Incentives work, but can prove costly

Oct 13 2009 By Sarah Green, The Journal

THE carrot or the stick? That is the basic first choice facing anyone trying to influence the behaviour of others. To persuade and reward good practices, or to instruct and apply sanctions for failure?

It is the choice faced by governments when trying to implement policy. Incentives to individuals to insulate their properties or legislation to ban the construction of buildings deemed wasteful of energy? Both are measures aimed at addressing climate change – but they work in different ways.

Incentives are likely to be more popular with the people you are trying to influence, but may be expensive. The legislative stick is cheaper to use, but is process heavy and unlikely to win many friends. The real cost in applying a legislative solution is the opportunity lost when you get it wrong – creating a climate which reduces activity or pushes it offshore.

Both these approaches have their drawbacks and we are increasingly seeing interest in a hybrid model – using Government procurement to change behaviour. A Government contract is a big carrot and, as governments would be spending the money anyway on the goods or services that they need to function, then it is a carrot with no cost.

It is also a stick as the public sector accounts for a large part of the economy and, in sectors such as construction, not being able to bid for Government work would be a big threat. And the use of procurement to drive policy goes with the flow of the market too. It is clearly for a buyer to decide what is important in making a purchasing decision.

As a result, we are now seeing an increasing use of social clauses in public sector procurement, and a lot of talk about more to come. A recent EU directive has allowed governments to discriminate in favour of suppliers with a protected workforce. We have started to see a requirement on construction companies to train a number of long- term unemployed individuals when winning contracts.

Out for consultation are plans to ask for evidence of a company’s sustainable development policies, as part of the Climate Change Action Plan, and the procurement strand of the Equalities Bill. This draft legislation will place duties on public sector bodies to tackle the gender pay gap and improve opportunities across a range of issues, including race, age and gender.

It is possible these duties will be passed on to companies through procurement channels. The list of other policy priorities that could be advanced through procurement might include bilingual services.

But, as with many good ideas, they only work up to a point. As you overlay more social clauses into any procurement contract there is a danger the original purpose of the exercise – to buy the best value widget – gets lost. And it is not at all clear that this policy has no cost. There will clearly be the cost of compliance with any individual clause, which may be low or high depending on its nature, and this will be reflected in the price.

Used selectively and intelligently, social clauses in procurement can be a useful tool in a policy maker’s armoury. But used indiscriminately, because the alternatives are too difficult, they will result in bad procurement and poor value for money for the public purse.

Sarah Green is regional director of CBI North East