive 2004/18/EC which means there is no requirement to follow strict procurement procedures (rules, formats, timings) and free format can be used, thus enabling a simpler, faster and more SME friendly process to be developed. 13 December 2010

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Technology Strategy Board, NESTA and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011

Technology Strategy Board, NESTA and Brian Collins, Chief Scientific Adviser (DfT and BIS)—Oral evidence (QQ 52-83), 11 January 2011 Please see page 209

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Transport for London—Written evidence (PP 25)

Transport for London—Written evidence (PP 25) 1

Introduction

1.1 Transport for London (TfL) welcomes the opportunity to contribute to the Committee’s inquiry into Public procurement as a tool to stimulate innovation. 1.2 TfL was established in 2000 to implement the Mayor of London’s Transport Strategy and to manage transport services across the Capital, for which the Mayor has ultimate responsibility. These include buses, the Underground, the Docklands Light Railway, London Overground, Tramlink and River services. TfL is responsible for a 580km network of roads and London's 6,000 traffic lights. We manage the central London Congestion Charging scheme and regulate the city's taxis and private hire trade. We promote walking and cycling initiatives across the Capital. We employ 28,000 people (as of April 2010) in 36 offices in central London, excluding operational buildings such as Tube stations. 1.3 As one of the world’s leading transport authorities and Europe’s largest, our aim is to provide the most integrated, efficient, accessible, reliable and safe service possible, supporting London’s economic development, environment and our local communities. From a procurement perspective, TfL spent £5.2 billion in the financial year 2009/10. 2

Rationale

What is the rationale for using public procurement as an innovation tool to stimulate innovation within the industries on which government relies? And what evidence is there to support its use as an innovation tool? 2.1 The public sector is a significant purchaser within the UK economy. In sectors such as transport infrastructure, it is the only UK client for industry and therefore can hold significant influence over suppliers in the market place. 2.2 There are clear challenges within the transport sector which push us towards looking for new and innovative solutions, namely: • An increase in population resulting in higher demands of our infrastructure; • The knock-on effects this has for the maintenance and operation of our assets (cooling the Tube is an example); • The restrictions we have in terms of legacy assets, infrastructure and systems (TfL operates an Underground network developed in the 19th century); • The need to recognise the links between investment in transport and other types of infrastructure, particularly energy, and information and communications technology (ICT); • There is an increasing need to reduce the environmental impact of our operations, particularly carbon; and • Cost pressures mean that we need to think of new ways to deliver services. 3

Co-ordination of innovation and procurement policies

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Transport for London—Written evidence (PP 25) To what extent are strategic departmental and cross-government policy objectives meshed with procurement and innovation policies and how might this be improved? What cross-government mechanisms and co-ordination is in place to help to facilitate this? 3.1 At TfL policies are meshed into procurement strategy, the recent National Infrastructure Plan draws out the interconnectivity between different types of infrastructure (transport, energy, ICT, etc) and includes a specific section on developing the intellectual capital to deliver these. 3.2 TfL engages with the Department for Transport (DfT) on a range of science and engineering issues including low carbon transport, the natural and built environment and skills. 3.3 On low carbon transport, TfL, alongside the Greater London Authority, responded to the DfT’s formal consultation on how the Government’s £250 million fund to incentivise the uptake of electric cars should be spent. The Mayor would like London to be the electric vehicle capital of Europe so this is a key area of interest for TfL. We have also had bilateral meetings with the DfT to discuss a rail strategy on carbon and we have been invited to participate in the DfT’s Carbon Pathways project and to send a representative to their Low Carbon Liaison Group. 3.4 TfL policy officials recently met DfT officials to discuss non-carbon environmental issues such as the natural environment, air quality and also the built environment. This is a new area of focus for DfT so it was an exploratory meeting, with TfL setting out its work in this area. 3.5 From a skills point of view, TfL’s Skills and Organisational Development team worked with the DfT to undertake ‘Project Brunel’. TfL and the DfT share concerns about skills shortages around the engineering, planning and technical sectors and therefore commissioned work to examine the current and future demand and supply trends for these sectors. This study was completed in January 2009 and TfL is now working with the DfT to implement the findings at an industry level. 3.6 With regard to ‘transport appraisals’, TfL’s involvement with the DfT is mainly in the role of consultee, but occasionally, when applying for direct funding from the DfT (or another department), TfL seeks the help of DfT officials to ensure an understanding of what information needs to be provided, in order for Government to carry out assurance checks. 4

Mechanisms through which government procurement can stimulate innovation

What public procurement mechanisms are currently used to stimulate innovation within industry? How successful are they? How is the success of such measures evaluated? 4.1 A general observation would be that there is not much activity in this regard specifically related to transport. 4.2 The forecasting of requirements to understand when demand is required is linked to the public sector’s approach to asset management and wider investment programmes. The ability to forecast with a degree of certainty provides better lead in time to develop 265

Transport for London—Written evidence (PP 25) innovative solutions and provides the market with more confidence that there is going to be demand. 4.3 Early market engagement and horizon scanning is important to understand innovations within the industry and to feed these into procurement strategies along with information of the deliverability of requirements. 4.4 Aggregation of demand to create a critical mass can help to make the introduction of new products/technology viable and can spread any investment/development costs. TfL is currently piloting category management which would drive this forward. 4.5 Utilisation of specifications based upon performance or functional requirements, rather than detailed and prescriptive specifications, would also be helpful. 4.6 A focus on whole life costing. This is an enabler as some new and innovative solutions can carry an initial premium, however, they can demonstrate a lower total cost of ownership over time. An example of this is in environmental technologies. Photo-voltaic cells, etc are emerging technologies which carry a higher upfront cost, but can deliver a positive return over the life cycle due to reduced energy costs. 4.7 Investing in Innovation Seminar - TfL’s Business Plan sets out how it will continue to improve and expand London’s transport network over the next 10 years. In the context of the current economic climate and given TfL’s cost saving exercise PYRAMID, 48 in conjunction with TfL’s Supplier Relationship Management (SRM) Programme, we hold an annual ‘Investing in Innovation Seminar’, with the aim of increasing the awareness of construction innovation within TfL. In an exercise managed by TfL Group Procurement, TfL’s key construction suppliers are invited to submit innovative ideas and the top three are presented at three separate sessions to TfL employees involved with the delivery of projects. TfL has evidence that innovation presented at these events has led to cost savings and improved efficiencies. This approach has been very well received and is being rolled out to other categories of expenditure. 4.8 The improved management of intellectual property rights and sharing benefits, the principle that rights sit with the party best placed to exploit them. With this in mind, contractors would rather keep an innovative solution to help them win the next contract than give away intellectual property during the term of a contract. 4.9 A different approach to risk allocation would be beneficial, traditional approaches to procurement have assigned as much risk as possible to the supply side. Aside from pushing up costs, this can also stifle innovation. 4.10 Where possible a closer collaboration with Research & Development (R&D) teams would be beneficial. Arguably there is a need to assign budget to R&D activities, however, this is increasingly difficult in the current economic climate. What lessons can we learn from successes and failures within the procurement processes of other countries to stimulate innovation within industry?

PYRAMID is a cross-modal initiative, aimed at enhancing the capability of TfL's internal programme and project management (PPM) community to deliver its investment programme

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Transport for London—Written evidence (PP 25) 4.11 Using procurement to encourage innovation is a key topic at a European level and there are a number of projects in which TfL is either actively involved, or is monitoring progress. These include the European Commission’s Pre-Commercial Procurement (PCP) programme, and the SMART SPP project and the SCI Network. 4.12 The PCP initiative focuses on the research and development phase before commercialisation. The approach focuses on public authorities running a competitive process to identify innovative solutions to a problem, and paying for their development to the point of commercialisation. Although it does not currently have projects specific to transportation, the approach being tested offers a framework for early engagement with the market, and a legally compliant approach to bringing new innovative solutions to a point of commercial readiness. Further information on PCP is available at: http://ec.europa.eu/information_society/tl/research/priv_invest/pcp/index_en.htm 4.13 The SMART SPP project is a pan-European initiative on how to use public procurement to encourage innovation. It is exploring practical applications of the PCP principles, and has also prepared guidance on whole-life costing. SMART SPP has a specific work-stream on electric vehicles. Further information is available at: www.smart-spp.eu/ 4.14 TfL is supporting the ‘SCI-Network.’ This is a project established under the European Commission’s Lead Markets Initiative. The SCI network is tasked with creating a network of buyers across Europe to share good practice and develop approaches to using public procurement to drive innovation in sustainable construction. The network, which was established in May 2010 already has membership from across ten member states and is growing steadily. The procurement process

5

What incentive do those working within public sector organisations have to use procurement as an approach to stimulating innovation? 5.1 We believe there is currently very little incentive for the public sector to use procurement as a means to stimulate innovation. Public sector buyers are not rewarded for procuring innovation. Generally, the focus is upon savings or doing more with less. Innovation can be a way of achieving both of these goals, but this is often not explicit and there is conflict with short-term savings targets. A better focus is needed on whole life costing to draw this out. 5.2 There is a also an established culture of high profile public sector procurement projects being ‘named and shamed’ through National Audit Office reports and Press scrutiny which can act as a disincentive for a buyer to try new and innovative approaches. To what extent are those responsible for public procurement of research and development “intelligent customers”? • • •

Do they have the appropriate expertise to identify innovative solutions to procurement needs? How well do they identify when innovation could provide a solution to a procurement need? How effective is the identification of and dialogue with appropriate potential suppliers? 267

Transport for London—Written evidence (PP 25) 5.3 TfL does not buy much R&D as a discrete activity. We are currently piloting category management and feel this could help to establish better buyer knowledge of the market. One of the traditional problems has been that buyers do not have the detailed knowledge to influence the specification. What obstacles do those responsible for procurement within public sector organisations face in encouraging innovation through their procurement strategies? How might these be tackled? 5.4 Points specific to the transport industry would be that: • the projects we have are generally very complex; • have significant risk transfer; • are subject to a substantial amount of change; • are tight in terms of time scales; and • are subject to time evolved standards and specifications. All of the above can make it very hard to introduce innovation during the life of a contract as the risks are too great for an individual project. 5.5 Some more general points about barriers to innovation within public sector procurement: • Lack of expertise and knowledge of buyers; • Perception that EU regulations prevent interaction with suppliers during and outside of the procurement process; • Absence of strategy to link policy objectives, procurements and market technology/developments; • Perceived conflict between value for money and innovation; • Fragmented markets (no aggregation to maximise ability to influence market); • Limited collaboration and networking between buyers to share experiences or intelligence of innovation; • Culture of risk aversion; and • Traditional approach to ownership of intellectual property rights. What obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements? How might these be tackled? 5.6 The negative points on the procurement process raised above would apply. 5.7 Of particular importance is the issue of intellectual property – suppliers will be very wary of disclosing this during a procurement process (particularly competitive dialogue where this is the perceived risk of the public authority cherry picking the best ideas), and then the issue of who is able to exploit the intellectual property once developed. 5.8 There is also an issue of how small and medium-sized enterprises (SMEs) with innovative ideas sell them to the public sector marketplace. They can wait for contract advertisements, but these usually have defined specifications or some kind of Small Business Research Initiative. A possible way forward is in public sector buyers managing their supply chain so that SMEs get the chance to pitch to tier one suppliers (prime contractors). TfL use the web-based portal CompeteFor to advertise lower value opportunities to SMEs and are requiring tier one suppliers to do the same by the inclusion of flowdown clauses. 268

Transport for London—Written evidence (PP 25) 6

Conclusion

6.1 The use of public procurement as a tool to stimulate innovation is a challenge given that past practice has not been focused on innovation but on a more straight-forward cost efficiency view. Both the application of the EU Regulations and the current economic climate add further weight to financial efficiency so it is important that the way forward in respect of innovation encompasses financial efficiency. December 2010

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Transport for London—Oral evidence (QQ 147-175), 25 January 2011

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 Evidence Session No. 6

Heard in Public

Members present Lord Krebs (Chairman) Lord Broers Lord Crickhowell Baroness Hilton of Eggardon Baroness Neuberger Lord Patel Lord Rees of Ludlow The Earl of Selborne Lord Wade of Chorlton Lord Warner ________________ Examination of Witnesses Witnesses: Andrew Quincey [Director Group Procurement, Transport for London], Collan Murray [Senior Procurement Manager, Transport for London] and Martin Rowark [Head of Procurement, Crossrail].

