Issues raised with the committee
2.1
This chapter summarises the main issues raised during the committee's
hearing at Port Augusta and in submissions from South Australia. It considers: mechanisms
to enhance communication and engagement; suggestions from witnesses regarding
business opportunities; the challenges faced by local businesses; communication
about training exercises; the need for greater transparency around regional engagement;
and the South Australian Industry Participation Policy.
Facilitating opportunities for regional and local business
2.2
Spencer Gulf Cities outlined the challenges facing the region as well as
the strengths and opportunities.[1]
Mr Sam Johnson, Chair, Upper Spencer Gulf Common Purpose Group told the
committee that the region has identified the expansion of the Cultana training
facility as well as new military vehicle and vessel construction as
opportunities to grow the region's involvement and capabilities in defence
industries. The region is also interested in maximising local business activity
during exercises and troop rest and recreation, citing Exercise Hamel as an
example.[2]
2.3
Mr Johnson also highlighted potential accessories, component
manufacturing and fabrication opportunities during construction 'as part of the
Australian government's commitment to a continuous shipbuilding program for
major surface combatants and minor war vessels and to the construction of new
submarines'.[3]
2.4
Mr Dion Dorward, Chief Executive Officer, Regional Development
Australia, Whyalla and Eyre Peninsula, emphasised that Whyalla needs to
diversify its economy and Defence training and asset building are an opportunity
to assist this process.[4]
Mr Dorward reported that over the last six months there has been interest
from companies looking at the infrastructure and other capabilities in Whyalla
related to future defence opportunities and this is very welcome.[5]
2.5
Mayor Lyn Breuer, City of Whyalla, echoed these comments stating that:
A good working relationship between Defence and the three
Spencer Gulf cities is really important and certainly leads to that much-needed
economic boost that all three cities need for our regions given the current
economic predicaments that we are facing.[6]
Utilising the skills in the region
2.6
The committee heard that there can be a perception that regional areas
do not have the necessary skills to provide goods and services. Ms Paula Osborn,
Deputy Chief Executive Officer, Regional Development Australia (RDA) Far North,
also pointed out that successful tenderers may not know what businesses are in
the local region and what the capabilities are and 'unless they come out here
and actually face the businesses, they are not going to find out'.[7]
Witnesses emphasised the capabilities and skills available in the regions. As
an example, Mr Johnson highlighted local manufacturing skills:
It is no secret that we are an industrialised region between
Port Augusta, Whyalla and Port Pirie. We do have the skill set. We have the
skill base. We have the people here who know how to manufacture. For example,
Whyalla used to build ships for our Defence Force. So we have a proven history
in being able to do it. We are not sitting here thinking that we are going to
be building ships again in Whyalla, much as we would like to, but what about
the componentry for that? What are the small widgets, for example, that could
be made to be put into these vessels, whether it be in Adelaide or anywhere in
Australia? What are the opportunities here that we can maximise while we still
have that skill base here in the region?[8]
2.7
The South Australian Government also noted the skills available in the
region:
The USG [Upper Spencer Gulf] region does comprise a number of
businesses, that have the experience and capabilities in delivering civil and
heavy industry works, due to their exposure to the mining sector. These
companies are available to support the expansion; however, some businesses may experience
capacity pressures and will need to make a decision whether to grow and
diversify into the Defence sector or miss out on business opportunities.[9]
Challenges for local business
2.8
RDA Far North highlighted that the majority of local businesses are SMEs
and therefore:
...when dealing with a large Department such as Defence, it is
quite daunting for these SMEs to go through the rigorous procurement and
prequalification processes that are sometimes required. RDAFN did extensive
work with local suppliers and businesses and assisted them with the paperwork
and requirements for the prequalification process. Without this assistance,
these businesses may not have been able to complete the paperwork.[10]
Documentation
2.9
The committee heard how some aspects of dealing with Defence can be
daunting for smaller businesses. The committee was told that a key challenge
for smaller businesses is the procurement process, including the documentation.
