Sovereign capability and local content
Australian sovereign industry capability
6.1
Australian sovereign infrastructure industry capability can be viewed as Australia’s independent capability to access, or control, the resources necessary to meet agreed infrastructure needs, such as the delivery of the current Australian infrastructure pipeline and other crucial requirements into the future. These requirements include Australia being able to access, or control, design expertise, rights to technical data, and production capability, with the ability to increase capacity at critical times.
6.2
The committee notes the distinction between sovereign infrastructure industry capability and Australian Industry Content (or local content). In practical terms this means that the work to meet strategic infrastructure objectives does not necessarily have to be conducted in Australia. However, using Australian Industry Content for infrastructure projects is considered as desirable and important to help grow sustainable Australian businesses and serve the broader national interest.
6.3
Economic modelling by Australian Owned Contractors (AOC) showed that ‘for every billion dollars in infrastructure projects a greater focus on Australian contractors leading the work led to a $280 million to $310 million benefit to the Australian economy’.
6.4
In considering capability matters the committee noted the Department of Defence’s focus on building sovereign supply capability. Defence’s definition of defence industry capability is outlined in the Defence Industrial Capability Plan in the following terms:
Defence sovereignty is the ability to independently employ Defence capability or force when and where required to produce the desired military effect. It does not automatically mean a defence capability has to be designed, developed or maintained in Australia, but it does mean Defence has to have access to a functioning defence capability (whether radars or tanks) as and when required.
Australian defence industrial capability is the capability provided by Australian industry that contributes directly to the delivery of a defence capability. It becomes a sovereign industrial capability when Australia assesses it is strategically critical and must therefore have access to, or control over, the essential skills, technology, intellectual property, financial resources and infrastructure as and when required.
6.5
In 2020, the Joint Standing Committee on Foreign Affairs, Defence and Trade (JSCFADT) inquired into the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade. In the report, JSCFADT examined the potential to use procurement practices to maximise Australian industry capacity and contribute to ‘the generation or sustainment of an Australian sovereign capability to supply a critical national system’.
6.6
While the JSCFADT’s consideration relates to Australian industries broadly, and not specifically the infrastructure industry, the committee noted with interest the following JSCFADT report recommendations seeking to improve industry sustainability through procurement by:
Moving Australian Government support for Australian industry sectors supporting identified critical national systems away from purely grant‑based assistance to the intentional use of procurement to build and sustain sovereign capability. (Recommendation 14)
Modifying Commonwealth Procurement Rules and Accountable Authority Instructions to reflect Recommendation 14 by explicitly requiring procurement authorities to consider how the generation and sustainment of sovereign industry sectors that supply to critical national systems could be facilitated by:
Aggregation of demand across Commonwealth departments and where agreed, state government requirements, and
Phasing of procurement where the timeframe for delivery can be optimised to meet operational requirements and Australian industry capacity. (Recommendation 15)
Adding a new subparagraph to paragraph 4.5 of the Commonwealth Procurement Rules dealing with assessing value for money, to the effect that officials must give a priority weighting to the extent to which a proposed project or individual procurement contributes to the generation or sustainment of a sovereign Australian industry capability which is providing nominated supplies to a critical national system. (Recommendation 16)
6.7
The Department of Industry, Science, Energy and Resources observed that there is an opportunity for both government and industry to examine the impacts of procurement on how sectors are built. It explained that if Australia is committed to building strong sectors for the future, this will require:
…not only building capability within industry to bid into government contracts but also building capability in procurement officers in government agencies to understand the types of challenges that can be faced by industry in putting in applications for tenders.
6.8
The Australian Workers’ Union (AWU) contended that with Australia’s sovereign capability ‘currently under critical risk’, governments should consider ‘fully’ using exemptions in trade obligations to support the nation’s sovereign capabilities. The AWU outlined that:
These exemptions have been introduced to trade instruments like the Government Procurement Agreement for a reason – yet the Australian Government remains fearful to even suggest relying upon them, let alone test their boundaries. Although exemptions in relation to…SMEs are drawn upon by many states, there are several key exemptions with direct relevance to infrastructure that are rarely explicitly identified in procurement criteria, particularly in protecting Australia’s national security and environment. These will become critical as geopolitical risk continues to increase from our trading partners and Australia takes the emerging opportunity to invest in the future of our manufacturing technologies.
6.9
Energy was identified by some groups as an area of opportunity for developing Australian industry capacity. Australian solar panel company, Tindo Solar noted that Australia is currently transitioning to an energy system controlled by other countries, and that Australia would benefit if it could retain sovereign control over energy. To support this objective, Tindo Solar proposed that ‘government procurement for energy infrastructure should contain at least a weighting for sovereign capability, if not a full criterion’.
International obligations
6.10
Australia is party to a range of free trade agreements, which are then implemented domestically through legislation and Commonwealth policy. Relevant international obligations have been incorporated into the Commonwealth Procurement Rules (CPRs). Paragraph 4.8 of the CPRs provides that policy operates within the context of relevant national and international agreements and procurement policies to which Australia is a signatory, including free trade agreements and the Australia and New Zealand Government Procurement Agreement.
Free trade agreements
6.11
There are a range of free trade agreements (FTAs) in force in Australia and others are being negotiated. FTAs are international treaties between two or more countries that aim to reduce or eliminate certain barriers to trade in goods and services, as well as investment.
6.12
FTAs place obligations on procurement by the Australian Government and states and territories. FTAs and other relevant international obligations are incorporated in the CPRs to cover Australian Government procurement, and each state and territory produces guidance for their procuring officials on meeting the relevant requirements.
6.13
A key condition of FTAs is that Australian Government entities do not discriminate against suppliers based on locality, size, degree of foreign ownership, or origin of goods and services. The CPRs relating to incorporating FTA obligations into government procurement set out that the procurement framework is non-discriminatory, with all potential suppliers to be treated equitably.
6.14
The Department of Finance noted that FTAs allow Australian businesses ‘valuable access to overseas markets that are considerably larger than our own’. The Australian Industry Group (Ai Group) also recognised the benefits of this access and suggested that the Australian Government explore increasing the number of FTAs that Australia is a party to as an opportunity to improve Australia’s sovereign capability.
