Government Procurement
5.1
This chapter outlines the Australian Government's current procurement
frameworks and policies in relation to steel, and details issues raised by inquiry
participants regarding past and current procurement policies.
5.2
The chapter focuses on issues raised that have not been addressed in the
recent revisions to the Commonwealth Procurement Rules, which came into effect
on 1 March 2017, and ends with a committee view and recommendations to address aspects
of current government procurement policies that continue to disadvantage the
Australian steel industry. It should be noted that much of the evidence that
this inquiry received related to a previous iteration of the Commonwealth
Procurement Rules.
5.3
A number of other recent parliamentary inquiries have considered or are
considering the issue of government procurement and local content, including
the Joint Select Committee on Government Procurement, which tabled its final
report in June 2017; and this committee's ongoing inquiry into the future of
Australia's naval shipbuilding industry, which is due to report in June 2018. As
appropriate, evidence received and findings made in these inquiries are
referred to throughout this chapter.
Current Commonwealth Procurement Rules
5.4
A number of the current Commonwealth Procurement Rules (CPRs) are
relevant to the Australian steel industry and set out below.
5.5
Much of the evidence that this inquiry received concerned previous
provisions of the Commonwealth Procurement Rules that were in effect from July
2014. These were replaced in March 2017 by the amended current CPRs.[1]
5.6
The current CPRs require governments to take into account a range of
financial and non-financial costs in making procurement decisions, including
quality, fitness for purpose, the supplier's experience and performance,
environmental sustainability and whole-of-life costs.
5.7
However, Division 2 of the current CPRs sets financial thresholds at
which additional requirements apply for larger projects. These include: the
requirement that tender responses demonstrate the capability for goods to meet
an Australian standard; the requirement that relevant entities make reasonable
inquiries to determine compliance with a standard; and the requirement for
Commonwealth officials to take into account economic benefit to the Australian
economy for procurements above $4 million.[2]
5.8
The 2017 CPRs stipulate that '[a]ll potential suppliers to government must...be
treated equitably...and not be discriminated against due to their size, degree of
foreign affiliation or ownership, location, or the origin of their goods and
services'.[3]
Other government procurement policies and instruments
5.9
The Commonwealth Government has a number of other policies and
legislative instruments related to government procurement. This inquiry also received
evidence outlining the procurement policies of South Australia and Victoria and
recommendations that Commonwealth procurement adopt some of these principles.
These are outlined below because a number of their features are now evident in
the 2017 CPRs.
Australian Industry Participation
Framework
5.10
The Australian Industry Participation framework and policies are
intended to provide opportunities for Australian industry to compete for or
take part in major private and public projects. As the Department of Industry,
Innovation and Science (Department of Industry) in its submission explained,
the 'key objective of AIP policy is that Australian industry should have full,
fair and reasonable opportunity to supply goods and services to major projects'.[4]
5.11
Since the commencement of the Australian Jobs Act 2013 in
December 2013, 'proponents of major private and public projects ($500 million
and above)' have been required to develop and implement AIP Plans ensuring
'full, fair and reasonable opportunity for Australian entities to supply key
goods and services'.[5]
5.12
Since 2010, the Australian Government has required that tenderers for
government procurements of $20 million or above develop AIP Plans, including,
from 2012, Commonwealth funded infrastructure projects. The Department of
Industry explained that AIP plans:
...outline the actions a tenderer will take to provide
Australian suppliers, especially small and medium enterprises, with full, fair
and reasonable opportunities to supply goods and services on a project.[6]
5.13
In February 2017, the Department of Industry noted that the government
is currently working with states and territories to review the Australian
Industry Participation National Framework. The review is considering 'opportunities
for greater consistency of industry participation requirements between
jurisdictions and better information sharing and reporting of outcomes for
Australian industry'.[7]
5.14
Australian states and territories also have industry participation
policies to assist local businesses to compete for private and public projects.
These include, for example, the Victorian Industry Participation Policy, outlined
below.
Code for the Tendering and
Performance of Building Work 2016
5.15
The Code for the Tendering and Performance of Building Work 2016 (the
Code), which applies to steel used in building work, requires all new tenders
for Commonwealth-funded work to provide information on: the extent to which
Australian sourced and manufactured building materials will be used; whether
the building materials comply with Australian standards; the impact of the
project on jobs; whether the project will contribute to skills growth; and the
whole-of-life costs of the project.[8]
5.16
The Code requires Commonwealth funding entities to only enter a building
contract 'with a code covered business...where that business uses products in
building work that comply with the relevant Australian standards published by,
or on behalf of, Standards Australia'.[9]
5.17
The Code's model clauses for work directly funded by the Commonwealth
require tenderers to acknowledge that they will comply with the Code and ensure
that their subcontractors do so. Tenderers also must declare that they will
only enter into a subcontract in which 'the subcontractor undertakes to only
use products in relation to the Works that comply with the relevant Australian
standards published by, or on behalf of, Standards Australia'.[10]
5.18
The Code is an important instrument for government procurement, but the
question of who holds responsibility for the enforcement of compliance with the
Code is yet to be determined.
South Australian Government
procurement policies
5.19
The committee received evidence outlining the procurement policy of
South Australia, aspects of which have been adopted in the 2017 CPRs. The South
Australian procurement policy, notably, requires reinforcing and structural
steel used in projects that the South Australian Government funds to:
...fully meet the requirements of the relevant Australian
Standards. Steelwork procured for public projects must be supplied by
independently‑verified fabricators who are capable of meeting required
standards to ensure its quality and safety.[11]
5.20
The South Australian Government also has a Steel Economic Participation
Policy, requiring 'tenderers to commit, through an Industry Participation Plan,
to the level of economic benefit the State can expect to receive from packages
of work under the contract'.[12]
5.21
South Australia's Steel Task Force was given responsibility for 'the
coordination of action across government to give Arrium's mining, smelting and
manufacturing operations in and around Whyalla every chance to thrive'.[13]
This has included working with South Australia's Industry Participation Advocate
'to establish a third party audit, to ensure State Government projects use certified
Australian standard steel'.[14]
5.22
The South Australian Government's Support Our Steel website also
outlines its steel industry participation initiative, which states that it aims:
...to ensure all South Australian Government projects include
contract conditions specifying that:
-
Steel must be sourced from mills with Australasian Certification
Authority for Reinforcing and Structural Steel (ACRS) third party
certification.
