Introduction
2.1
This chapter considers:
the value of procurement undertaken both directly by the Australian Government, and by state and territory governments on its behalf;
Australian Government procurement of locally made or supplied goods, and the potential impact on the Australian economy; and
the operation of the Commonwealth Procurement Framework, including the application of the Commonwealth Procurement Rules (CPRs), procurement connected policies and Department of Finance guidance material.
Value of government procurement
2.2
The Australian Government’s annual expenditure on goods and services is substantial. In the 2015-16 financial year Commonwealth agencies reported entering into 70 338 contracts valued at $56.9 billion. Altogether 10 793 suppliers (9 595 of which were small to medium sized enterprises) delivered goods to the value of $24.5 billion and services totalling $32.5 billion. According to the Department of Finance, the top five categories of goods and services procured directly by the Australian Government are:
commercial, military and private vehicles, plus accessories and components;
management, business and administrative services;
building, construction and maintenance services; and
engineering, research and technology based services.
2.3
In addition to this direct expenditure, the Australian Government also funds state and territory governments to procure goods and services on its behalf.
2.4
The exact value of state and territory government procurement funded by the Australian Government is unclear as Commonwealth funding is not always provided explicitly for the purposes of a specific procurement. State and territories use a mixture of federal funding and independently generated revenue to finance different purchases. However, a sense of the scale is given by considering total Australian Government funding to the states in conjunction with states’ expenditure on infrastructure. Witnesses provided evidence that infrastructure is one of the largest Commonwealth expenses that is primarily delivered by state and territory governments. Mr Christopher Walton, Chief Executive Officer of Professionals Australia, explained:
…one of [the Australian] Government's largest procurement spends is infrastructure, which it is then relying on states to deliver. The Commonwealth, in its own right, procures a lot but it procures huge amounts of infrastructure and relies on state governments for delivery.
2.5
The Australian Government’s 2017–18 budget papers show that the Commonwealth expects to provide state and territory governments with a total of $119 billion in funding consisting of:
… payments of $55.9 billion for specific purposes like schools and hospitals and general revenue assistance of $63.1 billion.
2.6
Payments to individual state and territory governments in the 2017–18 budget papers are:
$35 148 million to New South Wales;
$27 262 million to Victoria;
$26 787 million to Queensland;
$8 334 million to Western Australia;
$10 576 million to South Australia;
$3 625 million to Tasmania;
$2 136 million to Australian Capital Territory; and
$4 193 million to the Northern Territory.
2.7
It is unclear how much of this Commonwealth funding is used by states to procure goods and services. However, infrastructure is one of the largest Commonwealth expenses delivered by state and territory governments, and state budget papers show the following expenditure on infrastructure across the forward estimates:
$73.3 billion in New South Wales from financial year 2016–17 to 2019–20;
$38.4 billion in Victoria from financial year 2017–2018 to 2020–21;
$1.8 billion in Tasmania from financial year 2016–17 to 2019–20;
$1.75 billion in the Northern Territory in financial year 2017–18;
$12.1 billion in South Australia from financial year 2016–17 to 2019–20;
$22.9 billion in Western Australia from financial year 2017–17 to 2019–20; and
$40 billion in Queensland from financial year 2016–17 to 2019–20.
2.8
Mr Ian Nightingale, Industry Advocate of South Australia, provided similar evidence, but pointed out that state and territory government spending on infrastructure varies from year to year:
In total [South Australian Government procurement] is approximately $6 billion. Per annum it is around $4 billion in goods and services and about $1.8 billion in building and infrastructure. But I do need to clarify that it fluctuates. If you build a massive hospital in one year then you will have a much higher building and construction figure.
2.9
The Department of Finance suggested that goods and services purchased by the states on the Australian Government’s behalf shouldn’t be considered procurement:
Payments to the states and territories are subject to intergovernmental agreements. Intergovernmental agreements are not procurements …
2.10
It is unclear what conditions the Commonwealth imposes on the state and territory spending funded through ‘intergovernmental agreements’. The Department of Finance noted that state and territory governments conduct procurement according to their own procurement frameworks:
Similar to the Commonwealth Procurement Rules, each state and territory procurement framework reflects international trade obligations applicable to state and territory jurisdictions which arise from international agreements negotiated by the Commonwealth, such as the Australia United States Free Trade Agreement and the Japan Australia Economic Partnership Agreement. State and territory obligations are similar to those of the Commonwealth, though they differ with respect to the applicable thresholds, exemptions, and covered entities.
