COMPANIES INSTITUTE LIMITED

Senate Inquiry 2014 Government Procurement

Australian Owned Businesses

Current Practices Cases Studies Impediments Opportunities

A Basis for Further Discussion Policy Input

Prepared in Consultation with ACIL () Corporate Members

January 2014

1 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]

INDEX

Page Page

19. G - The Inherent Value of 3. A - Executive Summary Australian Owned Businesses 5. B- Discussion to Our Economy

8. C- Interpreting Our Rules 20. H - Reinvestment in Our Economy – Think Local 10. D - Managing the Practices 22. I - Managing the Tender Process 12. E - Case Studies 23. J - Proudly Australian Owned 18. F - Why Give Priority to Australian Serviced, Manufactured and businesses? Grown

24. K - Summary

2 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] REPORT ON GOVERNMENT PROCUREMENT FOR AUSTRALIAN OWNED BUSINESSES

A Executive Summary: i. Governments are big customers. At every level, governments do not generate income. They are an expense funded by tax payers, businesses, or money borrowed off shore. It is therefore in ’s interest that Government Procurement funds are reinvested here to support Australian skills and jobs, and give priority to and sustain our owned businesses. ii. At the beginning of the GFC President Obama stated that he was the President of the USA not the world, and that Government Procurement would give priority to US businesses. In the USA that largely means to US owned businesses. The President’s “intent” was that USA Government’s procurement policies ensure Government funds are reinvested in local businesses and jobs. iii. Australia has few requirements for Australian companies’ participation. The issue of international obligation does not appear to deter other countries from closing their doors to support their own, although it is an excuse here to open our markets to competition. iv. Our governments cannot devolve their responsibility to engage Australia’s assets and our people to work and reinvest in Australia’s long term interests v. There may be some examples of Australian public companies fulfilling government contracts in other countries, but this paper addresses how the Australian process impedes opportunity for our local businesses condoning competition from overseas. We need to change how we approach the issue. vi. Australia’s policy of value for money appears in practice to be interpreted rather as the cheapest price. This approach costs Australia in the disregard of such issues as intellectual property and failure to meet Australian standards. vii. While we can talk about future opportunities, we have failed to think strategically and support our sustainable competitive advantages. 3 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] The consequences are the erosion of business profitability especially those Australian owned businesses that pay full taxes and employ people here. Foreign countries and companies operating here enjoy unfair advantage under the current system.

We appreciate we cannot deliver stealth bombers and our foreign owned manufacturers are leaving or threatening to do so, but there are still many highly skilled efficient Australian businesses that could supply and service governments’ needs at many levels if given “a fair go”.

viii. Case studies below highlight some of the key issues from Australian owned businesses’ perspectives, current impediments and management issues, some of which put businesses under threat of closure that have been operational for years.

ix. Poor policies and management mean as a country we lose the critical mass of owned business in key industry sectors. These are necessary for a vibrant productive economy that nurtures and develops innovation and reinvests here. They are also important for the supply of basic commodities and services. In all industries we are failing our own. Government Procurement at every level that gives priority is an opportunity could ease the loss of national income and skilled jobs.

x. Australians have a history of “thinking outside the square”. We need to be open to creating the opportunities for our own.

Government Procurement has been a concern for the Australian Companies Institute Limited (AUSBUY) since forming in 1991.

The Senators who have instituted this Inquiry are to be commended. It is long overdue. This review at least acknowledges the problem.

4 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] B

Discussion: i. Our Government’s first obligation is to get Australian businesses, our assets and our people working for Australia again so we can pay off our national debt, renew confidence among our business people to reinvest in Australian innovation, create skilled jobs and revitalise our economy.

We appreciate that we cannot supply all the skills and products required, but even those we can supply should be given priority.

In practice we have interpreted our rules to operate against our own interests. ii. At Davos recently the Prime Minister said he wanted business to lead the change.