-
Steelwork must be sourced from steel fabricators independently
certified to the recently created National Structural Steelwork Compliance
Scheme.[15]
5.23
The South Australian Industry Advocate, Mr Ian Nightingale, advised that
the reason the South Australian Government had selected ACRS third party
certification was because this body provides accreditation to foreign steel
mills, thereby not interfering with Australia's trade obligations, and because
of the number of audits that ACRS carries out.[16]
5.24
Mr Nightingale outlined that the South Australian Government provides financial
assistance to steel fabricating businesses so that they can quickly obtain
certification and apply for government contracts. He also gave more detail
about the South Australian Government's planned third-party audit for 12 months
to ensure that contractors are meeting the obligations of their contracts,
'right through from where the steel is being sourced from – is it an ACRS
accredited mill? – to the documentation around the steel certification'. This
audit would examine a random sample of state government projects, followed by
investigations of breaches of contract if necessary.[17]
5.25
Mr Nightingale explained that the specific approach the South Australian
Government takes to defining 'economic value' in procurement involves measuring
economic value in terms of 'labour, capital investment and supply inputs'.[18]
This means making a distinction between economic benefit and price.[19]
He further noted three key elements in the state's industry participation
policy: looking at labour issues (for example, employment and where that
employment is sourced from); where the supply inputs come from (in this case,
steel and the components to the steel); and the capital investment to the state.[20]
5.26
The Industry Advocate has the power to intervene, Mr Nightingale advised
the committee, if there is 'a deviation from the commitments made to the
particular tender and when those industry participation plans were assessed'.[21]
5.27
A number of submitters and witnesses to this inquiry emphasised the
benefits of the South Australian Government's procurement policies and the
positive effects of the Industry Advocate on the South Australian steel
industry. For example, the Executive General Manager of Steel Manufacturing and
Integration, Arrium Mining and Materials, told the committee that:
the South Australian and Victorian governments...have engaged
us very early on projects, and we have been able to work very successfully to
maximise local content. It is a benefit to our company, but it is also of
tremendous benefit, and has a multiplier effect, to the economy and to federal
and state governments.[22]
Victorian Government procurement
policies
5.28
Some evidence provided to the committee also drew attention to aspects
of the Victorian Government's procurement policies that have positively
impacted the steel industry. The Victorian Industry Participation Policy for
small and medium-sized enterprises (SMEs) sets minimum local content
requirements and other conditions, determined on a case-by-case basis, for
government procurements valued at $50 million or more.[23]
5.29
In some instances, minimum local content requirements have been applied
to steel used in Victorian Government projects. The Victorian Government has provided
reassurances that its policy framework meets its obligations under Free Trade
Agreements.[24]
5.30
A representative of the Australian Workers' Union highlighted how the
Victorian Government had mandated Australian-manufactured steel in some
projects:
[I]n Victoria...they are using Australian-manufactured,
Australian-made, steel 100 per cent on the rail crossings. A minimum of 86 per
cent local content has been used on their projects. That has assisted the
construction and manufacturing industry in Victoria that has been suffering,
has been going downhill...We would encourage whatever level of government in
whatever state to certainly look at what is happening in Victoria and build on
it. It is a good thing.[25]
Issues raised about government procurement
5.31
Submitters and witnesses to the inquiry raised a number of issues that
have not been addressed directly by the 2017 amendments to the CPRs. These
included calls for government procurement to explicitly favour Australian
steel; for all steel used in Defence contracts to only include local content; competitive
neutrality; a lower threshold in Australian Industry Participation Plans;
consistency across jurisdictions; monitoring of conformance; and accreditation
showing commitment to environmental sustainability.
Policies to preference Australian
steel
5.32
Mr Michael Zelinsky from the Australian Workers' Union highlighted that
more than half of government spending on steel goes to overseas producers:
The net impact has been that basically we are under 50 per
cent [that is Australian steel] in terms of overall procurement in this
country. In terms of government spending on steel, less than half of every
dollar goes to an Australian producer.[26]
5.33
The Australian Steel Institute in its submission suggested that the
future of the Australian steel industry depended on the domestic market:
For the Australian steel industry to remain viable and
profitable, it firstly needs to produce at (or near) capacity and secondly sell
as much of its product as possible into the domestic market and sell less into
the less profitable (or often unprofitable) export markets where global
oversupply has pushed down prices and margins.[27]
5.34
A number of submitters and witnesses argued that the government should
explicitly preference Australian produced steel in its procurement policies so
as to increase domestic demand for Australian steel.[28]
5.35
Mr Geoff Crittenden from the Welding Technology Institute of Australia
told the committee that '[w]e would like to see a positive procurement plan
that favoured Australian steel and Australian fabricators'.[29]
5.36
Several witnesses and submitters drew on a report by BIS Shrapnel,
commissioned by the Australian Workers' Union, to highlight the positive
effects of a government procurement policy that would favour domestic steel.
