Introduction
9.1
Chapter nine relates the Committee’s views on evidence heard throughout the inquiry. It details sixteen recommendations to improve the operation of the Australian Government’s new Commonwealth Procurement Rules (CPRs).
Support for new Commonwealth Procurement Rules
9.2
The Committee supports the introduction of the revised Commonwealth Procurement Rules. It believes that, implemented effectively, the new clauses will enable a broader, more accurate consideration of value-for-money in procurement decision making which may result in savings for the Australian Government and provide important support to Australian industry and the economy.
9.3
The Committee recognises that Australian industry has been advocating for these changes for some time and commends the Australian Government for acting to address these concerns, building on the significant work and policy reform agendas of previous governments to improve Commonwealth procurement practices.
Implementation issues
9.4
Although the Committee supports the intent of the new Commonwealth Procurement Rules, it is concerned that ineffective implementation may hinder their ability to enhance procurement outcomes. Many of the new clauses lack clarity or leave too much to the discretion of officials.
9.5
The Committee believes that a three pronged approach is necessary to address implementation issues and ensure the new rules are applied consistently, transparently and to maximum effect. It would like to see:
the publication of comprehensive implementation guidelines coupled with public service wide training to support officials to apply the rules in the manner in which they are intended;
the introduction of procurement connected policies to safeguard the Australian Government’s role as a model procurer; and
the establishment of an independent Australian Industry Participation Advocate modelled on the South Australian (SA) system to facilitate consideration of economic benefit required by clause 10.30.
9.6
In the following paragraphs the Committee outlines implementation issues specific to each clause, and those applying to the CPRs more generally.
New clauses
Clauses 10.10 and 10.37: Australian standards
9.7
The Committee is pleased to see that the new Commonwealth Procurement Rules require suppliers to adhere to relevant international or Australian standards wherever it is appropriate to do so. The Committee believes this will help safeguard the quality of goods and services supporting Australian Government programs and policies. It will also ensure the Australian Government is not complicit in the infiltration of non-conforming products in industries such as building and construction. The Committee anticipates that requiring suppliers to comply with Australian standards, where applicable, may also help level competition between Australian and international suppliers for Commonwealth procurement.
9.8
The Committee notes concerns that compliance with Australian standards, particularly with regard to large projects that may encompass multiple standards, may increase the regulatory burden on suppliers. However, evidence provided to the Committee indicated that this possibility could be mitigated by efficient and well-considered implementation.
9.9
However, it was evident to the Committee that there is some confusion about whether Australian or international standards should apply in cases where it may be appropriate to employ either. Stakeholders noted that clause 10.9(c) of the CPRs appears to require the application of international technical standards in the first instance, apparently contradicting clauses 10.10 and 10.37 which look to preference the application of Australian standards. The Committee recognises that many Australian and international standards are aligned and that the application of one standard over another may not always result in material difference to procurement outcomes. Nonetheless, it would like to see the interaction of these clauses clarified through redrafting or through comprehensive implementation guidelines.
9.10
The Committee recommends that the Department of Finance revise clause 10.9(c) of the Commonwealth Procurement Rules to require all goods purchased by the Australian Government to comply with Australian standards unless none are applicable.
9.11
The Committee also acknowledges the concerns of some stakeholders that requiring international suppliers to comply with Australian standards contravenes Australia’s international trade obligations. However, it accepts Department of Foreign Affairs and Trade (DFAT) assurances that the new CPRs comply with Australia’s existing free trade agreements.
Clause 10.18: Relevant regulations
9.12
The Committee shares stakeholder views that the Australian Government should be a model procurer, ensuring that all businesses within its supply chains comply with international and domestic regulation, including employment, environmental, and work, health and safety legislation. With this in mind, the Committee supports the introduction of clause 10.18 but is concerned that it leaves too much to the discretion of officials with the phrase ‘relevant regulations and/or regulatory frameworks’.