Q147 The Chairman: Good morning to our three witnesses and I’d like to welcome you as well as members of the public. I’d like to thank our three witnesses for agreeing to appear before the Committee at rather short notice, but we are very pleased to take evidence from you in your roles in Transport for London and in Crossrail. I should inform you that the proceedings are being webcast, as is our usual practice. And for members of the public, I wish to draw your attention to the information note that provides some background on the inquiry and lists Members’ interests. While the light is on there that says we are broadcasting, all the microphones are live, so sotto voce comments will be picked up as well as the formal responses. We have about 40 to 45 minutes for this session and we want to cover a number of areas. So I hope that you will be succinct and to the point in your answers. I’m sure you will be. But what I’d like to do first of all is to invite you, for the record, to identify yourselves, starting with Mr Rowark, and say who you are and if you wish to make any brief opening statements in relation to the inquiry please feel free to do so. Martin Rowark: Good morning. I’m Martin Rowark. I’m Crossrail’s Head of Procurement. I’m here today to give you some feedback as to what Crossrail is doing in procurement. 270

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 Collan Murray: Good morning, Chair and Members of the Committee. My name is Collan Murray. I’m from the Greater London Authority Group of which Transport for London is part. I’m responsible for areas including innovation and skills and employment in our programme. Andrew Quincey: Good morning. I’m Andrew Quincey. I’m the Director of Group Procurement for Transport for London. Q148 The Chairman: Thank you very much indeed. I will kick off and invite you to start off with a general response to the question that is at the heart of our inquiry, which is how public procurement is used to stimulate innovation. I’d like to ask you to give us an overview of how Transport for London procures major infrastructure projects such as Crossrail and what you see as the role of innovation in that procurement process. You might also, within that, give us your definition of what you think innovation means in this context. So who would like to kick off; perhaps Mr Quincey? Andrew Quincey: I was going to kick off with some overview about TfL and how we approach major projects and then I was going to ask Collan and Martin to give some examples of some of the innovation that’s currently going on. Transport for London is chaired by the Mayor of London, Boris Johnson. There are 17 nonexecutive members on the TfL Board. We have three committees: the Audit Committee, the Finance Committee and the Safety and Health and Environment Assurance Committee. We also have three board panels: Environment, Corporate and Planning Panel, Rail and Underground Panel and the Surface Transport Panel. So there are six panels and committees in TfL. TfL has a divisional structure. It’s split into three main operating units: London Underground, Surface Transport and London Rail. Currently the Managing Director of London Underground, Mike Brown, is covering both London Underground and London Rail. There are four senior corporate executive divisions. There’s finance, planning, general counsel and marketing and communications. In terms of how TfL approaches the delivery of major infrastructure projects, it all falls under a governance process called the Corporate Gateway Approval Process, which is called CGAP. The CGAP process has five main project delivery gateways, A to E: the first project commencement, single option selection, pre-tender, contract award, and project close. So those are the gateways that each project has to pass through. There is a separate project for annual programmes of work that are not specifically designated as a project. There’s a defined scheme of delegated authority for project approvals enshrined within TfL’s standing orders and any project over £5 million has to be approved by the Project Review Group, which looks at each of these stages of the process. So papers are submitted to that review group. The review group is chaired by the Managing Director of Finance, who is my immediate line manager. Each of the projects submitted to the Project Review Group can have an independent engineering evaluation. So we bring in independent consultants, experts in their field, to review the projects and they report to the Investment Management Programme Office on areas of improvement that we can do within the project. Concerns and risks are identified through that process. We’ve also recently appointed, following the change in the PPP structures, an Independent Investment Advisory Group, which is a group of six senior industry executives who have been recruited as effectively non-executive directors, giving a wide range of skills and 271

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 experience of input into projects as we deliver them. They have terms of reference that we can provide if you require it. So that’s how the overall structure of Government works within Transport for London. From a procurement point of view, the approach for the marketplace is to find a procurement strategy that is developed in line with standing orders and is generally developed at the end of gate B for approval in gate C, pre-tender award. So that’s the overview and structure. Even though Crossrail are part of the TfL family, because of the structure we have with the DfT, they have slightly different internal government processes. I was just going to ask Martin to talk through that. Q149 The Chairman: Yes. We’d also like to get to the point about innovation. You were describing process. We want to know how innovation is folded into that and preferably have some examples; so could you focus on that in future responses. Martin Rowark: Sure. I mean we’re trying to innovate in terms of process as much as we can. Crossrail, of course, needs to work at some speed. It also needs a high degree of assurance. We’re obviously letting £100 million contracts and above. We have a process whereby we have seven milestones end to end in the procurement process, three of which are signed off by the main board. We have a sub-committee to the board that agrees each one of those three key steps for each procurement and every procurement is the same in that respect. Overseeing this activity is a Procurement Expert Panel and that’s chaired by David Orr who is a past president of the ICE. A number of individuals on that panel are from contracting organisations also down within the supply chain. So we have an overview. The Procurement Expert Panel reports directly to the board and is answerable to the chief executive. So if they pick up anything during the procurement process they’re unhappy with, they will report directly to the board. We meet quarterly on that basis. Q150 The Chairman: Could I just follow up while talking to Martin on Crossrail? One piece of evidence that we have had from a chartered engineer refers to the procurement process for Crossrail and the ability of suppliers to innovate within the constraints of the contract and he says, “The biggest transport disaster of our current generation will be if we build a Crossrail tunnel through London which has no provision for later installation of double-decker trains due to lack of current adoption of innovation in power, track and tunnels. Typically this contract has been divided up so that it is no longer possible for any one bidder in the supply chain to propose innovation benefiting the whole project.” What is your response to that? Martin Rowark: Well, first I should say to you I’m not a specifier of Crossrail. My procurement organisation should not be a specifier. What we can do is accommodate flexibility. Q151 The Chairman: Who does specify then? Martin Rowark: Our engineering standards have to support the Crossrail functional requirements as laid down within the PDA, the development agreement we work to. As a procurement professional, I advise for tender flexibility. I do have an example to give you about the major running times that I do think demonstrates innovation. It’s rather at a methodology level rather than an out-turn. The idea of maybe running double-decker trains 272

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 is fine in terms of a design development stage but by the time we get to the procurement stage it’s quite difficult for a procurement organisation to take into account. I should explain that because, first and foremost, when you’re trying to buy a programme of the scale of Crossrail do you want innovation at every turn? The answer for me is not necessarily, because with innovation you do import risk. I can give you an example, in fact, that should we get a challenge to our procurement process—and, of course, you’ll be acutely aware of the remedies directive we’re now obliged by—we could be in a delay of a significant number of months and the Crossrail programme costs tens of millions of pounds per period in terms of delay. So you have that as the background to your procurement decision to take innovation. We do have innovation. If you look at the announcement we made on 23 December pertaining to the railway tunnels and station tunnels procurement, we’ve moved from six packages at the commencement of the procurement activity with a request to the supply chain to come back with their good ideas as to how they could make us more efficient. We awarded the same scope in three packages, so we conjoined packages. We had gone through over 40 varying ideas, both from the supply chain and those of our own, in terms of testing how they could take forward tunnelling under London. And the western side package is a single package, originally with three parts, whereby the supply chain has come up with inspired methodology to allow us to drive tunnels and then break out station caverns later, saving many millions of pounds. And the other benefit, of course, is we’re taking a significant number of trucks off the roads because we’re taking out material on trains. I think that is innovation. Every step of the way we’ve imported risk to do that possible change. We’ve had a significant matrix of evaluation to overcome to achieve that and that, in itself, I believe, is taking innovation forward as far as Crossrail is concerned. Q152 The Chairman: Do you agree with the proposition that it would be a transport disaster if there were no provision for later installation of double-decker trains? Martin Rowark: I couldn’t comment, to be perfectly honest. I’m not a transport engineer. Q153 Lord Wade of Chorlton: Can I just go back to some of the comments you’ve made, because you’ve painted a picture of a series of decision-making processes that have to go through a series of committees that are very rigid in what they can decide to do? You virtually explained the situation where nobody in it is prepared to take a risk. Would that be right? Martin Rowark: No, absolutely not. No. No, absolutely not. What we’ve done is take some significant risks in terms of taking— Q154 Lord Wade of Chorlton: Could you explain, within the structure you’ve outlined, who within it is going to be the person to take the risk and say, “Look, I’m just going to disagree with what all you committees say and I’m going to do that”? Martin Rowark: We don’t have too many committees. We have a sub-committee for procurement. That’s the only committee underneath the board. That sub-committee meets every two weeks. It’s a very hands-on working meeting and at that meeting the Programme Director, Andy Mitchell, can direct that he wants to explore certain engineering solutions with an engineering committee. 273

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Q155 Lord Wade of Chorlton: Has that happened? Martin Rowark: Pardon? Lord Wade of Chorlton: Has that happened? Martin Rowark: The western running side is evidence of that. We went with a completely different design from the contractor and awarded it on that basis. The risk for us, of course, is design obviously takes a significant amount of time and we have to award a contract based on an innovative solution. And, for Crossrail, we need to test that that solution works because what we can’t do is award a £450 million contract on a suite of promises and assurances. It has to be robust. We’ve taken that decision; we’ve made that decision to tunnel in a completely different way. So I think that’s evidence of the system working. We’re quite a small team and we have set ourselves up to not to be checkers checking and checkers checking and checkers, but people to make quite significant decisions. Q156 Lord Warner: Could I just come back to this issue of the double-decker trains? And let me emphasise, I’m not a transport engineer either or any other kind of engineer. The process you are describing does rather suggest that the financial framework for a project could get set on a false prospectus that rules out significant innovation, because what you rightly say is when you get to the procurement stage you are very rightly concerned with risk. But if some of those risks have been defined out very early on in the stage it’s not your job to put it right. That we understand. But the process does seem to me to enable you to get the financial envelope for the project stratified in a way that you can’t innovate on a big scale and the double-decker train seems to me a good example where your processes can shut off innovation too early in the process. Would you think that’s a fair comment? Martin Rowark: I completely agree with you. Q157 Lord Crickhowell: Can we move on to the general barriers to innovation? I think we’ve already identified some possible barriers. You list in your evidence a number of general barriers within public sector procurement, some of which are very specific to the transport industry. You suggest a number of ways in which procurement can stimulate innovation. How can the barriers best be overcome? Can you give us some examples of projects that have overcome the barriers that you identify and projects that have applied approaches that you describe, designed to deliver innovative solutions to the procurement problems in transport? Who would like to lead on that one? Collan Murray: I’ll take the first point on that one. Perhaps if I just start by saying that we had a point earlier on about what we see innovation being within the business and I think there are probably three perspectives to that from us. One would be that it is certainly the seeking out and procurement of new and innovative products, technology and solutions for us. Secondly, we would suggest it’s also around our role in identifying existing new products and technology and helping them be commercialised and mainstreamed within the business, certainly. I think, thirdly, we’d suggest there is a point there on innovating ourselves, in terms of our own processes and approach to procurement. So perhaps I should take the first two in answering your point. In terms of procuring new and innovative technologies, one of the barriers we often come across is around our awareness and understanding of the marketplace in terms of what is out there; what is available in terms of technology; what is available in terms of different suppliers in the locality 274

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 and more widely. That fundamentally influences our approach to procurement in terms of our knowledge of who we can engage with and we do a lot of work around early market engagement at pre-procurement—before we go out and advertise for a contract. We will go out and talk to the marketplace to understand, first, who is in the marketplace that we can work with; secondly, what the capacity of the marketplace is to work with us; and, thirdly, what new innovations are surfacing or becoming visible in that marketplace. To give you an example of that: one of the objectives for Transport for London from a strategic perspective is to reduce the congestion and traffic movement on London’s roads. And we did a piece of work last year where we looked at whether we could identify and then bring to market a new technology that would alert drivers on our roads to the speed limits of the roads they were on to help smooth traffic flows, improving driving standards and reduce delays due to accidents and incidents. So we approached the marketplace to find out from technology developers and software companies what they could do in that sphere for us and the response we got back was there are some clear barriers to these companies in terms of, first, the data being available on the London road network in terms of quality data on speed limits. There were barriers in terms of how that data was held and stored and how accessible it was. So in response to that feedback from the marketplace we went and built our own data set of road speeds within the M25 and then, when we did go to market on the back of that, we were able to go out with an open advert to companies in the software and development field with a data set we knew they’d be able to use and work with. And we were able to appoint a company who had the base external data to build that technology solution for us and, because we were able to offer them a minimum guarantee of business, we procured 26 pilot vehicles from them installing this new technology, which allowed them enough revenue to go and identify a manufacturing partner and a business partner in the UK to deal with servicing. And now we have 26 of these vehicles around London as proof of concept in the new technology and we’re now moving into a phase 2 of this project. We’re starting to engage with the insurance industry around how we can help commercialise this technology to make it commercially attractive to road users to purchase as a potential way of reducing their insurance costs on the roads. Q158 Lord Crickhowell: You’ve touched on two of the problem areas that you identified: the culture of risk aversion—I think we’ve already just referred to it—and fragmentation of markets. One of the difficulties in the transport sector with many different centres of procurement around the country, the major cities and so on, is knowing perhaps what is going on in the other centres. But the other one you identify is the perception that EU regulations prevent interaction with suppliers during an outside procurement policy and we’ve had one piece of evidence suggesting that an innovation that could benefit UK railways is the European Railway Traffic Management System. Now, I don’t know anything about that. You might just elaborate a little on that and whether it’s something you have on board and the influence that European policy does have on inhibiting or encouraging innovation. Martin Rowark: Yes, I’m familiar with the ERTMS. I know it’s been piloting in the Cambrian area. Lord Crickhowell: Sorry, could you say that again? Martin Rowark: Sorry. I’m familiar with ERTMS to which you referred. It’s a signalling system that’s been piloted in the Cambrian area and currently Crossrail are considering that along with a more tried and tested CBTC system, I understand, and our procurement takes 275

