Public Sector Procurement Reform To Build Local Industry

“I don’t want access to another grant; I want to be able to have the government as a customer.” That’s the answer I often get to the question of what the government could do to better support Australian business. 

In 2021-22, there were 92,303 federal government contracts published on AusTender worth a a total of $80.8 billion. More local, and especially smaller, Australian businesses want a fairer shot at getting a slice of this pie.

After a year being a senator for the ACT, one of the things I’ve loved the most is getting out and visiting startups and other innovative businesses around Canberra.

We have a thriving startup scene – the highest number of startups per capita of any Australian city – and so many businesses with world-class capability in everything from cybersecurity to artificial intelligence and quantum computing.

I’ve been told story after story of growing businesses receiving government grants to support the development of innovative products only to find at the completion of the grant process, a closed door awaiting them as far as government procurement is concerned.

One company said the government officials responsible for administering the grant they had received to help build a world-leading AI-based capability then refused to put them in contact with the government officials responsible for implementing precisely that capability. This makes no sense.

Of course, we need integrity in procurement processes and having received a grant is no guarantee of a company’s suitability for a government contract thereafter. But shouldn’t governments at least consider using the products they have helped to fund?

A big government contract – unlike a grant – can offer the level of ongoing certainty needed for an emerging business to take a long-term view, invest heavily in growing its capabilities and commit fully to upskilling its staff.

This discontinuity between government grants and government contracts is just one of many glaring issues in Australia’s public procurement system.

Companies report being excluded from procurement opportunities because their staff don’t have the requisite security clearances, which seems fair enough until you realise that they can’t apply for security clearances without first winning a government contract.

This is the classic chicken and egg scenario that is seeing so many worthy companies fail at the first hurdle.

Government buyers report being given a list of companies ordered from A to Z and asked to choose three names to tender for a contract.

Companies appearing earlier on the list reliably win more contracts than those appearing later on the list. ‘AAA Advisory’ would have a significant competitive advantage over ‘Zenith Consultancy,’ simply by virtue of being found on page one.

Smaller local providers share stories of not being given an opportunity to bid for contracts awarded under a closed tender process to large multinationals ‘due to an absence of competition’, despite the local providers being able to offer similar or better capabilities at a similar or lower price – and despite having offices within walking distance of the government agency claiming no competitors are in the market!

There is no mandated process that government buyers must follow to determine there are no viable competitors before declaring this to be the case.

Winning government contracts is a skillset. And it’s a skillset that adds nothing to our economy and has very little to do with delivering the best outcomes at the lowest price. 

Smaller businesses struggle to access government procurement opportunities simply because they lack this skillset, and the time and resources to complete extensive government procurement applications.

But much of the innovation takes place at the startup and scaleup phase, where winning a government contract can be the difference between making it to the other side of the valley of death or crashing and burning along the way.

There are too many stories of larger companies with a history of selling to government hoovering up the opportunities, and then sub-contracting to these smaller companies – which actually have the staff and capabilities to do the work – but not before taking the cream off the top of the contract for themselves.

One local firm said when they were starting out, 75 per cent of their work for the government was delivered via larger companies that took a 25-45 per cent margin. Eventually they grew to where they could win contracts themselves and now 100 per cent of their contracts are direct with the government.

This company was always offering the same capability, but now there isn’t another bigger, more established company charging a surcharge of up to 45 per cent of the value of the contract to function as an intermediary between them and the government.

We have also seen a pattern of behaviour where large companies set up SME arms and 51-per cent-Indigenous-owned subsidiaries to make themselves eligible for procurement opportunities targeted at SMEs and Indigenous-owned companies.

PwC Indigenous Consulting, for instance, has won $51.81 million in AusTender-listed government contracts since the Indigenous Procurement Policy was introduced in 2015.

We have government-wide procurement targets for Australian SMEs in our Commonwealth Procurement Rules (CPRs). But we don’t have a process in place to guarantee that the public servants making the procurement decisions actually know whether or not they are dealing with an Australian SME when inviting a company to bid on – or when awarding – a government contract.

Business owners seeking to provide their goods and services to government tell me they often have to win contracts internationally before the Australian government will give them a look in.

But they are hesitant to speak publicly about the insufficiency of our public procurement system for fear of being permanently ‘blacklisted’ by the government entities whose doors seem to be closed to them. And I’m told their fears are justified.

The recent fallout from allegations against partners at PwC and the subsequent focus on the scale of contracts being won by the big consultancy firms raises many questions. One is whether this over-reliance on big multinational firms at the expense of smaller Australian-owned firms is a good use of public money.

Could procurement deliver the needed expertise and outcomes while also building local skills and capabilities, strengthening our economy, encouraging young Australians to start their own businesses and fostering a high-quality, high-paying job market that keeps more businesses here as they grow? 

When costs blow out and foreign providers fail to deliver, as has been the case with the Parliamentary Expenses Management Systembeing built on German software despite local providers asserting they can offer a better product at a fraction of the price, we should be going back to market rather than succumbing to the sunk-cost fallacy and doubling down on the foreign company.

If taxpayers’ dollars aren’t being used to deliver value-for-money solutions, at least they can be used to invest in our people, our skills, ourindustries, our intellectual property and our technologies. Put bluntly, if we are going to sink costs, we should sink them here in Australia, not abroad.