9.13
The Committee would like to see the introduction of comprehensive implementation guidelines explicitly defining the meaning of ‘relevant regulation’ and clarifying whether international suppliers should be required to comply with Australian, international or country of origin regulation. This may include a list of all applicable Australian and international regulation, agreements and principles.
9.14
Furthermore in recognition of the Australian Government’s leadership role, the Committee considers it appropriate that procurement connected policy is established to ensure Commonwealth purchasing is conducted in line with best practice. Specifically in relation to human rights, environmental sustainability, and subcontractor terms and conditions applied to subcontractors throughout the supply chain.
9.15
The Committee shares stakeholders’ apprehension that human rights are not explicitly provided for in the CPRs. It sees scope for the introduction of a procurement connected policy targeting industries at high risk of breaching human rights, and requiring these suppliers to be audited or accredited if they are participating in Commonwealth procurement.
9.16
The Committee recommends that the Attorney-General’s Department oversee the introduction and application of a procurement connected policy requiring Commonwealth agencies to evaluate suppliers’ compliance with human rights regulation.
9.17
The Committee believes it is also necessary to introduce procurement connected policy which sets clear whole-of-life environmental sustainability standards for Commonwealth procurement.
9.18
The Committee acknowledges that whole-of-life costs and environmental impact are already included in the CPRs, but feels they are not currently afforded due weight of consideration. Evidence to the inquiry supports this conclusion.
9.19
Clause 4.5(e) of the CPRs explicitly requires Commonwealth agencies to consider the environmental sustainability of goods and services to be procured as part of value for money considerations. Despite this explicit requirement, the Commonwealth’s procurement of recycled copy paper appears to have rapidly declined following the abolition of the ICT Sustainability Policy.
9.20
The Committee recommends that the Department of Environment oversee the introduction and application of a procurement connected policy requiring Commonwealth agencies to evaluate the whole-of-life environmental sustainability of goods and services to be procured.
9.21
The Committee heard that, although the Commonwealth’s relationship with prime contractors reflects best practice in working conditions, these conditions do not always flow through to subcontractors in the supply chain. Indeed, witnesses reported that Commonwealth agencies’ unwillingness to acknowledge and monitor subcontractors may be resulting in practices such as delayed payments, the inappropriate transfer of risk and an imbalance of power.
9.22
As such, the Committee believes that a procurement connected policy is needed to require agencies to engage prime contractors in a manner which mandates their provision of best practice terms and conditions to subcontractors and builds in reporting obligations to monitor compliance.
9.23
The Committee recommends that the Department of Industry, Innovation and Science enhance the procurement connected policy for Australian Industry Participation Plans, requiring that good procurement practices are implemented down through the supply chain so that both prime and subcontractors:
implement best practice terms and conditions; and
are contractually obligated to report on those terms and conditions.
Clause 10.30: Economic benefit
9.24
The Committee anticipates that, if implemented effectively, clause 10.30 will complement the value-for-money considerations provided for in Division One of the Commonwealth Procurement Rules. It will enable more accurate and nuanced consideration of the value of goods and services offered by both domestic and international suppliers by considering suppliers’ role in the Australian economy. The Committee feels that the effect of the clause will depend on its ability to overcome a culture of ‘lowest cost’ as value-for-money which persists in some Commonwealth agencies.
9.25
The Committee believes this culture is widespread and the introduction of implementation guidelines may not facilitate the effective application of this clause. Its first preference to safeguard the operation of clause 10.30 is the formation of an Industry Participation Advocate, based on the South Australian model, to:
provide independent, consistent and transparent evaluation of the unique economic benefits offered by different suppliers;
support Commonwealth agencies to draft tenders which provide opportunities to domestic businesses without contravening Australia’s international agreements;
inform the creation and application of industry participation plans; and
review contracts to ensure suppliers are delivering the economic benefits committed to during tender processes.
