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Where Obama leads, let the UK follow and overtake – procuring from responsible firms

Tuesday June 4th, 2013

There is an interesting public procurement initiative in the USA. It strives to align the multibillion-dollar government procurement expenditure with the pursuit of more responsible capitalism and public expenditure constraint.

President Obama is to propose to Congress that federal contractors should experience sizable reductions in future payments and remuneration for senior executives. The President is to present draft legislation to Congress this coming week. This is welcome news.

John Tizard

John Tizard

In a bid to stop excessive payments to contractors’ executives, the plan would expand across government a small provision in last December’s National Defense Authorization Act and cap the reimbursement rate at the President’s own salary (currently $400,000), according to Joe Jordan, administrator of the Office of Federal Procurement Policy.

This new initiative would expand the scope of the cap from just the top five highest-paid contractor employees to all employees. This change has been supported by the public sector unions.

The Office of Federal Procurement Policy claims that contractor senior executive pay has grown 300 per cent in the past 15 years, outpacing inflation.

Interestingly the proposal will not stop companies from paying their executives what they wish to but it caps the amount taxpayers must cover under cost-plus contracts. Exceptions would be made if “an agency determines such additional payment is necessary to ensure it has access to the specialized skills required to support mission requirements, such as for certain key scientists or engineers”.

This US initiative could be adopted in the UK. And in addition there could be opportunities even within the EU procurement regulations for the UK Government and wider public sector procurers to set expectations and even conditions related to employment practice in public procurement for goods and services. These could include:

  • potential caps on the level of senior executive remuneration that the taxpayer will fund
  • maximum ratio between the highest remuneration and the lowest in the business providing procured services or goods
  • pay levels of at least the ‘living wage’ for all employees
  • reasonable pension schemes with employer contributions
  • no ‘zero hours’ contracts
  • specified levels of spend on training and people development
  • talent strategies that benefit all employees
  • targets for numbers of apprenticeships
  • specified employment standards including some terms and conditions
  • honouring TUPE at all stages of a contract and re-contract
  • equal opportunities for share ownership and similar arrangements for all employees
  • the right to collective representation, consultation and involvement, and where appropriate negotiation and bargaining
  • and for the above to apply as far as practical throughout a provider’s supply chain including appropriate measures for internationally based suppliers

Such approaches are consistent with the spirit of the Public Services (Social Value) Act and, I feel, with current public opinion. It would be wrong to impose a set of arrangements but every public contracting body should be expected (and in due course legislation may be required) to consider what would be the most appropriate employment, remuneration and employee conditions expected of those organisations which are the recipients of public money to deliver services and/or supply goods to the public. This will require dialogue between potential suppliers in the business, social, third, community and public sectors; and with the relevant trade unions.

Where providers have business activity beyond the public sector they may challenge this approach, but they have choices as to which markets they seek to be in.

When the Government spends public money it should always seek to maximise both value for money and social value. It is unethical, though sadly not uncommon, for the public sector to use outsourcing and/or the procurement of goods simply to reduce costs even when this is at the expense of employees’ terms and conditions. Poor employee terms and conditions often lead to higher turnover, lower motivation and a less skilled workforce, all of which in turn usually have an adverse impact on service quality.

President Obama’s initiative in many ways is modest but could lead to a more radical and far-reaching international consensus putting employment, remuneration and people issues at the heart of public procurement.


John Tizard
Twitter: @johntizard
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