Introduction
7.1
This chapter considers international best practice in procurement with a particular focus on policies and practices which may be applicable to the Australian context.
7.2
Throughout the inquiry, witnesses highlighted the federal procurement frameworks of the United Kingdom (UK), the United States of America (USA) and Canada as examples of best practice. They explained how these countries use procurement to support local industries, drive social outcomes and safeguard the working conditions of sub-contractors.
7.3
Witnesses noted that the UK, USA and Canadian social and economic benefit policies operate successfully despite the existence of international trade agreements. They suggested that the Australian Government could introduce similar measures without contravening its international trade obligations.
7.4
The following paragraphs describe the procurement frameworks of the UK, USA and Canada in more detail and record witness comments on their merits.
United Kingdom
7.5
The UK Government’s federal procurement framework is based on its obligations to the European Union (EU). The EU aims to maintain an open public procurement market across member states and ensure the free movement of goods and services across Europe. It does so through:
EU Treaty obligations of non-discrimination, free movement of goods, freedom to provide services and freedom of establishment;
European Court of Justice case law which provides for equality of treatment, transparency, mutual recognition and proportionality; and
EU procurement directives.
7.6
As a member state, the UK has enacted domestic legislation to give effect to EU obligations, including:
the Public Contracts Regulations 2015; and
the Public Services (Social Value) Act 2012.
7.7
This legislation is complemented by policies and initiatives targeted at specific areas of procurement, such as:
the Commissioning Academy which trains officials to achieve excellence in procurement; and
the Government Construction Strategy which requires use of building information modelling (BIM) in large building and construction procurements.
Public Contracts Regulations 2015
7.8
Much like the Australian Government’s Commonwealth Procurement Rules (CPRs), the UK’s Public Contracts Regulations 2015 establishes the procedures government agencies must follow when conducting procurement above specified financial thresholds.
7.9
The core principle of the regulation is value-for-money, defined as ‘the best mix of quality and effectiveness for the least outlay over the period of use of the goods or services bought’. The regulations also provide for:
equal treatment of domestic and international suppliers;
electronic procurement techniques;
consideration of social and environmental factors;
measures to enhance small and medium enterprise (SME) access to government procurement, such as splitting larger contracts into a series of smaller contracts;
whole-of-life costing; and
preliminary market consultation.
7.10
Witnesses to the inquiry commented on the operation of the Public Contract Regulations 2015, highlighting functions which could be adopted by the Australian Government.
7.11
The Australian Steel Institute (ASI) noted that the regulations unambiguously require suppliers to comply with applicable UK, EU and international law to be considered for a government contract. It pointed out that sub regulation 56(2) refers to an annex which explicitly lists applicable regulation:
Contracting authorities may decide not to award a contract to the tenderer submitting the most economically advantageous tender where they have established that the tender does not comply with applicable obligations in the fields of environmental, social and labour law established by EU law, national law, collective agreements or by the international environmental, social and labour law provisions listed in Annex X to the Public Contracts Directive as amended from time to time.
7.12
The ASI suggested that this approach is preferable to the CPRs’ ambiguous requirement to ‘make reasonable inquiries that the procurement is carried out considering relevant regulations’ contained in clause 10.18. It argued that the clarity of the prescriptive UK regulations avoids confusion over whether international suppliers need to comply with the regulation of their country of origin, international regulation, or the regulation of the nation offering the contract. The ASI said this approach also removes the requirement for officials to determine what regulation within the applicable jurisdiction of law should be considered ‘relevant’ to the procurement:
This regulatory model unambiguously identifies the relevant standards a supplier must satisfy.
7.13
The ASI also highlighted the operation of regulation 67 of the Public Contracts Regulations 2015. This regulation outlines a diverse range of evaluation criteria, including social factors, which can inform procurement decisions and provides for the use of weighted criteria. The ASI suggests that the inclusion of a similar clause in the CPRs would authorise officials to apply weighted evaluation criteria to procurement while maintaining the flexibility to fine tune weightings to affect different outcomes.
7.14
The Public Contracts Regulations 2015 also provide for improved SME access to government procurement by:
requiring procurement opportunities to be advertised through the UK Contracts Finder Portal;
preventing officials from setting company turnover requirements at more than twice the value of the contract; and
encouraging officials to split projects into smaller contracts.
7.15
According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) the Australian Government could save money if it adopted some of these provisions:
In some cases, breaking a job into smaller parts could actually save the Government money. ASBFEO have been made aware of instances where prime suppliers are paid a large sum of money to manage contracts with a few key subcontractors who are paid much, much less for their work.