Mr Johnson told the committee:
I think the process itself needs to be simplified. The
process has become quite onerous, from what I understand. I have obviously not
gone through a tender process myself, but, in terms of the way in which it is
presented, it is really quite difficult and in some cases impossible for some
small businesses to tender.[11]
2.10
Mr Tony Mitchell, Director, Crossroads Concepts, also spoke about the
complexity of the tender documents.[12]
Mr Mitchell also reported that local businesses are hesitant to put in the time
and energy into the documentation when it may just be a waste of time.[13]
2.11
Mr Wayne Kirkham, Director, Port Augusta Refrigeration & Air
Conditioning Service, also told the committee that the documentation is
onerous. Ms Osborn agreed, explaining that the first time businesses are
confronted with the documentation 'it is very onerous and very confusing and
longwinded'.[14]
2.12
Mayor Breuer also pointed out that local businesses 'are butchers, not
accountants. They really have great difficulty working their way through a
tender process'.[15]
2.13
When asked about the complexity of tender documentation, Defence
responded that as a result of the First Principles Review,[16]
a 'slimmed down' version of the Defence procurement manual has been recently
reissued.[17]
To investigate this issue further, the committee asked Defence on notice to
explain why there appears to be a difference in the amount of paperwork between
civil and Defence-civil contracts.[18]
Mechanisms to enhance engagement
Improving communication and
coordination
2.14
Spencer Gulf Cities highlighted coordination as the key for local
business to take advantage of business opportunities:
Maximising the local business opportunities of the Cultana
expansion for the Upper Spencer Gulf is a key consideration that will require a
coordinated and concerted effort between Defence SA and Office of Industry
Participation, Department of Defence and Regional Development boards in the Upper
Spencer Gulf.[19]
2.15
The South Australian Government also pointed to the need for an
appropriate communication mechanism within the region which requires:
...a coordinated and concerted effort between local businesses,
local government, and state government organisations including Defence SA and
the Office of the Industry Advocate and the Department of Defence and Regional
Development Australia associations in the USG region. This will ensure that
local communities have a full understanding of their requirements and potential
investment opportunities.[20]
2.16
In relation to Woomera, the South Australian Government advised the
committee of the Woomera Prohibited Area Advisory Board.[21]
In addition, the Department of State Development coordinates a weekly schedule
of activities and events taking place in the region which is circulated for
information and input.[22]
2.17
The South Australian Government noted that many local businesses do not
track Defence procurement portals as the exercises are infrequent. It suggested
a method of advertising these opportunities locally needs to be explored to
assist local business to maximise business opportunities.[23]
2.18
The committee explored existing communication and coordination
mechanisms with witnesses.
Port Augusta
2.19
Some businesses indicated to the committee that despite reaching out,
they have had difficulties finding information about work opportunities
associated with the Cultana explanation project.[24]
Ms Osborn stressed the need to open communication with key agencies such as the
RDAs, local government, businesses associations and other agencies which can be
the conduit for information sharing.[25]
The committee heard that Global Maintenance Upper Spencer Gulf may provide the
basis or means for such a coordinated effort.[26]
2.20
RDA Far North told the committee they have also played a key connection
role with Defence and local and regional businesses in relation to operations
and opportunities at Cultana and Woomera.[27]
Ms Osborn told the committee that she would like to see increased communication
by Defence to key organisations, businesses and community leaders.[28]
2.21
Some witnesses suggested that local SMEs should have the opportunity to
showcase their capabilities directly to the department and/or head contractors.[29]
Ms Sarah Joyce, Commercial Manager, Max Crane & Equipment Hire,
spoke about the need to be proactive and make contact with the large tier 1
contractors in the region:
From our point of view, we try awfully hard to try to get in
front of the client to understand who their tier-1 contractors are likely to
be, and then we do our own homework behind the scenes to try to talk to them
about our capability, local pricing and being regional. Hopefully, we could
provide cost benefits to them...[30]
2.22
Ms Osborn spoke about a new initiative to bring together stakeholders
from the region including the RDAs, AusIndustry, chambers of commerce and
industry, local government, the Department of State Development and Defence. This
group held its first workshop in May 2017 and a key outcome is to develop a
coordination framework. Defence is also 'taking the lead in providing
information about sector opportunities that are relevant to the region and also
key contacts'.[31]
2.23
Ms Osborn also highlighted the Industry Capability Network (ICN) where businesses
can load their business profile and capabilities and can nominate companies to
follow. ICN also links closely with Global Maintenance Upper Spencer Gulf which
has a similar system for their members.[32]
Whyalla
2.24
Mr Dorward indicated that they are working on appointing a coordinator
who would assist businesses to access opportunities through defence.[33]
However, he advised the committee of an existing forum which includes Defence,
the Cultana Expansion Area Environmental Advisory Committee, which has
'provided a forum locally for finding out more about the opportunities that are
emerging and monitoring issues that might arise from a community or
environmental perspective'. The committee meets approximately quarterly and
includes Defence, South Australian related Defence agencies and a mixture of
agencies from within the region. Mr Dorward's view was that
Defence has been 'first rate in terms of saying 'these are the opportunities'
but 'trying to move past that to seriously engage has been difficult'.[34]
2.25
Mr Dorward felt there is a need for education on both sides where local
businesses need to develop the right skills and strategies to be able to take
advantage of the opportunities and Defence needs to facilitate access to the
opportunities.[35]
2.26
Mayor Breuer supported the need for communication and collaboration:
The key we see is for effective communication and
collaboration at all levels of government—federal, state and local—and the
communities as stakeholders. We want to ensure that clear and concise
information is being disseminated.[36]
2.27
To this end Mr Sotirios Stuppos, Executive Member, Whyalla Chamber of
Commerce, reported that the chamber has spent time working with the State Department
and the Centre for Defence Industry Capability (CDIC) to ensure they are
working through a common person who will disseminate information to the council