Australia cannot do that if we do not attend to our owned businesses.

If the businesses he referred to are foreign owned and operate here then they will look after their own first. Evidence of this is their lack of commitment unless highly subsidized to stay here. Countries buying our assets will have a longer term view. Either way we pay.

We are missing the potential that our small, medium and larger business could contribute to our economy.

Instead we allow countries to buy our assets, have ready access to government contracts, use off shore skills, source off shore and take profits off shore with little reference to opportunities for local suppliers.

How does Australia benefit? iii. Governments, their advisers and economists rarely discriminate between what is Australian owned and what is foreign owned operating in Australia.

When governments give preference to foreign companies against Australian owned companies that can fulfill the requirements, it uses tax payer funds against our owned business and puts their viability, skills, jobs and reinvestment at risk.

Government Procurement that gives priority to Australian owned companies would return some balance and opportunity for reinvestment here. 5 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] iv. Procurement policies’ concepts of value for money rarely give preference for Australian interests. Nor do they determine the real value to Australia when these contracts are won and substitutes for local made goods or skills are sourced off shore.

The real “value for money” is when Australian owned businesses deliver product quality, service and integrity, source here and employ skilled people here and reinvest here.

The cheapest price for off-shore services or imports cost twice in lost opportunity to secure skilled jobs here and reinvestment here.

If foreign interests dominate here then Australia does not get the full advantage for the money sent. v. The problem is we are losing the critical mass to optimise productivity among our businesses.

While the global market place remains fragile, other countries will seek opportunities for themselves. We are losing the critical mass is key skill sectors in engineering and farming.

As the declines, we have become even more reliant on imports for basic needs we will only add to and unemployment.

Trade is not the solutions as many of our export industries are controlled by foreign interests and we do not get the full benefit of assets that were once reinvested here. Government Procurement could form a buffer to this situation. vi. Many of the countries we now deal with require majority local representation to ensure locals dominate in their countries.

In the sector we have rules for Australia Industry Participation (AIP Programme), but this is circumvented.

In the majority of sectors our systems do not discriminate between foreign owned interests that largely control the supply chain and Government contracts.

6 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] The big picture approach of big government undermines the opportunities that right policies could stimulate to benefit our whole economy through reinvestment across industry sectors.

This is practical stimulation to create productive skilled jobs and reinvestment here.

We need to think local before we can take advantage of global opportunities.

7 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]

C

Interpreting Our Rules:

Value for Money i. In any business transaction value for money means more than price.

If budgets are tight, and the cheapest is the measure by which Government contracts are allocated, then we are not getting value for money. There will always be off shore interests keen to cut prices

Australian businesses have high costs imposts relative to imports in terms of employment costs, rising energy and high taxation. If foreign owned operating here they can siphon jobs off shore and substitute local goods with imports.

Australia loses at many levels. ii. Consumer laws protect consumers from faulty goods or services, but when Government procurement contracts purchase goods or services which do not meet our standards to meet the perceived value for money , then the real value to Australia is lost in revenue, skills and product or service integrity. iii. Although price is often quoted as the reason why people buy, in international marketing disciplines it is recognised that price is the fifth reason why people buy. Buyers: 1. need it 2. know where to find it 3. have used it before or are aware of it through promotions 4. offers value for money – used before and satisfied 5. price – we do not always buy the cheapest if it does not meet the above criteria 6. provenance – in every country this is increasingly significant – our policies should reflect this iv. Our owned businesses are paying for our openness to competition because we do not manage to Australia’s advantage.

8 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] Lost opportunities cost. When Government does not get what it pays for we all pay. v. The Government cites competitive procurement, yet in many cases the process precludes opportunities for Australian businesses to participate in projects.

Many of the major government approved contract businesses are foreign controlled. If their economies are in trouble, and most are, we add to their cash flow.

Larger companies have dedicated, highly paid teams to work on Government tenders. It is in their interests to win the tender by sourcing cheapest here or off shore. vi. Strategic industries should be designated as Australian only.