7.16
ASBFEO suggested that the Australian Government target for small business participation is ‘unambitious’ at 10 per cent and should be ‘increased to match the UK [target] by 2020, with an option to review the target once reached’:
The UK has a target of one third (33 per cent) of the value of Government procurement spending going to small and medium-sized businesses (businesses employing 250 employees or less) by 2020. The previous target was for 25 per cent by 2015.
7.17
Additionally, the UK Government can require prime contractors to source sub-contractors from government panel arrangements where rates, terms and conditions have already been set, and to apply specific payment terms to their supply chains. It also surveys its supply chains to accurately assess the level of SME participation in government procurement and requires primary contract terms and conditions to be applied equally to sub-contractors up to three levels removed. ASBFEO supported the introduction of these measures into the Australian context:
All efforts to ensure a level playing field for businesses of all sizes should be taken.
Public Services (Social Value) Act 2012
7.18
The Public Services (Social Value) Act 2012 requires UK officials to consider the economic, environmental and social benefits that can be secured through procurement before a procurement processes commences. It compels officials to consider consulting relevant communities and suppliers to design procurement processes that secure goods or services while maximising benefit to the community.
7.19
The Act only applies to the preparatory processes undertaken in the lead up to procurement expected to value more than relevant thresholds. It does not apply to any formal stages of the procurement process. Nor does it dictate how consideration of social impacts should shape procurement processes.
7.20
The Act specifies that resulting procurement processes must not discriminate against suppliers from EU member states or from countries party to the World Trade Organisation’s Government Procurement Agreement (WTO GPA), in line with the UK’s international trade obligations.
7.21
ASBFEO noted that the Public Services (Social Value) Act 2012 is similar to clause 10.30 of the new CPRs in that it, ‘is intended to focus government procurement decision makers on external benefits as part of the value for money consideration’. As such, ASBFEO believed the implementation of clause 10.30 may be affected by issues similar to those which accompanied the introduction of the Act. For example, officials applying the clause may struggle to rank the unique economic benefits offered by different suppliers:
Like the UK, Australian Government departments are likely to encounter problems assessing value for money due to measurement confusion for economic benefits. We recognise the Department of Finance guidelines have considered measurement of economic benefit by restricting the quantification of it to direct effects (or first round impacts). However, there is not any guidance for businesses bidding on contracts about how they can demonstrate and quantify the social and environmental outcomes. This will make it difficult for procurement officers to determine if, e.g. 20 additional staff employed is a more valuable economic benefit than a 2-hour interactive class to transfer knowledge to local businesses.
7.22
ASBFEO believed the impact of CPR clause 10.30 could also be inhibited by its narrow focus on economic benefit:
Assessing a value for money outcome through the current narrow lense of “economic benefit” will likely lead to the proposal that provides the lowest “cost to outcome” ratio to win[ning], over a proposal that provides social benefits but at a higher “cost to outcome” ratio.
7.23
However, it suggested that adding a requirement to consider the social impact of procurement to clause 10.30 may address some of these issues by explicitly enabling a broader consideration of non-economic factors:
For social value to be considered as part of procurement processes and value for money assessments in Australian Government procurement, it needs to be given explicit consideration, alongside economic and environmental outcomes and explicit wording in the CPRs as part of a value for money assessment.
7.24
If the Australian Government does go down this path, ASBFEO suggested that it could assess compliance with the clause and handle complaints from SMEs in a similar manner to the UK Government’s Mystery Shopper Scheme. The Mystery Shopper Scheme allows for anonymous investigation and dispute resolution by:
carrying out spot checks on procurement processes;
receiving supplier complaints about procurement practice; and
discussing findings with contracting agencies so practices can be refined.
7.25
ASBFEO also noted that the UK Government issues Social Value Awards to ‘recognise and celebrate good practice in commissioning and providing social value’ under the Act.
UK Commissioning Academy
7.26
The UK Government’s Commissioning Academy aims to develop public sector leaders capable of designing services, influencing external parties, and shaping and managing markets to achieve the best outcomes for the community. Consult Australia suggested that such an institute is needed in the Australian context to promote excellence in procurement:
With large amounts of public funds being spent on infrastructure, it is incumbent on governments to ensure they get maximum value for money through the procurement process. To buy wisely you need wise buyers…
Government Construction Strategy
7.27
The UK Government’s 2011 Government Construction Strategy outlines measures to improve the efficiency of public sector construction projects, including the use of BIM in procurement.
7.28
BIM is the accumulation of data from all parties involved in a building or infrastructure project so that a 3D model can be created to inform the design, construction and ongoing management of the resulting infrastructure. When procurement is informed by BIM:
the implications of different designs can be easily evaluated;
products manufactured separately can be tested for fit;
design data can be programmed directly into construction tools, eliminating intermediaries; and
asset management post construction is better informed.
7.29
The Government Construction Strategy is driving closer collaboration between the UK Government and the construction industry by facilitating the move towards standardised data provision and broader use of BIM.