6.15
The Department of Defence told the committee that in the defence supply chain it had been successful in designing an integrated approach to market that works with the CPRs, recent reforms and the Australian Government’s policy priorities to support local businesses and Australian industry. Defence outlined that:
I think what's really important when you work through all of those free trade agreements is what the Australian government needs to achieve and then how you can manage through our international obligations. A really important part of what we do in Defence…is how we enable Australian industry to compete in those international markets. So, getting that balance right is important. One of the things we have done that's really helped us in this particular area in infrastructure is, as we develop project plans, developing and supporting local industry capability plans.
6.16
The Grattan Institute suggested that it was ‘open to question’ whether local content rules are consistent with obligations under FTAs. While suggesting a review and reform of the ‘method and ease with which government procures from local industry’, commercial law firm HWL Ebsworth acknowledged that these opportunities would be subject to FTAs and international obligations, which ‘can prohibit such preference measures’.
6.17
However, other groups saw more scope for supporting local content and growing Australian industry capacity while still meeting Australia’s international obligations. This is explored in the sections on local content and industry sustainability criteria in this chapter.
6.18
The Department of Finance advised that Indigenous procurement policy is consistent with Australia’s FTAs due to specific exemptions in the agreements for measures that support the economic and social advancement of Indigenous peoples.
World Trade Organization Agreement on Government Procurement
6.19
Australian Government procurement must comply with the World Trade Organization Agreement on Government Procurement (WTO GPA), which obliges parties to treat bids by suppliers from GPA parties and local providers on an equal footing and requires an independent, transparent dispute review process.
6.20
As well as placing obligations on Australia, the Australian Chamber of Commerce and Industry (ACCI) highlighted that the WTO GPA also provides Australian businesses with reciprocal access to the government procurement markets of ‘the 47 current GPA members worth approximately A$2.5 trillion each year’. The ACCI asserted that under the agreement Australian exporters:
…benefit from a level playing field in global government procurement markets, with businesses enjoying significantly expanded access to be able to bid for government procurement opportunities internationally…Opening up SMEs to the global community has much greater economic benefits to local firms and industries than discriminatory protectionist policies.
Foreign owned companies and investment
Foreign owned companies
6.21
Ernst and Young market analysis of a sampling of Australian infrastructure projects in 2019 and 2021 showed that foreign owned companies had been awarded 61 per cent of total contracts and 74 per cent of the total contract value across all tiers and forms of contract.
6.22
The committee notes that there are no longer any Australian owned tier one contractors. To put the above project allocation in the context of company tiers, tier one companies were awarded 50 contracts in 2019 (representing 32 percent of the value of the contracts) and 53 contracts in 2021 (representing 32 percent of the value). Tier two companies received 75 contracts in 2019 (representing 19 per cent value share) and 60 in 2021 (representing 24 per cent value share). For tier three companies it was 45 contracts in 2019 (representing 4 per cent value share) and 39 in 2021 (representing 9 per cent value share). The remainder of the projects sampled went to joint ventures, 43 contracts in 2019 (representing 45 per cent of overall contracts value) and 75 in 2021 (representing 35 per cent of overall value).
6.23
AOC highlighted that currently all Australian major infrastructure projects above $500 million are awarded to foreign tier one companies. AOC argued that in this regard Australia compares unfavourably to G10 (Group of Ten) countries, where ‘they award 75 per cent or more of major infrastructure projects to companies owned within that country’. AOC observed that despite having similar foreign investment rules, these governments’ procurement practices and culture have ‘allowed local companies to grow and become a tier one’.
6.24
AOC claimed that Australia’s current procurement practices for major transport infrastructure ‘overwhelmingly favour’ tier one contractors. Lamenting the loss of Australian tier one contractors, AOC commented:
What happened within Australia to change all this, and why is Australia so different? Australia has a proud history of creating great Australian construction companies: Leighton, Thiess, John Holland, Baulderstone, Abi Group, Lendlease, Transfield and Multiplex—to name a few. All of these companies grew from very small family businesses with the procurement practices that allowed them to participate in major projects. Why have Australian governments, state and federal, and their agencies allowed the delivery of major projects to evolve into an oligopoly? In many cases government agencies have allowed foreign tier one contractors to enter joint ventures with other foreign tier one contractors, with no mid-tier or Australian company in the head project.
6.25
The Georgiou Group also noted that the top tier of civil construction companies operating in Australia are foreign owned, and:
…come with a considerable bank balance behind them guaranteed by international parent companies, they deliver the bulk of major infrastructure projects around Australia and therefore most of the profits migrate offshore.
6.26
The Department of Finance clarified that where procurers must also consider economic benefits to the Australian economy as part of assessing value for money on a project, this does not necessarily mean using an Australian supplier. The Department of Finance noted that projects delivered by foreign owned companies also benefit the Australian economy.
Attracting foreign investment
6.27
Australian technology company Ansarada noted that Australia is ‘one of the world’s most desirable recipients for foreign infrastructure investment’, due to its healthy economy, political stability and reliable legal frameworks. Ansarada suggested that:
Australia could utilise foreign investment and utilise best-practice procurement design and technology to ensure that critical information stays on-shore, key decisions are made in the best interest of the Australian people and that all procurement activities are recorded and auditable.
6.28
Infrastructure Australia, in its 2021 Australian Infrastructure Plan, supported focusing on maintaining global competitiveness to ensure the sector remains attractive to foreign organisations and investment. It outlined that reforming procurement practices would help ‘create a more attractive infrastructure market’ and drive cultural changes.
6.29
Australia’s foreign investment framework involves reviewing major foreign investment proposals on a case-by-case basis through the Foreign Investment Review Board (FIRB), a non-statutory advisory body, to ensure that these proposals are consistent with Australia’s national interest. The framework is set by the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Fees Impositions Act 2015, along with associated regulations.
6.30
Significant reforms to Australia’s foreign investment framework were announced in June 2020, came into effect on 1 July 2021, and were subsequently evaluated. In its evaluation, Treasury found that the reforms have achieved the government’s intentions, particularly by enabling scrutiny of investments that may pose national security risks that previously were not subject to scrutiny. Additionally, that it was ‘too early to determine whether the reforms have affected foreign investment flows into Australia or the broader economy’.