For example, Mr Wayne Phillips from the Australian Workers' Union stated:
...through the BIS Shrapnel report we call on the government
for a 90 per cent mandated use—or some other terminology—of Australian steel
products in government funded projects. The report clearly indicates to us that
that would secure our industry—us and Arrium—in this country and globally. We
do not accept that the [World Trade Organisation] blocks that. Currently, we
have a Victorian government who has mandated the use of 100 per cent local
product for their level train crossings.[30]
5.37
The BIS Shrapnel report noted an increase in the five years prior to
2015 in the use of imported steel in publicly funded projects:
Over the past five years, the share of imported steel in
publicly funded projects has increased steadily from 45 per cent in 2009/10 to
51 per cent in 2014/15, an average increase of 1 per cent per annum. If this
trend continues, then the share of imports will increase to 57 per cent by
2019/20 meaning that the proportion of domestically sourced steel will fall to
43 per cent.[31]
5.38
BIS Shrapnel proposed 'a procurement policy which aims to have at least
85 [per cent] to 90 [per cent] of local steel in all publically funded
projects', and outlined that a local steel content policy involving 90 per cent
of local steel content would cost 'an average of $61 to 80 million annually in
extra costs to the public sector', while adding 'a cumulative $1.3 billion to
real GDP over the next five years'.[32]
5.39
The same report estimated that such a policy would lead to an increase
in domestic steel used in publically funded projects from the 2014/15 annual
volume of 633kt to 1514kt, worth around $989 million in steel sales. It argued
that the extra tonnages in public sector construction would enable Arrium and
BlueScope to remain open.[33]
5.40
On the other hand, the committee also received evidence arguing against
mandated local content. Mr Mark Vassella from BlueScope Australia and New
Zealand agreed that domestic steel should be used in government procurement,
but highlighted that any such policy would be limited by Australia's
obligations to the World Trade Organisation (WTO):
We absolutely support the use of domestic steel—that is
vitally important for us. Our view is that it is difficult to have mandated
percentages, particularly in relation to the WTO requirements. Any policies
that reflect competitive neutrality and take into account the value of domestic
manufacturing—those domestic tonnes are vitally important to our business, but
we have not gone as far as suggesting mandated percentages, because of the
challenges we think that brings governments.[34]
5.41
Best Bar Reinforcements was strongly against a policy that would prevent
any company using imported steel tendering for government projects, arguing:
[T]his would essentially hand OneSteel and BlueScope a
regional monopoly in supply of steel for government projects...OneSteel and
BlueScope do not produce goods that compete [domestically], so essentially such
a requirement would mean that there is no competition for government tenders in
the relevant state. The cost of infrastructure projects would increase significantly
because, in the absence of any other suppliers, BlueScope and Arrium would be
able to win tenders at any price they named.
While this may assist BlueScope and Arrium, it would cause
significant injury to the rest of Australia's steel industry, as well as the
tax payers who fund the infrastructure projects. Additionally, such a policy
would run the serious risk of breaching the State's obligation not to enter
into contracts or arrangements if to do so would have the effect of seriously
lessening competition.[35]
5.42
On the question of whether AIP Plans could be used to increase the use
of Australian steel in government contracts, a representative from the Department
of Industry stated: 'I think the answer is a fairly clear no, under a provision
for the AIP framework being restricted to a full, fair and reasonable
opportunity to compete and bid for work'.[36]
5.43
The Department of Industry in its submission outlined that the AIP
Framework does not have mandated minimum local content and is subject to Australia's
international trade obligations:
The [AIP National] Framework does not mandate a minimum level
of Australian content and Australian suppliers must be competitive in terms of
price, schedule and capability to be considered for contract award. Activities
under the Framework are consistent with Australia's international obligations,
including those under the World Trade Organisation and Free Trade Agreements.[37]
International obligations
5.44
Australia has a range of specific obligations regarding government
procurement practices under a number of international agreements. To the extent
these obligations may be relevant to the current Australian Government
procurement framework in relation to steel, or to any potential changes to that
framework, they are set out below.
5.45
While not yet a signatory, Australia is an observer to the WTO Agreement
on Government Procurement (GPA). In September 2015, Australia presented an
initial accession offer to the WTO Committee on Government Procurement to
become a party to the GPA. As of November 2017, Australia had presented its
second revised offer to the Committee but had not yet become a party.[38]
5.46
Should Australia become party to the GPA, it will be obligated to base
its procurement policies on the principles of transparency and non-discrimination,
as is the case in Australia's FTAs, and for foreign parties to the GPA
tendering for government contracts be treated equally in government procurement.[39]
5.47
Currently, Australia maintains exemptions in all free trade agreements,
including exemptions for defence and for SMEs. For example, the
Australia-United States Free Trade Agreement may allow government procurement
policies to preference SMEs.[40]
5.48
However, the Joint Standing Committee on Government Procurement in its
inquiry into 2017 Commonwealth Procurement Rules heard evidence expressing
concern that by acceding to the GPA, Australia could risk losing its current
flexibility to exempt SMEs and support local suppliers in government
procurement policies.[41]
5.49
Similarly, under the Australia and New Zealand Government Procurement
Agreement (ANZGPA), the Commonwealth, states and territories are required to
treat New Zealand suppliers on an equal basis to Australian suppliers in making
procurement decisions, and vice versa.[42]
The ANZGPA states that value for money should be the primary determinant in all
procurement decisions.[43]
5.50
Australia is also a party to free-trade agreements (FTAs) that include
procurement commitments with Singapore, the United States, Chile, Korea and
Japan. While Australia's current FTAs with Thailand and China currently do not
include government procurement commitments, they allow for the possibility of
future negotiations to include government procurement.[44]
Defence procurement to only use local
content
5.51
Some of the evidence taken by the committee stressed the importance of
steel to the Australian defence industry, and questioned why local content is
not mandated in Defence contracts, given relevant exemptions in our trade
agreements. Mr Zelinsky from the AWU noted that some countries have legislated
that only local steel can be used in Defence contracts:
That lever, the procurement lever, is there for every
government around the world, so it comes down to how hard or how vigorously
each government wants to pull that lever. The American government makes it very
clear in the Buy American Act. I think what is also interesting within that is the
so‑called Berry amendment, which says if it is for a defence contract it
has to be 100 per cent American produced steel. We are having a very large
debate at the moment around submarine contracts and around various other
maritime acquisitions in our Navy. There is going to be a lot of steel used in
that. Some form of Berry amendment in the Australian legislative procurement
mechanisms would be very welcome.[45]
5.52
The South Australian Industry Participation Advocate also mentioned this
issue in his evidence, stating that in the United States, '[t]here is a clear
piece of legislation that affects that 100 per cent [American] steel for
Defence contracts and that may be something that the Australian Government
needs to consider'.[46]
5.53
The BIS Shrapnel report highlighted the Buy American Act and the
benefits that a local steel content policy in Defence contracts would bring to
the domestic industry:
If these projects were also subject to a local steel content
policy, then there is upside to the above tonnages from the construction
sector. It should be noted that under the US 'Buy American Act', the Berry
Amendment requires certain purchases to be 100% American in origin. If the
Commonwealth aimed for a high level content for Australian defence expenditure,
it would have significant benefits, to not only the steel sector, but other
suppliers. If the next round of submarines are built in Australia, and further major
defence projects are undertaken, then a local content policy would realise
further tonnages for domestic steelmakers.[47]
5.54
The Whyalla Branch Representative of the Australian Workers' Union also contended:
Part of our mantra here is that Defence spending should be
looking at Aussie steel as well. If you are spending money on Aussie defensive
devices, and they need steel to be made, I do not see what reason you could
come up with to give it to another country to supply other workers with work
and to bring the steel back into the country and use it here. It is crazy to
me.[48]
5.55
The Australian Manufacturing Workers' Union highlighted the risks of
relying on imported steel in the defence industry, arguing that 'complete
reliance on imported steel for the nation's defence industry represents an
existential threat in any scenario where the defence forces are called upon to
defend Australia'.[49]
5.56
Currently, Australian Industry Capability plans are required for Defence
procurements above $20 million or where procurements will impact Sovereign
Industrial Capabilities. The Australian Industry Capability Program under the
Department of Defence does not mandate local content. However, its stated aims
include providing 'opportunities for Australian companies to compete on merit for
defence work within Australia and overseas'.[50]
5.57
The issue of local content in Australia's naval shipbuilding industry has
been taken up by the Senate inquiry into the future of Australia's naval
shipbuilding industry, due to report in June 2018.