These include Government computer security and Defence supplies. Other industries that would benefit include food and beverages, water, energy and .

The real value to Australia is for all levels of government to ensure we retain the critical mass necessary to sustain the skills, knowledge and manufacturing capacity in Australia by reinvesting in and giving priority to our own.

9 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] D.

Managing the Practices – Supported by Case Studies:

Government Procurement contracts should:

a. require a whole of Government approach and at all levels b. have the “intent” to support local business c. require a majority of goods and services are sourced within Australia d. be transparent as to how and where the resources are allocated e. be better managed so that what is proposed is done to our standards f. give priority to Australian owned businesses where appropriate and available g. anticipate the misuse of Australian rules and be prepared to take action against companies that do not comply

The Tender Process - Ideas:

 Keep the tender simple in the first instance.

 Add a step before the current process which outlines 1. what is wanted, 2. when and 3. where.

 If a business is able to service or supply this, then send the more detailed document.

 Currently many tenders seem to emanate from consultation with a large company as many of the Government people preparing them do not have the technical expertise. This can preclude Australian businesses that who employ Australians, source technology within Australia or use highly skilled teams that appreciate the Australian environment and codes.

 Submitting tenders can be costly for business. Some of the policies are so cumbersome that small businesses cannot afford to participate even if they have appropriate skills and products.

 Opportunities could include a grant scheme to allow locally owned businesses to make applications for government work.

 Provide an exclusive web site for Australian owned businesses to sort their way through the tender process. Keep it simple.

10 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]

 Engage tender champions that aid rather than obstruct opportunities and who are evaluated on the success of Australian owned companies tendering and supplying from within Australia.

a. Examples of direct action to assist local businesses include, the Government‘s policies in place to support Australian owned businesses and encourage Queensland owned businesses to bid all their contracts. b. In a few years ago there was commercial benefit to locally owned businesses Government gave then a 5% price advantage. c. In Queensland recently a Victorian based company won a health contract and the bureaucrat who condoned this was moved. There was a local business that could meet the contract.

 Access to the appropriate people to even get onto approved vendor lists means companies that could supply goods and services have taken up to a decade to be approved. Many businesses would not and could not afford to persist.

11 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] E. Case Studies:

 Our systems currently do not discriminate between foreign owned interests that largely control the supply chain and Government contracts. There has been a provision for mining projects to support Australian companies. Countries can now circumvent this.

Case Study One:

1. The North West Shelf is now mined from foreign owned ships for foreign owned companies. They are mining our resources in our waters but the Government Procurement Australian Industry Participation preference does not apply. Australia loses every way.

2. Up until the Carbon Tax the LMG Processing facilities for Australian gas were being constructed on Australian sovereign land.

3. Since the Carbon Tax has been implemented the investors saw Australia as a destination where 50 year financial decisions were no longer possible due to the changing tax implications Carbon Tax Rent Resource Tax etc.

4. They have since opted for a floating LNG Process Platform or a FLNG, (Browse LNG Scarborough LNG).

5. When the plants were being constructed on the land there was a requirement of the developers to meet with the Australian Industry Participation Programme which meant that as long as it was commercially viable a certain percentage of procurement was required to be from Australia.

6. This worked well and locally owned businesses who were internationally competitive to participate, and the AIP gave the international participants a reason to talk to our owned businesses in the first place.

7. Now that this work has gone to FLNG, effectively we have platforms/ships being built in Korea, China and Philippines with no caveats about AIP yet they will be processing Australian gas.

The Government did not give consideration to enforcing an Australian Industry Participation Clause as these Floating LNG Plants are being constructed due to the fact that their use will be in Australian waters.

12 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] This is only one example of other countries benefiting from our incapacity to anticipate the implications of policy and look after our own interests.

