Slump in DFID contracts going to small and medium enterprises

A Syrian refugee at work in a Lebanese textile factory supported by UK Aid and Mercy Corps. Photo by: Russell Watkins / DFID / CC BY

LONDON — The United Kingdom Department for International Development’s latest annual report shows an 18 percent drop in direct procurement to small and medium-sized enterprises, after three years of steadily increasing its SME engagement.

The drop coincides with a new layer of regulation imposed by the 2016 Supplier Review, which observers warned may be discouraging local and smaller firms from bidding on DFID contracts.

Over the 2017-18 fiscal period, DFID spent 38 percent of its total procurement budget through SMEs, according to draft figures, compared with 46 percent in 2016-17. It comes after three years of modest but steadily increasing SME engagement, averaging a rise of 3.5 percentage points each year between 2014-15 and 2016-17. Despite the drop, DFID is still exceeding the U.K. government target of spending 33 percent of procurement through SMEs by 2020.

However, direct engagement with SMEs — where they serve as the primary delivery partner on DFID contracts — fell from 33 percent in 2016-17 to 18 percent in 2017-18, a startling 15 percentage points.

At the same time, the level of indirect engagement — where SMEs subcontract on DFID contracts — rose from 13 percent of total procurement in 2016-17 to an estimated 20 percent in 2017-18, meaning DFID’s primary suppliers are subcontracting more work to SME firms.

“These numbers suggest that DFID isn’t doing enough to ensure that SMEs are competing on a level playing field when it comes to bidding for DFID contracts,” Sarah Mistry, director of effectiveness and learning at Bond, the U.K. network for development organizations, told Devex.

“Unless DFID revises its existing stringent government requirements, which have been exacerbated by DFID’s Supplier Review, this trend is set to continue, and smaller NGOs, SMEs and other organizations will be excluded,” Mistry said.

The Supplier Review produced new terms and conditions for U.K. contractors, introducing heightened accountability and transparency measures, including mandatory, open-book accounting. Critics argued that while large firms could withstand the new compliance measures, smaller firms lacking adequate capacity would likely walk away from DFID bids, unless larger prime contractors or DFID itself shouldered some of the burden. The measures were rolled out in October 2017, half way through the 2017-18 fiscal year, which runs from April.

A government spokesperson said the decrease in direct SME engagement was due to the growing size of DFID’s SME partners, which had led to their reclassification as “large” organizations during the past year. In order to be classified as an SME by DFID, an organization must have fewer than 250 staff, a balance sheet less than or equal to £43 million ($56,95 million), or turnover less than or equal to £50 million.

As a result, the government spokesperson said the recently reclassified suppliers were able to employ more SMEs, which in turn explains the increase in indirect SME engagement.

But one member of the U.K. development supplier community, who asked to remain anonymous to preserve business ties, was doubtful.

“Frankly, [the government] response raises more questions,” he said. “How many [organizations] were reclassified? And was this significant enough to cause the related change in stats?”

Asked whether the Supplier Review may have been a factor in decreasing SME engagement, the source said there wasn’t enough information about the statistics to be sure. “The drop was over the period DFID have not been issuing much in the way of contracts, and also rolled out the new requirements,” he said. “It is not too surprising both would have an impact on SMEs.”

Compiling data on SME subcontractors has been historically challenging for donors. Last year, DFID pledged to improve its methods for evaluating indirect SME engagement, and those new efforts may account for the apparent sudden rise in SME subcontractors.

In response to criticism from the Independent Commission for Aid Impact in 2017, that DFID risked excluding SMEs and local organizations from its procurement, DFID wrote: “Data limitations prevent us from easily identifying local suppliers on contracts below the [Official Journal of the European Union] threshold of £106,047 and those who form part of consortia, or who are second and third tier suppliers in centrally let contracts.”

“We expect these numbers would paint a healthier picture of many local supplier markets,” the response read, “and our new commercial platform will allow us to report on the numbers of local suppliers who win DFID business. However we recognize that we need to do more to encourage local suppliers into the market so that we can capitalize on their experience, expertise and contextual understanding that international staff may not provide.”

DFID had not responded to queries about the impact of these efforts on the latest figures at the time of publication.

A large number of small and medium-sized aid organizations entering the market are thought to be local, national, or regional, making SME engagement a crucial part of the localization agenda, which the U.K. government committed to as part of the 2016 “Grand Bargain.”

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    Molly Anders

    Molly Anders is a U.K. Correspondent for Devex. Based in London, she reports on development finance trends with a focus on British and European institutions. She is especially interested in evidence-based development and women’s economic empowerment, as well as innovative financing for the protection of migrants and refugees. Molly is a former Fulbright Scholar and studied Arabic in Syria, Jordan, Egypt and Morocco.