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 that into account currently. So we are considering that new technology. It isn’t proven technology at the moment. I think the industry is very aware of that. But we are considering it thoroughly going forward. Q159 The Chairman: And the other part of Lord Crickhowell’s question was: are there barriers in the EU system—the rules for procurement—that limit your ability to elicit innovative solutions to problems? Collan Murray: I think, in general terms, our view would be no and I think the point we made in the submission was there is still a perception that there are barriers there. I think the regulations set up a variety of processes that can be used by procurers to obviously procure the outcomes they need but also to pursue a lot of other ends that do offer opportunity for the public sector, including innovation and a whole set of other key policy objectives for us. I think the 2006 iteration of the directives did bring greater clarity around what you can and can’t do in terms of assessing and evaluating different bids, which is incredibly useful, and there’s nothing overtly in there that does say you can’t include innovation. I think in many ways it sent a challenge down to the procurement people to work within their boundaries to pursue innovative outcomes. Q160 Lord Crickhowell: On the fragmentation point, we addressed fragmentation in a particular project but I’m also interested in fragmentation across the United Kingdom. You’re not all inventing the wheel separately, I hope. But when you pick up this vital expertise that the client has to have if he’s going to have the right relationship with the project, how far are you effectively collaborating with the other big transport operators in the country? Andrew Quincey: I can answer that. I think there’s a balance between aggregation and effectively giving people accountability like Crossrail to get on and deliver through, as Martin has talked about, the structures of governance. So certainly on the rail sector, between Crossrail and Transport for London, we’re working on a number of areas where we see opportunities that Crossrail can change the market for us in terms of being a big one-off purchaser of new items, and we ought to be using that opportunity to open up the marketplace. So one of the categories we’ve been leading on is escalators—working together on escalators to have a look at challenging the specification within London Underground to say, “Look, should we be innovating? Should we be developing our specification for escalators?” And we’re on the cusp of agreeing, finally, a specification where we’re going to go to the market together in a joint way to talk about escalators, which we think is going to be of huge benefit. We’re also in discussions with Network Rail about how we can collaborate more with them. We have some follow-on categories that we’re looking at: lighting, CCTV, signage in stations. So in a number of these categories we’re looking at developing innovative ideas—on signage again, moving away from vitreous enamel to probably look at aluminium and some more stable ways of signage within stations. So the answer to your question is: to an extent, yes; but equally, to an extent, no. So if we look at the broader rail community then the answer is we don’t have a huge amount of collaboration. Q161 The Earl of Selborne: I’d like to come back to Mr Murray’s observation, which I think is absolutely fair, that by co-operation with entrepreneurs software has been developed that is clearly innovative and of great benefit, indeed, to passengers, to travellers 276

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 and the like. And I’d give the example of applications that are now put on your smart phone that will tell you in real time whether the trains are delayed; whether the Underground is working to time; it will wake you up early; tell you where you can park your Boris bike. Now, all these are innovations that clearly do represent progress and development for the passenger but, in practice, what Transport for London have done is simply allowed an enormous amount of stream of information to be available for entrepreneurs. I’m not sure whether there’s a procurement role as such. What you’ve done—and I think it’s a very sensible decision of the Government—is to require all this vast stream of information to be available to entrepreneurs who are developing, by the day, apps which are immediately taken up. Would that be a fair comment? Do you think there’s a procurement role, as such, for Transport for London? Collan Murray: Yes. Just briefly, the example I gave was an example where we didn’t have the data and, based on our engagement in the marketplace, put the data together for them to go and procure a product. But I think, absolutely, we are making an awful lot of data available to the public for exactly this reason: to encourage innovation out there through entrepreneurs to build new applications and technology for us. So I’d absolutely agree that we are certainly making mainstream data sets available and that’s not necessarily a procurement issue, although I do think we have examples where we’re building data ourselves in conjunction with the market that directly feeds into procurement processes. Andrew Quincey: The other thing I would add is around performance-based specifications; where, instead of going with some of the more risky areas like Crossrail, you want a detailed specification that you want the supplier to bid against. In a number of areas we’re looking at now what we call performance-based specifications, where we say what we want as outcomes or performance, and then allow the marketplace, as you say, to develop innovative solutions: so our bus for London design competitions, and procurement is an example. So we’re looking at the opportunity to use those much more than we have done in the past because, again, you get into the risk of—if you base it on a performance specification—the management of the process becoming much more rigorous and onerous, if you like. But it can lead to the development of ideas that you wouldn’t have otherwise thought about. So the response would be: one point is allowing data but another is it being not for us to decide what we want every time and to say to the market, “This is what we want”; to say, “This is the outcome we want. Can you come up with a way of meeting that requirement?” Q162 The Chairman: Can I just ask about a slightly different angle on innovation? Do you, in Transport for London or in Crossrail, have links with the Technology Strategy Board? Is there any work that TSB has commissioned that’s of relevance to you? Andrew Quincey: Not that I’m aware of. Martin Rowark: Not to my knowledge. Collan Murray: Not that I’m directly aware of, no. Andrew Quincey: We’ve done some work on Project Brunel regarding skills within the Transport for industry, with technology boards and science institutes. From a transport point of view, we’re aware that the skills relevant to the transport sector are very specialised and our big concern is about the emerging gaps in engineering skills. So we did a piece of work with the DfT where we did work on—was it some of the STEMskills? Collan Murray: Yes. 277

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 Andrew Quincey: We were looking at identifying these skills shortages and trying to develop a way with our suppliers to build apprenticeships and skills in those areas. So now on a number of our major constructions projects—and Crossrail is going to take this as well—we have what we call a skills policy. We embed in the contracts a demand for the supplier to start developing these skills so that we don’t build a long-term gap in some of the absolutely critical skills we have within Transport for London. Collan leads that piece of work with a team of skills brokers that helps us deliver a set of apprenticeship schemes with industry. So that would be an area that didn’t necessarily come out of that work but it’s linked with some of the technology and skills concerns we have. Collan Murray: If I might say, we have a number of specific projects where we have worked directly with further education institutions—so London South Bank University, and I believe Cambridge as well—on initiatives like Cooling the Tube where we brought London South Bank in to work directly with us and our engineering teams and our contractors to develop new and innovative solutions through an R&D programme, it was a research and development process, to meet the constraints of our underground network, which is very small and very hot, as you may know. We have to interact with them. We’ve also done a lot of work, I believe, with Cambridge on regenerative braking on our trains. So we’ve certainly, on a project level, done some direct engagement with the FE institutions. Q163 The Chairman: I just wondered whether the Technology Strategy Board might also be a source of information about where innovation is going on in small or indeed in large companies. But that’s not a body that you interact with? Collan Murray: No. Q164 Lord Broers: What horizon-scanning activities do you carry out to future-proof London’s transport network over the next 40 or 50 years, or longer, and what processes do you have in place to ensure that consideration is given to innovative ways of meeting future challenges in procurement needs? Andrew Quincey: A lot of our long-term horizon planning is set by the London Plan, which is a 20-year view. So I wouldn’t have said we do anything longer than 20 years. The London Plan is something that’s published by the GLA—so that’s in the Mayor’s office—and out of that we develop the Mayor’s Transport Strategy that looks at how we implement the transport infrastructure to deliver the London Plan. So that, again, sets in context, if you like, how transport operates and that has six main themes within it. I think it will suffice to say, generally speaking, from a procurement perspective, that we look over a five-year horizon. So we look at procurements that are coming up and we do, as with Crossrail, for example, engage with the marketplace. So we’re out there sort of scanning the marketplace in that timeframe. We don’t have anything, I wouldn’t have said, that goes beyond the 20-year horizon. Q165 Lord Broers: Does anybody? Are the roadmaps out 20 years? Collan Murray: I have just a couple of points on that. From a procurement and commercial perspective we certainly look at the priorities and challenges that our 20-year planning is throwing up for us in terms of informing where we engage the market and identify innovation. So if I take a couple of examples from the key challenges that we’ve been set: one is around accommodating population increase and increased volumes on the 278

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 Underground network. We’re essentially constrained by a very old asset base in terms of the capacity it can handle. So the challenge we’ve had directly back to try and explore with the market is: what can we do, firstly, in terms of cooling the tube? And I’ve mentioned the work we’ve done jointly with London South Bank and industry around innovative ways of cooling trains, and platforms as well. We also have a lot of work underway directly with industry around design options for new specifications of London Underground trains as well. So we’re directly working with the major train manufacturers to identify what options there are from a technology perspective to have trains that can accommodate more people within a safe and accessible environment. So that’s a response to one direct question; I shall give a second as well. We have had direct challenge to us to reduce our environmental impact, particularly on carbon emissions, over the next 20 years certainly. And the challenge back to us is to look at our asset base from a buildings perspective, whether that’s head office or operational, because most of those buildings will be around for the next 50 years or indeed for the foreseeable future. We’ve engaged in a fairly innovative project around mainstreaming in the retrofitting market in the UK. Working directly with the London Development Agency, which is our RDA, to identify market capacity for this and indeed stimulate a new market around retrofitting regionally and, to a degree, I believe, in the UK as well, and develop jointly with input from the marketplace a new commercial model based on energy performance contracting which allows us to give contractors the chance to propose a range of energy-saving solutions and carbon-reduction solutions for our building portfolio, which we can then assess based on the payback period and the implementation with installers. We’re expecting to see from our initial implementation around 30% reduction in energy use and carbon emissions over the next few years. Q166 Lord Broers: Those all sound very worthy, but is there an overall stage plan to reach a certain point for the overall transport system? Collan Murray: Yes. Q167 Lord Broers: I worked for IBM for years and IBM had one generation of computers coming out in five years, another one planned in 10 years it was fairly certain and, in our view, even beyond that. You have that, do you, sort of the ideal signalling system that you’re working towards? Collan Murray: We certainly have the understanding and the numerics around where we see London being from a transport perspective over the next 20 years, which is set on our transport strategy. That picks out changes in usage. It also picks out changes in volumes and capacity and that directly informs what we need to do in procurement with the marketplace to meet those challenges. So I think, taking the point around outcomes, we have some clear outcomes that have been set for us. The challenge back to us, working in partnership with the market and further education is to develop the solutions from a technology perspective that will accommodate this and that’s directly informing our current work around new signalling contracts, our development work around how we engage the market and procure new rolling stock for our networks and indeed some of the more back-office systems around how we can improve and make more efficient our ticketing systems around using Smart Card technology. 279

Transport for London—Oral evidence (QQ 147-175), 25 January 2011

Q168 Lord Broers: So when will the Underground have an integrated signalling technology in place? I visited the Edgware Tube Station the other day and was told about five generations of signalling systems going back to 1920 and a sort of vague plan. Is there a concrete plan to get integrated signalling? Because I hear from everybody it’s signalling that determines throughput on a lot of these premises. Collan Murray: We’re at the very late stages of procuring and awarding a new signalling contract for a number of our underground lines, which I believe will be awarded early this year. I don’t have the technical details with me, I’m afraid, in terms of scope of that network interface but I’d be very happy to provide some more information on that. Q169 Lord Broers: But overall you’re happy that long-range planning is going on? Collan Murray: Yes. The Chairman: Could you perhaps follow up with a written comment on the procurement of the new signalling system and particularly answering Lord Broers’s question about a long-term plan? Collan Murray: Yes. Q170 The Chairman: Before I come to Lord Rees, who would like to ask a question, I just wanted to come back to your point, which slightly alarmed me, that your time horizon is looking ahead 20 years when the infrastructure that you’re building is going to last probably 100 years or more. That seems a bit of a mismatch and let me take one example and it’s an example that I have involvement in as a member of the Climate Change Committee. We know, in general terms, that the climate by the end of this century is going to be very different from the climate today. So what are you doing in, let’s say, the procurement of Crossrail and future developments of the Tube that will proof them against the climate in which people will be using those facilities by the end of this century? What sort of modelling have you done and what sort of procurement have you done that takes into account that modelling? Crossrail. Martin Rowark: I came across to you as maybe being a little blinkered but, of course, we’re testing, through procurement, the marketplace. Every single one of our categories—breaking it down into signalling, comms, running tunnels, civil engineering, stations—is subject to a comprehensive market engagement exercise. We put out PIN notices in the EU. We understand what the interest is. We’ve just gone out on a very high-profile—certainly in the marketplace—exercise where we’ve sent comprehensive questionnaires to all of the key providers in Europe we’ve identified for signalling systems and comms systems. We’re now engaging those providers and understanding what they have and what they are developing to bring forward. The ERTMS is obviously subject to that discussion. So we’re looking in that envelope, certainly. We’re looking in terms of what the environment challenges are going forward as part of that questioning process. As part of my role in procurement, I am not looking ahead in terms of sustainability over the window that you’re discussing. Q171 The Chairman: Is somebody at Crossrail? Martin Rowark: Certainly, yes; but not myself. I can come back to you as to what Crossrail is doing about that. 280

