Introduction
8.1
This chapter considers Australian best practice in procurement, including policies and practices which may be applicable at the federal level.
8.2
In discussing the merits of the new Commonwealth Procurement Rules (CPRs), witnesses shared their view of what constitutes ‘best practice’ in government procurement. Many suggested that the Victorian and South Australian (SA) Government procurement frameworks are highly successful. Some even urged the Australian Government to consider incorporating elements of the states’ industry participation policies or strategic procurement project criteria, into the Commonwealth procurement framework.
8.3
A discussion of each state’s approach to procurement follows along with stakeholder comments on the strengths of each model.
Victoria
8.4
The Victorian Government procurement framework is primarily established through a series of Victorian Government Purchasing Board (VGPB) policies. However, these policies are complemented by a range of other organisations and policies, including:
the Industry Capability Network Victoria (ICN), which facilitates the application of the whole-of-government Victorian Industry Participation Policy (VIPP); and
Infrastructure Victoria, the Office of Projects Victoria and the Major Skills Guarantee Initiative (Skills Guarantee), which partner to plan and deliver major infrastructure procurement targeted at workforce development.
8.5
The roles of these organisations and the aims of the VIPP and the Skills guarantee are considered in the following paragraphs.
Victorian Government Purchasing Board
8.6
The VGPB is the Victorian Government agency with overall responsibility for government procurement. It maintains a suite of five policies which govern how state agencies undertake procurement and contract management:
Complexity and Capability Assessment Policy;
Market Analysis and Review Policy;
Market Approach Policy; and
Contract Management and Contract Disclosure.
8.7
Like the Australian Government’s CPRs, the first principle of these policies is ‘value for money’, defined as:
A balanced judgement of a range of financial and non-financial factors, taking into account the mix of quality, cost and resources; fitness for purpose; total cost of ownership; and risk.
8.8
However, unlike the CPRs, the VGPB policies do not mandate methods of procurement based on financial thresholds. Rather, the procurement approach employed is based on a ‘complexity and risk’ assessment, informed by:
the complexity of the procurement, i.e. the level of difficulty involved in purchasing the required goods or services; and
agencies’ capabilities, i.e. their ability to perform procurement activities effectively (expertise and resources).
8.9
Considering the complexity and risk associated with procurement prompts agencies to determine whether required procurement can be undertaken independently, or whether ‘additional or special capability may be required’.
8.10
The VGPB support state agencies to apply its policies by consulting in relation to ‘strategic procurement’ and through the provision of detailed guidelines, including:
Guide to improving access to government business for SMEs;
Guide to building innovation into the procurement process; and
Guide to environmental impact in procurement.
8.11
The VGPB’s role in procurement is complemented by the work of the ICN.
Industry Capability Network Victoria
8.12
ICN is a not-for-profit organisation funded by the Victorian Government to assist state agencies to apply the VIPP. It is a business network which assists local businesses to participate in government procurement by:
liaising with state agencies and suppliers on procurement projects subject to the VIPP;
providing local suppliers with the opportunity to register interest in upcoming Victorian Government procurement by publishing a forward plan of ‘strategic projects’; and
administering the VIPP Management Centre, a secure online centre used by agencies and suppliers to manage and process VIPP documentation, or to contact ICN.
8.13
ICN also evaluates whether the businesses contracted by the Victorian Government honour their commitments to use local content.
Victorian Industry Participation Policy
8.14
The VIPP aims to leverage Victorian Government procurement to generate local jobs, boost economic activity and ensure small and medium enterprises (SMEs) are given ‘full and fair opportunity’ to participate in government procurement. It seeks to achieve this through:
promoting employment and business growth by expanding market opportunities for local industry;
providing contractors with increased access to, and raised awareness of, local industry capability;
exposing local industry to world’s best practice in workplace innovation, e-commerce and use of new technologies and materials; and
developing local industry’s international competitiveness and flexibility in responding to changing global markets by giving local industry a fair opportunity to compete against foreign suppliers.
8.15
Procurement subject to the VIPP is categorised as either a ‘standard project’ or ‘strategic project’ depending on the scope of the purchase.
