Overcoming the barriers to SME participation in public procurement

Government agencies can take steps to overcome the barriers to small- and medium-enterprise (SME) participation in public procurement to enhance local employment and economic outcomes.

Public procurement is an important source of market opportunity for businesses. It has been used to drive industrial development through government demand for industrial innovation and technological change since the 1970s, gaining particular attention at the beginning of the 2000s onwards.

The global procurement market was estimated in 2020 to be US$13 trillion per annum.

Governments are increasingly taking steps to give SMEs better access to public markets and to remove barriers preventing SMEs from winning public contracts.

Engaging SMEs in public procurement is beneficial both for businesses and for the public sector. While public procurement contracts give SMEs better access to markets and help them strengthen their capacities, the public sector can better meet its procurement needs by working with innovative, responsive and flexible SMEs.

SMEs face many problems accessing public procurement markets. Removing the barriers to SME participation in public procurement aligns with equal treatment, open access and effective competition.

Complex procurement procedures and administrative burdens

Poor and complex regulation and burdensome compliance and administrative requirements lock SMEs out of public procurement markets. A 2022 survey of businesses selling technology to the federal government by InnovationAus.com found that 93 per cent of firms with less than 250 employees found the process of selling technology to the federal government “complex, difficult and slow.”

Good quality procurement regulation is associated with greater SME participation and a higher probability that SMEs win contracts.

Simplifying procurement systems and streamlining regulatory and reporting requirements will help improve SME success in public tendering.

Size of contract

SMEs are often unable to participate in public procurement markets because the volumes and value of the contract are too large. A UK study into local procurement found that smaller suppliers are more likely to thrive when a broader-based value-for-money decision factor is required and when shorter and smaller-scale contracts are available through open competition.

Dividing contracts into smaller lots can bolster participation by SMEs. However, there is a danger that this only increases the probability of SMEs winning contracts for small-value lots. Other interventions are needed to help SMEs develop to improve the overall quality of procurement processes.

Poor government coordination

The traditional focus on value for money and the problem of fragmentation of public demand can limit the potential scale effects of public procurement. Many government agencies with responsibilities for public procurement operate separately from those with a remit to foster industry development or innovation. Thus, better government coordination across demand and supply-side interventions is essential.

Bias among procurement officials

Often, government procurement officers see little benefit in engaging with smaller suppliers and are challenged by the complexity of managing multiple procurement objectives. Larger suppliers are easier to deal with and a considered by procurement officers as less risky.

One Brazilian study found that SMEs were more likely to have their contracts terminated early due to poor performance. Small businesses might face additional constraints in fulfilling contractual obligations with government purchasing units. Alternatively, public managers might be biased against SMEs and could be spending more time and effort monitoring and enforcing contracts.

Another Irish study found a gap between what the government policy recommends public buyers do to facilitate SMEs and what they actually do.

Australian research on implementing a social procurement initiative on a major construction project in Melbourne found little collective understanding among project stakeholders regarding what social procurement policies can achieve. Managers were focused on downside risks rather than upside opportunities and perceptions of distributive injustice about how new social procurement risks are managed.

Thus, public investment in the human capital dimension of public procurement is required to achieve policy objectives.

Lack of reporting and transparency

One of the justifications for promoting local content and SME participation relates to transparency. Taxpayers and citizens want to know how public money is spent and what social and economic outcomes have been produced.

One interesting organisation working on transparency in public procurement is the Open Contracting Partnership, which brings “open data and open government together [to] make sure public money is spent openly, fairly and effectively on public contracts.”

A lack of transparency hinders efforts to increase competition, especially for SMEs.

Good data and reporting are essential to overcoming the barriers to SME participation in public procurement. SME participation in public procurement markets is increased by setting procurement targets, annual reporting on expenditures with local firms, the inclusion in contract award criteria of broader local community benefits, and the calculations of local multiplier effects.

Regional and local barriers

Many SMEs outside urban centres face additional barriers to participating in public procurement markets. This is often due to a conflation of many of the other barriers discussed above. These are exacerbated by poor coordination across different line ministries operating in the regions and limited capacities and capabilities among local SMEs.

Avoid the big-small dichotomy

While SMEs face more barriers to entry to public procurement markets than large enterprises, this is a diverse group of firms that should not be treated as uniform.

Research on the use of public procurement for SME development suggests it is necessary to move beyond the SME versus large firm dichotomy and to apply a more fine-grained analysis of the relationship between enterprise size and involvement in public procurement markets.

There are many differences between micro, small and medium enterprises and their tendering resources and capabilities. Efforts to create more opportunities for these firms to participate in public procurement markets require more bespoke interventions. Indeed, it may be appropriate for policymakers and legislators to think about micro and small enterprises rather than SMEs when finding ways to widen access to public procurement.

UK research on local government procurement suggests that more focused interventions should be designed to overcome a simplistic dichotomy based on firm size. This includes creating a database of potential local suppliers and online guides for SMEs on how to sell to the government designed to address specific local issues using different policy instruments.

Capacity constraints

Many SMEs cannot successfully bid for and manage public procurement contracts because they lack the requisite capacity and capabilities. These constraints have many dimensions, including the lack of tendering skills, experience, information and guidance in tendering processes, limited financial capacity and limited access to finance.

Balancing demand- and supply-side responses

In summary, overcoming the barriers to SME participation in public procurement requires a two-pronged approach that balances demand- and supply-side responses. While creating procurement targets for SMEs will help increase market opportunities, there will often be a need to help SMEs to become better able to exploit these opportunities. Moreover, all arms of government need to be well coordinated to ensure policy objectives of public procurement are achieved.