6.31
In its submission, the Civil Contractors Federation (CCF), the peak body representing Australia’s civil construction industry, noted that it had provided input into the draft Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020. CCF’s contribution focused on the legislative framework applied to foreign owned contractors undertaking major civil infrastructure projects in Australia, and included a recommendation encouraging the Australian Government to use the foreign investment framework reforms process to ‘achieve greater industry sustainability by adopting a more balanced project allocation policy’. The CCF proposed that ways to achieve this could include disaggregation of contract size, procurement reform and focusing on contracting models to ensure tier two and three contractors secure more work and can mature.
6.32
While acknowledging the ongoing interest and involvement of foreign owned companies tendering for Australian civil construction projects, CCF expressed support for:
…a more balanced approach to the tender process to support industry sustainability and the broader national interest by maximising the return to the Australian economy of taxpayer funded civil construction projects.
Improving access for small and medium enterprises
6.33
Competition is one of the key elements of the CPRs that underpin Australian Government procurement, with procurement processes required to be non‑discriminatory.
6.34
However, recognising the challenges facing SMEs in accessing government project opportunities particularly for larger and complex projects, provision is also made to help ensure that SMEs can compete in Australian government procurement practices.
6.35
Accordingly, when assessing value for money, officials should consider: the benefits of doing business with competitive SMEs; barriers to entry preventing SMEs competing such as the bidding costs; SMEs’ capabilities and their commitment to local or regional markets; and the potential benefits of having a larger, more competitive supplier base.
6.36
The section also commits non‑corporate Commonwealth entities to sourcing at least 10 per cent of procurement by value from SMEs and recognises the importance of paying suppliers on time.
6.37
Hughes et al highlighted receiving constructive feedback following the tender process as an important learning opportunity for companies. The committee notes that the Department of Finance’s Selling to Government webpage advises that tenderers can view an unsuccessful tender process as a chance to learn and improve their offering for the next opportunity. Unsuccessful tenderers are entitled to request a debriefing from the procurement officer after the completion of every approach to market, and that some agencies regularly offer these debriefing sessions.
6.38
AOC contended that having an Australian contractor deliver a project provided distinct flow on benefits that are not necessarily the case with foreign owned companies. AOC indicated that in its members’ experience, Australian owned companies often provide the benefit of being in and part of their local communities, and outlined that:
As the research that we've developed and provided shows, contracting with Australian contractors means the amount of money that's spent in the Australian economy is increased significantly, as opposed to making that same investment with foreign companies. So, in terms of the benefit that flows from investing in and supporting Australian versus foreign companies, there's a material difference in the outcome. In terms of jobs, the reality is that civil construction is a local business. We need locals on the ground delivering those projects, and they will be Australians.
6.39
To foster a more sustainable and competitive sovereign industry, the Georgiou Group called on Australian governments to provide a framework to ‘genuinely require mid-tier contractor engagement’, which it suggested could be done by making it a condition of project funding.
Unbundling projects
6.40
It is well recognised that breaking large projects down into smaller packages (unbundling) significantly improves the ability of mid-tier firms to access government-funded infrastructure project opportunities.
6.41
Evidence to the committee indicated that breaking up mega projects (worth over $1 billion) into smaller packages is a common approach taken overseas, which helps SMEs to bid for contracts and then ‘gradually grow’ in major players internationally.
6.42
AOC contended that the lack of competition and market concentration of tier one contractors is exacerbated by the trend towards mega projects. It suggested that breaking projects into smaller packages—ideally below $500 million—will allow smaller domestic and international companies to participate and as a result create capability.
6.43
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) agreed that governments ‘should do more to unbundle procurement contracts into more manageable components for small businesses’.
6.44
The Business Council of Australia (BCA) called for urgent action ‘to unlock delivery of today’s mega projects and to better utilise available market capacity’. The BCA supported a joint effort by governments and industry to improve tier two and three capability and capacity, enabling these companies to take on increasingly complex projects. It outlined that this could involve governments:
…[putting] programmes of projects to market that build the capacity and capability of tier two and three contractors over time. These programmes should increase in complexity…to the point that some tier two contractors are bidding for mega projects in the medium term.
6.45
The CCF submitted that a sustainable level of project allocation to mid-tier contractors that recognises local content will deliver community benefits that include:
higher local employment opportunities
increased and upskilled local workforce, and
higher economic growth in the local community, and local economic multiplier.
6.46
While breaking up projects does not automatically result in local participation, Master Builders Australia observed that seems to have been the case for Defence. It provided an example of Defence facilities upgrade works around Australia which were unbundled into 14 contracts, where historically it would have come under one contract. This permitted using greater local capability for works in a specific area, for instance, in the Newcastle contract local workers were used rather than bringing in Sydney workers to undertake the project.
6.47
While supporting the principle of unbundling projects, both government and industry recognised that not all projects are suitable to be broken into smaller works. AOC emphasised this point well with the light-hearted example that one ‘cannot build half a bridge or half a tunnel’. It also raised the significant opportunity costs of breaking down projects, where packaging could have delivered other project efficiencies or benefits.
6.48
In cases where unbundling is not feasible, requiring tier one companies to partner with tier two or three companies was proffered as an alternative to supporting mid-tier engagement in infrastructure projects, perhaps through industry sustainability criteria in the tender process.
6.49
The Georgiou Group encouraged governments to consider both unbundling and mandating mid-tier participation for large mega projects in Australia. The group argued that it was not questioning the need for, nor value of, tier one companies in delivering Australia’s infrastructure. Rather, it saw these approaches as a way to support more infrastructure being delivered by Australian owned companies, ‘therefore developing local capability, which will increase the sustainability of the Australian infrastructure market’.
Industry sustainability criteria
6.50
Where it is not possible to break larger projects up, AOC proposed that government should use an industry sustainability requirement. Main Roads Western Australia (WA), for example, has incorporated industry sustainability plans into major projects to manage impacts and leverage opportunities for sustainability or social responsibility within project supply chains.