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 Imported substitutes that do not meet our standards and put users at risk. Government contracts and specified goods are poorly managed and supervised and Australian owned intellectual property rights are being ignored. When this happens Australia does not get good value for money and puts our people and businesses at risk.

Case Study Two A:

1. An Australian owned company’s product was specified for a Government contract for the BER Programme.

2. The product selected had innovative fire retardant qualities. It was designed, developed and patented by the Australian manufacturer who makes it here.

3. This was a highly engineers, innovative product that meets the highest Australian Standards – an important element for Victorian schools.

4. The Australian company submitted quotes and provided samples to the company that won the tender.

5. Instead the company that won the tender sent the samples to China where it was mimicked, but did not meet the same specifications.

6. No one here checked to see if the product installed was the one specified.

7. The tender was to install over 200 schools and was estimated to be well over $3M.

8. The local supplier and owner of the specified product received and order for $80k and supplied stock for fifteen (15) schools.

9. The non-compliant imports now potentially place Australian children’s safety at risk as they do not meet Australian Standards. No one checked.

There is little redress for local businesses already under pressure to keep their operations viable.

13 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] The business that designed, manufactures and holds the intellectual property rights had the capability to manufacture the order for more than one State.

What price so we put on this loss and this deceit?

…………………………………..

Case Study Two B:

1. An Australian owned business manufactures fabrics for a range of industries including recreational vehicles, outdoor architecture and the Defence Department. Long term government contracts have been important to the growth and reinvestment in this business which has been operational for over 20 years. It is the last of its kind in Australia.

2. In recent years the business worked with the Defence Department to develop a special tent fabric for the Defence Forces which would camouflage soldiers especially at night. However when it came to buying product the Government sourced the product off shore.

3. The imported product mimics the original and does not meet Australian standards, or the security standards inherent original product.

4. This business on-sells fabric to other Australian businesses which produce the finished product.

When a Government department or its agents disregard the rights and opportunities for one key business in the supply chain, placing it under undue pressure, and substituting imported products, the knock on effect across other locally owned businesses multiplies.

This means loss of jobs and skills here, and of taxes and reinvestment of profits in Australia.

This does not deliver value for money. It is short term thinking with little regard for the consequences.

As this business deals with many other Defence suppliers, they have advised ACIL that many of these small, specialty businesses have had no orders since July last 2012 and are struggling to stay afloat. They are concerned that these suppliers, their skills and their valuable input will be lost to those businesses still operating here in the sector. …………………………………..

14 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]

 The flow on effect when industries close and Government Procurement does not require local input.

Case Study Two C:

1. A highly specialized engineering firm that started in 1965 is the last business of its type in Australia and like many local manufacturers currently operates at 30% capacity.

2. It engineers press brake dies: safety devices used on manufacturing equipment.

3. It was asked to provide a sample by another company for a Government contract, which was sent overseas and copied.

4. The local business has little or no redress.

5. The business owner advises that every week on average two small engineering firms close here.

Large Government subsidies are given to big manufacturers, but companies with specialized skills that make component parts for assembly lines are left to compete or close their doors.

The recent closures in the car industry are further testament to what will happen to our specialist, high end engineering businesses still struggling here as we open our doors to cheap imports or countries that do not respect our intellectual property.

These smaller businesses bring many skills and strengths to the economy. They are highly skilled, adaptive to change, innovative, product quality and integrity to paramount, yet they are not acknowledged.

…………………………………..

 Lack of transparency in submitting tenders:

Case Study Three:

1. A highly specialised professional lighting design and supply engineering firm submitted a tender for a large local government project.

2. Tenders were to be sent by fax and not placed in the tender box on site as is the usual practice for local government. Only one fax number was provided. 15 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] 3. The 80 page tender was sent to the one fax number provided more than one hour before the tender closed. The fax noted the time it was sent and arrived. It arrived 3 minutes after the close time.