9.26
The introduction of a Commonwealth Industry Participation Advocate is discussed in more detail towards the end of the chapter.
9.27
In the absence of an Industry Participation Advocate, the Committee accepts that comprehensive implementation guidelines may go some way towards overcoming the primacy of cost in value-for-money considerations. However, to be effective guidelines must:
explicitly define what constitutes economic benefit;
outline how rubrics or weighted criteria may be used to compare the unique economic benefits offered by different suppliers and in assessing economic benefit as part of the overall tender evaluation; and
describe techniques for assessing the veracity of suppliers’ claims of economic benefit and for ensuring these benefits are delivered.
9.28
The Committee feels strongly that any guidelines introduced should define economic benefit as broadly as possible without contravening Australia’s international trade agreements. At a minimum, the Committee believes economic benefits should encompass: social benefits; regional, state and the national economic impact; potential tax revenue; employment and innovation opportunities; workforce training; and building Australian industry capability.
9.29
The Committee accepts evidence that the use of assessment rubrics or weighted criteria could help ensure that clause 10.30 of the CPRs is applied in a more fair and transparent manner. Specifically, these tools could aid officials to:
compare and rank the unique economic benefits offered by different suppliers; or
guide how consideration of economic benefit informs overall tender evaluation.
9.30
The Committee would like to see any implementation guidelines introduced prescribe the appropriate use of rubrics and weighted criteria except for large or complex procurement projects where use of criteria may be detrimental. For example, complex procurement involving the careful evaluation of a range of subtle qualitative factors (such as those undertaken by the Department of Defence), or procurement with potential social ramifications.
9.31
The Committee considers that economic benefit should receive a minimum 15 per cent weighting, following the example of the South Australian Office of the Industry Advocate, across a tender. Weightings applied to any procurement above the economic benefit threshold can be increased by the procuring agency or a Minister to leverage best economic benefits (for example, for strategic sectors of the economy, for depressed sectors of the economy or on a region by region basis). Weighting factors should be included in the request documentation.
9.32
The Committee considers it essential that any guidelines introduced encourage officials to validate suppliers’ claims of economic benefit and require the delivery of economic benefits to be contracted. It would like to see implementation guidelines describe techniques for assessing the veracity of suppliers’ claims and advice on incorporating the delivery of economic benefit into contracts.
9.33
In this regard, the Committee notes the example of the Government of the United Kingdom (UK) which requires primary contract terms and conditions to be applied equally to sub-contractors up to three levels removed. The Committee notes the Commonwealth Contracting Suite (CCS) contains a clause applying the obligations of the contracts to all sub-contractors. The CCS only applies to contracts for less than $1 million. The Committee recommends that this clause is made mandatory in all Commonwealth contracts.
9.34
The Committee recommends that all Commonwealth contracts contain a similar clause to Commonwealth Contracting Suite clause 10, ensuring that the obligations of prime contractors apply to all sub-contractors.
9.35
The Committee notes the evidence from the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) that the practice of bundling contracts may disadvantage and discourage SMEs. The Committee is aware that other Parliamentary committees are also grappling with this issue and that it may warrant further scrutiny.
9.36
The Committee notes that the UK’s Public Contracts Regulations 2015 specifically encourages the splitting of larger contracts into a series of smaller contracts to enhance SME access to government procurement. The Committee considers that this practice would be of particular benefit to rural and regional small and medium enterprises (SMEs). Recent media comment on Defence procurement outcomes in these areas appears to support this conclusion.
9.37
For Commonwealth entities operating in rural and regional areas, using local suppliers provides an important means of integrating into the community. To reinforce the positive effects of these clauses, the Committee recommends that an exemption for rural and regional SMEs be added to Appendix A: Exemptions from Division 2 to encourage the use of local suppliers by government agencies operating in these areas.
9.38
The Committee recommends that rural and regional small and medium businesses be added to the list of exemptions under Appendix A: Exemptions from Division 2 of the Commonwealth Procurement Rules.