6.51
An example of Main Roads WA applying such an approach in practice was the Bunbury Outer Ring Road project. Driven by the WA Government’s identified need for healthy competition in the delivery pipeline of the state’s infrastructure, Main Roads WA specified tier two or three participation within the project’s tender documentation. The objective was to encourage tier one companies to joint venture with mid-tier companies.
6.52
The $852 million Bunbury Outer Ring Road project is 80 per cent Australian Government funded and 20 per cent state funded. Under the alliance structure and composition section, tender applicants for the project were asked to provide details of the proposed structure and relationship between non-owner participants in the Alliance, including any proposed tier two or tier three prequalified road and bridge contractors. The section provided that preference would be given to applicants that have committed to building capacity and capability of local industry, in particular the construction industry. The industry sustainability criteria had a weighting of 10 per cent, in line with other key selection criteria such as project management, and design and construction capability.
6.53
AOC submitted that it was intended, but not mandated, that companies responding to the expression of interest for the Bunbury Outer Ring Road would include a tier two or three contractor in its delivery consortium—providing an opportunity for mid-tier companies that, AOC maintained, would not otherwise have occurred. Ultimately, the outcome was a positive one for local industry participation—the project was awarded to the Southwest Connex Alliance, comprising the international tier one Acciona, AECOM, Aurecon and two Australian owned contracting firms MACA and NRW Holdings.
6.54
Other examples of where industry sustainability criteria have been used in tender criteria, or where packages have been made smaller, and Australian owned mid-tier contractors have been successful include the jointly-funded Bruce Highway Cooroy to Curra (Section D) road upgrade, M1 Pacific Motorway—Varsity Lakes to Tugun project, M1 Pacific Motorway—Eight Mile Plains to Daisy Hill project.
6.55
In contrast, AOC claimed that large projects that do not include industry sustainability criteria or are not unbundled, are ‘almost wholly awarded’ to tier one contractors. AOC recommended that the Australian Government:
…mandate the inclusion and assessment of industry sustainability criteria as a part of the early-stage procurement process. This has the effect of encouraging mid-tier participation within head contract roles and should be included in the federation funding agreements [FFAs] for each project. Meeting these two requirements should be a condition of Commonwealth funding for all major projects.
6.56
AOC saw including industry sustainability and unbundling requirements in FFAs as a way to establish these as accepted expectations for government-funded infrastructure projects.
6.57
AOC asserted that international obligations should not influence Australian Government policy development in this area, ‘particularly where industry sustainability seeks to develop an underdeveloped section of the economy, in this case mid-tier companies within the civil construction industry’.
Insurance, retention and surety requirements
Insurance market challenges
6.58
Evidence to the committee suggested that the current insurance requirements and the nature of the insurance market can act as a barrier to SME participation in large infrastructure projects. The Jacobs Group submitted that:
Smaller contractors, including majority Australian owned ones, are unable to bid directly (or in joint venture) for mega projects, especially when unlimited liability and project specific insurance requirements make the risk profile or cost of bidding unacceptable.
6.59
Infrastructure Australia acknowledged that the tendency for government procurers and head contractors to shift risk to subsidiaries can result in, for instance, an advisor or designer on a project having to ‘rely on their insurance as penalties soar and then in time the pressures that we see now with the hardening professional indemnity [PI] insurance market’.
6.60
The insurance implications for risk shifting from clients to contractors is raised in the Chapter 4 discussion on risk. North Projects observed that the insurance industry has been the ‘only winner’ of the circumstances of duplicated liabilities insurance and unnecessary risk pricing. As outlined in Chapter 4, North Projects and other submitters see the alliance form of contracting as a good model for sharing risk.
6.61
Market soundings with leading contractors and insurers in the October 2021 Infrastructure Market Capacity report highlighted that insurance market changes are significantly impacting the delivery component of the infrastructure value chain. The report outlined that:
These changes are being driven by the size and complexity of the infrastructure program and the desire to transfer 100 per cent of the risk and insure against delay risk. Market proponents have estimated a 50 per cent reduction in the capacity of insurance for the construction market as the costs continue to rise.
The impact is most pronounced within professional indemnity where there is a challenge in understanding the contractor requirements, with market proponents having seen the amount of PI insurance [coverage] decrease from $150–200 million to around $50–60 million. There is a shift to more defined policies with less coverage, while contractors are being influenced by their insurance coverage in their decisions to bid.
6.62
ASBFEO has called on the Australian Government to take urgent action to ensure that SMEs can access essential insurance products like public liability and noted reports of SMEs being denied insurance or having their premiums tripled, effectively pricing them out of the market.
6.63
Consult Australia expressed concern about the implications of insurance challenges for consulting businesses and claimed that the infrastructure sector is experiencing ‘significantly diminished access’ to professional indemnity insurance ‘because Australia’s building and construction sector is now considered one of the highest risk industries in the world for PI insurance’.
6.64
While Consult Australia acknowledged that insurance issues are affecting businesses of all sizes, it submitted that its small business members have advised that ‘PI insurance premiums are their largest business expense and year on year premiums are increasing while coverage amounts decrease’. Further, similar to ASBFEO findings, Consult Australia is also seeing forced closures of SMEs and sole traders, and early retirements, ‘based solely on the fact they can no longer get insurance at any price (let alone at an affordable premium)’.
6.65
Consult Australia noted that Infrastructure Australia’s 2021 Australian Infrastructure Plan highlights the current crisis in the profession indemnity insurance market and has confirmed Consult Australia’s call to action for governments to work with industry to ‘de-risk the market through appropriate risk allocation’.
6.66
The National Study of Infrastructure Risk: A report from Infrastructure Australia’s Market Capacity released in October 2021, found in relation to market capacity that the ‘single most critical factor’ in delivering projects in the infrastructure pipeline was to ensure the sustainability of the Australian contractor market. Noting that the hardened PI market was acting as a major constraint on consultants, one of the identified actions was to undertake a review of the market conditions for infrastructure insurance.
Retention and surety issues
6.67
Apricity Finance Group contended that the issues around retention clauses and surety bonds is ‘a serious overlooked issue’ that has prevented many Australian SMEs from participating in the large infrastructure stimulus projects program.