Competitive neutrality
5.58
The committee heard that Australian businesses often incur additional
costs than some of their international competitors because they may operate in
a stricter regulatory environment. The Chief Executive of the Australian Steel
Institute outlined some of the areas that may cause competitive disadvantage:
I want to understand the disadvantages that [the Australian
steel industry] has vis-a-vis some of its international competitors, because
they do not face any of those issues. It is twofold. The international players
get subsidies on land, they are state owned and they get support around power
and support around all sorts of issues. Our businesses here have higher levels
of standards to meet around occupational health and safety, the environment and
payroll tax. We do not argue they should not be there; we think, in a
sophisticated developing economy, we want that, but we want it reflected in the
way we do our procurement that the people they compete with compete on a level
playing field.[51]
5.59
The Chief Executive of BlueScope Australia and New Zealand proposed that
the principle of competitive neutrality between Australian and foreign
businesses be incorporated into government procurement policies to counter this
competitive disadvantage:
Major employers such as BlueScope are at a competitive
disadvantage with overseas competitors, due to inefficient state taxes, such as
payroll tax, and high costs that reduce our competitiveness. This added cost
puts us at a competitive disadvantage, especially when we are bidding for
government funded infrastructure projects. We would like to see competitive
neutrality with foreign suppliers so that when governments are making decisions
on local content our higher cost base is taken into account.[52]
5.60
The Department of Industry in its submission emphasised its commitment
to creating an environment in which Australian businesses are given equal
opportunities to tender:
The Australian Government supports an open market economy as
the best way to generate investment and employment, and is committed to
fostering an environment where Australian businesses have equal opportunities
to bid for work on major Australian public and private projects and be
evaluated on the merits of their offerings, consistent with Australia's
international trade obligations.[53]
5.61
The Department of Industry drew attention to particular advantages that
Australian plants have over international competitors, but also acknowledged
the need for further examination of areas that add to domestic costs:
Australian plants appear to have some advantage in terms of
raw materials cost for crude steel production...the drivers of labour and
overhead costs, and their impacts on cumulative stage costs, are areas that
require further investigation.[54]
5.62
It should be noted that the 2017 CPRs explicitly state that
environmental sustainably is to be taken into account in procurement decisions.[55]
Lower threshold in Australian
Industry Participation Plans
5.63
Some evidence in this inquiry called for a lower threshold for projects
to qualify for AIP Plans.[56]
For example, the Australian Steel Institute argued that:
The current threshold of $500m for a project to qualify for
an Australian Industry Participation Plan is too high. This threshold was set
amidst the mining boom with $400b of projects in the pipeline. This threshold
should be reduced to a more realistic figure like $200m.[57]
5.64
Evidence from representatives of the Australian Steel Institute further
outlined why, in their opinion, the current threshold for AIP Plans is too
high:
...the threshold was set when we had the mining boom...There
were $450 billion worth of projects in the pipeline and that was carved up to
say you needed 60 people to maintain all these 60 projects that were coming
online. We are living in a different completely different project environment.[58]
The biggest spend going forward is going to be infrastructure
and the government funded infrastructure, particularly driving the
infrastructure needs right across the country and there have been some good
initiatives as part of that. That, to my best estimate, is going to be under
$200 million so the demand curve is significantly lower.[59]
5.65
The Australian Industry Group also proposed that 'a lower threshold than
$500 million should apply, supported by effective monitoring and compliance'.
They also urged 'continuing disclosure and greater transparency of the extent
of local participation in major projects'.[60]
5.66
Mr Travis Wacey from the Construction, Forestry, Mining and Energy Union
suggested that AIP Plans should expressly take into account not just financial
cost, but also social, economic and environmental costs:
[The Jobs Act] was ultimately about providing for the full,
fair and reasonable participation of Australian industry in not just government
projects but private sector projects above a certain threshold—my recollection
is that it was $500 million. Part of that element should be to ensure that
providing that full, fair and reasonable participation takes into account the
social, economic and environmental costs, not just the price tag.[61]
5.67
In its submission, the Department of Industry acknowledged a decrease in
recent years in the number of large projects, but argued that projects below the
threshold still provided opportunities for the involvement of local businesses:
Since 2013 there has been a reduction in major project
activity particularly in the resources sector and an increase in government
funded infrastructure projects. Many of these new projects fall below the $500
million threshold but still present opportunities for local industry
involvement. Increasingly, communities are looking to such projects to provide
economic growth, particularly in regional areas. Proponents in the resources
sector have long recognised the need for a social licence to operate from local
communities and a large part of this is achieved through the provision of jobs
and opportunities to supply goods and services for a project.[62]
Consistency across jurisdictions
5.68
The Australian Industry Group called for consistency across
jurisdictions, proposing in its submission that 'Procurement agencies at all
levels of Government – Commonwealth, State and Territories commit to a
consistent approach to purchasing steel product certified to internationally
aligned Australian Standards'.[63]
5.69
The Council of Australian Governments in its Communique on 9 June 2017
stated its agreement on the important role of governments in ensuring the
future of the Australian steel industry:
Leaders further agreed that governments have an important
role to play in ensuring our funded infrastructure projects use Australian
steel and that Australian steel products are not discriminated against in
procurement processes.[64]
5.70
The issue of consistency in standards across states and territories was
broadly discussed in chapter 4.