9.39
The Committee considers that the effectiveness of clause 10.30 can only be measured using accurate and comprehensive data, noting that a number of Australian states successfully collect data on locally procured content. The Committee considers that the current mechanisms for collecting information are inadequate. A suitable framework should be developed and applied rigorously to ensure that relevant data is available to monitor and evaluate the degree of Commonwealth procurement that is supplied by Australian-owned businesses, contains Australian-manufactured goods, or uses Australian-based services. The Committee therefore recommends that data reporting and collection be improved.
9.40
The Committee recommends that the Department of Finance and the Department of Industry, Innovation and Science jointly develop and implement a framework to collect relevant data on the degree of Commonwealth procurement that is supplied by Australia-owned businesses, contains Australian-manufactured goods, or uses Australian-based services.
Clause 10.31: Australia’s international agreements
9.41
The Committee heard some stakeholder reservations regarding the compatibility of the new Commonwealth Procurement Rules with Australia’s international trade agreements, including:
concerns that clause 10.30 may infringe the Australia–New Zealand Government Procurement Agreement (ANZGP);
concerns that clauses 10.10 and 10.37 may be incompatible with a European Union-Australian Trade and Investment Relationship; and
concerns that Australia’s accession to the World Trade Organisation’s Government Procurement Agreement (WTO GPA) will require a ‘watering down’ of the new clauses.
9.42
The Committee notes DFAT’s assurances that the CPRs comply with Australia’s current free trade agreements and that minimal changes will be required to accede to the WTO GPA. It notes the Australian Government’s recent introduction of the Government Procurement (Judicial Review) Bill 2017 into the House of Representatives which has now been referred to the Senate Standing Committee on Finance and Public Administration, due to report on 4 August 2017. The Committee has concerns about this enabling legislation and believes it should not be progressed until WTO GPA negotiations are finalised.
9.43
The Committee considers that the new CPRs will improve procurement outcomes and should be protected. It understands that the CPRs have been developed to align with the principles in Australia’s current trade agreements and believes it is important that future agreements do not conflict with, or diminish, the impact of the benefit to the Australian economy or the ability to preference small to medium sized enterprises. The Committee urges that the Government ensure that its trade negotiators are fully aware of the implications of the terms of any future trade agreements on the successful implementation of the amended CPRs or any further changes to the CPRs that may be implemented.
9.44
Further, the Committee recommends that, in negotiating future trade or WTO agreements, Australia does not enter into any commitments that could undermine the Australian government’s ability to support Australian businesses.
9.45
The Committee recommends that, in negotiating future trade or World Trade Organisation agreements, Australia not enter into any commitments that undermine the Australian government’s ability to support Australian businesses.
Other implementation issues
9.46
The Committee received evidence on a range of other implementation issues throughout the inquiry, including:
Commonwealth agencies are not aware of, or have a culture of underutilising Division Two rule exemptions listed in Appendix A of the CPRS; particularly those supporting small and medium sized enterprises to engage with Commonwealth procurement;
the lack of transparency around the value of state and territory procurement funded by the Commonwealth, and the percentage of Australian goods and services purchased through these arrangements;
Commonwealth agencies are deliberately or inadvertently inappropriately shifting risks onto suppliers including SMEs; and
Commonwealth agencies no longer possess the technical expertise to make informed procurement decisions, particularly in regard to infrastructure.
9.47
Evidence to the inquiry was anecdotal and in the scope of the inquiry the Committee did not have capacity to further investigate these claims. It may be that comprehensive implementation guidelines, training, or the recruitment of technically qualified professionals is required to address these issues.
Addressing implementation issues
Comprehensive implementation guidelines and training
Guidelines
9.48
The Committee feels that comprehensive implementation guidelines will be critical to the application of the CPRs in a manner which improves procurement outcomes. Rather than supporting successful implementation, the Committee is concerned that the current guidelines developed by the Department of Finance have the potential to undermine the intent of the new CPRs. It therefore recommends that Finance issue guidelines addressing all implementation issues identified in this report as a matter of priority.