Government procurement is in desperate need of reform in Australia.

The inquiry Australian Small Business and Family Enterprise Ombudsman Bruce Billson is currently tasked with is a very welcome first step.

My hope is that it offers robust, ambitious recommendations that the Albanese government commits to fully implementing.

Because these problems are not insoluble. Greater transparency and improved reporting would go a long way, and both would be made possible by tracking better data on who is winning which contracts and how many of them.

To offer one example, searching the AusTender database with the term ‘Deloitte’ yields a list of 120 different Deloitte suppliers: Deloitte Canberra, Deloitte Australia, Deloitte Risk Advisory, Deloitte Access Economics, Deloitte Consulting, and so on.

This makes it unreasonably difficult to answer the question: “how many procurement dollars did Deloitte earn last financial year?” Improved data standards in AusTender would solve this problem.

Another example is monitoring the government’s SME procurement targets. In order to determine whether or not 20 per cent of federal government contracts have been delivered to SMEs each year, per the Commonwealth’s whole-of-government target, the Australian Bureau of Statistics (ABS) is enlisted to undertake an analysis and produce an estimate based on various data sources, including data provided by the ATO.

This data should be entered directly into AusTender on the front-end by requiring entities bidding on government contracts to declare their size (number of full-time-equivalent employees and annual turnover) and their country of origin.

This information would be stored in AusTender alongside the value of the contract, giving every government department and agency exact figures indicating where its procurement dollars went – and how many went to SMEs – in any given year.

More internal compliance auditing would also help. While the CPRs themselves need to be reworked, it is unclear how many government agencies actually comply with the existing rules.

Four of five recent Australian National Audit Office (ANAO) reports related to procurement found instances of noncompliance with the CPRs. The Department of Finance should play an active role in monitoring compliance across government.

I’ve heard from a local company whose software could be used to track whole-of-government compliance with the CPRs in a way that could be instantaneously updated with the establishment of any new policies.

Ironically, they have been largely unsuccessful in providing this capability to major government departments, which seem to have opted for foreign providers with inferior capabilities instead.

Closed or limited tender processes, whereby one or more potential suppliers are approached directly with procurement opportunities to the exclusion of all others, should be far less common.

Competition increases quality, decreases cost and boosts productivity. It should be fostered at every opportunity. The requirements for deciding not to take an open approach to market should be radically tightened. Suppliers who believe they are being unfairly excluded from government work through closed tenders should have recourse to make their case.

The business owners I speak with aren’t asking for hand-outs or carve-outs; they just want local industry to be given a fair chance to compete. We provide this already on larger contracts ($20m+) and major projects through Australian Industry Participation Plans.

There’s a very strong argument for smaller businesses having this right. Australian SMEs could be given the opportunity to bid on a contract if they can demonstrate they have a unique ability to deliver the goods or services being procured.

More effort needs to go into upskilling public servants with procurement responsibility, providing them with the resources they need to make good decisions, and a framework that prioritises bids from local SMEs before awarding contracts to big multinationals.

Until recently, nobody blinked an eye when one of the Big Four won another government contract. Incentives simply do not exist to encourage individual decision-makers to bet on lesser-known up-and-coming competitors.

What’s more, procurement officials often have little to no information on hand regarding the past performance of companies, meaning firms can repeatedly allow timelines and costs to blow out on their government contracts with minimal consequences.

More than $27.9 billion worth of contracts listed on AusTender for the 2022-23 financial year were contract amendments, which equates to 37.67 per cent of the total value of contracts awarded during that period.

In other words, more than one third of the government dollars spent on procurement in the past year left our coffers in the form of contract extensions without a return to market in search of a competitor able to offer a better rate or a faster turnaround time.

It is reasonable to assume that at least some – if not many – of these contract amendments imply a budget blowout followed by a reinvestment in the original supplier. This inverts the value-for-money principle at the core of the CPRs, delivering the company more money and the government less value.

These are just a handful of areas for potential reform. Many more have been recommended and many more should be explored.

We are faced with a procurement reckoning that could become a boon for local industry. All the available evidence suggests that the PwC tax leaks scandal is indicative of deep and widespread problems in how the Australian Public Service engages with the private sector.

The government should be bold in taking immediate steps to address these problems and grasp the opportunities presented by ambitious reform in this area.

There is an appetite for change here. The government should take note and ensure taxpayer money is spent in a way that makes sense, delivers value for money and better supports the Australian businesses that are creating the jobs, capabilities and industries of the future.

Australian companies are not second-rate. We have some of the world’s leading innovators and entrepreneurs. Our procurement processes should be designed to engage and encourage them, not exclude them.

David Pocock is the ACT’s first independent senator. Having migrated from Zimbabwe with his family as a teenager, David went on to captain the Wallabies and vice-captain the ACT Brumbies as part of a stellar rugby career in which he has been recognised for leadership on and off the field. With a Masters in Sustainable Agriculture, Senator Pocock also has a track record as a powerful advocate on issues ranging from climate to marriage equality. He has been involved in multiple small businesses and has co-founded numerous not-for-profit community initiatives in Australia and overseas, including with his wife Emma.

This article originally appeared on InnovationAus.com published 30th November 2023