6.68
Retention clauses are a traditional part of construction contracts, whereby a fixed percentage of the total payment for a contract is withheld for a determined period after the work is completed, as security to ensure that a contractor or subcontractor properly completes the contracted work to the client or head contractor’s satisfaction. It is typically around 5 per cent to 10 per cent of the contract value held by the head contractor.
6.69
When applied, for example, to contracts valued at $20 million plus that run over a two-year period, in practical terms, this means that an SME would have $2 million or more ‘put away’ for an extended period, with the problem further compounded if they are working on several concurrent projects.
6.70
Apricity Finance expressed concern about these requirements impeding one of the intended purposes of the infrastructure stimulus spending; to support Australian businesses. It submitted that:
We see this as an enormous bottleneck to the great work of the Government to stimulate the economy with infrastructure projects. The injection of $10 billion plus out to tier one construction groups (with the view that this will flow to tier two and three groups) means that potentially small businesses will need to collectively find $1 billion in guarantees to be able to work on the projects—a request that simply can’t be fulfilled.
6.71
Further, Apricity Finance argued that beyond traditional retention clauses in construction contracts, in recent years there has also been ‘an emerging requirement’ for SME subcontractors on large infrastructure and mining projects to also provide ‘bank guarantees, performance or surety bonds’ on these projects. It observed that the intended opportunities for SMEs in the bolstered pipeline of infrastructure projects ‘may unfortunately be in vain if the performance bonds and bank guarantees status quo continues’.
6.72
Apricity Finance asserted that the surety bond market is ‘becoming tougher’, with its research showing that only around five providers of performance bonds remain in the Australian market, and that there are ‘extremely high hurdles’ that businesses must meet. Apricity Finance’s Chief Executive Officer told the committee that:
These products are underwritten by an insurance company, and the insurers are now requiring evidence of annual revenues in excess of $20 million but more commonly $50 million, a minimum of three years’ trading accounts with each one being profitable, a clear line of sight to company assets, and a growing emergence of directors’ backgrounds being reviewed for such items as moral risk…One adverse element means that underwriting will be declined.
6.73
Similarly, the ASBFEO stressed the importance of ‘right-sizing requirements throughout the supply chain’, noting that many SMEs seek loans to meet contractual requirements thus further reducing their capacity to engage in projects.
Local content
6.74
The committee notes that what constitutes ‘local’ content can vary significantly. Hughes et al, an advisory firm on local content best practice, suggested that the source of the confusion could be the Australian Government’s definition, noting that for major projects of over $500 million ‘local’ includes all of Australia and New Zealand. Hughes et al observed that while this may make sense in the context of participating in the global economy and to align with FTAs, ‘at a day-to-day level, this definition of local is more likely to confuse and dilute meaningful support’.
6.75
The Department of Defence does not have a set definition for local and tailors it for each project, based on the geography of where the work is being delivered.
6.76
Hughes et al found that state government definitions were not necessarily any better. As a practitioner of local content best practice, Hughes et al recommended ‘clarifying what local means’ and clarifying ‘industry, supply and employment’, as necessary for improving outcomes for local industry. The Hughes et al Project Directors Local Content Guidance Note provides detailed guidance on local content best practice.
6.77
There has been a substantial increase in the use of measures favouring domestic industries over foreign competitors in recent years to support governments in pursuing certain policy objectives. The Organisation for Economic Co-operation and Development (OECD) notes that local content requirements (LCRs) are the fastest growing of these domestically focused measures. It describes LCRs as policies imposed by governments that require firms to use domestically manufactured goods or domestically supplied services in order to operate in an economy.
6.78
Despite the popularity of these measures, the OECD questioned the effectiveness of LCRs at the macroeconomic level and noted that sector-specific studies have ‘generally concluded that while LCR policies may achieve certain short-term objectives, they undermine industrial competitiveness and overall employment over the long-run’.
6.79
In contrast, in Laing O’Rourke’s experience, the company has found that the collaborative forms of contracting supporting the connections between project participants to local content and other non-financial outcomes are ‘effective at delivering value to the client [and] better facilitating increased local content’. Laing O’Rourke also identified increased training and upskilling on projects, and maximising engagement with social and indigenous enterprises, as important legacy benefits from these arrangements.
6.80
While in terms of sourcing local content, Hughes et al identified early market engagement as key to being able to assess the market for capability, and ultimately to better local content and economic outcomes.
Australia and New Zealand Government Procurement Agreement
6.81
The Australia and New Zealand Government Procurement Agreement (ANZGPA) is an agreement between the Australian Government, the New Zealand Government and Australia’s states and territories to create and maintain a single ANZ government procurement market to maximise opportunities for competitive ANZ suppliers and reduce costs of doing business for both government and industry.
6.82
ANZGPA applies to government procurement that is controlled by the parties to the agreement. It does not include procurement by local authorities, government owned corporations, body corporates or other legal entities, except where a party exercises its discretion to determine that the ANZGPA will apply to the procurement.
Supporting industry participation
Australian Industry Participation
6.83
The Australian Industry Participation (AIP) Framework consists of a national agreed set of objectives, principles and strategies that aim to strengthen industry participation and build on existing arrangements.
6.84
AIP plans are required by the Australian Jobs Act 2013 for major projects with estimated capital expenditure of $500 million or more and are a productive facility, and for projects that receive Australian funding of $20 million or more.
6.85
Under the National Partnership Agreement (NPA) on Land Transport Infrastructure Projects (2019‑2024), which has now been consolidated into the Federation Funding Agreement on Infrastructure, jurisdictions must develop and implement a Local Industry Participation Plan (LIPP) or an AIP plan for all infrastructure projects receiving over $20 million from the Australian Government.
6.86
The Australian Industry Participation Authority is a full-time statutory position, established by the Australian Jobs Act 2013. It is responsible for evaluating, approving and publishing summaries of AIP plans for major Australian projects, as well as monitoring compliance and reporting on the implementation of plans.
6.87
Work by the Department of Finance and the Department of Industry, Science, Energy and Resources to improve Australian business participation in government procurement has included undertaking an ‘industry scan’ to better understand the challenges facing businesses. It was found that risk shifting featured prominently in industry concerns as a barrier to participation.
6.88
The Department of Defence was pleased to note that its focus on growing Australian industry capacity was challenging the natural tendencies of prime contractors to simply draw on their current supply chain, by requiring foreign tier one companies to engage with Australian suppliers.