2.11
Further, the Department of Finance suggested that it would be difficult, if not impossible, for the Australian Government to require states to apply the CPRs to procurement funded by the Commonwealth:
The Commonwealth Procurement Rules are designed only to apply to federal government entities. They are not designed to be imposed on states and territories for their procurements, or for state and territory expenditures using funding from the Commonwealth. Imposition of Commonwealth Procurement Rules on state and territory procurements, or state and territory expenditures, would require careful consideration and legal advice on a case by case basis to address:
consequential procurement outcomes,
Procurement of Australian made or supplied goods
2.12
It is difficult to determine the proportion of government procurement that is supplied by Australian businesses, or whether the goods and services being delivered are Australian made. The Department of Finance collects data on procurement undertaken directly by Commonwealth agencies; however it is limited to information about suppliers’ Australian Business Numbers (where available) and business addresses. When a business address in Australia is taken as an indicator of Australian supply this data indicates that:
84.8 per cent of goods and services, by value, were likely to have been sourced from Australian suppliers, or in the case of services, delivered by Australian suppliers;
97 per cent of services were likely to have been sourced from Australian suppliers; and
69 per cent of goods were likely to have been sourced from Australian suppliers.
2.13
However, a business address in Australia is not a reliable indicator of Australian supply. Witnesses pointed out that international companies may have Australian offices, and Australian businesses may manufacturer their products—or components of their products—overseas.
Mr Myron Mann, Managing Director of South Australian footwear manufacturer Rossi Boots, provided one such example. He noted that Rossi Boots lost a Defence Materiel Organisation (DMO) tender for 100 000 pairs of non-combat boots to a Western Australian based company offering footwear manufactured in Indonesia.
2.14
Similarly, the Department of Finance highlighted the difficulties in determining the proportion of Australian-made goods in a time of integrated global supply chains :
A consensus definition of what is ‘Australian’ is also difficult to achieve as, for example, goods may be made of components from various sources.
2.15
Mr Arthur Rorris, Secretary of the South Coast Labour Council (SCLC) used steel manufacturing to illustrate this point:
There seems to be a lot of confusion and inconsistency in what is Australian-made steel, and I am sure that you can use that for other products and goods. Is it the steel itself that comes out of those furnaces? Could it be imported steel that is fabricated in Australia? Is it a combination of the two?
2.16
Some state and territory governments collect data on locally procured content. The South Australian Industry Advocate reported that the average value of state government contracts awarded to suppliers with a predominately South Australian based workforce was 65 per cent. The Victorian Government reported that $5.43 billion worth of procurement commenced in the 2015–16 financial year and ‘will support approximately 5 556 local jobs and 510 local apprentices and trainees.’ However, there is little transparency around the amount of local content procured by state and territory governments using Commonwealth funds.
Impact of Commonwealth procurement
2.17
The total value of government procurement undertaken in Australia is significant. Witnesses highlighted the positive impact this expenditure has on the economy when governments purchase Australian made goods or services, or engage Australian businesses.
2.18
Professionals Australia asserted that local procurement can support Australian businesses to grow and generate employment:
Every time the government spends tax payer dollars, it provides the chance for a company to provide its services. These companies then employ people to carry out their work. In doing so, government procurement directly contributes to the health of the Australian economy.
2.19
This point was corroborated by Mr Robert Schweitzer, former Managing Director of RMS Distribution Services, who described the impact of a Department of Defence contract his company held:
The account in terms of our business represented about three per cent of the company's turnover and 2.5 per cent of the profit, yet there were seven per cent of our staff—in other words, it was a very high labour component compared to the rest of our business.
2.20
Mr Walton, Chief Executive Officer of Professionals Australia, suggested that strategic procurement can boost workforce development. He drew attention to the Victorian Government’s procurement framework which requires contracted businesses to provide training opportunities:
… [the Victorian Government] brought in the Major Projects Skills Guarantee where projects over a relatively low limit required at least 10 per cent of the jobs on it to be for engineering cadets, graduates or apprentices.
2.21
Mr David Giles-Kaye, Chief Executive Officer of the Council of Textile and Fashion Industries of Australia, said procurement can also be used to foster industry innovation:
In the vastly larger fashion market [designer innovation] is driven by consumers, very many of who recognise the broader value of a better product. There is the opportunity in government to use procurement as a tool for encouraging investment in innovation …
The only example of this I know of in our industry is the current combat uniform for the Australian Defence Force, which is required to be made in Australia … This is a good thing, and it does maintain important capability in country and supports very many jobs.