7.30
BuildingSMART Australasia considered the UK Government a global leader in the use of BIM and suggested the practice may result in a 20 per cent reduction in construction costs for government buildings there. It called on the Australian Government to adopt BIM as part of its building and construction procurement; suggesting that it could ‘minimise red tape and additional costs to suppliers’.
7.31
Ms Motto also spoke positively of the UK Government’s approach to construction procurement and suggested that the Australian Government could ‘draw from’ this experience.
United States of America
7.32
The fundamentals of the USA Government procurement framework are established through the Federal Acquisitions Regulation (FAR) and supplemented by:
legislation including the Buy America Act and the Berry Amendment; and
Presidential Executive Orders.
Federal Acquisitions Regulation
7.33
Similarly to the Australian Government’s CPRs, FAR outlines the principles and rules which guide officials’ use of public funds to procure goods and services. The first principle of FAR is:
... to deliver on a timely basis the best value product or service to the customer, while maintaining the public’s trust and fulfilling public policy objectives.
7.34
FAR covers the entire procurement process from identifying a need for procurement, to contract management, including:
market research and acquisition planning;
describing procurement needs;
procurement methods and competition requirements;
contracting, including: administration, modification, quality assurance and auditing;
the application of labour laws; and
sustainable acquisitions.
7.35
Witnesses to the inquiry praised the breadth of the FAR, particularly its incorporation of human rights.
7.36
The United Nations International Children’s Emergency Fund Australia (UNICEF Australia) said FAR protects human rights by prohibiting the purchase of goods ‘produced by forced or indentured labour’.
7.37
UNICEF Australia claimed that international recognition of the role governments can play in improving supply chain practices is increasing. It acknowledged that the Australian Government’s new CPRs are an improvement. Particularly, clause 10.18 which requires officials to inquire whether suppliers comply with ‘relevant regulation’, specifically ‘labour regulation, including ethical employment practices’. However, it suggested that the CPR requirements do not cover the full range of ‘civil, political, economic, social and cultural’ rights outlined in the United Nation’s Universal Declaration of Human Rights:
This is a significant omission. It is not only incomplete and inaccurate, but from a practical perspective such an omission fails to harness the significant purchasing power of the Government to seek policy consistency and efforts to achieve the protection, promotion and realisation of human rights.
7.38
UNICEF Australia would like to see the Australian Government’s CPRs amended to directly reference international human rights principles and conventions.
Buy American Act
7.39
The Buy American Act (not to be confused with the similarly named, Buy America Act) was introduced in 1933, although it has been ‘substantially’ amended since. The Act aims to protect American businesses and labour by restricting the USA Government purchase of goods which are not substantively domestically produced. ‘Domestically produced’ is defined generally, as materials mined or produced in the USA or manufactured products 50 per cent comprised of American manufactured components (by cost).
7.40
The Act comes into effect when the cheapest supplier bid for government procurement is deemed not to be ‘domestic’. In these circumstances:
… the procuring agency must add a certain percentage of the low offer’s price to that offer before determining which offer is the lowest priced or “best value” for the government. This percentage generally ranges from 6 per cent, in cases where the lowest domestic offer is from a large business; to 12 per cent, when the lowest domestic offer is from a small business; to 50 per cent, for Department of Defense procurements, although agencies may adopt higher percentages by regulation.
7.41
The Act generally applies to the procurement of goods expected to value at or above $3 500. However there are exceptions, including when goods to be procured are for use outside of the USA or when the use of domestic goods would not be in the public interest. The Act can also be waived pursuant to the Trades Agreement Act which enables some ‘foreign products’ to be treated the same as domestic products for the purposes of procurement. For example, goods produced or substantially transformed in a country which is a signatory to the WTO GPA.
7.42
The Australian Workers’ Union (AWU) suggested that the USA Government’s approach to government procurement is ‘well in advance of Australia’s’. It argued that the Buy American Act demonstrates that Australia’s international trade obligations are ‘no legal impediment’ to ’stronger procurement policies’ which recognise the value of purchasing goods from Australian manufacturers.
Berry Amendment
7.43
The Berry Amendment is a statutory requirement that limits the American Department of Defense from procuring items such as clothing, fabrics and other made-up textiles which are not grown, reprocessed or produced domestically.
7.44
AWU noted the effect of the Berry Amendment and suggested that the Australian Government could introduce similar legislation to guarantee demand for Australian steel during scheduled warship and submarine construction projects.
Buy American and Hire American Presidential Executive Order
7.45
On 18 April 2017, the USA President issued the Buy American and Hire American Presidential Executive Order. The order outlines the President’s intention to maximise government procurement of domestically produced goods. It does not make ‘substantive’ changes to existing US Government procurement processes; rather it requires the Department of Commerce to report on possible legislative and policy changes to achieve this aim.