6.89
The Department of Industry, Science, Energy and Resources expanded on what is meant by providing Australian industry with ‘full, fair and reasonable opportunity’ when competing for work in major public and private projects, outlining that:
‘Full’ means that Australian industry has the same opportunity as other global supply-chain partners to participate in all aspects of an investment project, right from design through engineering and project management.
‘Fair’ means Australian industry is provided with the same opportunity as global suppliers to compete on an equal and transparent basis, including equal tender time.
‘Reasonable’ means tenderers are free from non-market burdens, such as standards that might rule out Australian suppliers.
6.90
The committee notes that AIP plans are consistent with Australia’s international obligations, and accordingly do not mandate the use of Australian industry on projects. Instead, the AIP framework provides an opportunity for Australian businesses to demonstrate what they can offer.
6.91
The Department of Industry, Science, Energy and Resources stressed that it does not mandate any commercial outcomes through AIP plans, and outlined that:
…it is about giving Australian industry the opportunity to communicate about their capability and what they can provide to bid into tendering processes or expressions of interest for providing products and services. There are instances in some of the trade agreements where we can go to certain things in terms of supporting Indigenous businesses and small and medium enterprises; and there are some thresholds at which there is some allowance for some things. But, as a general rule, we would like to approach it from a perspective of building Australian capability to be competitive in bidding into these types of supply opportunities. As we have said, that can take into consideration not just the cost but also the value that brings.
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The Australasian Railway Association recommended that the Australian Government investigate the benefits of reducing the threshold of the size of projects requiring an AIP plan, and work with industry to improve transparency and guidance on how AIP plans are assessed during the tender evaluation process.
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However, advisory firm Hughes et al contended that the AIP national framework ‘needs some practical revisions’. Further, that the AIP Authority—which is responsible for evaluating AIPs and monitoring compliance—‘could do with more teeth and more hustle’ to transform what is currently a compliance or risk avoidance culture into a ‘performance culture’ seeking value from local industry.
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AIP plan and state local content policies play an important role in initiating contact with the local market that may otherwise not have occurred. The Australasian Railway Association acknowledged that both governments and industry may ‘need to be incentivised to engage with local suppliers and contractors to in turn realise and appreciate the local capabilities that exist in the sector’. Further, it called for research and analysis on the benefits and effectiveness of these policies to help measure the practical impact of having these requirements in tenders.
Local industry participation
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The Department of Infrastructure, Transport, Regional Development and Communications noted that most jurisdictions seek to avoid duplication by ensuring that their Local Industry Participation Plan meets the NPA requirements. New South Wales (NSW), however, is the main jurisdiction to develop and implement AIP plans. While the South Australian approach, in particular its Industry Advocate model, elicited the most commentary from inquiry participants as having broader application at the national level.
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Under the NSW Government’s Procurement Policy Framework, for contracts valued at $3 million and over, suppliers are required to submit an SME and local participation referencing SME and NSW specific content and make quarterly reports on these commitments. The contract manager is responsible for monitoring progress on the commitments. For the purposes of the SME and LIPP:
SMEs may include, but are not limited to, local businesses, Aboriginal owned businesses, social enterprise and disability employment organisations.
Local content is defined as goods produced, services provided, and labour supplied in NSW.
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By 2023, the NSW Government’s Small and Medium Enterprise and Regional Procurement Policy is expected to deliver on: more contracts awarded to SMEs, increased SME participation on large contracts; increased government spend with SMEs; and improved SME and regional building capabilities. The policy does not cover the Parliament of NSW, local councils and state owned corporations. However, the latter are encouraged to adopt aspects of the policy consistent with their corporate intent.
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The South Australian Industry Participation Policy (SAIPP) is the high-level framework for delivery of the requirements of section 4 of the Industry Advocate Act 2017. South Australian agencies and private parties contracting to the SA Government are required to comply with the SAIPP and its supporting guidelines.
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Industry participation plans apply to all procurements in South Australia valued over $550,000 (with the minimum or increased weighting) and may be optionally applied to procurements valued above $220,000 and up to and including $555,000.
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The Industry Advocate Act 2017 (SA) also establishes the role of the Industry Advocate, an independent statutory authority, whose responsibilities includes facilitating economic contribution and development from public expenditure and to ensure capable businesses based in South Australia are given full, fair and reasonable opportunity to tender and participate in government projects. This Industry Advocate model is discussed in Chapter 4 of this report.
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In evidence to the committee, ASBFEO proposed that the Australian Government consider emulating South Australia’s Industry Advocate model at the national level, and explained that:
This model allows for timely, targeted advice on how procurements can be used to ensure the best possible value-add for South Australian businesses, and we think many of its practices and principles can be carried over to the Commonwealth jurisdiction.
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The Local Jobs First Act 2003 (Vic) enables the Victorian Government to provide opportunities for local businesses and workers to supply to government projects. The Local Jobs First Policy comprises the Victorian Industry Participation Policy (VIPP) and the Major Projects Skills Guarantee (MPSG).
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The VIPP provides that local SMEs be given full and fair opportunity to supply to projects, while still achieving value for money. The Victorian Government funds the Industry Capability Network Victoria, a not‑for-profit organisation responsible for facilitating the VIPP and increasing local participation in all major procurement activities.
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The VIPP applies to projects valued at $3 million or more for metropolitan Melbourne and state-wide activities and $1 million or more for regional Victoria. Under the VIPP:
A 10 per cent weighting for local content is to be applied by procuring agencies.
Local covers all suppliers producing Victorian, Australian or New Zealand goods of services or when they have added value to imported items.
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For projects valued at or over $20 million, the MPSG requires using Victorian apprentices, trainees and cadets for at least 10 per cent of the total estimated labour hours.
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The Queensland Procurement Policy (QPP) is the state government’s overarching policy for the procurement of goods and services. The Queensland Government also maintains other procurement-related policies. The enhanced QPP 2021, which commenced on 1 February 2021, provides that as part of value for money assessments:
Local supplier means a supplier of goods or services that maintains a workforce whose usual place of residency (i.e., where they normally live, sleep and eat) is located within a 125-kilometre radius of where the good or service is to be supplied. If a capable local supplier does not exist within the 125-kilometre radius, the radius should be extended progressively to the local region, then Queensland, then outside of Queensland, until a suitable supplier is identified.
