Small and medium-sized enterprises policies in public procurement: Time for a rethink?1
| Date | 01 March 2014 |
| Published date | 01 March 2014 |
| DOI | https://doi.org/10.1108/JOPP-14-03-2014-B002 |
| Pages | 328-360 |
| Author | Caroline Nicholas,Michael Fruhmann |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 14, ISSUE 3, 328-360 FALL 2014
SMALL AND MEDIUM-SIZED ENTERPRISES POLICIES IN PUBLIC
PROCUREMENT: TIME FOR A RETHINK?1
Caroline Nicholas and Michael Fruhmann*
ABSTRACT. This paper will consider the rationale and effectiveness of SME-
support policies in the award of public procurement (PP) contracts. One
group of economic justifications for SME policies derives from the notion
that awarding PP contracts to SMEs (and micro-enterprises) encourages
innovation, entrepreneurship and so contributes to job creation, economic
growth and can support local and regional developments to the benefit of
wider society. The link between SMEs, innovation and economic growth has
often been assumed in PP policy-making. While some studies show higher
growth rates in small than larger firms, others indicate, to the contrary, that
many micro and small enterprises, and particularly informal businesses, are
not actively seeking to grow. This paper will assess how effective SME
policies may be, and questions the extent to which they are properly
evaluated.
INTRODUCTION
Günter Verheugen, Member of the European Commission,
Responsible for Enterprise and Industry, said in 2006, “Micro, small
and medium-sized enterprises (SMEs) are the engine of the European
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* Caroline Nicholas, LLM, is lawyer with the International Trade Law Division
of the United Nations Office of Legal Affairs (the Secretariat of UNCITRAL).
Working on modernization and harmonization of national public
procurement rules, her research and public interests relate to procurement
and limits on its role to support economic and social development. Michael
Fruhmann, Ph.D., is the Head of Unit Constitutional Service of the Austrian
Federal Chancellery. Representing the Republic of Austria at UNCITRAL,
and European Council Working Groups, his research and publication
interests are in various topics of Community law as well as national and EU
Procurement Law.
Copyright © 2014 by PrAcademics Press
SMALL/MEDIUM-SIZED ENTERPRISES POLICIES IN PUBLIC PROCUREMENT: TIME FOR A RETHINK? 329
economy. They are an essential source of jobs, create entrepreneurial
spirit and innovation in the EU and are thus crucial for fostering
competitiveness and employment ….” (EC/Enterprise and Industry,
2006, frontispiece). Looking beyond the EU, SMEs “constitute the
vast majority of business establishments, are usually responsible for
the majority of jobs created and account for one third to two thirds of
the turnover of the private sector” (OECD/UNIDO, 2004). As a result,
governments of countries at all levels of economic development
pursue policies to support SMEs (Storey, 1999).
This paper will consider the economic rationale behind such SME
policies, how they may be pursued through public procurement, and
whether and how their effectiveness can be evaluated. It will
conclude with some considerations for policy-makers in public
procurement. It will not analyse social and political justifications for
SME policies per se, though it is acknowledged that righting historical
disadvantage and supporting minorities in public procurement can
have consequential economic benefits.
The two main economic policy considerations revolve around (a)
improving SME participation in the public procurement market, with a
view to enhancing competition and hence value for money, and (b)
awarding more procurement contracts to SMEs, with a view to
encouraging entrepreneurship and innovation, and thereby job
creation, economic growth and development to the benefit of wider
society. While this paper draws heavily on authoritative works on SME
policies, it is not intended to provide a comprehensive survey of the
economic literature on the subject. Rather, it seeks to highlight some
of the published findings on the scope and impact of SME policies,
and to urge policy-makers to seek and consider empirical evidence
and move to policy, rather than the other way around.
STATISTICS ON SMES AND THE PUBLIC PROCUREMENT MARKET
The volume of statistics on SMEs in many systems amply
demonstrates that SMEs overall constitute the overwhelming majority
of all enterprises (to report on them in detail exceeds the scope of
this paper, but an example is found in EC, 2003). For example, in the
EU, 99.8% of enterprises in the non-financial sector are stated to be
SMEs (representing 67% of the total non-financial employment), and
92% of the total business sector is estimated to be micro-enterprises,
with fewer than 10 employees (de Kok et al., 2011). SMEs comprise
330 NICHOLAS & FRUHMANN
over 99% of the UK’s 3.8m businesses, and provide 56% of its
private-sector employment and 52% of total UK turnover (Small
Business Service (SBS), 2004, cited in Zheng, Walker, & Harland,
2006). In South Korea, the statistics show that SMEs comprise 99%
of businesses and 88% of private-sector employment (Government of
Korea, 2011); in South Africa, 55% of private sector employment, and
22% of GDP (Kauffmann, 2005, and cited in Kim, 2011). In the US,
SMEs constitute 99.7% of all businesses, generate 46% of private,
non-farm GDP, and smaller SMEs employ 34.9% of all private sector
workers (US Census Bureau, 2007).
There are varying definitions of SMEs: OECD/UNIDO (2004) note
that SMEs are defined in the literature most commonly by reference
to employment, due to the simplicity of the measure and the ease of
collection of data (the OECD and US generally use a measure of
under 500 employees, the EU 250). Many systems use a broader
definition in practice, e.g. in the EU, where SMEs are those with fewer
than 250 employees, provided that their turnover and assets are
below certain limits (EU, 2008), although EUROSTAT statistics are
presented by reference to employee numbers only (EU, 2014). A
similar approach is employed in the standards used by the US Small
Business Association (SBA) to classify SMEs (though the SBA is not
concerned with public procurement). Hence the figures in the
preceding paragraph are not directly comparable, even before
accounting for the different level of development in the countries and
regions concerned, though a general conclusion that most
businesses are “SMEs” can be drawn.
It is also clear that SMEs’ share of the public procurement market
is below their proportion of total enterprises: in the EU, for example,
SMEs secured 35%-35% of contracts by value in 2006 and 2007,
and 42% in 2008 (EU, 2009); and between 53% and 78% of
contracts by volume (EU 2008). This is not a recent trend: Bovis
(1998) argued that market access is also limited for SMEs. The
situation is similar elsewhere: the US SBA estimates that 21.89% of
contracts were awarded to SMEs in 2009 (SBC, 2010), whereas in
Canada since 2006-2007, over 43% of the total value of contracts on
average was awarded to SMEs (Government of Canada, 2014).
Within the overall numbers and using a more flexible approach to
what is an SME, the EU (in a report on SME access to public
procurement) notes that SMEs’ access to public procurement varies
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