7.46
The Department of Foreign Affairs and Trade (DFAT) acknowledged the order, noting that section six states that the order should not be ‘construed’ as affecting the USA’s international trade obligations.
Small Business Act
7.47
The Small Business Act provides for the creation of the Small Business Administration whose function is to ‘aid, counsel, assist and protect … the interests of small business concerns’. Types of aid provided by the Administration include:
facilitating technology transfers;
ensuring the interests of small businesses are adequately represented in international trade deals;
enhancing small businesses’ ability to compete against exports; and
supporting small businesses’ to participate in government procurement.
7.48
Section 15(g) of the Act establishes goals for the participation of small business in US Government procurement. It requires ‘not less than 23 per cent of the total value of all prime contracts for each fiscal year’ to be awarded to small businesses. Furthermore, it specifies that agencies should seek to engage small businesses from a wide variety of industries.
7.49
ASBFEO highlighted the US Government’s goals for small business participation and noted that the Australian Government’s 10 per cent target is comparatively ‘unambitious’.
7.50
Ms O’Neil, National Secretary of the Textile Clothing and Footwear Union Australia (TCFUA), also reflected positively on US Government initiatives supporting SMEs to participate in government procurement. She claimed that they are ‘supporting and growing jobs’.
Canada
7.51
The bulk of Canadian government procurement is conducted by the federal Department of Public Services and Procurement (DPSP) on behalf of other government agencies (approximately $15 million of average annual procurement contracts valued at $18 million).
7.52
DPSP conducts procurement according to a Supply Manual which describes the principles and procedures governing procurement. The manual reflects the requirements of the Canadian Government legislation, policies and international trade agreements, including the Canadian Content Policy.
Canadian Content Policy
7.53
The Canadian Content Policy fosters the development of domestic industries by limiting competition for government procurement to suppliers of Canadian goods and services in specific circumstances.
7.54
The policy applies to competitive procurement administered by DPSP’s Acquisitions Branch, which is expected to value $25 000 or more and which is not subject to an exemption. For example, the policy does not apply to procurement conducted by other government agencies or government procurement subject to international trade agreements.
7.55
In applying the policy, Acquisitions Branch can conduct procurement which is:
‘solely limited’ to suppliers of Canadian goods and services (used in circumstances where officials know there are two or more such suppliers); or
‘conditionally limited’ to suppliers of Canadian goods and services (used when officials are unsure whether two or more such suppliers exist).
7.56
In both cases suppliers are required to provide certification that the goods or services they offer are Canadian.
7.57
In ‘solely limited’ procurement, the evaluation of supplier bids proceeds as normal. However, if the procurement process was ‘conditionally limited’ officials must first determine whether there are two or more bids offering certified goods or services. If there are two or more, the evaluation will be limited to the bids with the certification; otherwise, all bids will be evaluated.
7.58
The ACTU approved of Canada’s local content policies and claimed they defend its domestic steel manufacturing capabilities.
7.59
The Canadian Government also has an internal trade agreement with its provinces which enables procurement to support domestic industry.
Canadian Agreement on Internal Trade
7.60
The Canadian Agreement on Internal Trade (AIT) establishes a legal framework and institutions to diminish barriers to trade between Canadian provinces. It is specifically designed to address:
‘discriminatory practices’, such as favouring suppliers from the same province;
‘unharmonised practices’, such as unique product standards in each province; and
the ‘inequitable application of administrative practices’, such as only advertising procurement locally.
7.61
Chapter five of the agreement explicitly provides for procurement evaluation criteria to be weighted to favour Canadian goods:
5
Except as otherwise required to comply with international obligations, a Party may accord a preference for Canadian value-added, subject to the following conditions:
g
the preference for Canadian value-added must be no greater than 10 per cent;
h
the Party shall specify in the call for tenders the level of preference to be used in the evaluation of the bid; and
i
all qualified suppliers must be informed through the call for tenders of the existence of the preference and the rules applicable to determine the Canadian value added.
7.62
It also enables province governments to limit procurement to suppliers offering Canadian goods or services:
Except as otherwise required to comply with international obligations, a Party may limit its tendering to Canadian goods or suppliers, subject to the following conditions:
a
the procuring Party must be satisfied that there is sufficient competition among Canadian suppliers;
b
all qualified suppliers must be informed through the call for tenders of the existence of the preference and the rules applicable to determine Canadian content; and
c
the requirement for Canadian content must be no greater than necessary to qualify the procured good as a Canadian good.
7.63
AWU argued that the Canadian Government’s use of the Agreement on Internal Trade to protect domestic industries is further proof that there is no legal impediment for Australia take similar action with Commonwealth procurement.