and chamber who get the messages out to clients.[37]
His view was that with clear communication the smaller SMEs should be able to
achieve a portion of the contracts:
Do not talk to a client in Whyalla about building a
submarine. They will run scared; they are not capable. But if you ask that
person: 'Can you build 20,000 widgets for us?' they will probably say yes.[38]
2.28
Mr Stuppos also reported to the committee that the Chamber of Commerce
has written to St Hillers, the Tier 1 contractor, to ask them to visit with
their procurement team to facilitate meeting with potential subcontractors.[39]
Mr Stuppos explained that their approach has been:
Let's collaborate and see how we can help you and find a
solution to the problem.' Hence the chamber has been very proactive in
attending to trying to get St Hilliers to come in. We basically said in our
letter: 'Tell us what you want and what your shortfalls are and we will try and
match the business community with that person so that they can all have a good
chat and, hopefully, an outcome comes from it.[40]
2.29
Mayor Breuer reported that local businesses need assistance to navigate
the processes:
I spoke to the fellow the other day about it. I said, 'Are
you getting any work from Defence? He said: 'No. We went to a meeting and they
put me on an email list and they keep sending me emails, but it looks like it's
all to do with the eastern states. I don't really know what we're meant to do
so I don't think we're going to get any.' The guy is a butcher. He probably has
trouble working out the system. So I think there is a big block there. The
willingness is there, but they do not know how to go about it. That is what has
been happening to a large extent. That is something I think we as a community
have to try to overcome with Defence, so that businesses are comfortable and
able to find somebody who can assist them with this process.[41]
2.30
Mr Stuppos indicated that they are part of the coordination committee
mentioned by Ms Osborn above with RDA Whyalla and Eyre Peninsula and the Chamber
of Commerce working together to disseminate information to the business community.[42]
Port Pirie
2.31
Ms Kelly-Anne Saffin, Chief Executive Officer, Regional Development
Australia Yorke and Mid North, highlighted the work of the Global Maintenance
Upper Spencer Gulf mentioned above in relation to the mining industry:
One of the key activities that they have done over the last
three or four years is put together a panel of mining companies who have put
together a model tender. They invite companies to do that, and then that panel
provides feedback on that tender. What that does is give a specific opportunity
for them to see how their own business looks, as opposed to the more proforma
Tender Ready workshops. It also gives an opportunity for them to have feedback
in a really positive, preparatory manner. That is a tool that has really
assisted our local businesses to do that.[43]
2.32
Ms Saffin acknowledged that each region has different mechanisms for communication
but she suggested that stability would come from channels of communication with
the local government.[44]
2.33
Mr Stephen Richter appearing in a private capacity, was attracted to the
idea of an office in Port Augusta where SMEs could go to provide information on
what they can supply and in turn, they can receive information on how to best
engage with Defence and the standards required.[45]
2.34
The committee explored whether the local skill sets, services and
products have been captured so that the information could be provided to
Defence. Dr Andrew Johnson, Chief Executive Officer, Port Pirie Regional
Council, said that between the council and RDA, the information is easily
available.[46]
Defence contact point
2.35
Witnesses also called for a local Defence contact point for procurement
explaining that initial contact can sometimes be made but when that person
moves on there seems to be no continuity and the contact is lost.[47]
While understanding that most discussions about specific procurements are with
the tier 1 contractors, rather than the department, Mr Dorward reported that
trying to speak with the department about general procurement issues such as
utilising locally produced goods has been frustrating.[48]
Defence confirmed that there is no single person in Defence who would be the
point of contact for everything in terms of various defence procurements.[49]
Local engagement underway
2.36
Regarding the creation of local jobs, Defence has provided the following
information on the Cultana Training Area Expansion Project on its website:
Media reports that suggested there will be large numbers of
jobs created as a result of the expanded training area are misleading. The
project will generate short-term employment during the construction phase
through on-site labour and construction materials fabrication and supply. This
will have a positive economic impact on local communities.
The proposed works, including training facilities, camp
accommodation and environmental sustainability works will be delivered by one
or more Head Contracts. Defence anticipates that local building sub-contractors
would be employed on a large proportion of the construction works by the Head
Contractor. Increased use of the expanded Cultana Training Area by the
Australian Defence Force will provide further opportunities for the local
communities through the purchasing of supplies.[50]
2.37
However, Defence acknowledged that using local contractors can provide a
value for money solution and Brigadier Noel Beutel, Director, Capital
Facilities and Infrastructure, Department of Defence, addressed this point:
The point I would make here is that, as all our head
contractors and managing contractors understand, ultimately the Commonwealth is
seeking a value-for-money outcome for the Commonwealth and for the taxpayer.
Using local contractors or subcontractors or sourcing local suppliers is
synonymous with getting value for money, but it is where there is the capacity
and the capability. Ultimately, at the end of the day they have to prove a
value-for-money solution. It is well known with all our contractors—the primes
or tier 1s and tier 2s that we referred to this morning—that it is beneficial
to source from local contractors if there is capacity, capability and a value-for-money
solution.[51]
2.38
Defence informed the committee that the 2014 Cultana expansion ceremony
also provided information to local communities regarding the development and
related contract opportunities. Following that, community contract information
sessions were held in November 2014 in Whyalla and Port Augusta.[52]
Brigadier Beutel reported:
[The fact sheets provided at the community information sessions]
goes through about contracting opportunities, the process of the Commonwealth
Procurement Rules, how to get registered on AusTender...[53]
2.39
In relation to the specific tender process for the Cultana Training Area
Expansion Project, Brigadier Beutel advised that the Austender process:
...was conducted in accordance with the Commonwealth
Procurement Rules. It was an open tender; it was not a select tender. There
were about 13 companies that tendered for that, off the top of my head.