Conformance by subcontractors to be
monitored and enforced
5.71
The committee heard concerns expressed about the level of monitoring of
subcontracting in government projects. For example, Mr Ian Waters, who appeared
on behalf of 63 businesses, gave an example of:
...a project that had New South Wales government money in it...It
was not totally their project, but it had significant New South Wales
government money in it. It was one of those public-private partnerships. This
project had a lot of tonnes of steel, the equivalent of 1,000 semitrailers of
steel lined up one after the other...A contractor paid by our state government
issued specifications for the steel, and the guidance notes in those
specifications said, 'For this project, structural steel is intended to be
sourced from imported materials and fabricated outside Australia'. And we have
found other examples where that is the case.[65]
5.72
In their submission, the same 63 businesses outlined this issue in
greater detail and argued that subcontracting of government contracts may lead
to safety concerns if these are not properly regulated:
Businesses in our group who are intimately involved with
fabrication and steelmaking have observed that the NSW and other Governments'
implementation of large Infrastructure projects involves 'handing over' the
responsibility of procurement to the tier 1 Contractors. This 'handing over'
includes every aspect of the procurement including price, delivery, decision on
who the supplier is and most importantly – quality...We have no issue with
Contractors engaging whoever they wish – from any country in the world – as
partners. This is a normal business decision. We do have an issue though with
the NSW and other Governments' management of some contractors where the
financial need of the contractor to get the cheapest price/support their
partner overrides the need of the taxpayer to have safe structures erected and
the need of hundreds of fabricators and the two steelmakers in the nation to
survive.[66]
5.73
The committee notes that this issue informed one of the recommendations
(4) made by the Joint Select Committee on Government Procurement in its inquiry
into the new CPRs. Specifically, the report recommended that 'good procurement
practices are implemented down through the supply chain so that both prime and
subcontractors:
-
Implement best practice terms and conditions; and
-
Are contractually obligated to report on those terms and
conditions'.[67]
5.74
The committee also notes that the government recently rejected this
recommendation in its response to the inquiry's report.[68]
5.75
The Department of Industry in its submission stated that the AIP
Authority currently monitors compliance with legislation for projects required
to use AIP Plans: '[t]he Jobs Act created the statutory position of the AIP
Authority to monitor compliance with the legislation and provide guidance to
proponents'.[69]
5.76
According to a representative from the Department of Industry, enforcing
compliance with standards would be antithetical to the principles of the AIP
Authority:
An Australian industry participation plan will typically
address the standards to be applied and the AIP authority, if you like, will
monitor compliance with those standards, but the authority is not in a position
to enforce standards—there are no powers to enforce which particular standards
are used. That would go significantly beyond the remit of full, fair and
reasonable, and I think you would want to have a look at the destruction that
they would cause within the general procurement framework. At the moment, there
is a clear delineation, separation and synergy of the role of AIP. I think if
you are doing such a fundamental revisit of the role of AIP and those national
frameworks then it would need to be a holistic review including the procurement
policy and the complementary AIP and any standards.[70]
5.77
The Head of the Sectoral Growth Policy Division in the Department of
Industry gave evidence suggesting that ultimately responsibility for
enforcement of non-conforming products should lie with states and territories:
With issues around conformance, the federal government chairs
the Building Ministers Forum and, not only in relation to steel but more
broadly with building products, it has been looking at ways in which
information can be better shared between agencies so that better enforcement
responses can be delivered. As well as that, the key enforcement of those
issues actually falls with the states and territories. My feeling is that that
is something that is not widely accepted, but it is a fact that the states and
territories are responsible for the use of the product that goes into building
their structures.[71]
5.78
The Australian Steel Institute submitted that procurement policies
should require a compliance management plan that sets out the steps taken to
ensure products conform to standards:
The steps taken to ensure that only products meeting
Australian standards are being used in infrastructure should...be recorded in a
compliance management plan. This should be a mandatory requirement imposed in
the procurement framework document.
This is an important management tool for complex infrastructure
projects such as the development of freeways, where no one standard or
construction code can act as a normative document to guide the development of a
quality project.[72]
Environmental accreditation
5.79
Some of the evidence that the committee received concerned the
competitive advantage that the Australian steel industry has over some imported
steel because of its greater attention to environmental issues.[73]
5.80
The Australian Steel Institute proposed that 'all steel products
[should] be procured from businesses accredited under the steel industry's
Environmental Sustainability Charter'.[74]
Members of this Charter declare that they will commit to operating their
businesses to reduce their environmental footprint, increase the efficiency of
their resource use, demonstrate environmental responsibility and share their
knowledge of sustainability with others. In addition, they commit to using
these principles when choosing their sub-contractors and suppliers as well.[75]
Accreditation is used to demonstrate companies' commitment to environmental
sustainability, especially if they are required to demonstrate this commitment
in contracts, as well as by regulators and environmental rating agencies and
bodies.[76]
5.81
Although the 2017 CPRs do not mention certification of environmental
standards, they do require that the 'environmental sustainability of the
proposed goods and services', including energy efficiency and environmental
impact, be taken into account.[77]
5.82
However, the committee notes that the government has recently rejected a
recommendation (3) from the Joint Select Committee on Government Procurement
that proposed '...the introduction and application of a procurement connected
policy requiring Commonwealth agencies to evaluate the whole-of-life
environmental sustainability of goods and services to be procured'.[78]
Commitment to research and
innovation
5.83
One submission, from a number of academic experts, proposed that the
government should consider funding research and development work to further
improve the domestic steel industry's environmental sustainability, because
this feature of Australian steel gives it a competitive advantage:
We would argue that, as countries around the world, including
Australia, seek to decrease their emissions in an effort limit climate change
impacts...the projected emissions from iron and steel production are going to
become increasingly problematic, and their mitigation will result in
significant investment....