Targets include sourcing at least 25 per cent of procurement by value from Queensland SMEs, increasing to 30 per cent by 30 June 2022. The target aims to increase government spending with SMEs, building confidence in the sector and creating more local jobs, business growth, innovation, competition and capability to access new markets.
For significant Queensland Government infrastructure projects (valued at $100 billion or above), contractors and suppliers, including manufacturers, that employ local workforces must be used, wherever possible.
As part of value for money assessments:
Agencies must address factors including conducting a local benefits test for all significant procurement where a weighting of up to 30 per cent may be applied.
For major projects of $100 million or more and declared projects, must include application of all best practice principles relating to: work health and safety systems and standards; commitment to apprentices and trainees, and industrial relations.
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The Queensland Government Procurement Strategy 2017: Backing Queensland Jobs outlines how the Queensland Government will use procurement spend to support government objectives: to help the Queensland community prosper; to make it easier for local business; and to create and sustain real value in order to achieve positive economic, social and environmental outcomes. The Buy Queensland approach prioritises Queensland jobs.
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The Queensland Charter of Local Content, under the Queensland Industry Participation Policy Act 2011, provides a framework for encouraging government agencies to apply best practice in local content procurement while minimising the compliance burden on government agencies and contractors, and ensuring full, fair and reasonable opportunity for local suppliers. However, it does not mandate that government agencies use local suppliers.
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Government agencies are encouraged to apply the charter to all procurements with a total Queensland Government contribution of $5 million and above (exclusive of GST), or $2.5 million and above (exclusive of GST) in regional Queensland, excluding information and communications technology products and services. The Queensland Charter of Local Content:
Captures procurement for large infrastructure projects where over $20 million in funding is provided by the Australian Government through the Queensland Government.
Local content comprises components, materials and services that are procured from a local source for a given project and local industries are defined as Australian and New Zealand SMEs. It also sets out Regional Queensland and South East Queensland areas
Excludes local government procurement, but the requirements for developing competitive local business and industry in the contracting and procurement activities, in accordance with the Local Government Act 2009 (Qld).
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In Western Australia, one of the stated aims of the state’s Procurement Act 2020 is to reduce barriers to SME participation in government procurement by streamlining procurement procedures. The WA Buy Local Policy 2020 contains initiatives and price preferences providing local businesses with an enhanced opportunity when bidding to supply to the WA Government. The policy is administered by the WA Department of Jobs, Tourism, Science and Innovation.
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The Tasmanian Government’s Buy Local Policy requires that an Economic and Social Benefits test be applied to all competitive procurements valued at $100,000 or more, with agencies requiring suppliers to complete the test and set out the benefit they can bring to the Tasmanian community if the contract is won.
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The Tasmanian Government has introduced a requirement for a Tasmanian Industry Participation Plan (TIPP) for large value procurements and is mandatory for procurements over $5 million. For procurements greater than $2 million up to (and including) $5 million, a TIPP may be required but is at the discretion of the procuring agency. In addition, proponents of private sector projects valued at over $5 million that receive support (including in‑kind support) from the Government are required to work with agencies to develop a TIPP.
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The Australian Capital Territory (ACT) Government’s approach to engaging with local content is guided by the Canberra Region Local Industry Participation Policy (Canberra LIPP) which applies to all approaches to market by territory entities. Territory entities must consider local capability and economic benefits for the Canberra region when determining the best available procurement outcome. Key elements of the Canberra LIPP include:
Canberra LIPP requirements at the initial invitation stage of a procurement process for projects $200,000 or above.
For procurements $5 million and above, respondents will be required to submit a LIPP and report on their plan as part of the contract terms, if successful.
An outline of the respondent’s level of commitment to using local content and/or local businesses and how the respondent’s proposal and business contributes positively to the economic benefits of the Canberra region.
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In addition, the ACT Government has introduced the Aboriginal and Torres Strait Islander Procurement Policy that includes, where possible, sourcing from local and Aboriginal and Torres Strait Islander Enterprises. Head contractors for large projects are provided with a list of subcontractors as a resource.
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The Northern Territory (NT) Government’s approach to local content is set out in its procurement rules. These rules include a focus on local content and Aboriginal participation, where the agency must consider opportunities to maximise local content and Aboriginal participation and employment throughout the procurement lifecycle through an Agency Procurement Management Plan. Further, an assessment criteria weighting must include a minimum 30 per cent weighting for local content, and up to a maximum 30 per cent weighting for price.
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In addition, the NT Government’s Buy Local Plan gives local businesses greater opportunity to tender for and win government work and aims to improve the way local benefits are identified, evaluated and realised across the procurement and contracting lifecycle. The Buy Local Plan’s key actions include:
A local content test in all government quotes and tenders, worth a minimum of 30 per cent in tender evaluations.
Inviting at least one quote from a Territory enterprise for tier one and tier two procurements.
A Buy Local Industry advocate to provide an independent advocate function to government on behalf of local industry.
Contractual terms and conditions to incorporate the successful tenderer’s local benefit commitments.
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Under the Buy Local Plan’s local content assessment criteria, a tenderer’s score is determined by both the potential benefits available, and the NT Government’s degree of confidence in the tenderer’s ability to deliver those benefits.
Defence engaging local industry
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As outlined in the Defence Industrial Capability Plan (DICP) released in 2018, the Australian Government’s goal by 2028 is ‘to achieve an Australian defence industry that has the capability, posture, and resilience to help meet Australia’s defence needs’, requiring the strengthening of sovereign capability and maximising of opportunities for local businesses. The DICP incorporates a range of industry initiatives that support local industry engagement including:
The Australian Industry Capability Program to maximise Australian industry involvement in procurements of $20 million or more and requires companies to submit a plan as part of the tender response.
The Centre for Defence Industry Capability that brings together private sector, Defence and industry to strengthen relationships, build supply chains, and provide support for businesses working in or looking to enter the defence sector.
