Federal agencies unite to hit reset on procurement option

By Stephen Easton

Wednesday July 22, 2015

Grant Hehir

The Department of Prime Minister and Cabinet is making double sure it effectively promotes and monitors the use of procurement to support indigenous Australians, on the advice of auditor-general Grant Hehir (pictured).

Together with the Department of Finance, the central agency has agreed to work on a “strengthened promotion strategy” for the Indigenous Business Exemption (IBE), which allows public service agencies to bypass a competitive tender process in favour of majority indigenous-owned suppliers.

As The Mandarin reported last year, the IBE has rarely been invoked since its introduction in 2011. But momentum has been building in the intervening months thanks to the advocacy of indigenous business people and their supporters, and a relatively high profile example of its use by the Department of Defence.

The audit report comes hot on the heels of the July 1 commencement of the brand new Indigenous Procurement Policy (IPP), which includes mandatory targets requiring each portfolio to ramp up its spending with majority indigenous-owned suppliers to 3% by 2019-20. The auditor-general recommends the internal promotional campaign remind public servants responsible for procurement of the potential for the exemption to contribute to broader aims of indigenous affairs policy.

While agreeing to the recommendation, PM&C’s deputy secretary for indigenous affairs Richard Eccles told ANAO of “a much stronger approach to promoting the IBE” under the IPP including clearer guidance and a new website, as well as a nascent indigenous business directory being developed by the non-government organisation Supply Nation: “It is anticipated that these measures will ensure that the IBE is much better understood and more frequently used.”

In its response, Finance said:

“The IBE supports easier and more streamlined purchasing from indigenous SMEs and will be promoted for use by Commonwealth entities as a tool to assist them to meet the requirements of the new Indigenous Procurement Policy. Finance will also continue to actively promote awareness of the IBE at procurement and other related forums.”

ANAO found that agencies generally haven’t delivered on the good intentions of the IBE, nor the old Indigenous Opportunities Policy which was recently superseded by the new IPP regime: “Overall, while the policy intent to leverage better Indigenous outcomes from Australian Government procurement activity has been clear, the frameworks developed by entities to achieve the objectives have not generally facilitated effective delivery of the outcomes sought.”

The good news is the audit office is satisfied that the new policy addresses some of the key barriers under the one it replaced, which included:

“… the absence of any requirement for procuring entities to drive or monitor outcomes including those resulting from either their own or their suppliers’ actions, and the voluntary reporting requirements placed on entities which have hindered the ability of the [PM&C] and [Finance] to analyse activity and provide advice to government.”

To this end, the two central agencies have also agreed to develop a “periodic reporting arrangement” to keep government informed about the level of indigenous-owned business participation in government spending. At the same time, PM&C explained how reporting requirements have already been tightened in the new policy:

“Data on performance against the target, as well as on performance against the other requirements of the IPP, will be collected through AusTender as far as possible, as well as through periodic manual reporting to PM&C.

“This will allow PM&C to provide regular advice to government on the extent of Indigenous business participation in government procurement. This information will also be used to report publicly on an annual basis, on the Commonwealth’s and each portfolio’s performance under the IPP.”

In its supporting role as keeper of the Commonwealth Procurement Rules where the IBE resides, Finance will run a yearly data-matching exercise using its AusTender database and the Supply Nation directory. Portfolio-level and whole-of-government performance information will be published online by PM&C.

Complex rules, weak reporting

In order “to inform implementation arrangements” of the new policy, PM&C has also agreed to review the geographical restrictions that applied under the old Indigenous Opportunities Policy and, according to the ANAO, were a key factor in its disappointing outcomes. The department explains it has already done so in developing the new policy, with new provisions for extra assistance to indigenous enterprises in remote areas:

“The IPP was developed through extensive engagement with government entities and the regional approach that applied under the IOP was carefully reviewed. As a result of this review, the IPP takes a new approach to achieve better procurement outcomes for Indigenous businesses and simpler administration for government entities.

“Under the new approach, all contracts in remote Australia will be set aside for Indigenous businesses, together with all contracts valued between $80,000 and $200,000. The detailed IPP guidelines include clear guidance for agencies to assist them to determine whether a contract is in remote Australia.”

As Finance explained to the auditors:

“The regional focus of the previous policy has been replaced with minimum Indigenous participation requirements for high value contracts in eight key industry sectors known to have high Indigenous employment. Additionally, the new policy recognises an opportunity for additional Indigenous employment in remote areas, and includes additional requirements for suppliers delivering contracts in those areas.”