Technical merit was undertaken as part of that procurement process, and also a
value for money assessment. That was a decision that was undertaken. All
unsuccessful tenderers were offered a debrief. My understanding is that at that
stage, when that contract went through, most of the unsuccessful tenderers
accepted the opportunity for that debriefing.[54]
2.40
Defence informed the committee of the steps being undertaken by the head
contractor St Hilliers to engage with the local community in relation to the
Cultana Training Area Expansion Project:
St Hilliers, in undertaking their response to us for the
request for tender for the head contract, undertook an amount of local industry
or market testing to understand what the capacity and capability was within the
local market. That was included as part of their tender and as part of our
assessment of their technical merit on methodology. That was part of what we
were looking at. Again I would say that it is not that we are now looking for
'Are you using local contractors?' but understanding what their subcontracting
methodology is. St Hilliers intend now to hold a forum within the next month to
further engage with local communities about the potential opportunities for
subcontracting packages. St Hilliers will be advertising that. They have also
made contact, I am advised, with the local chamber of commerce or equivalent in
Whyalla, and they intend to consult further with the Port Augusta equivalent of
that chamber of commerce.[55]
2.41
Brigadier Beutel also indicated that St Hillers will look to break down
the whole scope of works into trade packages or subcontracted trade packages.
Additionally they have identified that about 65 per cent of the trade value of
the contract will potentially come to the Port Augusta and Whyalla region.[56]
2.42
While sourcing 10 per cent of procurement by value from SMEs is a
national target, Defence indicated that it will be able to track regional
information regarding the Cultana expansion project through St Hilliers as the
prime contractors and their subcontracting processes.[57]
Encouraging collaboration
2.43
Mr Dorward spoke about the need for local companies to work as
consortiums rather than as individual companies:
There has also been work undertaken between companies to look
at how they can better organise themselves to have collective bids so that,
rather than competing against each other, they are looking to how they can
collaborate and go in as a single unit to win opportunities. So there has been
a lot of activity. There has not been a lot of positive outcome yet, but it is
still very early days for a lot of those contracts.[58]
2.44
Ms Saffin spoke about a mechanism used by a local company in Port Pirie:
We are lucky enough to have a company in Port Pirie—they are
Adelaide based but have an office in Port Pirie—who do significant work in
Woomera and Cultana and other places for Defence. One of the mechanisms we have
put in place with them is that, when they know work is coming on, we put
together a labour pool that can be used by all businesses. For instance, there
is that example of 20 people that we have put through asbestos training,
working at heights and driving forklifts and other activities. Some of that
labour pool worked in other businesses outside that business, some actually
went to council and some also worked on Defence projects.[59]
2.45
The committee heard how local businesses need to take into consideration
that Defence business may be transitory and when it is finished they need to
survive on their local clients and importantly, that labour pool outlined above
was available for that business to use to maintain the contracts they had in
local areas.[60]
2.46
Mr Stuppos spoke about how he assists his clients with smaller businesses
to look at the larger contracts in a different way:
[A client] said, 'I can't cope with five people to be able to
do that job.' As part of the chamber, I said to him as my client, 'Don't look
at the contract as the whole; pick parts of the contract that you can do and
tender for that. I suspect the reason they've done it is that the prime
contractor does not have enough people either, but, if he can get five of your
guys to do that little bit and another concreter with five blokes to do that
little bit, the whole project can be done.' The mentality was, 'It's too big for
me; I'm not interested.'[61]
Engaging with Tier 1 contractors
2.47
Mr Dorward indicated that most discussion around procurement is not
usually with Defence but with the Tier 1 contractors.[62]
As indicated above, Mr Stuppos told the committee that he encouraged local
businesses to speak with the prime contractors if they believe they can do a
portion of the work but not all of it.[63]
Centre for defence industry
capability
2.48
Mr Theunis Victor, Chairman, Heavy Industry Cluster Group, Regional
Development Australia, Whyalla and Eyre Peninsula, was positive about the new CDIC:
What we have seen in the last six to eight months is that the
discussions that we have had with the CDIC, the Centre for Defence Industry
Capability, have taken a very different approach. We have the right contacts.