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 The Chairman: Can you come back to us in writing to say what is Crossrail doing in its procurement process to think innovatively, or even non-innovatively if you like, about coping with the climate that Crossrail will experience by the end of this century? Martin Rowark: Yes. Q172 Lord Crickhowell: One point arises directly out of that: could we have, on the obvious flood risk which is part of that package—we were told by your retired or about-toretire director of Crossrail the other day, when he gave us a submission at a meeting in this House that, “Yes, of course we’re looking to the flood risks for Crossrail”, and it was on a basis of a one-in-a-100-year event. Of course, I discovered when I was chairman of the National Rivers Authority, the trouble with just saying “one-in-a-100-year event” is that they very frequently happen the following week and probably two of them within the next three weeks. So could you give us a little more indication of how Crossrail is looking to possible flood risks that arise from the climate change situation 50 or 100 years out? Martin Rowark: Yes. The Chairman: And just another specific would be extreme heat waves; so what’s now seen as a one-in-50-year event will probably be a one-in-three-year event by the end of the century. Q173 Lord Rees of Ludlow: When we talked to people concerned with buildings hospitals they said that they had a sort of 20-year contract that incentivised them differently to minimise running costs and so on. Is there an analogy of that in your area where a different incentive would have led to more concern with longer-range planning? Andrew Quincey: If I start with that. One of the things that we often talk about with the supply market, rather than hugely long-term planning—20 years—is certainty. They want certainty because if you look particularly at innovation, they need to invest and make a return obviously and one of the things that Transport for London has been working very hard at is giving the marketplace certainty of what our procurement is going to be so that they can do that investment and make that return and pitch to us products. The majority of our time is spent looking at a five-year timescale. Some of the work that we’ve been doing working on our supply relationship management is trying to work with suppliers to bring innovation ideas in, out of line of the inflight procurement. So I would say in terms of the 20-year view, possibly we’ve had some PPPs, which is well documented. We have some PFIs in place. They do play a role, definitely; but I think my view is that much more important is five-year horizons in the marketplace. So, “We’re going to build this station. We’re going to have this signalling. We’re going to have these road refurbishments. We’re going to do electric vehicles. It’s not going to disappear in six months when there’s a change and the marketplace is investing research and development costs in something that then doesn’t transpire”, I think would be my point. So the PFIs and the PPPs in the long-term plan definitely play a role in the transport sector where, as you’ve all pointed out, we have long-term life assets. I think for me the much more pressing issue—as it delivers much better value and much more innovation—for us is trying to get that certainty around the five-year horizon. I don’t know if you wanted to add anything? 281

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 Collan Murray: Maybe I’ll just quickly say one thing, if I may. Certainly some long-term contracts have delivered good examples of innovation. We have some fairly long-term highways maintenance contracts where we use outcome-based requirements around how they deliver the service but also how they mitigated their environmental and cost impact. And based on that, those companies have been willing to invest in new and innovative solutions around resurfacing the highways network and the materials they use to do that. So they have a new breed of surfacing being used that is much more environmentally friendly on users—recycled content—but also means it can be done an awful lot quicker on-site and also at lower cost as well. If I could just finish off by saying, going back to an earlier point about concerns around skills and employment in the industry, our research suggests a lot of our engineering community is 55 and above and, therefore, retiring. And we’re also seeing fewer entrants into the industry, particularly those with engineering degrees and with maths and other STEM qualifications, and we hold a concern that over time that can only mean there’s a reduction in capacity from the marketplace to work with us but also that may well reduce innovation due to fewer people being there with the technical knowledge. So we have a long-term programme with our suppliers to help build those skills through educational engagement, through working with the professional institutions, to ensure the capacity is there into the future and we have fresh blood coming into the industry, hopefully with new innovative ideas that we can bring forward in the future. The Chairman: We are running short of time so I want to ask Lord Warner to come with a question and I want to go back to an earlier point briefly. Q174 Lord Warner: We’ve skirted around quite a lot of issues around risk and the relationship of risk to long-term identification of innovation. Could you tell us a little bit about the contracting skills? I mean, the public sector’s involvement with PFI and PPP has not always been a happy one, as I’ve personally learned to my consequences. Do you feel that the public sector contracting processes and those who do it have the skills to push risk into the private marketplace rather than give them an easy ride with guaranteed unitary payments? Andrew Quincey: There’s a very good debate and we’ve debated this long and hard in TfL and Crossrail. So if I open and then, Martin, if you want to talk about— Martin Rowark: Yes, talk about unitary payments. I was going to respond more generically in terms of construction. The Chairman: Do keep your response very succinct because I do want to ask one more question. Andrew Quincey: About three years ago we made a decision for our investment programme that, for operating the Tube and across the board, we would move to something called NEC3, which is a standardised industry contracting choice. It was not something that was hugely used across the transport sector and NEC3 itself was fairly new. We’ve put several hundreds of project managers and commercial people through training on NEC3. It’s now what we call our preferred contract of choice. So it’s not mandatory, because obviously with PFI or something like that, it’s not appropriate. So our contract of choice now is NEC3, which is a standard approach—a much more collaborative approach than some of the other contracting choices—and we’ve been working very hard with up-skilling our people, our project managers and our commercial people, to run NEC3 successfully. We have a number 282

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 of examples during contract implementation, and we have good examples of innovation using NEC3 for a much more practical approach. Martin Rowark: I would say, for Crossrail, I think we’re taking a position that would be unusual in the private sector because our contracts have a very equal sharing of risk. We’re an informed team that’s been put together to deliver Crossrail and I think our contracts accurately reflect that. Q175 The Chairman: Could I then, just finally, go back to a point we discussed earlier, which is the relationship between local government and central Government. Just to quote from one piece of evidence, we had said to us, “One obstacle comes from the organisation of both national and local government into a series of standalone silos”, and I think we’ve heard echoes of that this morning. “Overcoming this difficulty requires a strong steer on behalf of the national Government that public procurement should be considered as a valuable tool to enhance local economic development.” So the question I want to put to you is: what does local government require from central Government to enable local procurement to stimulate innovation? Andrew Quincey: Well, if I start— The Chairman: Just briefly; a couple of sentences. Andrew Quincey: From our perspective, greater certainty in terms of demand; through initiatives like the National Infrastructure Strategy is key. Going to the market knowing what we’re going to buy, what volume and when is very important for them because it allows them to innovate with a level of certainty and deliver projects. I would say that’s one of the key things for me. Collan Murray: I’ll squeeze two in, if I can. One would be I guess helping to clarify and communicate the landscape around procurement and innovation. There’s an awful lot at a national and European level around innovation and sometimes it’s very hard, I think, for procurement people to see wood for trees and pick out the things that are relevant and useful and implementable for them. I know colleagues at ERG are doing some work around this at the moment. And I think the second thing for me would be trying to have a more consistent story on innovation across the various strategies that are produced. So we have the National Infrastructure Plan; we have the Low Carbon Construction Strategy. I’m sure there’ll be a procurement strategy for local government and the NHS and others. I think the clear message and role of innovation within those documents should be clear and consistent and, indeed, linked to some form of performance measure for authorities, if possible. Martin Rowark: I’ll keep it short but sweet. I have to say that I don’t think the Public Contracts Regulations 2006 did innovation any favours in removing the ability to negotiate to a place it would certainly assist industry. I think we would learn some lessons from 2012 that had to use a restricted process in a majority of cases and lost out because of that significantly. So reinstate the negotiation in the next public contracts rates review, please. The Chairman: Thank you very much. Are there any other points? We have a few moments. I’d like to thank all of our three witnesses for their evidence. You will, of course, have a copy of the transcript sent to you in due course—in the next couple of weeks or so—with the opportunity for you to comment on it if you wish to make corrections. Also, apart from the specifics that we’ve asked you to write in about, if there are any other points that you’d like to make in writing, please feel free to do so. Finally, if you wish to stay for the second half of this session, which is with three Government Ministers, then you’re welcome 283

Transport for London—Oral evidence (QQ 147-175), 25 January 2011 to stay and sit in the public observation area. But thank you very much indeed for your evidence. We have a slight hiatus now while we wait for the Ministers to arrive.

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Transport for London—Supplementary written evidence (PP 39)

Transport for London—Supplementary written evidence (PP 39) Martin Rowark, Crossrail’s Head of Procurement, welcomed the opportunity to provide evidence with Transport for London to the Committee on 25 January as part of their inquiry on public procurement. At the Committee evidence session additional information or clarification was requested from Crossrail Limited concerning the following issues: • • • •

the use of double-decker trains on the Crossrail route; action to ‘future-proof’ Crossrail against the effects of climate change including the increased risk of flooding and extreme heat events; the incorporation of environmental sustainability considerations are incorporated into Crossrail’s procurement processes; and minimising dwell times at stations.

Please find below additional information from Crossrail concerning these issues. I understand that Transport for London has written to you directly to provide further information on similar issues. Double-decker trains The Crossrail Act 2008 lays down the tunnel diameters that the Crossrail tunnels should be constructed to. Crossrail is required to construct the new rail tunnels at a diameter of 6 metres. When Crossrail is fully open, services will operate in the new tunnelled section but also on the existing National Rail network. During Parliamentary consideration of the Crossrail Hybrid Bill, the use of double-decker trains was rejected for a number of reasons including: • •

•

•

the increased construction costs of the larger diameter tunnels and the need to reconstruct existing bridges and rail flyovers on the surface network; double deck trains only offer a 30 to 40 per cent increase in capacity over standard rolling stock; Crossrail will initially operate with 200m long trains but the scheme is being constructed to enable to enable the introduction of 240 metre long trains at a later date as passenger demand increases. Safeguarding for longer trains will deliver an increase in capacity of 20 per cent at a marginal cost; because of the number of people in a double deck coach, dwell times on a metro service where a lot of people are both boarding and alighting at a station tend to be increased. This in turn reduces the number of trains per hour which can be operated and so the capacity increase offered by double deck trains is offset; and due to clearance issues on the existing National Rail network, double-deck trains could not be cascaded to other routes later in their life without infrastructure rebuilding. More importantly they could not be diverted at short notice to avoid operating problems or engineering blockades.

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Transport for London—Supplementary written evidence (PP 39) Climate Change Adaptation Crossrail has set in place measures to mitigate the railway against the potential impacts of climate change. These have been split into two main categories - construction and operation. Construction Risks The risks to construction are concerned with the impact of extreme weather events (snow, heavy rain causing pluvial flooding, wind storms etc) affecting and delaying works on construction sites and affecting the movement of excavated material barges in the Thames Estuary. These have been addressed by highlighting the risks to tenderers and providing ten year historic weather data in the contract information and requiring them to take this into account when developing their construction, programme and risk management planning. Operational Risks Heavy rainfall events and extreme adverse weather can cause flooding with a risk of ingress at stations, portals and shafts causing disruption to the railway. Extensive modelling work has been undertaken looking as far ahead as 2100 and appropriate flood design levels have been and continue to be agreed with the Environment Agency. Crossrail underground station platforms and rolling stock will be cooled to ensure that passengers are not subject to extremes of temperature during future hot weather events. All the mechanical and electrical systems are being designed to cope with higher ambient and extreme temperatures that could be experienced in the future. That equipment has a design life of some 30-35 years after which it will be replaced providing an opportunity to specify higher temperature tolerant; and higher cooling performance equipment should that be considered necessary. Prospective rolling stock suppliers are used to supplying trains for environments with higher temperatures than the historic UK levels. This is reflected in the international standards with which key aspects of the trains will be required to be compliant. High temperatures can also result in the buckling and warping of railway tracks. Crossrail tracks will be continuously welded and stressed to accommodate higher future temperatures. On-going maintenance and replacement work by the final Infrastructure Manager will ensure that this is kept under review and upgraded should this be required. The bulk power supply for Crossrail will be located outside of flood risk areas and will include backup such that if one system fails the remainder will be sufficient to provide all Crossrail’s needs. Environmental sustainability and procurement Crossrail operates in accordance with the Greater London Authority's Responsible Procurement policy and is committed to buying goods and materials in a socially and environmentally responsible way. Environmental criteria are included in all relevant procurement activities. Crossrail has set a target to ensure that at least 15% of construction material (defined by total material value) derives from reused and recycled content and will aim for 20%. The aim 286

Transport for London—Supplementary written evidence (PP 39) of setting the target is to divert materials from landfill with the additional benefit that it will reduce the amount of virgin materials used, thereby limiting the depletion of finite resource and the impacts associated with extracting and processing these resources. The target is based on what is known to be achievable based on contractor performance although it is set at the higher end of that performance range, in line with our aspiration to raise the bar on areas of environmental performance whilst still being realistic about what can be achieved. During the design phase, work has been undertaken with the framework design contractors on the specifications for materials. The reused and recycled content of the materials has been considered alongside other factors such as low environmental impact, ethical sourcing and low embodied energy. Crossrail is using two established industry tools for measuring overall environmental performance. For sub-surface stations we are using a bespoke version of the BRE's BREEAM tool and for tunnels, portals and shafts we are using CEEQUAL. Both include a selection of credits based on the choice of materials, the aim being to incentivise efficient use of materials and then to ensure that those used are of the lowest overall environmental impact, including credits for the reused or recycled content of materials. Under the Crossrail Act, Crossrail has included environmental requirements into works information for all of the enabling and main works contracts. Contractors working in the Central Section are required to have a certified Environmental Management System, to sign up to and meet the requirements of The Mayor of London's Green Procurement Code, to ensure all timber is from sustainable sources and to give preference to reused, refurbished or recycled materials that are low in embodied energy. Dwell times at stations Crossrail will operate a metro-style service with up to 24 trains per hour at peak times between Paddington and Whitechapel. Limiting dwell times at stations is critical to ensuring that a high-frequency metro service can be operated. The two main key components that will enable the metro service to be operated are the technical capability and design of rolling stock and the use of Automatic Train Operation which reduces the time it takes for the train to travel between stations. Crossrail has recently commenced the tendering process for around 60 new 200 metre long trains to operate Crossrail services. The contract to construct the new rolling stock will be awarded in late 2013. Detailed designs for the new trains will not be available for some time but a key feature will need to have sufficient door entrances to enable large numbers of passengers to board and exit swiftly particularly in central London. Internal seating layout is also a contributing factor to dwell times. In the central tunnelled section, Crossrail trains will utilise Automatic Train Operation, a feature of metro systems worldwide. This automatic system of train driving has been successfully used on the Central and Victoria London Underground lines for a number of years and will be progressively introduced to other Tube lines as they are upgraded. Automatic Train Operation provides computer controlled driving of the trains through the 287