4. It was not accepted.

5. The business complained with no recourse.

In this case the procedures potentially added to the cost to the user through the substitution of poorly designed and inferior quality low energy technologies that will not meet the energy saving, safety and lower maintenance criteria required for the job.

It is not what we do it is the way that we do it that enhances or undermines opportunities for our business. …………………………………..

 Likewise local companies that have had contracts for years are precluded and imports substituted without recourse.

Case Study Four:

1. A clothing manufacturer supplied shirts to the Defence Department for nearly 20 years.

2. Without notice, imports were substituted for the locally made and owned product.

3. The imports did not meet the Defence Force standards and all stock was disposed of. We paid two ways: a. loss of opportunity for reinvestment here b. waste of government funds.

4. The contract for the local business continues spasmodically.

5. Similar examples are supply of boots for the army which were sourced off shore instead of locally. The soles of the boots separated from the uppers during a parade on wet ground.

6. We appreciate we walked away from our textile and footwear industry, but there are still viable good businesses that can compete here with cheap imports on quality, integrity, service and innovation.

………………………………….. 16 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]  We give opportunities to off shore interests without checks and balances. Those same opportunities are not given to our local businesses.

Case Study Five:

1. An Australian owned business produces filters for food exhausts and sells here and throughout the world.

2. It cannot sell these through New Zealand government contracts because they protect their own interests.

3. The Australian product meets the highest world standards.

17 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] F

Why Give Priority to Locally Owned Business?

In the process of developing this submission ACIL surveyed Corporate Members to assess their business capacity to grow if given opportunities through Government Procurement.

If the Case Studies above do not alert our governments to the need for change then the issues below should provide further consideration.

Manufacturing Capacity:

When ACIL surveyed Corporate Members manufacturing across many industry sectors in mid 2013, respondents advised they have between 20% and 70% unused production capacity in their businesses, and would be prepared to invest in expanded capacity if the trading conditions and current government rules were more efficient, consistent, better managed and more equitable.

They would be prepared to employ more people if they regarded that the market was more certain, and not the constant overlay of regulation and costs, or exclusion from access to Government contracts.

In turn, this would add to real national productivity.

18 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] G

The Inherent Value of Australian Owned Businesses to Our Economy

The true value of Australia owned businesses is not acknowledged in Government policies.

In our rush to open our economy indiscriminately to foreign takeover or give contracts to foreign interests, without few checks and balances in place, we have failed to sustain strategic industries and skills and support our competitive advantages.

If actions speak louder than words, then we have little regard for long term support of local industries. Foreign interests will not rescue us. They benefit from our naivety.

Although not acknowledged in Australia, our owned businesses are more valuable to the economy both short and long term than foreign owned interests.

Every dollar spent buying Australian owned goods, manufactured here and services developed here, has a multiplier effect within our economy.

Every dollar the Government spends on goods or services that are imported or foreign owned and are substituted for Australian goods or services means the Government is not reinvesting our money in the real economy here.

It is not in our national interest.

Foreign owned companies and imports do not pay the same taxes here, decisions are made off shore and profits siphoned off before

And while we are in the process of opening our economy to countries which operate to a different set of rules, we further expose our owned businesses to competition that favours off shore interests and undermines the critical mass necessary for viable businesses.

Ultimately we all pay.

19 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] H Reinvestment in our economy: Think Local

A study of the value of local businesses to the local economy was undertaken several years ago in regional Australia with a mix of farming, manufacturing and service businesses. The findings from this study can be extrapolated across the economy.

Locally owned, that is businesses that are majority Australian owned and operated and which source the majority of the goods and services in Australia have a multiplier effect within the economy.

As Governments are major buyers across sectors, the real value of Governments funds are reinvested into the “local” (national) economy.