We have fairly senior people who came to Whyalla and had interactions with
businesses on the shop floor. So I think that was a different experience, and
that is something that we are really pushing hard.[64]
Assistance from the Office of the
Industry Advocate
2.49
Mr Ian Nightingale, the Industry Advocate, Department of State
Development, Government of South Australia told the committee that he looks at
the communication mechanisms between local businesses, councils and the
opportunities with Defence. Over the last three years 'meet the buyer' events
have been run as well as 'supplying to government' workshops. Mr Nightingale
was of the view that as Commonwealth and state procurement is similar, such
gatherings would benefit businesses looking to do business with Defence or
other Commonwealth departments.[65]
2.50
Mr Nightingale told the committee that they ran an information session
with Defence but his advice was that any further sessions should be more targeted.[66]
2.51
When discussing other methods to inform communities of possible
opportunities Mr Nightingale stressed the need for a forward procurement plan. In
addition, in South Australia, there is a tender website, tenders.sa.gov.au
which is also used by local government as well as the events outlined above.[67]
2.52
Defence advised that it is required to conduct its tendering through
Austender. In addition, Defence advised the committee that it puts out an
annual procurement plan on AusTender every year and businesses can receive
alert emails when opportunities arise.[68]
Examples of successful businesses
2.53
Mr Wayne Kirkham, Director, Port Augusta Refrigeration & Air
Conditioning Service spoke to the committee as a Defence subcontractor for a
company in Adelaide.[69]
Mr Kirkham highlighted that he does not deal directly with Defence but with the
head contractor and he has found out about the work through word of mouth and
previous engagement with the company.[70]
Mr Kirkham also mentioned using platforms such as BidContender or EstimateOne.[71]
2.54
Mr Dorward provided an example of a company which has been successful
with a Defence contract:
Walcha Mining won a contract around fencing and a few civil
works for the Cultana training facility, which really assisted that company.
They had a very good win there and that enabled them to employ, I think,
another seven or eight people, which is tremendous. But they also narrowly
missed an opportunity—I think they were just advised earlier this week—for some
further work. I was looking forward to being able to talk to them about that,
to understand why and see what we can learn for the future.[72]
Drawing on successful processes
from other industries
2.55
Witnesses brought up the practices and processes being used by the
mining industry, specifically OZMinerals, to engage with the local community:
I will give full credit to OZ Minerals. OZ Minerals have a
very good track record at supporting locals supporting the region. From an
employee perspective, they set their own targets to make sure they are
employing locally. They also set their own procurement targets to make sure
they engage local businesses, so much so that they have held a couple of
sessions, as recent as last week in Port Augusta, focusing on the three cities,
trying to engage those businesses and also work out how those local businesses
can therefore tender into their major contracts, should Carrapateena get board
approval. That has opened up some opportunities for, certainly, our smaller
businesses, whether it be in transport logistics, civil works or construction.
The businesses amongst the three cities have been given an opportunity. I think
that is a good example of a corporate taking some initiative and engaging with
local communities and local industry to make sure they get their fair share.[73]
2.56
Ms Joyce also spoke positively of the processes used by OZMinerals:
From our point of view, we are finding that fantastic. They
have employed a local content advisor. He has been great to us. He is keeping
us informed of potential contracts or people to speak with in the private
sector to get our capability out there and make people aware of what we can do
in the region.[74]
2.57
Mr Richter spoke to the committee about their initial experience of
trying to engage with the mining sector, comparing it to the current situation
with Defence:
One thing that seems obvious to me that you are looking for
are ways for Defence to engage with small to medium enterprises. We suffered
the same problem about 15 years ago trying to engage the mining sector. Fifteen
years ago Roxby Downs was established and they are about to go through a major
upgrade. As contractors, we have found in our region that we could not engage
with the procurement people at Western Mining. The amount of paperwork they
wanted was like this, and we discovered we did not have the skills—we could not
do it. So we sat down with the state development part of the Premier's office
and engaged the majors—Pasminco, at the time; Western Mining; and OneSteel—and
said, 'Let's try and make this work and get it together.' They all put their
hands in their pockets, and so did I, and we formed a cluster and we did
exactly what you are trying to do. We engaged with the client, we sat down with
them, we learnt what they wanted and then we disseminated that to everybody in
the engineering arena in our region.[75]
Communication about exercises
2.58
Mr Johnson told the committee that in relation to training exercises he
finds the communication from Defence to be very good:
Defence, particularly at a federal level, have always been
extremely good in notifying us as the local council, which I would imagine they
would be doing across a number of other bodies as well. They always give us
advance notice. Even with exercises happening at Cultana at present, we get
advance notice of what it is, what it involves, timing, what to expect and what
not to expect. So Defence are very good at engaging and ensuring they
communicate effectively.[76]
2.59
Mayor Andrew Rohde, Port Pirie Regional Council was similarly happy with
the level of engagement by Defence:
In being a host location for such a large exercise, we were
regularly informed and closely associated with the preplanning of operation
Hamel. Defence staff went out of their way to visit and inform us of what was
proposed, and they liaised effectively with council staff. Council had one
contact point during this process, which made it easier to seek information and
clarity.[77]
2.60
However, Mr Stuppos said that in his view everyone had learned from Exercise
Hamel:
The first operation Hamel was a bit of a learning curve for
everybody in the community and Defence. We had a debrief straight after
operation Hamel and I think we have narrowed down the issues that we all had.