The agencies have also agreed with the ANAO’s recommendation to look at “potential alternative models” for how these minimum indigenous participation requirements might be most effectively applied and, if appropriate, advise the government accordingly.

IOP regions shown in green.
IOP regions shown in green.

Free Trade complications

Interestingly, the superseded policy only applied in certain parts of the country to avoid breaching the Singapore-Australia Free Trade Agreement (SAFTA). The SAFTA obviously limits the government’s ability to support local businesses, but includes an exemption of its own allowing policies that support “training and employment” opportunities for indigenous Australians in areas where there is a “significant” indigenous population.

This was interpreted to mean the IOP would breach the agreement if it applied in areas where the indigenous population is below the national average, excluding nearly all metropolitan areas, where most people live and most economic activity takes place. According to the audit report: “This relative approach, however, had the effect of excluding areas … where there were significant Indigenous populations in absolute rather than relative terms.”

About 27% of the indigenous population lives in metropolitan areas where the IOP did not apply, and 29% of the businesses currently being financed by Indigenous Business Australia loans are in the major cities.

The SAFTA actually has another exemption that allows the government to use procurement to advantage any local SME, indigenous or otherwise. But as the report points out:

“… the option to ‘un-couple’ the employment component from the business support component of the IOP, in order to maximise opportunities for Indigenous businesses, was not canvassed amongst entities in developing the IOP model, nor was an ‘un-coupled’ proposal taken to the Australian Government for consideration.

“In view of the experience of entities to date, there would be merit in PM&C further reviewing the regional approach to determine the conditions under which the mandatory Indigenous participation requirements are most effectively applied under the Indigenous Procurement Policy.”

The auditors also found the regional approach created “practical challenges to its application by entities” by making the IOP more complex, and was inconsistently applied in six agencies they audited. They describe four different interpretations that were possible, and this confusion tied in with weak reporting mechanisms under the old regime:

“Overall, the application of the IOP by entities was variable, and while some entities reported to PM&C on the contracts to which they have applied the IOP, not all entities reported, and not all contracts applied the IOP as required. The voluntary nature of entity reporting, and the lack of a central mechanism for PM&C to monitor application of the IOP to contracts meant that the extent of under-reporting by entities was not accurately known by PM&C.”

But while the IOP has been replaced by the IPP, the auditor-general felt the continuation of a geographic component in the form of remote area provisions meant the lessons learned from the old policy should inform delivery and potentially adjustment of the new: “In this respect the experience of implementation of the IOP to date is relevant to informing the implementation of the IPP including the complexities introduced by a regional approach, in relation to the use of Indigenous businesses and the ability to use AusTender for overall monitoring.”

Supply Nation monopoly

Eccles also used his introduction to PM&C’s response to thank the audit office for its collaborative approach and acknowledge the contribution of its work to the development of the IPP. While the ANAO notes the key problems of the old policy are being addressed in the new, it warns that “achieving the intended policy outcomes is likely to require continued efforts by government entities.”

The six agencies whose application of the IOP in the past was audited also provided insightful responses.

The Department of Industry and Science pointed out “the difficulty in identifying a broad sample of Indigenous businesses” had led to heavy reliance on Supply Nation’s clients: “… this approach is likely to underestimate the actual instances of procurement from indigenous businesses given that Supply Nation certified suppliers represent a small percentage of Indigenous Businesses.”

For its part, Supply Nation welcomed the audit report and pointed out its new register would include any majority indigenous-owned business (not just those that choose to apply for Supply Nation certification).

The Australian Taxation Office is pleased that under the IPP, each agency now has responsibility for increasing indigenous procurement on its own patch, and commented on the revelation that “application of indigenous procurement policies generally only occurred when supported by senior leaders in an agency”.

The Department of Education and Training expressed enthusiasm for a whole-of-government approach to supporting indigenous Australians through procurement, while the Department of Employment said it was working to implement the new IPP, including stronger monitoring and reporting, through the Shared Services Centre. Human Services agreed with the thrust of the report and stated its commitment to addressing the issues identified through the IPP.

The Department of Defence has become something of a champion of the IBE, made a major contribution to development of the IPP, and spent over $900,000 with indigenous suppliers in the first half of 2014-15. It offered sagely advice:

“Defence notes that to obtain entity buy-in, current and future policy and procedures should be practical in their application, otherwise they will be difficult and resource intensive to apply and desired outcomes may not be achieved.”

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