8.16
Standard procurement projects are those expected to value:
$1 million or more in regional Victoria;
$3 million or more in metropolitan Melbourne or for state-wide activities.
8.17
Suppliers bidding for a standard project subject to the VIPP may be required to indicate how they will involve local industry in the delivery of goods or services and provide a VIPP Plan outlining how these commitments will be achieved.
8.18
Strategic projects subject to the VIPP are those expected to value $50 million or more, or those deemed to be strategic by the Victorian Government.
8.19
Suppliers bidding for a strategic project must demonstrate how they will deliver a required minimum of local content throughout the procurement. Local content is defined as Australian or New Zealand goods or services, or imported goods to which local suppliers have added value. Suppliers must work with ICN to prepare a Local Industry Development Plan (LIDP) outlining their commitment to ‘local content’ and describing how this will be delivered. They are also required to meet any extra conditions imposed by the Victorian Government. According to the Australian Council of Trade Unions (ACTU) extra conditions may include:
… requirements to demonstrate other industry outcomes such as number of new and retained jobs, number of new and retained apprentices/ trainees, training and skills development of the workforce and technology transfer (such as through innovation, research and development, transfer of intellectual property or transfer of know-how).
8.20
In both standard and strategic projects, procuring agencies must include a 10 per cent weighting for local content in overall procurement evaluation criteria. For example, if evaluation criteria provides for up to 100 points, ten of these points could be allocated to the evaluation of the VIPP or LIDP Plans provided by suppliers. A local content commitment of 95 per cent within these plans would earn suppliers 9.5 points out of a possible ten towards their overall tender evaluation.
8.21
Many witnesses suggested that the operation of the VGPB policies in conjunction with the VIPP represent ‘best practice’ in procurement and urged the Australian Government to consider adopting similar policies.
8.22
The ACTU said it ‘supports the national adoption of a policy which mirrors Victoria’s’; particularly the ability to mandate local content and apply weighted criteria provided for by the VIPP. It shared an example highlighting the economic benefits this approach can achieve:
Examples of projects completed in 2015–16 include the $989 million Victorian Comprehensive Cancer Centre (VCCC). The VCCC delivered 92 per cent local content and supported 2,084 local jobs including 185 apprentices and trainees. This is four times the original number of jobs anticipated.
8.23
The Australian Workers’ Union (AWU) shared this view. It argued that the VIPP has been ‘instrumental’ in delivering considerable benefits, including ‘revitalising’ local manufacturing sector. Further, it suggested that the ongoing success of the Victorian Government procurement framework may indicate that such an approach is not contrary to Australia’s international trade agreements.
8.24
Stakeholders also commended the longer term view of the VIPP. The ACTU highlighted the importance of providing a forward work plan of strategic procurement projects:
The forward plan … provide[s] industry with early notification and … enhance[s] opportunities to engage in government procurement projects.
8.25
Mr Ian Cairns, National Manager of Industry Development and Government Relations at the Australian Steel Institute (ASI), also singled out the longer term view of the Victorian procurement framework for praise. He said the model ‘gets a tick’ from his organisation.
8.26
The AWU suggested that a major strength of the Victorian procurement framework is its ability to enable the state government to impose additional requirements on the suppliers of strategic projects. It provided an example of the economic benefits which can be obtained through this mechanism:
The Victorian Government recently mandated the use of 100 per cent steel in its 50 level crossing replacement projects. This project is expected to provide a pipeline of certainty for 10,000 Victorian steel workers.
Victorian infrastructure procurement agencies and initiatives
8.27
The Victorian Government procurement framework recognises the importance of major infrastructure procurement to the future of the state economy. There are dedicated government agencies and initiatives to ensure building and construction procurement is planned and implemented effectively, and in a manner which maximises benefit to the economy.
8.28
In 2008, the Victorian Government created Infrastructure Victoria, an independent statutory body to supply ‘independent advice on infrastructure priorities’. It performs this function by providing:
… written advice to government on specific infrastructure matters … [including]:
assessment of any major infrastructure projects proposed by government or the private sector (market-led proposals);
intergovernmental submissions; and
government’s infrastructure plans.