Where other countries might currently have an advantage
because of lower costs of labour, we would argue that as the requirements for
reduced environmental emissions gradually become more stringent, our natural
resources advantage will play an increasing role in our ability to compete.
We believe that, alongside the other incentives required to
sustain our local iron and steel industry, the Australian Government should
look to establish programs to support this research and development work, in
collaboration with technology companies, universities and CSIRO.[79]
5.84
The South Australian Government called for the development of a National
Steelmaking Road Map to identify 'key strategies to ensure steel makers and
supply chain participants remain globally competitive by adopting world-best
practice'. This proposed Road Map 'would consider research and development
activities, the uptake of and commercialisation of new technology and
innovation [and] development of new materials and application'. The South
Australian Government also highlighted 'significant opportunities for
productivity improving investment by industry that will reduce emissions from
steel productions, such as harnessing significant waste heat to generate
power'.[80]
5.85
The Department of Industry outlined in its submission recent measures
that it has undertaken to fund innovation and research to strengthen
collaboration between the steel industry and research:
The Government is supporting the deepening of collaboration
between Australia's steel industry and the research sector. The Government,
through the Australian Research Council, has provided $5 million to the Steel
Research Hub, launched on 4 September 2014. The Steel Research Hub, based at
the University of Wollongong, brings together the Commonwealth, universities
and industry partners to develop cutting-edge processes and product
innovations. This will enable steel industry partners to improve their global
competitiveness.[81]
Re-establishment of a Steel
Supplier Advocate
5.86
The Australian Industry Group called in its submission for the 're‑establishment
of a dedicated Steel Supplier Advocate to improve opportunities for Australian
steel and fabrication businesses to access and supply to major projects'. They
also proposed that a major role of the Steel Supplier Advocate could be 'to
champion industry innovation and process improvements throughout the steel
supply chain' by working closely with the steel industry, industry associations
and research organisations.[82]
5.87
The Australian Steel Institute also called for the Australian Government
to:
commit resources to ensure...that a properly resourced steel
supplier advocate is allowed to operate properly to assist SME businesses
operating in the steel supply chain to identify business opportunities and to
generally champion the Australian steel supply chain...[83]
5.88
The Chief Executive of BlueScope Australia and New Zealand noted that
'[a]nything that advocates and assists us with domestic use of
steel—domestically manufactured steel—is a positive from our perspective'.[84]
5.89
The call for the re-establishment of a Steel Supplier Advocate was echoed
by the Australian Workers' Union, the Australian Workers' Union Victoria and
the Australian Manufacturing Workers' Union.[85]
Issues raised by submitters addressed in current procurement rules
5.90
The evidence that this inquiry received was provided prior to the 2017
revisions to the CPRs. A number of the issues raised in this evidence were
directly or indirectly addressed in the amended 2017 CPRs. These include
standards, third-party certification and calls for a revised understanding of
the concept of value for money, as outlined briefly below.
5.91
Several submitters and witnesses requested that government procurement
policies explicitly require the use of steel that conforms to Australian
standards.[86]
For example, the Australian Industry Group argued that 'an uneven approach to
standards...often allows foreign suppliers to avoid the same quality and
performance assessment that is applied to local producers'.[87]
5.92
Several submitters proposed compulsory third-party certification
attesting that standards are met in all steel used in government procured
contracts.[88]
This call was echoed in evidence from Mr Tony Dixon of the Australian Steel
Institute:
ASI [the Australian Steel Institute]...believes that all
Australian governments should have in place a system to ensure that products
that are used in government projects meet the standards promised. Therefore,
procurement documentation should specify that steel and steel products should
only come from suppliers who are accredited by third party programs certifying
that the supplier has in place procedures that will meet the quality and
environmental standards expected by Australian taxpayers.[89]
5.93
It should be noted that at present standards compliance ascertained by
assessing relevant certifications is compulsory only for large contracts above
certain thresholds, as outlined in Division 2 of the 2017 CPRs, and these standards
may be international (see chapter 4).[90]
5.94
Submitters called for Commonwealth procurement principles that included
a focus on whole-of-life costs, rather than the lowest immediate financial cost
when determining 'value for money'. For example, the Australian Industry Group
proposed that:
...the value for money principle in Government procurement must
look beyond 'least cost', and bring to bear and make more transparent, a
broader cost-benefit equation or value model that considers whole-of-life costs.[91]
5.95
The Australian Industry Group expressed concern that there was currently
'an undue emphasis on upfront costs rather than whole of life costs in public
sector procurement' that does not take into account maintenance and
through-life support. As a result, the Australian Industry Group stated, its
member companies 'increasingly report being locked out of contracts'.[92]
5.96
The Australian Steel Institute suggested that the concept of value for
money should take into account 'the cost to Government involved in purchasing
the good judged on a whole-of-life basis' and 'the environmental costs and
benefits of purchasing the good'.[93]
5.97
The National Vice President of the Australian Workers' Union proposed
that a revised definition of the concept of value for money take into account
economic benefit:
The government could still demand value. The government is
still able to go into the market and look at what the price is and then make an
assessment. If you look at the Victorian model they make an assessment of the
price that they would be charged and they calculate the value based on the
economic value that is generated throughout the economy and the multipliers,
which are spelled out within various documents. The government is not a passive
actor there where: 'We've now made commitments to procurement and now we are
simply bound by price'.[94]
5.98
Mr Vassella from BlueScope Australia and New Zealand also recommended
that '[t]he value of local production and the contribution we make' be taken
into account in government procurement, 'rather than just a flat "dollar
per tonne"'.[95]
5.99
It should be noted that the 2017 CPRs only require an assessment of
economic benefit for procurements greater than $4 million.[96]
Joint Select Committee on Government Procurement
5.100
Many of the issues raised with the committee were also brought before an
inquiry into the amendments of the 2017 CPRs by the Joint Select Committee on
Government Procurement (JSCGP). The JSCGP published its report in June 2017,
including a number of recommendations that addressed some of the areas of
concern brought before this inquiry. These are presented below.