Going forward, I believe that it will be a lot better than it was. All we asked
for is that we can get media releases out, telling the community of Whyalla,
for example, 'On such-and-such a day and between such-and-such a time, we are
going to be letting off a few shells and they will make a little bit of a bang
and might upset your dogs, cats or whatever.' That is all it was.[78]
2.61
The South Australian Government highlighted the need for sufficient
advance notice of large exercises as:
Local communities can often become frustrated by the impact
of these exercises on their lives without perceiving any benefit to their communities.[79]
2.62
Mr Stuppos spoke about the experience of local business who were not
prepared to take advantage of business opportunities:
They did not have an expectation of what was going to happen
when the troops marched into town, basically, and anecdotal evidence was that
the fast food outlets ran out of food the first night and all records were
broken on the delivery of pizzas and things like that. If we knew that that is
what they were expecting, obviously the chamber or whoever else could have
geared the town up by saying, 'We've got a couple of thousand guys coming in.
They'll be eating pizzas every night. You'd better make certain you've got
enough flour, ham, pineapple and whatever else makes a pizza.' That is all we
are asking for so that we can gear the community to provide the services that
are potentially required by Defence.[80]
2.63
Mayor Breuer indicated that from her perspective the exercise was
'fairly unexpected':
There were 10,000 troops between Whyalla and Port Augusta. We
knew there was an exercise happening, but we were under the understanding that
they would be in the Cultana area all the time and we would not see them, and
all of a sudden we had soldiers walking down the streets with guns and it was
like, 'What's going on?' It was actually a little bit of a surprise and a
shock. Businesses were not prepared. The local Apex Club made something like
$7,000 in a day or two selling sausages and bread, so there is obviously
something wrong with the rations! They were looking for coffee.[81]
2.64
Mayor Breuer added that in the last month there had been an agreement
that they would receive more warning. She stressed how important advance notice
is otherwise it would be a missed opportunity for the community.[82]
2.65
Mayor Rohde made a similar point. Despite being informed there would be limited
opportunity for local procurement, once personnel started to arrive, their
needs were much greater than was catered for by Defence on site. A wide range
of food and services were accessed locally and 'many local businesses could
have provided a full range of goods and services if given the opportunity and
early notification'.[83]
2.66
Mayor Breuer said that an ongoing contact point in Defence about
exercises has been problematic. They have recognised however, that they also need
to supply a contact point to Defence.[84]
2.67
Dr Andrew Johnson, Chief Executive Officer, Port Pirie Regional Council
saw value in a post exercise debrief to talk about learnings and what could be
improved. He states 'we see a lot of benefit in cooperating and working
together a lot closer for community benefit'.[85]
2.68
Defence advised that in the lead up to Exercise Hamel 2016:
...there was—starting approximately six months out from the
exercise—engagement with around 30 regional and state based organisations that
covered multiple forms of communication, from face-to-face contact and forums
to email and telephone. That included coverage of things like the exercise
activities, the conduct and dates, to the procurement plan and covering the
AusTender process.[86]
Post exercise issues
2.69
Mayor Rohde highlighted that it had been difficult to get issues
addressed post exercise:
Whilst the processes in working with the Defence Force before
and during the exercise worked seamlessly, dealing with issues after completion
was not as faultless. I mentioned earlier the very clear contact point that we
had in the beginning and beforehand. Unfortunately, this did not extend once
the exercise was complete, when we identified around $50,000 worth of damage to
areas of the airport. In the clean-up phase, it was difficult to contact one
person with our concern. Council seem to be dealing with a number of people and
are having to retell the problems we had. It took some time for the issues to
be rectified.[87]
Purchasing foodstuffs for exercises
2.70
The local community is keen to be able to maximise local business
activity during exercises. However, the committee heard from witnesses that
there seems to be a trend away from purchasing supplies locally. Mr Johnson
provided the committee with the example of the provision of milk:
Defence buys its milk from the one supplier. There is only
one supplier in South Australia. That used to go through our local vendors and,
during Exercise Hamel, they also supplied that milk. To give you an idea of the
volume, that was $251,000 worth to that local business. They were notified last
week by Defence that they will no longer be procuring locally; it will be
coming directly from Adelaide—but still from the same supplier. So there is one
business that, unfortunately, overnight has lost $251,000 of their turnover due
to Defence procurement changes.[88]
2.71
In response to questions from the committee about sourcing food supplies
locally for exercises, Defence responded that:
...as with most of our major activities, it is a combination of
both regional and local and, if you like, state and regional procurements to do
the things. Some of the fresh food came from Adelaide but there was also
significant purchases of food and foodstuffs inside that $2.7 million locally
in this region as part of that exercise expenditure.[89]
Defgram 218/2017
2.72
In relation to this area, the committee raised the issue of Defgram
218/2017[90]
which came out on 23 May 2017 from the estate service delivery infrastructure
group in relation to the procurement of foodstuffs such as dairy, meat and
bread. The committee was concerned that the words around encouraging the use of
the Standing Offer Panels could appear to be at odds with the government's
intent of engaging with SMEs.