Transport for London—Supplementary written evidence (PP 39) central section tunnel ensuring that the train operates at the maximum permitted speed therefore enabling a high frequency service to be operated. The presence of platform edge doors and platform staff also have a beneficial impact on dwell times in busy central London stations. Platform staff assist through the provision of advisory announcements to customers but also more importantly by assisting the driver and indicating whether it is safe for the train doors to be closed and for the train to proceed. February 2011

288

Transport for London—Further supplementary written evidence (PP 40)

Transport for London—Further supplementary written evidence (PP 40) Introduction Transport for London (TfL) is grateful for the opportunity to provide additional information on climate change adaptation and London Underground (LU) signalling following our oral evidence to the Committee. TfL’s Climate Change Adaptation Programme TfL’s current climate change adaptation programme has been developed within the context of the UK Climate Projections which were published in 2009 and look ahead to the year 2100. In addition, TfL is working with relation to DEFRA’s Adaptation Reporting Power and the Mayor of London’s Draft Climate Change Adaptation Strategy which sets out his priorities for climate change related risk assessment, including for transport infrastructure and services. The draft adaptation strategy includes: a) Climate change impacts risk assessment of infrastructure and operations to identify key risks and mitigation opportunities; b) The prioritisation of identified risks and proposals for appropriate management and/or mitigation action plans, including emergency planning and investment plans; and c) Guidelines for major procurement contracts (including design, construction and maintenance) to demonstrate a climate risk assessment for the lifetime of the investment. The wider context for TfL’s Climate Change Adaptation programme is provided by the Mayor’s Transport Strategy (MTS), draft replacement London Plan and Mayor’s Economic Development Strategy which form a strategic policy framework to support and shape the economic, environment and social development of London. In particular, the MTS, which was extensively consulted upon an finalised last year, clearly sets out TfL’s approach to adapting to climate change in setting the policy framework (Policy 25 of the MTS) and more specific proposals (proposals 110 – 114 of the MTS). The MTS confirms TfL’s commitment to preparing adaptation strategies, to development of the transport system with climate change in mind, and to minimise risk and disruption from the impact of climate change related events more generally. The MTS can be found at: http://www.london.gov.uk/publication/mayors-transport-strategy TfL continues to deliver measures to improve safety and network resilience to threats posed by climate change, and to ensure that new transport infrastructure is appropriately resilient. During 2010, TfL carried out a full review of risk assessments across the business taking into account the latest information from the United Kingdom Climate Projections 2009 to consider the impacts of climate change on its assets and services. TfL has recently submitted a detailed report to DEFRA on Climate Change Adaptation, fulfilling its legal duty under the Climate Change Act 2008 Adaptation Reporting Power. This 289

Transport for London—Further supplementary written evidence (PP 40) report sets out a detailed summary of TfL’s work to date on assessing and responding to current and future climate change risks to its existing and planned assets and services. As part of this process, TfL reviewed its risk assessments for the impact of the changing climate on new infrastructure with a long design-life, existing assets such as embankments, cuttings and bridges and service levels. Proposal 110 Effective and affordable solutions are sought to reduce potential risk to passengers from the threats posed by climate change, and improve the operational resilience of the transport system. To ensure long-term value for money is achieved through transport investment programmes, new transport infrastructure is designed and built with climate change in mind and the existing system adapted where possible in a cost effective manner. A selection of TfL’s adaptation activities are highlighted below: 1. Designing, locating and constructing new infrastructure to withstand climatic conditions anticipated over its design life TfL requires that longer term climatic conditions are taken into account when designing major construction projects. This is a clear requirement through Proposal 112(a) of the MTS. For example, the Victoria Station Upgrade and all the Crossrail elements, including Bond Street and Tottenham Court Road stations have included design to future climate parameters. Design for future climate parameters are also applied across TfL’s wider construction and engineering portfolio. For example London Underground’s Asset Management Plans and TfL’s application of the Design Manual for Roads and Bridges on the TfL road network enables the specification of appropriate works. 2. Introducing energy efficient air-conditioned rolling stock where feasible, for example, on London Overground services and sub-surface Tube lines With a view to fulfilling its requirements of Proposal 112(b) of the MTS, TfL is taking a strategic approach to engaging the rolling stock market in the design and performance of future rolling stock. Early market engagement activities are underway with international suppliers to explore design options including air-conditioning and energy performance. To support this activity TfL has established a central ‘Category Management’ resource to help co-ordinate procurement specification requirements for rolling stock across London Underground, Crossrail, London Overground and Docklands Light Railway. This approach will support clear and consistent engagement with suppliers, reduce fragmentation of demand and help identify opportunities for innovation including adaptive capacity and energy efficiency. 3. Continuing to investigate the feasibility of innovative methods for the cooling upgrades on the Tube network With a view to fulfilling its requirements of Proposal 112(c) of the MTS, TfL is working to manage heat issues on the Underground, where currently the chief source of excess heat is from improvements to trains and their frequency, in order to meet an increase in demand by up to 300,000 passengers a day. 290

Transport for London—Further supplementary written evidence (PP 40) TfL started to introduce the first of 190 new S-Stock trains in 2009 on the Metropolitan line, and these will subsequently be introduced on the District, Circle and Hammersmith & City lines. These trains have air-conditioning, because these lines have larger tunnels which allow for the equipment to be housed and for hot air to dissipate. TfL is delivering improvements to the ventilation system on the Victoria line to help manage waste heat from the increased train frequency. It has also trialled an innovative ground water heat exchange cooling system at Victoria Station. Further innovative approaches to cooling have been piloted by TfL including: • Deep abstraction – the drilling of deep abstraction wells into the water table, similar to the process described above. Cold water is pumped to cool the stations by heat exchangers and then the warmed water is pumped back into the water table; and • TfL will trial the use of an ice unit in carriages to provide a supply of cold air when trains are underground. The ice-block system is based on phase-change process to absorb heat. 4. Ensuring that all new buses entering the London fleet will feature specific climate change adaptation measures With a view to fulfilling its requirements of Proposal 112(d) of the MTS, all new buses operating under contract to TfL are required to have white-painted roofs; an automatic ventilation system serving the upper deck; opening windows on all full size window bays and specifically on the front two windows on the upper-deck; tinted windows; air conditioning in the driver’s cab and full roof and body thermal insulation. This is to help combat the exposure to solar heat gain in the summer. Further, a programme of retrofitting existing buses with white-painted roofs and automatic ventilation systems is also under way. Across the fleet, 270 double decker buses have been installed with cooling systems. Further retrofitting will be rolled out as the funding becomes available. The specifications of the cooling requirements are reviewed and updated as technology and manufacturing capability develops. Requirements regarding cooling are included in the specification for the ‘New Bus for London’ the first of which will enter service in 2012. 5. TfL supporting green skills Forecasts up to 2013 show that the low carbon sector in London as a whole is expected to grow at above the average rate and will require a further 18,000 employees. Part of this will relate to climate change adaptation. Applying the current skills profile of the sector to estimated growth of specialist firms within the low carbon sector suggests that by 2013 an additional 6,000 graduates would be needed; a further 1,600 individuals qualified to NVQ 3 and trade apprenticeships; and 1,700 will be required at NVQ 2 and below. To ensure employers in TfL’s supply chain have the required capability and competency to meet increased demand for transport, engineering and ‘green’ skills TfL has initiated a programme called ‘Strategic Labour Needs and Training’. This 291

Transport for London—Further supplementary written evidence (PP 40) programme combines procurement and contractual requirements with proactive support to businesses to access available support and funding packages. Further information on this programme is available at www.london.gov.uk/rp/employmentskills. Plans to put in place an integrated signalling system across the London Underground Network TfL’s plan to upgrade the Tube is well under way but it is necessarily a long- term undertaking. At the core of it are the line upgrades that will enable London Underground to help meet future demand through the installation of new signalling and control systems, new trains and new track. This will allow a 30 per cent increase in capacity across the network. The upgrade of the ‘sub-surface’ lines – the Circle, District, Hammersmith & City and Metropolitan lines - is the most ambitious project being undertaken as part of this plan and will be delivered progressively over the next eight years. The Edgware Road signal cabin is one element of the current signalling system on these lines, which comprises of a number of legacy systems. As part of enabling works to allow new trains to operate prior to the upgrades modifications to the legacy systems need to be made. Ultimately the legacy systems will be replaced with a properly integrated and modern system, delivering a much more reliable service and the ability to run trains at more frequent intervals. Implementing this whilst continuing to run the lines with the current record levels of usage is a huge challenge but when this and the other line upgrades are complete it will deliver a Tube network fit for the future. The contract to supply the new signalling for the sub-surface lines is expected to be let in spring 2011. More information about the overall plan to upgrade the Tube is available on the TfL website at: http://www.tfl.gov.uk/corporate/projectsandschemes/18070.aspx March 2011

292

Transport Research Laboratory (TRL)—Written evidence (PP 6)

Transport Research Laboratory (TRL)—Written evidence (PP 6) 1.

TRL (Transport Research Laboratory) was established in 1933 as a Government Research Establishment, was privatised in 1996 and is wholly owned by TRF (the Transport Research Foundation), a non-profit distributing company.

2.

We specialise in research and developing knowledge-based solutions, with about 40 per cent of our work for the Department of Transport (DfT) and its Agencies (particularly the Highways Agency).

3.

Most of our innovative solutions for DfT and its Agencies have been directly funded by the Department. We also self-fund innovative products and solutions.

4.

In our experience, the elements of Government procurement that stimulate successful innovation include: •

Continuity of purpose - maintaining focus over time on the desired outcome rather than specific methods, etc.

•

Continuity of funding. Developing innovative solutions can take several years (with stages including reviewing existing needs / technology, testing alternatives, developing prototypes, etc). Continuous funding is required for the supplier(s) to be able to develop and maintain expertise.

•

Consideration of medium / long-term benefits. Focusing solely on short-term benefits generally leads to established rather than innovative solutions.

•

Having an “intelligent customer” who understands the issues, can evaluate progress and is willing to consider alternatives.

•

Building open long-term relationships between the Government Department and its suppliers, where the customer and supplier(s) willingly share information on requirements, technology, etc. An example is where multi-year Framework contracts are used.

5.

A number of these issues are addressed by the Highways Agency’s Knowledge Programme. Between April and August 2008 HA reviewed its Research and Development processes with support from its framework supplier community (including TRL). This led to revised processes improving the links between the Agency’s needs, the research programme, the production of standards and guidance and implementation.

6.

In addition, the Highways Agency’s Procurement Strategy 2009 includes: •

“To stimulate supply chain best practice and innovation, we will support and encourage the introduction of ideas and proposals that deliver project objectives and support developing standard ways of working.”