5.101
Although the JSCGP did not publish recommendations related to product
compliance, the inquiry received evidence strongly encouraging:
...the use of suitably endorsed accreditation bodies to oversee
compliance with the standards required...for both clauses 10.10 and 10.37.
Tenderers should be expected to provide evidence of third-party certification
and third-party audit reports should form part of the 'reasonable enquiries'
undertaken when determining compliance.[97]
5.102
The JSCGP received evidence arguing that the Australian Government
should follow the example of the United Kingdom by setting a target for SME
participation in procurement, surveying supply chains to assess the extent of
SME participation in government procurement, and requiring the terms and
conditions of primary contracts to be applied equally to subcontractors, up to
three levels removed.[98]
5.103
The JSCGP report noted inconsistencies in the 2017 CPRs between 'the new
clause 10.10 and existing clause 10.9(c) which requires technical
specifications to be based on international standards'.[99]
However, the Department of Finance highlighted that internationally recognised
standards are rarely different from Australian standards, and clarified that
'international standards' refers to standards published by international
standards organisations, not the standards of other countries.[100]
5.104
Because of this inconsistency, the JSCGP recommended that 'the
Department of Finance revise clause 10.9(c) of the Commonwealth Procurement
Rules to require all goods purchased by the Australian Government to comply
with Australian standards unless none are applicable'.[101]
In its response to the JSCGP report, the Australian Government rejected this
recommendation.[102]
5.105
The JSCGP inquiry recommended, in response to concerns that the
requirement to prove economic benefit only applies to prime contractors and not
subcontractors, that clause 10 of the Commonwealth Contracting Suite become
mandatory for all Commonwealth contracts, no matter their size. This clause
currently stipulates that the obligations of prime contractors also apply to
all subcontractors in contracts less than $1 million.[103]
The government indicated its in principle support for this recommendation in
its response to the report.[104]
5.106
A further recommendation from the JSCGP to address the issue of the
extent of Australian industry participation was that the Department of Finance
and the Department of Industry 'develop and implement a framework to collect
relevant data' on the extent to which Commonwealth procurement projects are
supplied by Australian-owned businesses, contain Australian-manufactured goods,
or use Australian-based services.[105]
The Australian Government rejected this recommendation in its response to the
JSCGP report.[106]
5.107
The JSCGP recommended that the Government create an Australian Industry
Advocate as a statutory authority under the responsibility of the Minister for
Industry, Innovation and Science. The objectives of the proposed Australian
Industry Advocate would be, among others, to assist Commonwealth agencies to
create procurement processes that 'maximise benefits to the Australian
economy'; provide support to Australian businesses so that they could access
Commonwealth procurement; and 'monitor suppliers' delivery of contracted
economic benefits'.[107]
The Australian Government in its response to the JSCGP report rejected this
recommendation.[108]
Committee view
5.108
The committee notes that a number of the amendments to the Commonwealth
Procurement Rules, implemented in March 2017, address some of the concerns
raised to this inquiry. The unanimous and bipartisan recommendations put
forward by the Joint Standing Committee on Government Procurement would have
created the framework for the effective implementation of the new Commonwealth
Procurement Rules and evened the playing field for thousands of local
Australian firms. However, the majority of the recommendations from the report
of the Joint Standing Committee on Government Procurement were rejected by the
Australian Government in its response to the inquiry, tabled in Parliament on
Tuesday 10 November 2017.
5.109
The committee is concerned that the Australian Government's decision on
a number of the recommendations will undermine the intent of the new
Commonwealth Procurement Rules, negatively impacting job creation, and
disadvantaging local businesses. The Minister for Finance, Senator the Hon.
Mathias Cormann, cited cost and red tape as the basis for the rejections of the
recommendations from the Joint Standing Committee on Government Procurement.
5.110
It is clear, based on the evidence provided to this committee, that in
some instances the amendments to the Commonwealth Procurement Rules do not go
far enough, and further action is required to secure the future of Australia's
steel industry. The Australian Government should lead the way by considering
how the use of locally made steel can be maximised in Commonwealth funded
projects, without compromising Australia's international obligations.
Recommendation 7
5.111
The committee recommends that the Australian Government maximise the use
of locally made steel in Commonwealth funded projects.
5.112
Without an overarching steel policy, the committee is concerned that
efforts to defend Australia's steel manufacturing value chain will be
fragmented, given that the issues impacting the sector are multifaceted and
spread across a number of different portfolios and government jurisdictions.
Given this, the committee proposes that consideration should be given to
creating a comprehensive, all-government approach that coordinates efforts
across procurement, policy, trade measures and other relevant areas.
Recommendation 8
5.113
The committee recommends that the Australian Government develop an
overarching steel policy that would form the basis for decision-making and
initiatives affecting the industry.
5.114
Evidence given to this inquiry highlighted the important role that the
South Australian Industry Participation Advocate has had in supporting the
steel industry in South Australia. The committee is of the view that a national
Steel Supplier Advocate should be established to support Australian businesses,
particularly SMEs, to compete for procurement contracts. The responsibilities
of the Steel Supplier Advocate would include: advising the government on
challenges and opportunities facing the Australian steel industry; helping
Australian steel manufacturers to obtain major contracts and identify
opportunities for improved competitiveness; and working with state counterparts
to develop future industry initiatives.
Recommendation 9
5.115
The committee recommends the establishment of a national Steel Supplier
Advocate, which will:
-
provide strategic advice to the Australian Government on the
challenges and opportunities facing the industry;
-
assist Australian steel manufacturers to win major contracts and
identify opportunities to improve competitiveness; and
-
work with state government counterparts to plan for the sector
and develop future industry initiatives.
