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Contracts as a driver of employment

January 27, 2019

How effective can public procurement be in achieving social and political goals?

The leadership of the Australian Labour Party is just the latest in a long line of politicians promising a boost to the national and local economy through imposing requirements for the use of local firms and workers when awarding public contracts. It’s a policy that grabs headlines and is in many ways laudable, but is it realistic?

First, there is the challenge of the international trade rules that apply to public procurement and seek to prevent anti-competitive selection criteria. Whether or not one feels that the current rules are appropriate to the modern economy (and in general I don’t believe they are), it is pointless to deny their existence. Indeed, the Labour Party announcement acknowledges this when it says that “public service departments would still be required to prioritise value for money in major government contracts”. In practice, this always tends to mean ‘the lowest price’, since public procurement officers seem to struggle with finding an objective measure of ‘value’ that would avoid competitive challenge.

Understanding the numbers

Second, there is the issue of capability. It would certainly be nice to find small and medium enterprises and pockets of highly skilled local labour both available and with the capacity to fulfil major government contracts. But this is a real chicken and egg situation and in general those capabilities simply don’t exist. Where they are present, we run into the third problem, which is the unattractive nature of much government business. The time, cost and complexity associated with bidding and performing on public sector business is daunting. In general, small and medium enterprises simply find it impractical to engage. The United States has superficially been one of the most successful countries in driving SMB activity and social inclusion through public procurement policies, yet research shows this is often misleading. For example, many small businesses are owned by former government employees who know their way around the system and have inside connections. Many of the larger awards are fronted by a small local business, yet actually performed by a major enterprise as a sub-contractor. Too often, the numbers may look great, but the reality is very different.

A waste of time?     

This does not necessarily mean that political efforts to drive policy initiatives through public procurement are a waste of time. Indeed, the need for innovation in service delivery means that public procurement has a key role in identifying suppliers and solutions that can deliver social benefit. Encouraging local enterprise, growth and employment are important and laudable goals, but they require a level of analysis and understanding that is typically missing from politically-inspired initiatives. If the Australian Labour Party – and indeed Governments more generally – are serious about expanding the mission of public procurement, they must recognise the need for fundamental reform of the role and its underlying policies and practices.  

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