2.22
Mr Andrew Dettmer, National President of the Australian Manufacturing Workers’ Union (AMWU) went further, suggesting that procurement could be strategically deployed to create whole new industries:
We also know that industries can be created around particular sets of procurement decisions. We know that if there is a will to do so and a legislative basis to support it, that those industries can be created which are going to be nation-building.
2.23
This idea is supported by the Construction Forestry Mining and Energy Union of Australia (CFMEU) and the Textile Clothing and Footwear Union of Australia (TCFUA). In a joint submission to the inquiry, the unions noted that domestic procurement supports private investment in Australian industries:
Spending locally not only directly creates jobs in Australian industries, it also has a multiplier effect in that it increases economic activity in downstream industries and communities and can stimulate private investment in Australian industries.
2.24
However, Mr Stephen Gargano, National Research Officer with Professionals Australia, pointed out that the impact procurement has on the Australian economy is largely determined by the policies informing how officials procure goods and services, and the obligations imposed on contracted suppliers:
Obviously, [the impact] is going to differ depending on the item being procured, the type of procurement and the government agency, but at a very minimum we would be looking at items like job creation, economic growth, skill development, workforce development, local content, the capacity for a procurement to stimulate the economy or stimulate specific industries, and capacity to contribute to the development or growth of industry such as submarine or boat building.
Commonwealth Procurement Framework
2.25
The Australian Government’s Commonwealth Procurement Framework outlines the principles and rules guiding officials’ use of public funds to procure the goods and services required to support its policies and programs. It is a subset of the Resource Management Framework which applies to Commonwealth agencies and governs the effective and ethical management of public resources. The Resource Management Framework consists of the Public Governance, Performance and Accountability Act 2013, the Public Performance and Accountability Rule 2014 and the Financial Reporting Rule. The Commonwealth Procurement Framework is enabled by these rules and legislation and considered a subset of them.
2.26
The three main elements of the Commonwealth Procurement Framework are:
the Commonwealth Procurement Rules (CPRs);
Department of Finance procurement guidelines and resources; and
procurement connected policies.
Commonwealth Procurement Rules
2.27
The CPRs direct the way non-corporate Commonwealth agencies purchase goods and services, and articulate the requirements for Commonwealth officials performing duties in relation to procurement. They reflect Australia’s international trade obligations and provide for a variety of procurement arrangements including whole of government agreements, panel arrangements and multi-use lists.
2.28
The CPRs are issued by the Minister for Finance under section 105B(1) of the Public Governance, Performance and Accountability Act 2013 (PGPA Act). They are divided into two parts supplemented by appendices.
2.29
Division One of the CPRs sets out the rules which apply to all procurement, no matter the value of goods or services to be purchased. Division One rules aim to ensure procurement:
achieves value-for-money;
is conducted in an efficient, effective, economical and ethical manner;
is accountable and transparent;
engages sensibly with risk; and
is undertaken using appropriate procurement methods.
2.30
Division One rules require that procurement be conducted using one of three methods: open tender, prequalified tender or limited tender.
2.31
Open tender involves ‘publishing an open approach to market and inviting submissions’.
2.32
Prequalified tender involves inviting submissions from:
a shortlist of potential suppliers that responded to an initial open approach to market on Austender;
a list of potential suppliers selected from a multi-use list established through an open approach to market; or
a list of all potential suppliers that have been granted a specific licence or comply with a legal requirement, when the licence or compliance with the legal requirement is essential to the conduct of the procurement.
2.33
Limited tender involves approaching one or more suppliers to make submissions. This method may only be used in low value procurement or procurement subject to specific conditions listed in Division Two of the CPRs. For example, ‘for reasons of extreme urgency brought about by events unforeseen’, or ‘in the case of a contract awarded to the winner of a design contest’.
2.34
Division Two lists rules which apply in addition to Division One rules when the expected value of procurement is at or above one of the following thresholds:
$80 000 for general procurement by a non-corporate Commonwealth agency;
$400 000 for the procurement of construction services by a prescribed corporate Commonwealth agency; or
$7.5 million for the procurement of construction services by a non-corporate Commonwealth agency.