2.73
Mr Grzeskowiak responded that the Defgram was to inform the organisation
that there has been a re-tendering of the standing panel that existed. He
explained there are three ways in which food is purchased across Defence: first
is the food provided through the messes which is through contracts with two
providers: Broadspectrum and Compass Group The second is through the Standing
Offer Panel for providing food supplied to ships or for exercises. The third
way is by local purchase using the Defence purchasing card which is used for
exercises as required.[91]
The need for more transparency regarding regional engagement
2.74
Mr Grzeskowiak provided some high level examples of local procurement to
the committee from his area covering estate, facilities and infrastructure:
Across the 12 most recent infrastructure projects that we
have running, there are something like 1,300 separate trade packages that will
be awarded under those 12 projects, which add up to something like $1.9 billion
of expenditure. Concerning those 12 projects, so far around 400 of those work
packages have been placed, with a value of around $570 million. Of those work
packages, around 250 have been awarded to local contractors, with a total value
of around 73 per cent of the total value of those contracts. That is, of
course, an Australia-wide look. It is looking at some fairly large
infrastructure projects that we have running at the moment, but I think it just
makes the point that we do have a fair degree of success in working with some
local contractors in terms of those trade packages that we place.[92]
2.75
Brigadier Beutel also provided some examples of using local contractors:
This is not particularly rural now, but there is RAAF
Edinburgh or the Edinburgh Defence Precinct. It is on the fringes of Adelaide.
It is a recently completed a project of about $41 million under a managing
contract. Ninety-one per cent of the value of the subcontracts on that project
were awarded to local contractors within a 50-kilometre radius of RAAF
Edinburgh. The Air 7000 2B projects are the main operating base facilities for
Poseidon at RAAF Edinburgh at the moment as well—through their procurement
process at the moment we are tracking in the order of about an 80 per cent by
value of the trade packages let have gone to local contractors within a
50-kilometre radius.[93]
2.76
Brigadier Beutel added that there is recognition that the use of local
contractors can achieve value for money:
The point I am making here is that within that particular
area there is capacity and capability and there is the ability to provide a
value-for-money submission to do that. So where those three line up we get very
good or high statistics. It comes back to my point that the use of local
contractors is synonymous with value for money. Where there are other more
rural and remote areas, sometimes that capacity and capability is not always
there. This is particularly why we tend to go for those tier 1 and tier 2
companies on some of the larger projects. But even with the subcontracting
opportunities there may not be that capacity and capability there. I would also
note that the value-for-money chain does not stop with the subcontractors. It
goes to the subsubcontract aspect as well.[94]
2.77
Ms Paula Osborn, Deputy Chief Executive Officer, Regional Development
Australia Far North told the committee she would like to see some 'real data on
the number of local or regional businesses that have gained work through
contracts with Cultana and Woomera in, say that last three to five years'. She
pointed out that the submission from Defence focuses on the economic
contribution to the South Australian and Australian economies but she would
like to see a breakdown for local or regional communities.[95]
Commonwealth procurement rules
2.78
Defence confirmed that it must follow the Commonwealth Procurement Rules
(CPRs) and work within those rules[96]
and that they do not allow preferential treatment of a supplier because they
are local.[97]
The CPRs state that a procurement must be non-discriminatory which means that:
All potential suppliers to government must, subject to these
CPRs, be treated equitably based on their commercial, legal, technical and
financial abilities and not be discriminated against due to their size, degree
of foreign affiliation or ownership, location, or the origin of their goods and
services.[98]
2.79
An update to the CPRs commenced on 1 March 2017. A key addition is the
consideration of broader economic benefits in procurement which states at new
paragraph 10.30:
In addition to the considerations at paragraph 4.4, for
procurements above $4 million, Commonwealth officials are required to consider
the economic benefit of the procurement to the Australian economy.[99]
2.80
Mr Grzeskowiak explained the changes:
The changes to the procurement rules that came into effect a
couple of months ago do not change, in any way, the underlying tenet, which is
around value for money. That remains the core piece of the Commonwealth
Procurement Rules. My belief is that the economic benefits test was really more
aimed at ensuring that there is understood economic benefit to Australia as a
whole from procurements that are being undertaken by government across the
board. In the [estate] space in which I operate, which is infrastructure and
services, spending something like $4 billion a year, the vast majority of that
expenditure occurs in Australia with Australian-owned or Australian-based
companies. There are other parts of the acquisition process in Defence that,
for very necessary reasons, spend overseas—buying high-technology equipment
from the Joint Strike Fighter program or whatever. I think, really, the
economic benefits test is more focused on how we are leveraging Australian
economic benefit from those types of procurements and how we...get Australian
industry involved in those types of procurements. That is where the real target
of that clause will be.[100]
South Australian industry participation policy
2.81
Noting that the CPRs economic benefit test for contracts over $4 million
is based on the economic impact to the Australian economy and not a particular
region, the committee was interested to hear from Mr Ian Nightingale, Industry
Advocate, Department of State Development, Government of South Australia about
the SA model. The Industry Advocate:
Provide[s] independent advice to the government on
procurement reforms and advocate[s] for increasing the number and diversity of
locally based businesses winning government contracts.[101]
2.82
Mr Nightingale advised the committee that the approaches used under the South
Australian Industry Participation Policy, which has been designed to deliver
regional and economic benefits, could be tailored to the national, state and
regional level. The policy establishes:
...a framework for assessment of economic contribution between
rival tenders and grants within a broad value-for-money framework.[102]
2.83
Mr Nightingale emphasised that the South Australian policy 'is not about
special treatment or price preferencing but, rather, about recognising the
important contribution businesses make to the South Australian economy'.[103]
The model can measure state economic benefit verses regional economic benefit.[104]
2.84
Mr Nightingale reported that when the Minister for Finance, Senator the
Hon Mathias Cormann, spoke about the recent amendments to the CPRs, he
acknowledged Australia's obligations under free trade agreements and other
treaties but also acknowledged that these 'do not preclude the commonwealth
from appropriately gathering information and looking at the full economic
effects of procurement as part of the decision-making process'.[105]
2.85
The model used in SA has a weighting or a percentage at tender which
measures the economic benefit using capital, supply inputs and labour.