The following document outlines the advantage of local business to an economy. This can be extrapolated many thousands of times across a country. See Page 21

20 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]

THINK LOCAL

21 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] I

Managing the Tender Process - Problems and Solutions:

1. Poorly managed tenders cost time for tendering companies and these inefficiencies cannot be costed into the process.

2. Where time and resources are limited the originator of the tender needs to think what they want.

3. A tender document is full of items concerned with the contract and its application and does not identify what is required in a clear and concise manner.

4. Often these contracts have been prepared by outside consultants and have no direct bearing on the tender at hand, being generic and designed to cover all eventualities, but are not pertinent to the specific tender.

5. In the first instance what is wanted, why and when it is required is not obvious, being buried somewhere in the multi-sectioned document.

6. Contract requirements are important but not initially. Many small to medium sized companies simply do not have the resources to interpret the legal needs in the first instance. They therefore cannot readily identify if their product or services can meet the specifications.

7. A solution in commercial markets could comprise one page summary listing the key aspects of the project. This would greatly assist potential tender companies in time and resources to determine if they can/should apply.

8. Once a short-list has been prepared, the contract requirements can be issued.

9. We need a review system of Government expenditure that randomly assesses the projects to ensure that the goods stipulated in contracts meet Australian standards and are sourced here and used, not replaced with cheap imports that do not meet Australian standards, potentially put lives at risk, and lock local businesses out of the transactions.

10. Institute use of random supervisors to assess quality standards and financial arrangements so that these remain transparent across projects, and government expenditure is spent as stipulated.

11. There should be a government body in every State that oversees and reviews malpractice and is independent of Government departments. It should be 22 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected] accountable for its decisions and the implications of delays. Supplier contracts to be reviewed so foreign products are not substituted for locally owned goods and services.

J

Proudly Australian owned, serviced, manufactured and grown:

Ideas to reinvigorate our economy and have a flow- on effect on businesses that service and supply these businesses, as well as reinvestment in our jobs and communities.

1. The Federal and State Parliaments and local councils should source food (dairy, meat, fresh produce, confectionery, snacks etc) and beverages (water, tea, coffee, wine) from locally owned producers and processors and/or national Australian owned brands.

2. Every level of Government procurement should support locally owned companies and suppliers including food, beverages, desks and furniture, web designers, energy suppliers, services and locally made motor vehicles.

3. All Australian off shore representatives Defence and Embassies should showcase Australian owned foods and beverages.

a. For example Cobram Estate an Australian owned business growing olives here won an international Olive Oil Award in the USA., Cobram Estate Oils. They have sold several million litres of high quality olive oil to the USA Defence force serving in Iraq and Afghanistan and are unable to supply the same to Australian Defence men and women. Yet we import olive oil, 90% of which does not meet the standards of olive oil according to the Australian Olive Oil Association.

4. National carriers such as and airlines operating here should give preference to local producers. (Danish butter is currently served on our airlines – EU subsidized and our dairy farms and processors are under threat).

5. Gifts for dignitaries should be sourced within Australia by Australian artists.

6. All major tourist outlets and galleries funded by public funds should showcase Australian food and beverages. For example, the Opera House serves USA ice-cream and Italian water. Even foreign tourists comment on not being able to taste Australian quality and experience Australian brands. Multinational brands are not Australian.

23 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]

7. A help line for Australian businesses with innovations. The current system through State industry bodies is inefficient and our businesses are sent off shore and put them in contact with someone who will buy the IP and develop it off shore.

8. Government Procurement should showcase Australian innovations that are that are generated and developed here and give them priority.

K.

In Summary:

Key Issues identified in the survey related to Government Procurement include:

1. Tax payers money reinvested in Australia 2. Priority Australian owned companies – think local act global – Q 3. Transparency in management of procurement contracts 4. Transparency in the supply chain 5. Its not just about price a. Australian standards b. Substitution of imports that do not meet specifications c. Protection of intellectual property rights 6. Support and protection of our sustainable competitive advantages

24 Prepared by the Australian Companies Institute Limited (AUSBUY) 02 94375455 [email protected]