Change procurement rules to stop ‘race to the bottom’ for manufacturing

By Joseph Brookes

There are fresh calls for more strategic government procurement policies after a manufacturing inquiry heard the current rules and international trade deals are undermining the Australian industry.

Currently there is no local content mandate for federal government contracts, and Australia is a party to global agreements that require non-discrimination of foreign companies in government tenders, meaning immediate value for money concerns usually trump more strategic government tender objectives.

A Labor-led Senate committee on manufacturing this week called for a review of Commonwealth procurement rules and recommended several new policies to that would preference companies with local supply chains and force large projects to be opened up to local companies.

The changes could see minimum levels of Australian made materials and workers in large Commonwealth projects like the $5.1 billion Snowy 2.0 scheme, which is currently being built without using Australian-made steel for its most massive and important components

But the Coalition has poured cold water on reforming federal procurement policies, insisting small Australian-based businesses are getting a fair share of tenders and restricting foreign firms’ access to tenders would hurt Australia’s access to other markets.

A Senate inquiry into the Australian manufacturing industry released its final report this week, setting the manufacturing battle lines for the upcoming election.

Among the recommendations, is a call for federal government tenders to “preference bidders that have sustainable supply chains that maximise the use of local suppliers, manufacturers, and service providers and which are committed to developing the domestic manufacturing industry, and that are sustainable”.

Industry department officials told the inquiry last year this is currently difficult because Australia is party to the World Trade Organisation’s procurement agreement and several bi-lateral trade deals that create similar restrictions. A lack of awareness about when the greater economic benefits of local suppliers can be considered is also a problem.

The global agreements give foreign companies access to government contracts on a non-discriminatory basis, while a lack of knowledge from procurement officers and local firms means wider benefits aren’t well communicated in tenders or fully considered in contract decisions.

There are some exceptions to get around the open-market procurement policies, but they focus on areas like national security, indigenous businesses, SMEs, and suppliers supporting persons with a disability.

State governments also have more room to support local businesses with a higher threshold for when tenders must be opened to international competition: $680,000 compared to the Commonwealth’s $80,000.

Industry department officials told the inquiry there is no local content mandate for Commonwealth procurement and value for money remains the primary focus. A clause in the Commonwealth Procurement Rules does allow for the economic benefit to Australia – beyond simply the lowest cost – to be considered in awarding contracts.

But the department officials acknowledged procurement officers and the local firms bidding often aren’t aware of the allowance, and more education is needed for both parties.

Local manufacturers and unions told the inquiry the open market rules can effectively lock out local suppliers from government contracts. Several of them called for more investment in manufacturing through government procurement and local content procurement rules, because it would create more local jobs.

Australian Manufacturing Workers Union national secretary Steve Murphy warned a lack of local procurement rules could create a “race to the bottom” as value chains shift.

“As the manufacturing gets more high-tech and more specific, the job creation downstream becomes higher and higher, which means you’re creating more local jobs,” he told the inquiry.

“The shift to not requiring local procurement is simply shaping a race to the bottom, where you go for the cheapest possible option. We’re asking for a fair chance for Australian manufacturers and Australian workers to get a foothold in the industries that are important, particularly when there are large government spends.”

The Senate committee ultimately agreed that government tenders should “preference” bidders who have sustainable supply chains that maximise the use of local suppliers, manufacturers, and service providers.

It also called for a review of procurement rules, including and appraisal of current exceptions, and for the Commonwealth to lead a coordinated approach to state and federal procurement which includes new policies to maximise domestic production and local jobs.

Any future international trade agreements should also not include provisions to not restrict Australian governments’ ability to procure local enterprises in a “full, fair and reasonable way”, the committee recommended.

It also called for a reduction in the current major project threshold amount from $500 million, which would require smaller projects to also submit Australian industry involvement plans.

However, the proposals were quickly quashed by Liberal senators in their dissenting report.

Government senators Paul Scarr and Andrew Bragg said changes to procurement rules were unnecessary because most suppliers are already SMEs with a presence in Australia.

“The latest Federal Government procurement statistics indicate that 86 per cent of Federal Government suppliers are small and medium sized businesses with 96 per cent of those businesses having an Australian address,” the government senators wrote.

They were also tepid on bringing a new procurement focus to free trade deals.

“Australia is a trading nation. Our access to export markets has been enhanced through Free Trade Agreements. The costs and lost opportunities arising from the recommendation should be carefully weighed.”

This article originally appeared at InnovationAus.

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