5.116
The committee supports a number of recommendations from the Joint Select
Committee on Government Procurement regarding the 2017 CPRs. Given the extra
cost base incurred by Australian products to meet Australian standards, and the
alarming body of evidence that this inquiry received regarding steel that poses
safety risks (as outlined in chapter 4), the committee recommends that all
procured steel should be required to meet Australian standards, whether it is
procured by a prime contractor or subcontractor. Further, the committee also
agrees with the JSCGP recommendation that Commonwealth procurement policies
should play an active part in supporting Australian small and medium
enterprises.
Recommendation 10
5.117
The committee recommends that the Australian Government reconsider its
decision to reject Recommendation 1 of the Joint Standing Committee on Government
Procurement report and request the Department of Finance revise clause 10.9(c)
of the Commonwealth Procurement Rules to require all goods purchased by the
Australian Government to comply with Australian standards unless none are
applicable or it is inappropriate to do so.
Recommendation 11
5.118
The committee recommends that the Australian Government reconsider its
decision to reject Recommendation 4 of the Joint Standing Committee on
Government Procurement report and commit to enhancing the procurement-connected
policy for Australian Industry Participation plans so that good procurement
practices are implemented down through the supply chain, so that both prime and
sub-contractors:
-
implement best practice terms and conditions; and
-
are contractually obligated to report on those terms and
conditions.
Recommendation 12
5.119
The committee recommends that the Australian Government reconsider its
response to Recommendation 8 of the Joint Standing Committee on Government
Procurement report and ensure that, in negotiating future trade or World Trade
Organisation agreements, Australia does not enter into any commitments that
undermine the Australian government’s ability to support Australian businesses.
Recommendation 13
5.120
The committee recommends that, in light of the evidence provided to this
inquiry by the Australian Steel Institute relating to the steel industry's
Environmental Sustainability Charter, the Australian Government reconsider its
decision to reject Recommendation 3 of the Joint Standing Committee on
Government Procurement report and facilitate the introduction of a procurement
connected policy requiring Commonwealth agencies to evaluate the whole-of-life
environmental sustainability of goods and services to be procured.
5.121
The committee is of the view that current exemptions in free trade
agreements for SMEs and Defence are being underutilised. The US-Australia Free
Trade Agreement, for example, may allow provision for procurement preferences
to benefit SMEs. The government should investigate ways in which SME carve outs
in free trade agreements can be better employed so that SMEs in the steel
industry are better equipped to compete on a level playing field.
Recommendation 14
5.122
The committee recommends that the Australian Government better utilise
the small and medium-sized enterprise provisions in free trade agreements.
5.123
The committee notes that changes to Commonwealth Procurement Rules include
the requirement for tenderers to provide evidence of proposed economic benefit,
for those projects that meet the thresholds outlined in Division 2 of the 2017
Commonwealth Procurement Rules. The committee is concerned that the
Government's procurement coordinator's guidance on the recent changes relating
to economic benefit explicitly reference pricing as an example of elements to
be considered when determining economic benefit of a procurement. This
committee therefore shares the view of the Joint Standing Committee on
Government Procurement which warned, '[r]ather than supporting successful
implementation, the Committee is concerned that the current guidelines
developed by the Department of Finance have the potential to undermine the
intent of the new CPRs'.[109]
Recommendation 15
5.124
The committee recommends that the Department of Finance reconsider its
current procurement implementation guidelines, noting the concerns of the Joint
Standing Committee on Government Procurement that the current guidance may
undermine the intent of the new Commonwealth Procurement Rules, specifically
clause 10.30 relating to economic benefit.
5.125
The committee is concerned that in the absence of a compliance regime,
steel is being used in government-funded projects that does not meet
appropriate standards and may pose a public safety risk. Although the Code
for the Tendering and Performance of Building Work 2016 (the Code) requires
products used in Commonwealth-funded building work to comply with relevant
Australian standards, responsibility for the enforcement of compliance with the
Code is yet to be determined. The committee view is that this should be clarified
as soon as possible to ensure that it is clear who will audit the compliance of
building materials with Australian standards.
5.126
Currently, clause 10.37 of the 2017 CPRs requires relevant entities,
when applying a standard for goods procured above relevant thresholds, to make
reasonable enquiries to determine compliance with a relevant standard, which
can include examining evidence of certification and periodic independent
auditing. In tandem with the committee's recommendations regarding compulsory
standards certification outlined in chapter 4, the committee considers that
this requirement to examine evidence that an Australian standard has been met
should be extended to all goods procured in Commonwealth funded projects, where
a standard is available.
Recommendation 16
5.127
The committee recommends that relevant entities should be required to
make reasonable enquiries to determine standards compliance in all Commonwealth
funded projects involving steel, not just those above relevant thresholds.
5.128
The committee notes the importance of federal Australian Industry Participation
(AIP) plans in increasing the use of Australian made steel in procured projects.
Given this importance, the committee considers that funding for the Australian Industry
Participation Authority should be increased, and compliance with AIP plans
should be monitored and audited. Further, the requirement in legislation that
all tenderers for Commonwealth projects should submit AIP plans, not just the
successful tenderer, should be reinstated.
Recommendation 17
5.129
The committee recommends that the Australian Government review the level
of funding to the Australian Industry Participation Authority to ensure it is
adequate, and that compliance with Australian Industry Participation plans
should be monitored and audited.
Recommendation 18
5.130
The committee recommends that the Australian Government restore the
requirement in legislation for all tenderers for Commonwealth projects to
submit Australian Industry Participation plans, not just the successful
tenderer.
5.131
Much of the evidence concerning the AIP plans that this inquiry received
argued that the current threshold of $500 million to qualify for an AIP plan is
too high. This evidence included an admission from the Department of Industry,
Innovation and Science that the threshold had been developed during the mining
and resources boom, with a subsequent reduction in major project activity since
mining has slowed down. The committee does not accept the Department of
Industry, Innovation and Science's reassurances that projects below the $500
million threshold provide enough opportunities for local industry, and
recommends that the government review the threshold for AIP plans, with a view
that they should be significantly reduced.
Recommendation 19
5.132
The committee recommends that the Australian Government review the
thresholds for Australian Industry Participation plans, with a view that they
should be significantly reduced to take into account recent changes in
industry.
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