•

“We will work with them to develop innovative and lean ways of working, making use of technology and improving performances”

17 November 2010

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Dr. Elvira Uyarra, Professor Luke Georghiou and Professor Jakob Edler, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16)

Dr. Elvira Uyarra, Professor Luke Georghiou and Professor Jakob Edler, Manchester Institute of Innovation Research, MBS, University of Manchester—Written evidence (PP 16) Please see page 160

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Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1)

Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) 1. The United Kingdom and the United States face common challenges in using public procurement as a tool to drive the results of research to the market, and there is much to learn on both sides of the Atlantic. U.K. policymakers could draw on the nearly thirty years of experience of the U.S. Small Business Innovation Research (SBIR) program to improve the operation of some elements of the U.K. innovation system. 2. The U.S. SBIR program is a legislative requirement. All departments and agencies with external research budgets above $100 million must reserve 2.5 percent of their funds for innovation awards to small companies. These highly competitive awards stimulate technological innovation among small private-sector businesses while providing government agencies new, cost-effective, technical and scientific solutions to meet their diverse mission needs. 3. In a recent comprehensive assessment, the U.S. National Academy of Sciences found the SBIR program to be “sound in concept and effective in practice.” The assessment found that SBIR encourages the entrepreneurship needed to bring innovative ideas from the laboratory to the market by providing scarce pre-venture capital funding on a competitive basis. 49 By procuring innovative technologies from small businesses, SBIR also makes significant contributions to the missions of participating government agencies and helps reduce their dependence on oligopoly suppliers. 4. Initially launched in 2001, the British SBRI program has similar objectives to the American SBIR program but was judged unsuccessful, largely because it was not obligatory. SBRI has since been significantly restructured in an effort to make it more effective. 50 While we would welcome an opportunity to learn more about the revised SBRI program, this brief describes the U.S. SBIR program and draws on the Academy’s recently concluded assessment to highlight key attributes that contribute to its effectiveness. STIMULATING INNOVATION WITH SBIR 5. Despite the proven value of innovative small businesses to the U.S. and U.K. economies, entrepreneurs with new ideas for innovative products face major challenges in bringing their ideas to market. Because new ideas are by definition unproven, the knowledge that an entrepreneur has about his or her innovation and its commercial potential may not be fully appreciated by prospective investors. 51 6. This asymmetry of information between entrepreneurs and investors can pose substantial obstacles for new firms seeking seed capital. The term “Valley of Death” became a popular description of the period of transition when a developing technology is National Research Council, An Assessment of the SBIR Program. Charles W. Wessner, ed., Washington DC: National Academies Press, 2008. 50 Discussions on SBIR with Lord Sainsbury at the National Academy of Sciences (January 22, 2007), which contributed to recommendations in the Sainsbury Review on revising the SBRI program. See also, Financial Times, “PM pledges £1bn boost for innovation,” October 6, 2007. 51Joshua Lerner, “Public Venture Capital,” in National Research Council, The Small Business Innovation Program: Challenges and Opportunities, op. cit. For a seminal paper on information asymmetry, see Michael Spence, Market Signaling: Informational Transfer in Hiring and Related Processes, Cambridge, MA: Harvard University Press, 1974. 49

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Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) deemed promising but is of as yet unproven commercial potential—and is therefore unable to attract the capital necessary for its continued development. 52 Lacking the capital to develop an idea sufficiently to attract investors, many promising ideas and firms perish. (See Figure 1.) 7. SBIR grants and contracts can provide early stage finance for technologies that are derived from public research funds but not yet ready for venture capital or other sources of early-stage funding in the United States. By creating new information about the feasibility and commercial potential of technologies held by small innovative firms through its competitive review process, SBIR awards provide a “certification” function, signaling the potential of young firms to prospective private investors. 53

Figure 1: The Valley of Death

SBIR GOALS AND STRUCTURE 8. SBIR’s goals, as set out in the founding legislation, are four-fold: “(1) to stimulate technological innovation; (2) to use small business to meet federal research and development needs; (3) to foster and encourage participation by minority and disadvantaged persons in technological innovation; and (4) to increase private sector commercialization derived from Federal research and development.” 54 9. Eleven federal agencies are currently required to set aside 2.5 percent of their extramural research and development budget exclusively for SBIR awards and contracts. Each year these agencies identify various R&D topics, representing scientific and technical problems requiring innovative solutions, for pursuit by small businesses under the SBIR program. These topics are bundled together into individual agency "solicitations" publicly announced requests for SBIR proposals from interested small businesses. 52 See U.S. Congress, House, Committee on Science, Unlocking Our Future: Toward a New National Science Policy: A Report to Congress by the House Committee on Science, Washington, D.C.: Government Printing Office, 1998. Accessed at . For an empirical analysis of the Valley of Death phenomenon, see Lewis Branscomb and Philip Auerswald, “Valleys of Death and Darwinian Seas: Financing the Invention to Innovation Transition in the United States,” The Journal of Technology Transfer, 28(3-4), August 2003. 53Joshua Lerner, “Public Venture Capital,” in National Research Council, The Small Business Innovation Research Program: Challenges and Opportunities, op. cit. 54The Small Business Innovation Development Act (PL 97-219).

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Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) 10. A small business can identify a topic that it wants to pursue from these solicitations and, in response, propose a project for an SBIR grant. The required format for submitting a proposal is different for each agency. Proposal selection also varies, though peer review of proposals on a competitive basis by experts in the field is typical. Each agency then selects through a competitive process the proposals that address mission requirements and national needs. 11. The SBIR grant-making process is structured in three phases: o Feasibility: Phase I grants essentially fund a feasibility study in which award winners undertake a limited amount of research aimed at establishing an idea’s technical feasibility and commercial promise. Currently, the standard Phase I grants is $150,000. Approximately one-fifth of all small businesses that apply receive a Phase I award. o Prototype: Phase II grants are larger—the standard amount is $1 million—and fund more extensive R&D to develop the scientific and technical merit and the feasibility of research ideas. Approximately 40 percent of Phase I award winners go on to this next step. o Procurement and Commercialization: Phase III is the period during which Phase II innovation moves from the laboratory to the consumer. During this phase, companies normally do not receive additional funding from the SBIR program, although there is a growing trend to provide additional funds on the condition that they are matched by equal amounts from the private sector. To commercialize their product, small businesses are expected to garner additional funds from private investors, or from an agency that is interested in procuring the technology. KEY FINDINGS OF THE NATIONAL ACADEMY OF SCIENCES ASSESSMENT 12. SBIR increases private sector commercialization of innovations: Drawing on detailed surveys of over 7000 projects and nearly 100 company case studies, the Academy assessment reported that small technology companies use SBIR awards to advance projects, develop firm-specific capabilities, and ultimately create and market new commercial products and services. 

Company Creation: Over 20 percent of companies responding to an Academy survey indicated that they were founded entirely or partly because of a prospective SBIR award.

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The Decision to Initiate Research: SBIR awards played a key role in the decision to pursue a research project. Over two-thirds those responding to the survey said that they would not have gone forward with their SBIR projects without SBIR funding.

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Providing Alternative Development Paths The assessment also revealed that companies often use SBIR explore additional technological options.

13. SBIR’s Advantages for the Government: Surveys and interviews with program managers at five major government departments also show that SBIR-funded technologies effectively support government missions—often faster and at lower cost.

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Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) • • •

Open source Innovation: Drawing on SBIR, the government can leverage private sector ingenuity to address public needs. In the process, it helps to convert ideas into potential products, creating new sources of innovation. A Low-cost Technical Probe: A significant virtue of SBIR is that it enables the government to explore, at low cost, potential solutions to agency needs. Few other mechanisms offer this advantage. Diversifying the Supplier Base: By providing a bridge between small companies and the federal agencies, SBIR serves as a catalyst for the development of new ideas and new technologies to meet federal missions in health, transport, the environment, and defense. SBIR not only injects competition to oligopolistic government contractors thereby lowering costs, but also introduces new, high performance products and services.

14. SBIR Links Universities to the Public and Private Markets. The SBIR program supports the transfer of research into the marketplace, as well as the general expansion of scientific and technical knowledge, through a wide variety of mechanisms. Over a third of respondents to the Academy’s surveys reported university involvement in their SBIR project. Among those reporting university involvement, more than two-thirds of companies reported that at least one founder was previously an academic; about onethird of founders were most recently employed as academics before founding the company; and some 27 percent of projects had university faculty as contractors on the project, 17 percent used universities themselves as subcontractors, and 15 percent employed graduate students. KEY SUCCESS FACTORS 15. The National Academy of Sciences assessment highlighted the role of the following design attributes to the effectiveness of the SBIR program. 16. Longevity and Large Scale: Currently a $2.5 billion per year, SBIR is the largest U.S. innovation program. At the same time, the individual award amounts are relatively modest, which allows for a relatively large and diverse investment portfolio. Given that the SBIR budget is based on a small set aside of federal agencies’ extramural research budgets rather than on an annual budget, the program has enjoyed a high level of stability since its inception in 1982. This has avoided annual swings in budgets and insulted the program against changes in political fashion. The scale and longevity of the program has permitted a portfolio of successful investments that have contributed to the development of the program’s reputation. 55 17. Needs Driven: As noted above, SBIR’s open source innovation model provides the technical solutions needed to further mission goals of government agencies. Faced with an operational puzzle, a program officer within a government department can post a 55As a point of comparison, venture capital firms generally anticipate that only two or three out of twenty or more investments will produce significant returns. While venture capitalists are a referent group, they are not directly comparable insofar as the bulk of venture capital investments occur in the later stages of firm development. SBIR awards often occur earlier in the technology development cycle than where venture funds normally invest. Nonetheless, returns on venture funding tend to show the same high skew that characterizes commercial returns on the SBIR awards. See John H. Cochrane, “The Risk and Return of Venture Capital,” Journal of Financial Economics, 75(1):3-52, 2005. Drawing on the VentureOne database, Cochrane plots a histogram of net venture capital returns on investments that “shows an extraordinary skewness of returns. Most returns are modest, but there is a long right tail of extraordinary good returns. 15 percent of the firms that go public or are acquired give a return greater than 1,000 percent! It is also interesting how many modest returns there are. About 15 percent of returns are less than 0, and 35 percent are less than 100 percent. An IPO or acquisition is not a guarantee of a huge return. In fact, the modal or ‘most probable’ outcome is about a 25 percent return.”

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Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) solicitation that describes the problem and prompt a variety of innovative solution. These solutions draw on the scientific and engineering expertise found across the nation’s universities and innovative small businesses. 18. Management Commitment: The commitment of upper management within government departments to the effective operation of the program appears to be a key element of success for SBIR. This promotes teaming among the SBIR program managers, agency procurement managers, the SBIR awardees, and, increasingly, the prime contractors, which is important in the transition of technologies from projects to products to integration in systems. 19. Management Decentralization and Flexibility: SBIR is decentralized across the federal government, effectively providing each agency with a mandate to innovate. The resulting flexibility in program management and modes of operation is one of the great strengths of the SBIR program. It allows the SBIR program to be adapted effectively by the management of the individual departments, services, and agencies. 20. Competitively Awarded Grants: SBIR is intensely competitive, with multiple-stage reviews and a limited number of successful applicants. In this regard, it may be compared aptly to leading scholarship programs for outstanding students, not only in terms of the success rate but more profoundly in terms of the social investment in private individuals based on the rationale of long-term public gain. 21. Awards Limited in Time and Amount: It is important that innovation award programs remain open to new entrants and stay competitive for each round of funding. Over a third of the participants are new to the program each year. This does not mean that companies cannot re-apply for additional awards; many do. It does mean, however, that there are no “politically favored firms” able to draw regularly on government support. 22. Industry Ownership through shared Costs and Risks: SBIR awards are sufficiently small to mitigate risks for agencies. Because they are grants or contracts, they preserve the benefits of ownership for the entrepreneur—they are, in fact, non-diluting capital. . 23. No Direct Recoupment: The U.S. government does not directly recoup the funds granted to successful SBIR companies. This is sound practice because it is often difficult to distinguish the relative contribution of an award or contract to a particular project. The cost of determining the contribution of an award is a poor use of public funds and can be a deterrent to would-be participants. The U.S. system relies, very simply, on the tax system to obtain funds from salaries paid to workers and managers and on firm earnings. 24. Learning through Experimentation and Regular Evaluation: In recent years, a culture of evaluation has developed around the program. The recent comprehensive evaluation by the National Academy of Sciences has contributed to this evaluation culture among the agencies responsible for managing the SBIR program. Agencies have commissioned additional studies and are experimenting with program innovations. CAVEATS ON PUBLIC PROCUREMENT 25. While the SBIR program is a proven mechanism to facilitate the development and market entry of new technologies, processes, and products, it is important to avoid some of the European myths about the role of U.S. defense procurement and, to some extent, the potential of procurement as a technology driver. Statements such as “17% of European GDP involves public procurement” may overstate the potential. Procurement agencies 299

Charles W. Wessner, PhD, US National Academy of Sciences, Washington, DC—Written evidence (PP 1) are not normally innovation agencies and indeed are not structured or incentivized to encourage innovation, particularly radical innovation. Managers of procurement agencies often support small company innovation in principle, yet the contractual process often requires substantial capital resources, established performance with large contracts, and proven track records, all of which are unlikely to be available to small companies with new ideas. 26. Changing the incentives in procurement to accept greater risk is more difficult than is commonly believed, as the U.S. experience in defense procurement sadly illustrates. Career incentives for procurement officers tend to support the selection of established products rather than promising prototypes whose production at scale, timely delivery, and quality assurance may be problematic. New high-tech products, no matter how promising, often require more time and more resources than anticipated. This is not to say that public procurement cannot benefit enormously from new, innovative products but the traditional procurement process does not easily support innovation, hence the importance of multi-gated programs such as SBIR. U.S. – U.K. COOPERATION ON INNOVATION POLICY 27. Innovation in the United Kingdom is facilitated by the relatively low regulatory burden on small firms, and by the high quality of scientific research. The challenge for the United Kingdom is to capitalize on its investment in research and development, and to generate returns to British taxpayers in the form of new, welfare-enhancing products, and jobs and growth that new companies can offer. 28. Critical Mass: At a time when the UK Government is making a sustained effort to foster innovation-based growth, we would caution against the British tendency to develop wellconceived programs and then to provide only modest funding. This “tyranny of small scale” does not permit the realization of the scale and reputational effects needed for innovation award programs like SBIR to succeed, short-changing in turn the potential of the UK’s excellent science base. There is also a tendency for UK policy makers to change innovation programs before they can develop a track record. 29. A scaled-up innovation program can, over time, help stimulate small business innovation while addressing the Britain’s national missions in transportation, defense, health, and beyond. We would welcome the opportunity to cooperate more closely with the House of Lords as it investigates the role of public procurement programs like SBIR in stimulating innovation. 4 November 2010

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Andrew Wolstenholme, Balfour Beatty; Colin Cram, Marc1 Ltd; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011