9.49
In particular, the Committee wants to see that economic benefit is explicitly defined, weighted and delivered. The Committee also wishes to promote the consideration of innovative solutions early in the design and scoping phase.
9.50
The Committee recommends that the Department of Finance, or the proposed Australian Industry Advocate, publish comprehensive implementation guidelines for the new Commonwealth Procurement Rules as a matter of priority. The guidelines should:
explicitly define what constitutes economic benefit;
prescribe a minimum 15 per cent weighting across a tender in accordance with the economic benefit criteria;
procuring agency or Minister to retain discretion to increase weighting to leverage economic benefit;
encourage maximisation of economic opportunities and benefits when assessing a tender for the degree of local content and participation;
outline how rubrics or weighted criteria may be used to compare the unique economic benefits offered by different suppliers and in assessing economic benefit as part of the overall tender evaluation;
describe techniques for assessing the veracity of suppliers’ claims of economic benefit and for ensuring these benefits are delivered; and
encourage the consideration of innovative solutions during the scoping and design stage of procurement projects.
9.51
The Committee considers that a qualitative assessment of economic benefit may encourage discretionary decision making by officials that is inconsistent with the objectives of the CPR17 amendments. The Committee accepts that there may be a valid reason for employing such assessment within certain specific areas, for example capability assessment. However, the Committee recommends that the comprehensive guidelines developed by Finance prohibit the use of qualitative assessments across whole tenders.
9.52
The Committee recommends that, in order to limit discretionary decision-making, promote consistency and safeguard transparency, the guidelines prohibit the use of qualitative assessments across whole tenders.
9.53
The Committee also encourages greater emphasis be placed in the guidelines on the need for accurate records to be kept of procurement decisions. Such detailed records are essential to address concern over a perceived lack of transparency and accountability. The Committee recommends that the guidelines specifically require that a record of a procurement decision include the reason for the tender approach chosen, the reason for the choice of the selected tender and the economic benefit score. Additionally as much information as possible should be placed in the public domain.
9.54
The Committee recommends that the guidelines specifically require that, for all procurements over $4 million, a record is created including:
the reason for the tender approach chosen;
the reason for the selection of the preferred tenderer; and
details of the economic benefit score.
Training
9.55
Furthermore, the Committee would like to see the introduction of the guidelines supported by a public service wide training program. Departments and agencies should be required to certify that an individual has undergone procurement training before that individual can be delegated a procurement authority.
9.56
The Committee recommends that the Department of Finance design and deliver a public service wide training program to support the effective implementation of the new Commonwealth Procurement Rules in line with new guidance material.
9.57
The Committee recommends that the Australian government ensures that all departments and agencies must ensure that an individual has successfully undergone procurement training before that individual can be delegated a procurement authority.
Industry Participation Advocate
9.58
The Committee believes that the best way to ensure the effective implementation of clause 10.30 of the CPRs is by establishing an Australian Industry Participation Advocate based on the SA model.
9.59
As noted in Chapter eight of the report, the Office of the Industry Participation Advocate (OIA) is instrumental in generating SA jobs, providing opportunities for local suppliers to participate in government supply chains and in driving local investment. It is involved in every stage of the procurement process, from the design of an approach to market which maximises benefit to the state economy, through to monitoring suppliers’ delivery of these benefits. It supports government agencies to consider local business capability in relation to procurement and aides businesses to successfully sell their goods and services to government.