8.29
Complementary to the role of Infrastructure Victoria, is that of the Office of Projects Victoria (OPV), which was recently established to ‘oversee the planning and delivery of infrastructure projects’. The Office aims to improve the Victorian public sector’s project development and delivery capabilities by providing:
… expert advice on asset investment decisions and delivery, and by carefully monitoring the performance of major projects, the OPV will help to ensure we deliver the right infrastructure projects, on time and on budget.
8.30
Furthermore, all Victorian Government construction, infrastructure, civil engineering and capital works projects valued at, or more than, $20 million are subject to the Skills Guarantee.
8.31
The Skills Guarantee is a whole-of-government policy which builds on the objectives of the VIPP by fostering workforce development and employment opportunities for Victorian trainees. Under the Skills Guarantee:
… all publicly funded works contracts with a pre-tender estimated value at or in excess of $20 million (inclusive of GST) will be required to utilise Victorian registered apprentices, Victorian registered trainees or engineering cadets for at least 10 per cent of the contract works’ total estimated labour hours. The Skills Guarantee will also apply to public-private partnership (PPP) projects valued over the applicability threshold.
8.32
Mr Christopher Walton, Chief Executive Officer of Professionals Australia, spoke positively about the Victorian Government’s approach to major infrastructure procurement and urged the Australian Government to ‘look’ at adopting similar initiatives. He suggested that the creation of Infrastructure Victorian depoliticised the prioritisation of projects:
… they brought in Infrastructure Victoria and said, 'Let's take out the ribbon-cutting parliamentarians deciding the best interests’.
8.33
Furthermore, Mr Walton felt that the introduction of the Office of Projects Victoria and the Skills Guarantee were important steps towards addressing the lack of technical expertise in both the public and private sectors. He suggested that the Office of Projects Victoria helps ensure the Victorian Government remains an ‘informed purchaser’ and safeguards strong procurement outcomes. Similarly, he viewed the Skill Guarantee as an effective strategy for compelling businesses to participate in workforce development. Although, he did suggest that the Skills Guarantee needs to be measurable:
The Victorian Government now has a skills guarantee requiring 10 per cent of jobs on a procurement project to be apprentices or cadetships. That needs to be measured, because if it just says you get extra ticks if you do some training, then the private sector will tell you it means nothing.
South Australia
8.34
The merits of the SA procurement framework were also discussed at length throughout the inquiry.
8.35
SA Government procurement is primarily based on the policies of its State Procurement Board, supplemented by the Office of the Industry Advocate’s (OIA) South Australian Industry Participation Policy (IPP). The role of these two organisations and objectives of the IPP are considered in the following paragraphs.
State Procurement Board
8.36
The SA State Procurement Board is responsible for ‘facilitating strategic procurement’ through the issue of a robust Procurement Policy Framework encompassing:
governance and reporting requirements; and
procurement planning, supplier selection and contract management.
8.37
The first principle of the framework is value-for-money; defined broadly to include factors like environmental and sustainability issues, contribution to government priorities and flexibility. The Procurement Policy Framework notes:
A key principle of value-for-money is that ‘lowest price’ does not always represent the best outcome when evaluating alternative offers …
The achievement of value needs to be considered within the context of creating ‘public value’.
8.38
Generally, SA Government agencies conduct procurement independently. However, the Department of the Premier and Cabinet oversees ‘strategic’ whole-of-government procurement projects as it affords it the opportunity to negotiate contracting terms which deliver ‘great social and environmental change’.
Office of the Industry Advocate
8.39
The OIA is an ‘independent unit’ within the state public sector; focussed on using government procurement to generate local jobs, provide local suppliers with opportunities to participate in government supply chains and driving local investment. It aims to do this by:
building the capacity of local businesses to successfully bid for government procurement; and
initiating procurement reforms that remove impediments to industry participation and provide greater economic benefit to the state.
8.40
The OIA has been instrumental in strengthening the IPP and is now responsible for its implementation and compliance. To support its performance of these duties, the OIA is imbued with the authority to:
request meetings with government buyers on behalf of local companies;
review acquisition plans and tender documentation in key contracts to assess any unnecessary impediments to local companies bidding;
review tender awards to evaluate if assessment criteria has been applied;
review contracts and assess if IPP Plans are being applied well by the prime contractor; and
review tenders post award and, when necessary, make recommendations to the relevant agency, the Chief Executive or Minister for improving industry participation going forward.