2.35
Division Two rules govern how procurement valued above these thresholds should be conducted. They specify principles including:
the conditions in which a limited tender may be undertaken;
minimum time frames for procurement; and
consideration of the broader benefits to the Australia economy for procurement expected to value above $4 million.
2.36
Appendix A details the types of procurement exempt from Division Two despite being above one of the relevant thresholds, for example the procurement of blood plasma or goods or services for the Defence Intelligence Organisation. Appendix B provides a list of definitions.
Department of Finance procurement guidance materials
2.37
The Department of Finance is the Commonwealth agency with responsibility for maintaining the Commonwealth Procurement Framework. It provides a range of resources to support other Commonwealth agencies to undertake procurement that is compliant with the Framework.
2.38
The Department’s website has information on procurement tailored to Commonwealth agencies and officials, as well as industries and businesses interested in selling goods and services to the Australian Government. Online resources offered by the Department include:
the CPRs, information about recent amendments and how the rules should be applied;
the Procurement Bulletin, a monthly e-magazine discussing new developments in procurement and advertising future procurement activities;
the Commonwealth Contracting Suite, a collection of ‘smart’ forms to assist officials to prepare documentation for procurement valued under $1 million;
ICT procurement strategies and national frameworks, policies, information on panel arrangements, and procurement guidelines;
links to a separate website which explains Commonwealth procurement processes to businesses including a Guide to Selling, FAQs and case studies;
links to the AusTender website and information for industry about Commonwealth agencies’ annual procurement plans and multi-use lists;
a description of the Procurement Coordinator’s role and access to their blog promoting changes to the Commonwealth Procurement Framework; and
Resource Management Guides, such as Commonwealth Grants and Procurement Connected Policies: Resource Management Guide No. 415 which outlines the process for establishing procurement connected policies.
Procurement connected policies
2.39
In addition to the CPRs, Commonwealth agencies must also comply with procurement connected policies. The Australian Government wields considerable economic influence through procurement. Procurement connected policies seek to utilise this influence to drive policy outcomes by placing additional requirements on Commonwealth agencies’ procurement activities.
2.40
Procurement connected policies are approved by Cabinet and managed by the Commonwealth agency which proposed their introduction. It is Commonwealth officials’ responsibility to ensure they inform themselves of the policies that apply to procurement they are conducting. Until 2014, there were 24 procurement connected policies administered across 11 government departments; however, in recent years many of these policies have been abolished and there are now only four:
the Indigenous Procurement Policy;
the Workplace Gender Equality Procurement Principles and User Guide;
the Australian Industry Participation Plans for Government Procurement; and
the Code for Tendering and Performance of Building Work 2016.
Indigenous Procurement Policy
2.41
The Department of the Prime Minister and Cabinet’s (PMC) Indigenous Procurement Policy took affect from 1 July 2015. It aims to ‘stimulate Indigenous entrepreneurship and business development [by] providing Indigenous Australians with more opportunities to participate in the economy’. The procurement connected policy has three components:
it sets increasing, yearly targets for Commonwealth purchasing from Indigenous enterprises;
it requires some Commonwealth contracts to be set-aside for Indigenous enterprises; and
it establishes minimum Indigenous participation requirements for certain Commonwealth contracts.
2.42
The Indigenous Procurement Policy is able to set mandatory requirements for Indigenous participation in procurement without contravening the CPRs due to exemption 17 in Appendix A of the rules. This exemption enables:
… Commonwealth entities to procure goods and services directly from [small to mediums sized enterprises] that are at least 50 per cent Indigenous owned regardless of the value of the procurement. This exemption only applies to the additional rules set out in Division 2 of the Commonwealth Procurement Rules, and refers predominantly to the requirement to approach the open market for goods and services valued above the relevant threshold ... The rules in Division 1 still apply to the procurement, including the requirement to achieve value for money.
2.43
PMC reported that in the 2015–16 financial year the procurement connected policy’s targets for Commonwealth purchasing from Indigenous enterprises were exceeded with 1 509 contracts, totalling $284.2 million, awarded to 493 Indigenous businesses. This represents almost 46 times the value of Commonwealth procurement from Indigenous businesses in previous years. Indigenous ICT Organisation, Gulanga reported that Commonwealth agencies are embracing the Indigenous Procurement Policy:
Most agencies we have spoken with are solidly behind the intent of the IPP. The hurdle is often shifting that intent into action ... The government’s vision and passion to open procurement that provides more valuable business opportunities for Indigenous entrepreneurs is commendable.