Andrew Wolstenholme, Balfour Beatty; Colin Cram, Marc1 Ltd; and Alan Powderham, Mott MacDonald—Oral evidence (QQ 105-146), 18 January 2011 Please see page 66

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Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34)

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) Introduction Construction is a £120bn industry representing around 10% of GDP. This figure grows if one includes the cost of maintaining capital assets over their life-cycle. There are no other sectors that generate such large spend profiles focused at one industry, namely construction, and at the same time spread the responsibility for procuring assets across so many public sector departments. The Government has realised for sometime the considerable payback that would result from generating modest savings from across the capital budget. Converting this opportunity however has proved difficult. The public sector, as the largest customer in the UK, will have to be at the forefront of change and improve its skills as a client and procurer of major capital programmes, if this is to change. At the same time it will have to develop an approach to stimulate an environment that promotes more 'open' innovation from across the supply chains that build and maintain UK's vital infrastructure. There are many different definitions for innovation. Some will assume that innovation has to involve making something, a new machine tool or a product. A wider interpretation is that innovation is simply doing things differently to create value. This could be derived through new products, but in the built environment it is as likely to be delivered though new processes, services or procurement models that, for instance, force the creation of long term value. Measured against the manufacturing or automotive industries the supply chains that create our built environment are seldom incentivised to innovate. Against the fastest developing industries, electronics for instance, we tend to be closed to ideas, rather than open. There are few organisations that are ‘leading’ change through innovation, as one might have described Toyota for the car industry in the 1990s for instance. Changes tend to be more incremental rather than transformational. But the changes that are made can be described as ‘complex’, as difficult cultural change across stakeholder groups are so often the precursor needed to deliver the environment for real innovation to occur. There have been a number of reports written over the past two decades that have focused on the moderisation the UK Construction Industry. Notably Latham’s ‘Constructing the Team’ in 1994 and Egan’s ‘Re-thinking Construction’ in 1997. In 2009 Andrew Wolstenholme was asked by Constructing Excellence (CE), the body set up to drive through the Egan changes, to find out how the industry had reacted to the Egan agenda, and what the key themes for the industry would be over the next 10 years. With only ‘skin deep’ changes being witnessed over the past decade, a predicated drop in public and private sector spend for the foreseeable future and a new challenge, namely, the de-carbonisation of the industry, now upon us, the report was entitled ‘ Never Waste a Good Crisis’. It is perhaps useful to reflect on the executive summary of the report, which contain many clues that this Select Committee will find relevant:

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Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) Executive Summary – Never Waste a Good Crisis (October 2009) Since Sir John Egan's Task Force published its report Rethinking Construction in 1998, there has been some progress, but nowhere near enough. Few of the Egan targets have been met in full, while most have fallen considerably short. Where improvement has been achieved, too often the commitment to Egan's principles has been skin-deep. In some sectors, such as housing, construction simply does not matter, because there is such limited understanding of how value can be created through the construction process. For the last decade, the industry has been sheltered by a healthy economy. This has enabled construction to prosper without having to strive for innovation. The current economic crisis is a perfect opportunity for us to think again. We cannot afford to waste it. Looking ahead, there are major challenges on the horizon. Most clients have already cut their long-term investment plans, and capital budgets will be at risk for many years to come as we anticipate a long period of recovery from the current recession. For Government, there is huge pressure to reduce public spending. But perhaps the greatest challenge is how we can deliver a built environment that supports the creation of a low carbon economy for the UK. So while there is no crisis yet in our industry, we are approaching a time when UK plc can no longer afford to build and maintain the infrastructure capable of supporting our future needs as a society. So what will make the industry change now when it has failed to do so before? We believe that an essential step is for suppliers, clients and Government to adopt a new vision for the industry based on the concept of the built environment. This means understanding how value is created over the whole life cycle of an asset, rather than simply looking at the building cost, which is only a part of the total equation. It is about how the relatively small up-front costs of design and construction can have such huge consequences for future users, whether expressed as business or social outcomes, as well as for the environment. The impact of this vision is potentially immense for our industry. We need to abandon our existing business models that reward short-term thinking. Instead, we should incentivise suppliers to deliver quality and sustainability by taking a stake in the long-term performance of a built asset. How will this be achieved? We believe that the era of client-led change is over, at least for the moment, and that it is now time for the supply side to demonstrate how it can create additional economic social and environmental value through innovation, collaboration and integrated working – in short, the principles outlined in Rethinking Construction. Clients should focus instead on professionalising their procurement practices to reward suppliers who deliver value based solutions.

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Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) Government, as a client, needs to understand the enlightened thinking that better and more intelligent designs improve patients’ recovery in hospitals and learning outputs in schools. So, rather than reduce the number of schools and hospitals being built, it must sponsor smarter and more productive solutions and reduce the amount of money wasted on the procurement process. For Government as a policy maker, the challenge is to create an environment that incentivises innovation and speeds up the modernisation process. There are other stakeholders with a key role to play. We need an education and training system that promotes holistic learning across disciplines, so that industry professionals are equipped with an understanding of how better integration delivers value. We also need industry bodies and professional associations to cooperate better to represent our industry effectively to Government and the public. Above all, we need leaders who can engage the public and key stakeholders about the ‘new value’ the built environment brings, who can engage employees to deliver the necessary changes and who can attract more talented people from a wider pool to work in our industry. If our present leaders do not feel up to the task, they should at least support the development of the next generation, who appear to understand very clearly what is needed. Questions and responses for consideration of the Select Committee 1. Is the government doing enough to foster innovation through procurement in the public sector in general and with major infrastructure projects in particular? Can you give us some examples of innovation stimulated through public procurement? Never Waste a Good Crisis (NWaGC) looked at evidence from ten years of KPIs, ten industry reports and more than a 1,000 questionnaires to come up with its conclusions as to why more progress had not been made around the Egan principles. The simplest explanation is that with ten years of steady growth, the industry was under no pressure to change – there was no ‘burning platform’. The lessons from other industries including automotive and manufacturing that had proved to be effective during the 1980s and 90s were, on their own, insufficient to change the majority of organisations representing the construction industries through the 2000s. There were exceptions however and many of these related to examples where procurement strategies ‘forced’ supply chains to change. The private regulated industries, especially water and electricity, had to demonstrate added value over a regulated period, normally five years, which in turn had to be delivered across the capital and life-cycle budgets. With the right environment clients and supply chains, often in alliance, or as an integrated partnership, would seek to continuously improve over a period of time. This enabled a predictable work flow to be matched with investment in people, process and innovation. With ‘skin in the game’ there has been demonstrable evidence that the right procurement models stimulates innovation and delivers value as a result. There are good examples of this in the utility industries, on road projects and from the ‘social infrastructure’ sector on hospitals and schools. 304

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34)

The bundling of schools into programmes in ‘BSF’ challenged educational clients and supply chains to work together to develop solutions that took a system approach rather than to develop individual projects. Despite the huge procurement overhead that had quite incorrectly been allowed to grow, there were some excellent solutions being generated through innovation. The solution developed by Balfour Beatty for the Hertfordshire programme for instance, manufactured new-build schools off-site, bringing the cost down by 25% and reducing the delivery programme by 16 weeks. More importantly the solution focused on business outputs (better education) by working alongside teachers and educational specialists during the early design phases. Another example is the PFI/PPP model - originally designed to transfer risk to the parties best able to manage it and in doing so improve the efficiency of an assets performance during the capital and life-cycle phases. Some looked at it as being a vehicle to take assets off the ‘balance sheet’ but this was not, and should never have been a primary driver. Introducing the life-cycle as part of the solution has forced the investing parties and supply chains to deliver and ‘own’ long term solutions that encouraged a more innovative approach. Other examples within the transport sector, taken from the Balfour Beatty ‘Alliance exchange’, a knowledge hub used to transfer lessons across the Balfour Beatty Group, might include work with: • Connect Plus (Highways Agency), a JV between Balfour Beatty, Atkins and Egis to operate and maintain the M25 – when the scale of the M25 capital and maintenance works were too big to deliver in-house, the HA with the private sector developed this innovative solution which was able to secure funding despite the adverse economic conditions that prevailed at close. • East Kent Spur Crossrail - (Network Rail) – have, through their procurement department ‘bundled’ several projects into a single programme, giving the responsibility to a single supply chain partner, set up to deliver the integrated services and better value as a result •

Early Contractor Input (ECI for of procurement)

A feature of existing ECI projects with Highways Agency, Network Rail and more recently Sellafield Ltd is that a target cost is agreed for the construction phase. A pain/gain formula is an integral part of the target cost approach. Gains are achieved through innovative practices – particularly through engaging with key suppliers at local level to deliver improved sequencing. In addition further gains are achieved through managing out risk. ECI projects include 

A3 Hindhead

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A421 Bedford

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A46 Newark 305

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) 

M1 J6A -10

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Blackfriars Station

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HALEF

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BEPPS1 & CIEF

All these examples have shown varying degrees of innovation – an output from working closely with the client team and delivery partners to manage the risks and deliver the customer value through innovation. There are too few examples of public sector clients creating the incentive, or mechanism, to stimulate ‘open’ innovation with its supplies or where the procurement strategy invited the industry to deliver solutions that deliver value to the tax payer at an ‘acceptable cost’ rather than at the lowest price. (Ian Tyler, CEO of Balfour Beatty has also recently prepared a paper on ‘Delivering Public Sector Infrastructure for Less’ for the Construction Minister and Chief Construction Advisor which outlines a possible new approach to public sector procurement). The recent publication of the National Infrastructure Plan (NIP), together with the Infrastructure Cost Review, published by the Treasury, defines a well thought through approach to tackle some of the issues described above. Paul Morrell, the Chief Construction Advisor is working hard to join up the best practices, including procurement, across all Government Department. An initiative that deserves support from all departments is promotion of Building Information Modeling (BIM) on all future public sector projects. This initiative is to be commended and will in itself force the UK industry to innovate around the use of IT and data technologies with the potential to make significant savings in time and cost across both the delivery and operational phases of an assets life-cycle. 2. In your experience, what obstacles do potential suppliers of innovative solutions face in responding to public procurement requirements in transportation? Are these obstacles the same when dealing with central government as oppose to local government? How might these be tackled? Can you give us examples of when such obstacles have hindered public procurement in your dealings with the Department for Transport and its agencies? Transport systems are complex. It seems that in the UK however we make them more so through our planning system and through the early development phases, when we seek to develop a clear scope and business case. The period over which the design of a major infrastructure project is developed is often several years and this alone is sometimes prohibitive to delivering innovative solutions. 306

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) While not in the public sector, Heathrow’s Terminal 5 is a good example of how protracted time frames for the early development phases can be counter-productive. The design that was submitted for public enquiry was already four years ‘out of date’ by the time the Government’s inspector gave BAA permission to build. Despite this BAA were bold, and innovative in how it engaged with its supply chain to develop the scope and to challenge the delivery ‘norms’ that were offered by the UK construction industry at the time. There were many examples when the supply chain offered different ways of managing the risks of the 50 projects and sub-projects that made up this £4.3bn development programme. Logistics solutions, manufacturing of mechanical and electrical systems in modules, preassembly of systems and sub-systems including the new Visual Control Tower, testing offsite, particularly IT systems were all new to the industry. The real innovation at T5 however was the development of ‘people solutions’, the alignment of objectives and processes and the incentivisation of teams committed to delivering ahead of expectations. The governance process was kept simple so that decisions could be made rapidly and when things went wrong the whole organisation could respond quickly to put the programme back on track. Many of the lessons from T5 were used to help the 2012 team at Stratford set up their highly successful programme. Unlike T5 there was little appetite for suppliers to work on the 2012 site at the start of the programme, until that is the industry were confident that a procurement strategy , a governance structure and a client team were in place that would balance risk and reward across the unprecedented scale of operations that they were about to face. The 2012 ‘construction commitments’ set out the expectations for client leadership, procurement, integration, sustainability, design quality, commitment to people and Health and Safety. These all define an environment where supply chains can innovate in the knowledge that their ideas will be assessed openly and where the value that they bring to the client will be ‘shared’. In contrast it is disappointing to work on programmes where the client teams often come from mature organisations with highly prescriptive standards and procedures and where innovation is less well received. There needs to be a better balance between good ideas that bring value, and a view that innovation adds unnecessary risk. The experience can be stifling and counter-productive, particularly where there is a healthy respect for risk management alongside responsible innovation. 3.

Does innovation in transport infrastructure come from small or large companies?