8.41
The OIA is involved at every stage of procurement subject to the IPP:
… to ensure the economic contribution to the State from the procurement can be maximised through the design of appropriate specifications, market approach, evaluation plans, IPP Plans and compliance and reporting on industry participation.
South Australian Industry Participation Policy
8.42
The IPP is designed to ‘ensure that capable South Australian [SME] are given full, fair and reasonable opportunity to tender and participate in significant public and private sector projects’. It does not accord ‘special treatment’ to local businesses, according to current Industry Advocate, Mr Ian Nightingale:
It is important to note the emphasis of the policy in South Australia is not about special treatment or price preferencing but rather about recognising the important contribution businesses make to the South Australian economy through labour and supply inputs.
8.43
The IPP applies to all government expenditure above $33 000 for the following activities:
the procurement of goods or services;
public-private partnership projects;
federally-funded infrastructure projects being managed by the SA Government; and
private sector projects receiving significant SA Government support.
8.44
The IPP places increasing obligations on procuring agencies and prospective suppliers as the expected value of procurement rises. For procurement expected to value between $33 000 and $220 000, procuring agencies (not undertaking direct procurement) must seek at least one quote from a local source. They are also required to perform an Employment Contribution Test (ECT) to determine capacity for local businesses to provide the required goods or services, and to consider resulting economic benefit to the state.
8.45
For procurement expected to value between $220 000 and $4 million ($1 million in regional SA), procuring agencies are encouraged to consult the ICN throughout the market research phase of procurement. An ECT must be conducted and its findings incorporated into the overall tender evaluation with a minimum weighting of 15 per cent.
8.46
For procurement expected to value between $4 million ($1 million in regional SA) and $50 million, prospective suppliers must prepare a Standard IPP Plan. The IPP Plan is assessed by the OIA and its findings must be incorporated into the overall tender evaluation with a minimum weighting of 15 per cent.
8.47
For procurement expected to value at, or above $50 million, prospective suppliers must prepare a Tailored IPP Plan. The Tailored IPP Plan should detail potential for SME participation in research, design and delivery work, and economic benefits to the state. It is assessed by the OIA and its findings must be incorporated into the overall tender evaluation with a minimum weighting of 15 per cent.
8.48
Mr Nightingale said that the independent assessment of IPP Plans by his office is important as it ensures that the value accorded to the unique economic benefits offered by different suppliers is not influenced by the prices quoted:
My office scores those industry participation plans, and we provide that score back to the purchasing agency, so it puts no burden on the agency…
The staff in my office who are scoring those industry participation plans are not seeing the price and they are not seeing the other aspects of the quote, and that is quite deliberate…
… so they are not being influenced by the price that has been quoted.
8.49
Mr Nightingale explained that the role of the OIA extends to finalising the IPP Plan of the successful bidder and monitoring compliance with the resulting contract (which includes obligations from the IPP Plan):
Once the successful tenderer has been identified then my office goes back and fine-tunes that industry participation plan with all of the commitments that were made in it so it is completely accurate. Once that fine-tuning or that finalisation has been done, the industry participation plan becomes an addendum to the contract and it is a commitment in the contract.
… if I found that any of those commitments were not being fulfilled, I would issue a notice of direction to the company to provide evidence why they were not delivering on that particular element.
8.50
The SA Government is currently considering enshrining the independence of the OIA in legislation. Mr Nightingale, said becoming a statutory body will strengthen the OIA’s ability to monitor supplier compliance with contracted industry participation plans:
… at this point in time, my role is as a third party to the contract. If you can imagine, it is between a particular agency and that minister and the head contractor. If I had a company that refused to give me [information] … then I would need to go back to Cabinet, Cabinet would need to agree to instruct the relevant Minister and then that Minister would need to instruct his or her [Chief Executive] CE. The proposed bill would give me the power to require that that information relating to the commitments made in the industry participation plan be provided to me by law. The bill also provides financial penalties if that is refused. That is something the industry has been asking for, for a long while...
