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19 Oct 2009

Changes in government procurement policies in response to the global economic crisis

by James Stellios

Changes to government procurement policies are intended to enhance access by local producers and suppliers to procurement markets. Commitments made by Australia and the United States to remove barriers to trade in the area of government procurement have been central to the formulation of government responses.

As a result of the global economic crisis, significant pressure has been placed on governments in both Australia and the United States to change government procurement policies and practices to favour locally produced goods. This note outlines the changes to procurement policies put in place by the New South Wales, Commonwealth and United States governments in response to that pressure.

New South Wales

In June 2009, the New South Wales Government released its revised government procurement policy - NSW Government Procurement: Local Jobs First Plan. The policy sets out its intention for procurement to be used to develop local industry capability and support local economic activity while achieving value for money. Value for money is said to be about broader economic benefits and not just lowest price. Substantial economic benefits are said to "flow from buying Australian or New Zealand goods and services and maximising opportunities for local service providers to compete for Government business on the basis of value for money." To that end, the policy operates explicitly to favour Australian and New Zealand producers and suppliers.

NSW government agencies must have a procurement plan that identifies local industry capability; provides local industry with enhanced opportunities to compete for tenders; and establishes specification and evaluation procedures that provide local industry with development and participation opportunities. When evaluating bids, price preference margins of up to 20% are to be provided in favour of local producers and suppliers. The requirements in the policy vary depending upon whether the procurement value is up to $1 million; between $1 million and $4 million; or over $4 million.

This kind of preferential treatment for local producers and suppliers is regulated by the World Trade Organisation Procurement Agreement, which prohibits such local favouritism. Australia is not a party to that agreement and is not bound by those obligations. However, Australia has entered free trade agreements with the United States and Chile which contain similar non-discrimination obligations in relation to government procurement. In recognition of the obligations under those agreements, the NSW policy is limited to small and medium enterprises where international obligations exist, thereby taking advantage of express exclusions within those agreements.

Commonwealth

Particularly in light of the NSW changes to procurement policy, significant pressure was placed on the Commonwealth government to implement price preference mechanisms of up to 20%. However, the Commonwealth has refused to go down the NSW path, saying that such a policy would produce few economic benefits and would damage our trade relationships, and that it is committed to a policy of non-discrimination in government procurement.

Instead, the Commonwealth has agreed to provide a funding boost for the Industry Capability Network to create opportunities for Australian companies to take advantage of procurement opportunities. Some of the measures will include using procurement experts to link Australian companies with procurement opportunities; appointing specialist advocates to champion Australian industry in the government marketplace; and requiring the development of Australian industry participation plans. The objective, the Government has said, is not to give preference to Australian industries, but to allow Australian producers and suppliers full, fair and reasonable opportunities to compete for tenders and major projects. The Commonwealth Government has also announced that it will implement a range of measures to improve the transparency and effectiveness of its procurement process, including the appointment of a Procurement Coordinator to oversee Commonwealth procurement and the simplification of the AusTender process.

United States

Since the enactment of the Buy American Act of 1933, the default rule has been to favour domestic industries unless a presidential waiver is in place allowing foreign producers and suppliers to access United States procurement markets. These waivers benefit Australian producers and suppliers as a result of the procurement provisions in the Australia-United States Free Trade Agreement.

In response to the global economic crisis, Congress has put in place a stimulus package under the American Recovery and Reinvestment Act of 2009. The legislation requires that American products and services be given preference when stimulus funds are being spent. However, as a result of last minute changes in Congress, this buy-American clause was amended to require that it be applied in a manner consistent with the United States' obligations under international agreements. Thus, as a result of the non-discrimination provisions in the Australia-United States Free Trade Agreement, Australian producers and suppliers retain access to federal procurement markets when stimulus money is being spent.

Conclusion

Economic downturns have always given rise to pressure to protect local industries from overseas competition. The current global economic crisis has been no different: significant pressure has been exerted in the area of government procurement. Australia and the United States have agreed to reduce barriers to trade in the area of government procurement, and the recent experience has shown that those commitments have been central to the formulation of government responses.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.