9.60
The Committee would like to see an Australian Industry Advocate established to perform similar functions, specifically:
aiding Commonwealth agencies to design procurement processes which maximise benefits to the Australian economy and increase opportunities for SME participation;
supporting Australian businesses to access Commonwealth procurement by promoting opportunities and assisting businesses to promote the economic benefits they can offer;
providing independent, transparent and consistent evaluation of the unique economic benefits offered by different suppliers;
guiding Commonwealth agencies’ application of weighted criteria and assessment rubrics to overall procurement evaluations; and
monitoring suppliers’ delivery of contracted economic benefits.
9.61
As is the case with SA, the Australian Government should consider establishing a statutory office under legislation within the responsibility of the Minister for Industry, Innovation and Science. The Committee believes that doing so will ensure the integrity, independence and impact of the role by clearly delineating its responsibilities and authority to compel action and impose penalties on non-compliant contractors.
9.62
The Committee understands that the establishment of a statutory Australian Industry Advocate will provide the transparency and consistency in procurement decision making that industry craves. It will also ensure that procurement subject to CPR clause 10.30 achieves outcomes which represent true value-for-money.
9.63
The Committee understands that the establishment of an Australian Industry Advocate would not contravene international trade obligations as the role would not impact international suppliers’ ability to bid for procurement, or result in bias when evaluating value-for-money. In line with the SA model, assessments of economic benefit would not consider the origin of suppliers, but rather the commitments they make to the local economy. Further, the Industry Advocate could equally work with Commonwealth agencies to maximise the economic benefit arising from the procurement of goods and services from international suppliers, as from those domestically based. In fact, the Committee sees potential for an Australian Industry Advocate to make it easier for international suppliers to secure Commonwealth procurement by partnering with local businesses.
9.64
The Committee recommends that the Australian Government legislate as a statutory authority under the responsibility of the Minister for Industry, Innovation and Science an Australian Industry Advocate to:
aid Commonwealth agencies to design procurement processes which maximise benefits to the Australian economy and increase opportunities for SME participation;
support Australian businesses to access Commonwealth procurement by promoting opportunities and assisting businesses to promote the economic benefits they can offer;
provide independent, transparent and consistent evaluation of the unique economic benefits offered by different suppliers;
guide Commonwealth agencies’ application of weighted criteria and assessment rubrics to overall procurement evaluations; and
monitor suppliers’ delivery of contracted economic benefits.
Review of the new Commonwealth Procurement Rules
9.65
The Committee notes the Department of Finance intends to conduct a review of the new Commonwealth Procurement Rules ‘after a year of operation’ which will include consultation of its Senior Procurement Officials Reference Group.
9.66
The Committee would like to see this review include supplier feedback regarding the operation of the new CPRs. It recommends that the feedback received by the Committee on the possible rewording of the new clauses identified in this report be considered during the review. It also recommends that the findings or the review be made public.
9.67
The Committee recommends that the Department of Finance incorporate supplier feedback, including on the rewording of clauses identified in this report, into its 12 month review of the new Commonwealth Procurement Rules. It also recommends that the findings of the review are made public.
9.68
While the Committee is encouraged by the reception that the amendments to the CPRs have received, it is acutely aware that the success of the amendments will depend on the implementation. With this in mind, the Committee considers that it is extremely important that the implementation is monitored and evaluated to ensure that the intent of the amendments is achieved.
9.69
The Committee recommends that a Parliamentary inquiry is established by March 2018 to evaluate:
supplier feedback regarding the operation of the new CPRs;
consideration of the interaction between the CPRs and the Anti-dumping framework;
the effect of recent changes to Australian Industry Participation Plan policy; and
the interaction of the CPRs framework with tax law, multi-national tax avoidance and tax treaties.
9.70
The inquiry should report by the end of 2018.
9.71
The Committee recommends that a Parliamentary inquiry is established by March 2018 to evaluate:
supplier feedback, including on the rewording of clauses identified in this report;
interaction with the Anti-dumping framework and the tax system; and;
recent changes to the Australian Industry Participation Plan policy.
The inquiry should report by the end of 2018.
Senator Nick Xenophon
Chair
22 June 2017