2.44
However, Gulanga noted that continuing implementation will be key to the policy’s long term success:
Given the success of the IPP to date and the demographic value of expanding and enhancing the Indigenous business community, accelerating intent into action is paramount for the enduring legacy the IPP initiative can deliver.
Workplace Gender Equality Procurement Principles and User Guide
2.45
The Department of Employment’s Workplace Gender Equality Procurement Principles and the supporting User Guide link the Workplace Gender Equality Act 2012 (WGE Act) to procurement outcomes. The procurement connected policy requires Commonwealth agencies to only procure goods and services (valued above the relevant thresholds) from organisations compliant with the WGE Act. The Workplace Gender Equality Procurement Principles have been in effect since 1 August 2013 and ‘focus on promoting and improving gender equality and outcomes for both women and men in the workplace’. Organisations with 100 or more employees must demonstrate their compliance with the WGE Act by reporting to the Workplace Gender Equality Agency on gender equality indicators and seeking a letter of compliance.
2.46
In 2015-16, the Workplace Gender Equality Agency noted in its regular publication, Australia’s Gender Equality Scorecard that organisations reporting in relation to the WGE Act were more aware of the gender equality issues in their workplace:
Employers tell us that reporting to the Agency has prompted them to take a close look at their data and face up to their own gender equality ‘hot spots’—whether it is rates of return to work after parental leave, representation of women in leadership or technical roles, or access to flexible work arrangements.
2.47
The Agency also reported modest progress in closing the gender pay gap and increases in women’s participation in leadership roles.
The Australian Industry Participation Plans for Government Procurement
2.48
The Department of Industry, Innovation and Science’s Australian Industry Participation Plans for Government Procurement was introduced on 1 January 2010 to support small to medium sized Australian businesses to participate in major investment projects. The procurement connected policy requires organisations which bid for non-corporate Commonwealth procurement valued at or above $20 million, to prepare and implement an Australian industry participation plan (AIP plan). AIP plans must:
demonstrate how the organisation will provide full, fair and reasonable opportunity to Australian industry to supply goods and services to the project; and
endeavour to maximise opportunities for Australian industry to participate in all aspects of the project.
2.49
The Department of Industry, Innovation and Science’s Annual Report 2015–16 noted that 304 AIP plans with a combined value of $13.9 billion were approved between 1 January 2010 and 30 June 2016.
2.50
The Committee notes the recent change in the Australian Industry Participation Plans for Government Procurement and further notes that this seems to have led to a dramatic decrease in the number of AIP plans implemented each year. This suggests the policy change may negatively impact the level of Australian industry engagement.
Code for Tendering and Performance of Building Work 2016
2.51
The Department of Employment’s Code for the Tendering and Performance of Building Work 2016 was introduced on 2 December 2016, replacing the Building Code 2013. The new procurement connected policy aims to ensure building contractors who tender for Commonwealth funded building work comply with:
right of entry laws for union officials;
freedom of association provisions for workers;
work health and safety regulation; and
security of payment laws.
2.52
The Building Code 2016 came into effect pursuant to the Building and Construction Industry (Improving Productivity) Amendment Bill 2017 and existing industrial agreements entered into prior to the issuing of the Building Code 2016 must be compliant by 1 September 2017. Building contractors become subject to the code from the first time they submit an expression of interest for a Commonwealth funded building work. Contractors who fail to comply with the code risk being excluded from Commonwealth funded building work.
2.53
The Electrical Trades Union and Australian Council of Trade Unions raised concerns that the retrospective application of the Building Code 2016 may breach the non-discriminatory requirements in clause 4.4 of the CPRs:
We are of the view that the newly issued federal The Building Code 2016 has the potential to breach the non-discriminatory requirements of the CPR. While one view may be that because the Building Code 2016 is applied to all building industry entities who wish to tender for commonwealth work equally, that view ignores the reality that the Code has a retrospective element that will impact some parties more than other for procurement arrangements that were in place prior to the existence of the Code.
2.54
Stakeholders also alerted the Committee to a possible contradiction between the requirements of the new Code and the amended CPRs. The Building Code specifies the use of Australian standards whereas the CPRs include an option to use international standards:
As an example, if I am builder A building a bridge in state B that has government procurement rules and also goes to the Building Code of Australia, I am legally bound by the Building Code of Australia to build that bridge to Australian standards, but the government procurement rules tell me I have to use international standards. So there is a contradiction between the two agreements.