Utilising public resources to expand SMEs’ participation in government procurement

The Bauhinia Foundation Research Centre (the Centre) today released the 'Study on strategic policy to promote SMEs' participation in government procurement', which analyses SMEs' current opportunities and challenges arising from public procurement. With reference to practices in South Korea and the U.K., the Centre makes policy recommendations to generate more business opportunities for SMEs, and thus facilitating the sustainable growth of local economy and maintaining Hong Kong's long-term competitiveness.

Many a little makes a mickle - contributions of SMEs on a par with large corporations

The Census and Statistics Department's figures showed that the local Gross Domestic Product (GDP) in real terms recorded a negative full-year growth in 2019, which means economy is under persistent downward pressure. The Centre's Chairman Lau Ming-wai said, 'Corporates, particularly SMEs, have to overcome multiple challenges brought by the global economic slowdown, social movement and epidemic-hit that create immense pressure on their business operations. Despite several rounds of relief measures introduced by the Government, such efforts in helping SMEs survive amid economic downturn have yet been effective enough, not to mention exploring new business opportunities. As such, the Centre suggests that the Government should utilise public resources and regard it as an important policy strategy to promote SMEs' participation in government procurement. The Centre believes that facilitating SMEs' access to government procurement market can help them generate a stable income source and enhance their competitiveness, and hence echoing the government's "support enterprises and safeguard jobs" objective.'

SMEs are the backbone of Hong Kong's economy. They constitute about 98% of the city's total business units and about 45% of the total employment in the private sector in 2019. Citing figures in 2018 as an example, SMEs represented 56.4% of the total value added in the import/export trade and wholesale industries, exceeding that of large corporates (43.6%). SMEs also shared 61.3% and 74.2% of the import/export trade and wholesale sectors respectively.

SMEs at weak financial position to fight an uphill battle

Unlike large firms with abundant resources, SMEs usually have less capacity to fulfil large-scale Government contracts and provide large quantities of supplies. When it comes to large firms, getting big deals is as easy as pie. Taking I.T. products and services as an example, only 6.6% or 1,411 procurement contracts were awarded to SMEs from 2016/17 to 2018/19, involving about 10% of the total contract sum of HK$323 million. Meanwhile, taking the public accountability into consideration, subject officers are rather conservative and risk-averse. Hence, they incline towards choosing large companies which are financially stable and well experienced as their suppliers.

Government's procurement policies hinder SMEs from competing

The objectives of the local government procurement policy are to achieve best value for money and maintain open and fair competition. The Government encourages different suppliers to submit tenders, from which it can adopt the most advantageous tender proposal that best serves the public interest. Moreover, to submit a high-quality bid, companies need to have a certain degree of technical and legal knowledge, as well as adequate manpower and material resources. These concerns would hinder SMEs from competing in the tendering exercises. Against this backdrop, SMEs are in an unfavourable position to win over large firms. In addition, the Government spent HK$114.48 billion on public procurement in 2017/18, which accounted for 24.3% of the overall government expenditure amounting to HK$470.86 billion. In 2018/19, the procurement expenditure as a percentage of total government spending even fell to 23.4%, indicating a lower scale of government procurement.

The Government has improved its procurement policy last year by factoring in ‘innovative' as one of the tender assessment principles. The change has revitalised the ‘lowest bid wins' principle and incorporated new and creative suggestions, and thus enhancing social benefits of public services. However, the aforementioned reforms apply to only specific industries and fail to help SMEs fully involve in public procurement market. By analysing different types of interventions taken by the British and South Korean governments in facilitating SMEs to take part in government procurement and reviewing their respective policies, the Centre makes four policy recommendations as follows:

1. Setting a clear target in public procurement

Both the governments of U.K. and South Korea have set out a procurement target to show their determination to support SMEs. For instance, the U.K. government has pledged to increase 33% of its public procurement expenditure on SMEs goods and services by 2022. As for the Government of South Korea, it is also legally mandatory for the Government of South Korea to purchase goods from SMEs at 50% of its total amount of government procurement.

The Centre suggests the Government learn from the U.K. and South Korea's practices and set a clear target in procurement budget, in an attempt to boost the government spending on procuring goods and services from SMEs. Government Bureaux and departments, especially those needing routine procurements, should take the lead to set the target. This measure will guide bureaux / government departments to select SMEs as their service providers as well as to shift their mindset on handling procurement activities. On the other hand, general goods and services required by the Government fall within the business scope of SMEs, it will also enhance the knowledge of SMEs regarding public procurement and provide them with greater chances to stabilise their capital inflow thereby fuelling their business development.

2. Drawing up an SME procurement list

The Small and Medium Business Administration in South Korea cooperates with the Government and formulates a list of pre-defined products to be procured through competition among SMEs. The procurement list, which is updated annually, specified a wide range of products that only allows the Government to select vendors from the list. With reference to this, the Centre suggests the Government establish an SMEs Procurement Committee and invite representatives from SMEs to formulate and timely update the list of ‘Procurement of goods and services from SME-only'. The ‘List' will only allow SMEs to bid specified goods and services such as stationary and furniture, electronic products, hygiene and cleansing products, and I.T. related services. Such measures can help maintain the competitiveness of SMEs through the tendering exercise and give greater incentives for SMEs to bid the government's contracts and enhance their participation in public procurement.

3. Efficiency-first: Enhancing the functionalities of e-platform

A user-friendly e-procurement platform has been set up by governments of the U.K. and South Korea respectively which centralises announcements of relevant tender information on the platform. The online platform streamlines the process which can facilitate SMEs to participate in the tenders more easily and conveniently, as well as reduces their administration cost. It also enhances the transparency and ensures a fair and just decision. Although Hong Kong has been pushing forward the electronic procurement platform, some vendors criticise that the system is not user-friendly, and they prefer submitting tenders by post instead. Besides, the digital platform has been underutilised by the Government that only 10 departments have handled procurement activities through the e-Tender Box system in 2018. The value of transactions, handled by the online procurement platform under the Office of the Government Chief Information Officer, accounted for only 16.6% of the total value of government contracts with purchasing value not exceeding HK$1.4 million in the same year. In light of this, the Centre suggests the Government review the implementation of the online Procurement Programme and explore ways to enhance its functions and utilisation rate.

4. Developing a bilateral communication mechanism

A bilateral communication mechanism has been adopted by the governments of the U.K. and South Korea, in an attempt to understand the challenges faced by SMEs during the procurement process, as well as to provide them with timely and targeted support. In the U.K., the SME Committee and SME representatives regularly review the procurement policies and assist the Government in promoting related procurement strategies. As for the South Korean Government, it also provides training and incentive programmes to SMEs in order to enhance their knowledge and popularity.

Lacking guidance, local SMEs may not be familiar with public procurement procedures, the Hong Kong Government is suggested to strengthen communication with SMEs. For instance, the Government Logistics Department and related departments can organise procurement seminars and training courses, so as to strengthen mutual-communication and instil knowledge into SMEs. It can enable SMEs to grasp the tendering technical knowledge and gain confidence when making a bid in government procurement despite the complex process.

The Centre's Chairman Lai Ming-wai concluded, 'To fully engage SMEs to become stakeholders in the public procurement market, the Government should proactively nurture a favourable environment which encourages SMEs in public procurement participation. SMEs can not only generate stable income, but also gain reputation and explore business opportunities when they become the Government's recognised contractors. On the other hand, public procurement policies can also serve as an effective tool for the Government to raise the service quality of public services and interests, achieving a win-win situation for the Government, corporates and the society.'



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