TO CREATE more and better-paid jobs, Britain needs more small businesses, and it needs the best of them to scale up. Government has a key role to play, by radically improving its own commercial relationship with small companies.
The US and Germany – two of our strongest competitors – are far ahead of the UK in the degree to which they use government procurement and R&D to scale-up successful small firms. Contracts, not handouts, need to be at the heart of government policy.
Whereas the US has a requirement that small businesses receive at least 23 per cent of all federal contracts, they receive just 10.5 per cent of government contracts in Britain. For the whole supply chain, including sub-contractors, the figure is lower still. Tellingly, among the worst offenders in Whitehall are HM Treasury and the Department for Business, Innovation and Skills, at 1.4 per cent and 2.5 per cent respectively. Yet these are the very departments which are supposedly responsible for promoting the interests of small businesses across government.
The government must practice what it preaches and contract to a far greater degree with small businesses. A new Small Business Administration (SBA) should promote state contracting with smaller firms, as does the SBA in the US, not least by monitoring and publishing how well departments and agencies are doing in contracting with small businesses.
The UK has also failed to replicate the innovation programmes which have been so successful in promoting small business in the US and Germany.
The Small Business Research Initiative (SBRI) in the UK, modelled on a highly-successful US programme dating back to Ronald Reagan’s administration in the 1980s, has failed to take off for lack of support from government departments and agencies. Under the SBRI, the UK government contracts with small businesses to provide innovative products and services. While the US federal programme awards around 4,000 contracts a year, worth $2.5bn (£1.5bn), the UK government launched just 36 SBRI competitions in 2013.
In particular, the US has used its large defence budget to promote innovation pioneered by small businesses, such as global positioning systems and the internet. The UK is uniquely placed to leverage its large state NHS budget to drive innovation and to scale up potentially world class businesses in the health sector. The annual NHS R&D budget is £1bn, so there is ample scope for improving on the six SBRI projects the Department for Health has commissioned in the past three years. Currently, none have led to the NHS buying products from these firms, which is the ultimate aim.
Each year, SBRI fails to meet its targets, and each year the government responds by setting a still higher target which it fails to meet. This does nothing to help small businesses, who want real contracts, not ministerial rhetoric.
The Small Business Administration’s director and staff must have significant entrepreneurial experience, and would publish data on state contracts on an independent basis. There need be no new bureaucracy. The UK’s Department for Business, Innovation and Skills has 3,000 staff yet no director specifically responsible for small business. We need to remodel the department so it reflects the need to support and focus on small business.
Small companies need a better deal from the banks, and a cut in red tape. Government can, and should, help small businesses by contracting with them, driving growth and innovation.
Lord Adonis, transport secretary in the last government, is leading a national growth review for the Labour Party. Contracts Not Hand-outs is published today by Policy Network.