David Prosser: Procurement savings are not a pain-freeway to cut spending

Outlook: David Cameron wants to give 25 per cent of Government contracts to small companies, but central procurement is bad news for all but the largest suppliers
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There is much to praise in Sir Philip Green's report into how the Government spends taxpayers' money – and the row over whether the retail tycoon is the right man to have conducted this review, given his own family's tax arrangements, should not distract from his findings. Plainly, there have been expensive failures of procurement across government departments. Addressing these failures ought to be a less painful way of cutting spending than, say, taking child benefit from families who depend on the money.

However, one question Sir Philip has not considered – he was not asked to – is how his recommendations might compromise the Coalition's pledge to support entrepreneurs and small businesses, supposedly at the centre of George Osborne's vision of the economy of the future.

For his part, David Cameron says he thinks small businesses should win at least 25 per cent of Government contracts. Theproblem is that centralised procurement tends to be bad news for all but the largest suppliers. In the private sector, large companies that procure goods and services for multiple divisions and subsidiaries through a single department tend to award contracts to handful of very large suppliers, rather than a multitude of their smaller competitors. There is no reason to think the experience in the private sector would be anydifferent. Scale tends to be equated with simplicity and savings.

As for Sir Philip's complaint that the Government has been too quick to settle its bills – an argument he made in interviewsyesterday – there is no doubtmoney to be saved if suppliers are paid after 30 or 60 days, rather than within a week, as is thecurrent aim (though try telling the staff in Top Shop that you will pay for those new jeans with a postdated cheque). However, smaller suppliers will be hit disproportionately hard by a shift to later payments because their cashflows tend to be much tighter. There was a time when bank borrowing helped to ease the pain for companies with this difficulty but, as we know, this is often no longer the case.

All of which is not to say that Sir Philip's recommendations should be rejected – just that the Government should remember the law of unintended consequences before rushing to adopt them. No-one wants to see public-sector joblosses, so this alternative pool of savings looks attractive. It is not pain-free, however, and the part of the private sector likely to suffer most is precisely the one Messrs Cameron and Osborne are keen to see encouraged.



EasyJet smoothes some turbulence

The hiring of Carolyn McCall as chief executive of easyJet in the summer prompted questions about the former Guardian Media Group boss's lack of experience in the airline industry. It would be only fair of her critics to note that the settlement yesterday of a potentially disastrous row between the budget airline and its founder, Sir Stelios Haji-Ioannou, was a prize that eluded her predecessor.

Nor does Ms McCall appear to have paid through the nose to get a deal. The royalty easyJet will now pay Sir Stelios – 0.25 per cent of its revenues – will be a drain on its resources but gives the airline greater freedom to exploit its brand. Ms McCall may even consider it a small price to pay for Sir Stelios's withdrawal from the fray. And the payment is smaller than the deal secured by Sir Richard Branson for Virgin's use of his brand, which is widely thought to be worth 0.5 per cent of revenues.

Still, Ms McCall has plenty more to do. Sir Stelios's dispute with the airline over its expansion programme – with fleet growth having come at the expense of dividend payments – is continuing. The airline's new chief executive will offer her views on strategy next month and it will certainly be interesting to hear what she has to say about the dividend, given the upgraded earnings forecast easyJet made to the City last week.

Ms McCall also needs to improve easyJet's image, with the airline admitting in the summer that staffing difficulties had led to punctuality failings – plus extra costs when it sought to address the issue. Its arch-enemy, Ryanair, has seized on those problems and will continue to make hay for as long as they persist.



Worthy winners for these troubled times

Congratulations to Peter Diamond, Dale Mortensen and Christopher Pissarides, this year's winners of the Nobel prize for economics. It is hard to imagine a time when work on how "unemployment, job vacancies and wages are affected by regulation and economic policy" might be more relevant.

Certainly, their ideas about "matching theory" in labour markets should be required reading for George Osborne and Iain Duncan Smith. Both should enjoy it: the economists looked into why labour markets are so often inefficient in the task of matching unemployed workers with job vacancies and the answer often seems to be that the wrong sort of interventions by the state clog up the process.

Those interventions might be in the form of offering unemployment benefits that are high enough to act as a disincentive for people to find work, or restrictions, via labour laws, on employers' rights to hire and fire staff.

Still, before the Government adopts the new Nobel laureates as poster boys for its benefits reform programme, it is worth noting that the UK's jobs market has learned many of these lessons already. Unemployment benefit is low by European standards and employment law is relatively unrestrictive. British workers, during this recession at least, have also been more willing to accept pay freezes, or cuts, another area the economists have studied.

Moreover, the biggest lesson of the Nobel prize winners' work, says Professor Pissarides, is that long-term unemployment is the scourge that must be most assiduously battled. That's advice Britain now has to work out how to follow.

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