One needs to differentiate between the different types of innovation and how each is stimulated across the interfaces of a major transport programme. Recent trends on major transport projects have seen the client procure the services of a delivery partner. This can sometimes be as an extension of the client team, or more usually as a ‘management’ layer or integrator between the client and delivery supply chains. Delivery partners are normally awarded to large organisations able to draw on resources from large pools and with a depth and breadth that would be able to demonstrate experience of projects of a similar scale and nature. 307

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34)

The integrator role has the opportunity to combine the skills of the supply chain in combinations that allow the value to be channeled across the defined interfaces to deliver a truly integrated solution. Without sometimes knowing it the delivery partner role has the opportunity therefore to bring much innovation value through this approach. They also have the ability to freeze out good ideas. Their behaviour will depend largely on their own incentive model passed down by the client team. As skills and products are procured through the various tiers of the supply chain so the size of company will vary. There is no pattern as to whether a manufacturing company, who’s ‘unique selling point’ is to supply latest technology through R&D programmes, are large or small. The suppliers of rail systems however will likely demand, by their scale, a high level of capitalization and are likely to be big multi-nationals. These are perhaps characterised by the large European based engineering companies who deliver rolling stock, signal systems and overhead power supplies. By contrast some of the system and communication networks, together with ‘system integration’ can be delivered by smaller companies. With an agenda that promotes the use of SMEs and ‘localism’ it is still be possible to design a procurement strategy that accommodates both large and small companies to deliver innovation – even on large transport projects. 4. How does the UK compare with other countries in the use of public procurement as a tool to stimulate innovation in transport infrastructure? What can the UK learn from other countries? The ability to stimulate innovation through procurement is very largely related to the maturity of the sponsoring department and client agent. There are only two questions that matter. How good is the client at leading the complex process of developing a brief to define the operational requirements of the asset over its life-cycle, a business case, managing change through its delivery and bringing the asset into operation? Second, is the maturity and approach of the client able to develop a procurement strategy that balances delivery and operational risk with a supplier’s capability and capacity to manage the risk? Value for money is delivered when the incentivisation model makes it worthwhile for the supply chain to share IP for an appropriate reward. When this does not occur the client will be denied good ideas from a supplier who will feel threatened by the risk of failure, rather than incentivized by the reward of sharing innovations. The ability for clients in the UK to lead the former is varied. There are well developed delivery models in Australia where they are entering the 2nd/3rd generation of competitive alliancing, particularly for Highways infrastructure. In the US by contrast, there are many client organisations that consider ‘design and build’ to be introducing ‘conflict of interest’, and choose to separate the disciplines. 308

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34)

5. What should government do to link procurement with foresight and horizon scanning activities in order to meet society’s grand challenges such as tackling climate change? What should the government do to engage industry in these activities? What recommendations would you make to Government to make better use of public procurement as a tool to stimulate innovation? Government have done a very good job in developing an agenda for the industry to decarbonise through its work on the Innovation Growth Forum (IGT), chaired by the Chief Construction Advisor (CCA). Only through a properly funded implementation programme of this nature will there be a joined up plan that tackles all side of the challenge. Without doubt this programme will be the biggest change programme the industry will see over the next 40 years. As with previous answers innovation will deliver the changes necessary if the business/procurement models are set up to incentivise the change. ‘Zero carbon’ houses, developed by the UK supply chain, exist today and can be seen as prototypes at the Building Research Establishment (BRE) near Watford. The housing market will respond to the demand for low energy and carbon neutral dwellings when the economics of the housing market is right to do so. 18 January 2011 Examples of innovation through better procurement Efficiency through asset life-cycle 60% more efficient use of highway asset Area 2 MAC, Area 4 MAC In our Maintaining Agent Contracts (MACs) for the Highways Agency in Area 2 (SW) and Area 4 (SE), we combined roadspace booking arrangements for cyclic and routine maintenance operations. Last year in Area 2, this reduced the number of planned roadworks operations by 60%, from 22 to just 9. Benefits of Early Contractor Involvement (ECI) Involving a key supplier to save 10 weeks on programme A3 Hindhead We involved pre-cast arch bridge specialist ABM early in the ECI phase to assist us develop the design and methodology for four key underpasses. With their input, we reduced the programme for each underpass by over 80%, from 12 weeks for a conventional in situ reinforced concrete structure to 2 weeks. This contributed to the £6.3m value engineering saving on the scheme – see below. It also had quality benefits: •

Less weather-dependent site operations

•

Less quality control overhead on site

•

Better quality of finish: we inspected the quality of their moulds before awarding the contract to ensure they could meet the demanding aesthetic criteria.

£14.5m in value engineering savings

A3 Hindhead, A421 Bedford 309

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) We completed the ECI phase works on A3 and A421 within budget, and made significant value engineering savings: A3: total saving £6.3m •

£4m saving by changing tunnel lining design to cast walls & sprayed crown

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£170k installing automatic switch at key drainage sump

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£100k saving by treating & laying contaminated coal tar planings from existing A3 as sub base A421: total saving £8.2m •

£5m saving by changing 8 structures from piled concrete abutments to reinforced earth retaining walls & bankseats

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£900k saving by de-risking statutory utilities diversions

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£500k saving by using tyre bale fill at major embankment in lieu of pile transfer slab

Leading sustainability in construction A421 Bedford On A421, we overcame a soft ground problem and an 800,000m³ net fill deficit by using compacted tyre bales as a lightweight fill. During the ECI phase we researched the design and construction, compiling a comprehensive case for the Approval submission to the Highways Agency. Approximately 4,500 tyre bales have been placed, equating to 500,000 tyres. This is the first large-scale use of tyre bales on a UK highways project, and has prompted its adoption on other Balfour Beatty projects, including the new Selly Oak Bypass in Birmingham. We have worked closely with the Highways Agency to publicise the benefits of this technique through the Agency’s best practice portal and major projects community. Designing out risk of working at height A46 Newark-Widmerpool On A46, we have used the ECI phase to develop an innovative method of constructing a new bridge over the main carriageway. This involves temporary backfill to raise the level of the ground surrounding the bridge, completely eliminating any risk of falling from height. A detailed cost-benefit study indicates that the additional nett cost of this approach is very marginal compared with the conventional construction method. £5m saving in land and utilities budgets M1 J6A-10, A3 Hindhead On M1 J6A-10 we saved £5m on the utility costs through better design, negotiated discounts and improved programming. We built good relationships with the utilities by implementing the Code of Practice in the New Roads & Street Works Act 1991 (NRSWA). We value engineered our works to minimise their impact on utility services and offered cheaper alternatives to utilities proposals. We used the Act to maximise discounts – eg agreeing a 9% discount with Yorkshire Electricity for diversions classed as ‘green field site’ under the Act. Discussions with utilities companies during the ECI phase on the A3 determined the best route and programme for the diversions needed. Once we had found the optimum solution we obtained C4 quotations. The enquiry document for C4 estimates included detailed drawings and the programme previously agreed. The work scope and programme were clearly defined, ensuring accuracy of the C4 estimate. Long-term planning & efficient procurement Certainty on key commodity prices

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Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) On M1 J6A-10 we worked with two of our key suppliers during the pre-construction phase to pre-purchase volatile materials and offset the risk of inflation, reducing the project Target Cost. Through Nusteel we pre-purchased steel for the gantries, which they stored at their works until it came to be used. We negotiated with Tarmac a cap on the bitumen price increase of 2½% /tonne, in line with gas oil futures. The open market rate proved to be 4 to 5%, giving Highways Agency a shared saving of £0.5 million. On M25 DBFO we have bought an innovative financial hedge product on the ‘red’ diesel to be used on both sections of the project. The hedge contract covers 10 million litres of diesel until May 2012. We have also capped the price of all bitumen to be used over the same period. Bulk procurement £3m annual savings through smarter buying Our aggregated group spend board has met since 2005 to rationalise our existing supply chain and look for efficiencies through smarter buying. This board has leveraged annual buying gains worth £3m in: ● Non-operated plant ● Quarried product ● Drainage & ducting ● Cranage. The success of the board has led to a wider Balfour Beatty Group procurement initiative, called Project GrACE (Group Aggregated Common Expenditure). Project GrACE targets cost savings in excess of 1% of group turnover by 2012. We have recently concluded an agreement for the provision of office supplies across all our OpCos with a single supplier, saving the Group more than £1 million per year on its current office supplies expenditure. Incentives driving efficiencies Pain / gain share A3 Hindhead, A421 Bedford, A46 Newark, M1 J6A-10, Blackfriars Bridge The majority of our major infrastructure projects incorporate incentives in the form of pain share / gain share arrangements in the contract. On A3 Hindhead and A421 Bedford, we shared the £14.5m total value engineering savings with the Highways Agency. Outsourcing savings 90% reduction in size of bridge maintenance crew Area 2 MAC In our MAC Area 2, we reduced the size of the Avonmouth Bridge maintenance crew from 40 personnel to just 4 by targeting bridge inspections more effectively. This saved the Highways Agency over £1.2m annually. We maintained the safety of the bridge by modelling the structure numerically and confirming the results with strain sensors on the structure. Risk allowance halved Area 2 MAC In Area 2 we saved £3.2m annually by reducing the risk allowance in the contract. Over the first 3 years of the contract, we reduced the risk allowance from 4% of contract turnover to under 2%. At the same time, our score in the OGC Risk Management Maturity Model improved by 150%. We achieved this through: •

Better and wider training of risk managers

•

Fortnightly risk surgeries

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More frequent auditing of risk processes and mitigation activities 311

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) •

Involving supply chain in design & planning of schemes

Improved productivity Area 2 MAC, Area 4 MAC We have reduced cost and improved productivity through more effective planning and supplier management – for example: •

24% saving in unit rate of small works surfacing from £15.33 to £11.69/ m²

• 8% saving per annum through shared haulage between planing and aggregate suppliers All savings have been shared with the Highways Agency. ‘Sweating’ the infrastructure Best-value widening solution M25 DBFO As part of our tender offer for the M25 DBFO contract, we developed an approach to widening Sections 1 and 4 of the M25 which made maximum use of the remaining life in the existing carriageway. We carefully surveyed the existing carriageway and assessed its remaining life using: •

Expert opinion from our consultants, Atkins, and from our in-house pavement specialists

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Pragmatic experience derived from our previous projects on M25 J8-10, M25 J12-15 and M1 J6A-10

•

Interpretation of extensive asset information available in the tender data room

From this assessment we produced an integrated construction & maintenance model of the project road which optimised the balance between the sections to be reconstructed or resurfaced during the widening programme, and those sections which will be reconstructed as part of future major interventions. This led to a winning bid, representing best value to the public purse, high standards of road user experience, and high levels of lane availability. We are successfully implementing this strategy, achieving productivity and programme milestones at least 3 times faster than any comparable UK motorway project to date. Maximising lane availability Managed Motorways Balfour Beatty Group company Birse Civils successfully delivered the Managed Motorways pilot scheme, which proved the case for this innovative programme. This approach increases the capacity of a motorway for around 35% of a ‘traditional’ widening scheme. It uses a combination of overhead electronic signs, safety refuges and sophisticated operational regimes. We contributed significant constructability, value engineering and cost management input to the pilot scheme. This resulted in a set of four tried, tested and approved retaining solutions. Standardisation and experience led to efficient selection of optimal solution for any site condition encountered. The workforce became used to these four methods, leading to quality and cost improvements, and a 50% programme saving compared with the early phases of the project.

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Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) At the end of the pilot scheme we participated in a series of intensive review workshops with Highways Agency. These workshops captured the lessons learnt in a set of mindmaps, enabling all parties to reflect on what went well, what needed improving, and where the key process linkages are in a technology project. Many of these lessons have since been developed further as part of the wider roll-out programme. We continue to participate in this programme as part of the M4/M5 project team. The Highways Agency’s innovative Enhanced Managing Agent Contractor Contract Background In Highways Agency Area 2 in the South West of England a unique form of contract is operated between the Highways Agency and Balfour Beatty. This contract rewards innovation through specially designed efficiency share mechanisms, along with contractual bonuses for innovation. As a result a number of improvements have been made to the effectiveness and efficiency of road management and maintenance activities as illustrated below. Under the unique contract arrangements the majority of any saving achieved are retained by the Highways Agency and re-invested in renewing the road network. Integrated Network Control Centre with the HA’s Regional Control Centre As a provider of road network management services to the Highways Agency Balfour Beatty is required to operate a number of 24/7 network control centres (NCCs) to manage the deployment of resources to support the clear up of incidents such as traffic accidents. Our bespoke Incident Support Units attend the scene and provide traffic management and undertake temporary repairs to the road infrastructure to enable the road to return to normal running as rapidly as possible. In parallel with the NCC operations the Highways Agency operates its own Regional Control Centres (RCCs) to manage the activities of their own Traffic Officers. Effective communication between the NCC and RCC is essential to the effective management of incidents. In Area 2 the NCC and RCC have been combined in a single building and the teams fully integrated, resulting in better team working, improved incident response, and savings of in excess of £0.3m pa through a reduction in overall staff numbers and reduced costs of premises. In-sourcing technology maintenance One element of managing and maintaining the trunk road network is the maintenance of roadside technology equipment which is typically undertaken by a separate specialist contractor. In Area 2 this specialist role has been absorbed within Balfour Beatty’s highway management and maintenance contract, enabling more effective management and communications and shared synergy savings of in excess of £0.6m pa. Embedded traffic measurement loops The measurement of traffic movements requires rubber cables to be placed in slots in the road surface at 500 metre intervals. These are then sealed with bitumen. However, when the road is re-surfaced the loops are unavoidably removed with the old road surface and must be replaced at considerable cost. In Area 2 Balfour Beatty has devised an innovative method whereby the loops may be installed deeper within the road surface whilst still being effective. This approach, combined with a special de-bonding layer means that the loops are 313

Mr Andrew Wolstenholme, Balfour Beatty—Supplementary written evidence (PP 34) not damaged during re-surfacing. This innovation is a change to national standards which if accepted will provide potential savings of in excess of £1.0m pa nationally.

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