Currently the weighting is mandated at 15 per cent minimum for all government
procurement above $220,000. In larger projects above $4 million it can be
around 20 per cent. In explaining further how it works Mr Nightingale stated:
Let us take 20 per cent. If 80 per cent are the other
components of your tender evaluation, that is still going to dominate the
outcome of your tender, so you will still get a very competitive tender, but
you are measuring a legitimate economic benefit as part of the tender
evaluation.[106]
2.86
There was strong interest in the South Australian Industry Participation
Policy model and support from a number of witnesses. Mr Dorward stated:
It is one of the best things the state government has done in
a long time in terms of a really effective policy. Ian Nightingale should be
congratulated for the tremendous work he has done there. He hosted his first
forum when he changed the state government's approach, over at Wudinna probably
a couple of years ago now. From that one meeting, we had two or three companies
get work in the coming months. These are very small businesses in the middle of
the peninsula, companies that might employ two or three people. I could not
speak highly enough of that. There are plenty of safeguards there, I think.
Local procurement policies can be sometimes interpreted as 'stacking the deck'
in regards to whether or not it is the most efficient or best spend. The way
that has been put together to ensure that the broader picture in the economic
benefit to the region and the country has been well assessed.[107]
2.87
Mr Stuppos also supported the South Australian policy indicating that it
has made a 'tangible difference'.[108]
Ms Saffin provided the following example:
...a $40 million road project at the moment in Yorke Peninsula
which is jointly funded by Commonwealth and state government. We found that the
introduction of those industry participation plans that are required to be done
means that the tier 1 and tier 3 tenderers who have the capability to undertake
that then contact the region earlier. I am not aware of the general number of
tenderers, but we certainly had five tenderers contact us as an organisation
commercially-in-confidence to keep their tenders but for us to provide the local
intelligence that we would provide given our exposure, including what
businesses, capability and employment were available. That has now extended to
the successful tenderer working with us in relation to fulfilling their local
demands, which are $11 million worth of work locally and 75 employees...[109]
2.88
When asked whether the templates to measure the economic benefit and
guidelines used by the Industry Advocate could be adapted for Commonwealth
agencies like Defence, Mr Nightingale was of the view that it should be
possible.[110]
Work of the joint select committee
on government procurement
2.89
The Joint Select Committee on Government Procurement tabled a report in
June 2017 which covered areas of interest to this committee. In investigating
the possibility of a weighting system to help implement the new clause in the
CPRs to consider broader economic benefits, the Joint Select Committee was
advised from Finance and the ANAO that the weighting given to various factors
varies from procurement to procurement. Defence told the Joint Select Committee
that it prefers a qualitative process as a mandated weighting system does not
provide the flexibility required to assess complex procurement projects. The Joint
Select Committee concluded that it would like to see any implementation
guidelines prescribe the appropriate use of rubrics and weighted criteria (at a
minimum of 15 per cent) except for large or complex procurement projects.[111]
2.90
Of particular relevance to this committee is the Joint Select Committee's
recommendation 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.[112]
Other initiatives in the procurement area
Indigenous Procurement Policy
2.91
Mr Grzeskowiak told the committee about the successful focus by Defence on
Indigenous companies as a result of the Commonwealth's Indigenous Procurement
Policy (IPP):[113]
We have done a lot of work with local Indigenous companies
using the government's Indigenous procurement policy. Last financial year
Defence spent roughly $140 million, essentially direct sourced to Indigenous
companies, on a whole range of types of work. That represented more than half
of the whole of the Commonwealth government's spend through the [IPP].[114]
Dynamic sourcing for panels
2.92
Defence advised the committee that the Department of Finance has
introduced new Dynamic Sourcing for Panels (DS4P) which
...provides government buyers with the information, search
tools and process automation to better access the Commonwealth’s 500 panels,
60% of which are shared arrangements. DS4P builds on AusTender’s reach and
integration across agencies to deliver a standard and streamlined approach to
panel buying.[115]
2.93
At the hearing Defence indicated that as this is a new initiative, it is
still considering how it will use dynamic sourcing.[116]
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