The Defence Industry Participation Policy to provide a more consistent approach to the engagement of Australian industry at the national and/or local level in Defence procurements valued at $4 million and above.
Sovereign Industrial Capability Priority Grants for SMEs.
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While Defence aims for a majority of its infrastructure to be delivered primarily through Australian companies, it conceded that there will be cases where components not manufactured in Australia will come from international supply chains. However, Defence indicated that it has worked with its prime contractors, through local industry capability plans (LICPs), to ‘divert as much of that business to local players’ in relation to work done on Defence estates.
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LICPs require tenderers to develop and submit a plan as part of their tender response. Defence explained to the committee that it does not have a set definition of ‘local content’, instead it is tailored for each project’s geographical location to account for the variety of subcontractors required for more regional or remote projects. Since it started using LICPs, Defence has:
…been able to lift local content in our large-scale infrastructure projects from around 60 to 65 per cent up to around 85 per cent. What's different, perhaps, in the way we're doing this is that we have a 10-year plan, and we have the planning process to think deeply about how we maximise our work with Australian prime contractors and about how we work with them to package work to lift the capacity of local industry and keep that vibrant industry going.
They're quite targeted interventions at a policy and practice level that work hand in glove with the Commonwealth procurement guidelines and with a government focus on Australian and local industry content, and we're seeing over time that that's working really effectively.
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There was widespread industry support for Defence’s approach to local capability throughout the inquiry, with various witnesses commenting on the success of the program and a desire for it to be more widely adopted across the construction industry. AOC described the Defence Industrial Capability Plan as ‘perhaps the best example of a successful Commonwealth policy approach to a real and deliberative strategic intent in developing Australian owned companies to evolve and grow’. Similarly, Master Builders Australia commented that Defence’s approaches to ensuring local contractors can realistically and fairly tender is ‘an effective model that should apply to future government investments’.
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The Department of Defence advised that through its 2020 Force Structure Plan, roughly $37 billion of the overall $270 billion capital investment in the portfolio will be for infrastructure. The majority of which will be delivered primarily through Australian companies. Defence conceded that there will be cases where components not manufactured in Australia will come from international supply chains. However, Defence indicated that it has worked with its prime contractors, through local industry capability plans, to ‘divert as much of that business to local players’.
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Master Builders Australia observed that the Local Capacity and Industry Participation Model has provided Defence with ‘some certainty around what their partners propose to do with engaging local firms and their employees’.
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The Department of Defence told the committee it takes an integrated approach to balancing Australian Government policy objectives to support Australian industry and meeting international objectives.
Committee comments
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The need to improve tier two and three companies’ access to, and participation in, government-funded infrastructure projects was a key theme throughout this inquiry, and indeed in other reviews in recent years.
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The increasing prevalence of mega projects—large-scale complex projects costing over $1 billion—combined with the fact that there are currently no Australian tier one contractors means that, without strategic action, Australian businesses will continue to miss out on important opportunities, especially in the context of Australia’s significant infrastructure pipeline. Small and medium enterprises (SMEs) need to be able to access these projects to support their growth as individual companies and as an industry.
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Australia’s traditionally piecemeal approach to infrastructure has not served the nation well. The committee considers that much of Australia’s infrastructure procurement has been short-sighted, focusing on single projects and not on how it fits into the larger pipeline and building Australia’s industry capacity and sovereign capability in infrastructure.
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The current unprecedented spend on infrastructure provides a unique opportunity to grow businesses in the sector and build Australia’s sovereign capability to support future infrastructure sustainability. If Australian governments are committed to building strong sectors for the future, they will need to build capacity in industry and government procurement officials.
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During the inquiry, the committee heard that there are opportunities for developing Australia’s industry capabilities in areas such as rail manufacturing, the energy sector and solar panels.
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The committee notes the use of industry sustainability requirements in tenders for recent infrastructure projects, which specified participation of a tier two or three company and sought information from potential head contractors (usually tier one companies) on how they would be engaging with potential tier two or three partners. The aim is to encourage engagement or joint ventures with mid-tiers where otherwise the tier one would not have been incentivised or inclined to engage with local markets.
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In particular, the committee notes that the criteria used in the Bunbury Outer Ring Road example only identified tier two and three contractors and did not preference Australian owned contractors, thus providing equal opportunity for foreign owned and domestic contractors to join with a tier one company in delivering this project.
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The committee does not see how seeking to develop the capacity of non‑tier one companies involved in delivering infrastructure projects in Australia could be construed as at odds with Australia’s international obligations. There is significant potential for the use of industry sustainability criteria in contracts to complement unbundling, or indeed, in cases where breaking up mega projects is not possible.
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The committee agrees with Infrastructure Australia’s assessment in the National Study of Infrastructure Risk: A report from Infrastructure Australia’s Market Capacity about the need for a review of the market conditions for infrastructure insurance. In addition to a more sophisticated rebalancing of how risk is assessed and shared for infrastructure projects, a targeted examination of the barriers due to costly and limited professional indemnity insurance and related requirements is warranted.
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The committee notes the Australian Small Business and Family Enterprise Ombudsman and other groups’ evidence on the insurance crisis that SMEs are facing. This is another area in which governments should explore how it can help ameliorate this challenge to better support SMEs to access the opportunities in the current infrastructure pipeline.
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The committee believes that to build strong sectors for the future the Australian Government will need to play an important leadership role in developing and clearly articulating its vision for the infrastructure industry and driving the necessary changes to get there.
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The committee sees increasing the access of tier two and three companies, and related Australian small and medium enterprises, to projects in the Australian infrastructure pipeline as key to enhancing Australia’s sovereign industry capacity. Accordingly, the committee recommends that the Australian Government examine ways to maximise developing Australia’s sovereign capacity in infrastructure delivery. As part of this work, consideration should be given to:
providing opportunities in procurement and contracting to engage local industry and utilise local content
ways to break up projects into packages of less than $500 million to increase competitiveness by tier two and three companies
making as a condition of Australian Government funding for major infrastructure projects over $500 million industry sustainability criteria within the early stages of procurement design that encourage tier one contractors to partner/joint venture with a non‐tier one company in the head contract
education and training for government officials to support these objectives
reviewing market conditions for infrastructure insurances and the impact on small and medium enterprises.