8.51
Weightings applied to any procurement subject to the IPP where an ECT or IPP Plan is required, can be increased by the procuring agency, a Minister or the State Premier to leverage economic benefits. Mr Nightingale said that the minimum weightings have already increased since they were first introduced from an original requirement of two per cent, to the current 15 per cent. He suggested that they could be increased further in the future. However, Mr Nightingale pointed out that the current configuration of the IPP, combined with the Industry Advocate role, is still securing significant economic benefits for the state:
The average value of State Government goods and services contracts awarded to suppliers with a predominant workforce within the State has grown from 65 per cent to almost 80 per cent …
On the average reported levels of procurement spending, this increase raises the economic contribution to the State by over $230 million per annum.
8.52
Mr Nightingale used an example to illustrate these benefits:
The Premier has signed a contract with CSC Australia Pty. Limited (CSC), a global ICT services supplier, for the provision of End User Computing (EUC) services to the South Australian Government. The Industry Participation commitments include creating job opportunities through partnership with industry, with the supplier increasing its workforce in [SA] from 100 to more than 700 by the end of the contract, including the creation of 400 new jobs. In addition it is also expected to deliver savings of $11 million per annum.
8.53
Businesses also appear to support the OIA and the IPP. According to Mr Nightingale:
The feedback … from industry over the last couple of years is that they appreciate the consistency. It is a very consistent model … every industry participation plan is the same—it has the same format, and that goes back to the simplicity—they know exactly what they are providing ...
8.54
Many witnesses to the inquiry were familiar with the SA Government procurement framework and the role of the OIA. All spoke positively of the model and many recommended that the Australian Government incorporate elements of it into the Commonwealth procurement framework.
8.55
The Industry Advocate himself suggested that a corresponding position should be introduced at the federal level to direct and support the application of the new CPRs:
My recommendation to the Commonwealth is that they consider some sort of independent office to oversee [the new clauses] use. It maintains consistency. It can provide advice to agency staff who need it.
8.56
The AMWU and Ms Megan Motto, Chief Executive Officer of Consult Australia, agreed. Ms Motto suggested that:
… [advocates] are very useful consultation mechanisms that provide forums to fill the gap between the experiences on the ground of industry and the experiences of procurement agencies.
8.57
The AMWU argued that an Industry Advocate could help identify areas without a local industry presence and ‘allow future tenders to be quarantined for Australian SMEs to help grow a local capacity’.
8.58
Mr Nightingale also suggested that the requirement of CPR clause 10.30 to consider economic benefit could be strengthened by incorporating employment and investment outcomes as explicit criteria for consideration, in line with the IPP. Similarly, Professionals Australia submitted that considering workforce development in Commonwealth procurement will encourage businesses to employ for the longer term:
Tenders will be encouraged to invest long term, and build a workforce capable on winning future contracts, rather than a workforce based on one project.
8.59
PT Blink advocated for a CPR requirement to consider the potential of procurement to drive economic benefit early in an approach to market; this is a current responsibility of the OIA.
8.60
A number of witnesses commented on the possibility of a ‘uniform’ analytical framework for assessing supplier bids for procurement; in a manner similar to SA agencies’ use of the ECT to assess local business capacity to participate in procurement. Ms Michele O’Neil, National Secretary of the Textile Clothing and Footwear Union of Australia (TCFUA) said consistency is ‘really important’. She argued:
Any sort of framework that is applied in a consistent manner across different departments would be important for our industry because we often see a very inconsistent approach, depending on which department you are dealing with.
8.61
However, Ms Motto warned that a ‘one size fits all solution’ would be inappropriate for more complex or larger procurement projects, particularly construction projects.
8.62
Finally, Mr Nightingale suggested that the CPRs should allow procurement evaluation criteria to be weighted to favour greater consideration of economic contribution where more than one supplier bid is competitive. The AWU may also support this measure. It said that weighting consideration of IPP plans as part of overall tender evaluation in SA provides domestic suppliers with a ‘significant boost’ when competing against ‘lower quality imports’.