10.21 Outsourcing, competitive tendering and procurement

Background

The government operates in the Australian market alongside businesses and individuals trading goods and services and applying their capital, labour and ingenuity to secure favourable outcomes. This section addresses some aspects of how the government should participate in the market place: how it should go about the procurement of goods and services, how it can draw on business capability to deliver its services and how it should charge for the products it provides that are of economic value in the market.

For the past three decades, governments have recognised the value of adopting market based mechanisms for both the delivery and procurement of services. Competitive markets offer the well established benefits that come when firms compete on the price and quality of their services.

Market-based options for the delivery of government services include corporatisation, outsourcing and delivering services in a competitive or contestable environment with service charges as appropriate.

Government procurement also benefits from competitive processes. Options include competitive tendering and requesting quotes from multiple providers. The transaction costs associated with going to market for procurement decisions have been reduced through mechanisms such as provider panels (that are established through competitive processes).

These principles are now well established and ingrained in the day to day operations of the Commonwealth Government. However, their application across government is haphazard.

The processes, guidelines, reporting arrangements and skills within the Australian Public Service need to be improved to drive greater consistency and better outcomes – including value for money – from the use of market-based mechanisms in both the delivery and procurement of services.

Current structures

Procurement

At the Commonwealth level, the Department of Finance is responsible for the procurement policy framework. This framework is articulated in the Commonwealth Procurement Rules and supported by AusTender, the Commonwealth’s centralised procurement information system.

Most Commonwealth agencies are required to comply with Commonwealth Procurement Rules which set out requirements, including for government officials, and combine both Australia’s international obligations and good practice. The core principle of the procurement rules is the achievement of value for money (Department of Finance and Deregulation, 2012).

In addition to the Commonwealth Procurement Rules, agencies must also comply with 24 Procurement Connected Policies which generally seek to deliver broader social and other non-procurement objectives through purchasing decisions. These policies range from industry participation arrangements and the Fair Work Principles through to energy efficiency, disability strategy and Indigenous opportunities policies. A full list of the Procurement Connected Policies is in Box 10.21.1 (Department of Finance, 2014a).

A key feature of the procurement system is the requirement for all government procurement contracts and agency agreements with a contract value of $10,000 or over to be published on AusTender by the agency awarding the contract.

Supporting this framework are whole-of-government coordinated procurement arrangements for goods and services commonly purchased by all government departments, such as computers, travel and paid advertising. These arrangements were introduced to deliver operational efficiencies and generate savings for the Commonwealth through aggregated demand. The use of these contracts is mandated for all Financial Management and Accountability Act 1997 agencies.

Whole-of-government procurement arrangements assist agencies when they procure commonly used goods and services as they establish the standard-form contract, standing offer or template documentation once, rather than many times. Whole-of-government arrangements are established from time to time through a tender process and may be led by an agency with policy responsibility or expertise in the particular goods or services.

Agencies also use panel arrangement to procure goods or services they regularly acquire. In a panel arrangement, a number of suppliers are selected, each of which are able to supply identified goods or services to an agency. For example, there is a whole-of-government panel for printing and publication services (Department of Finance, 2014c).

Assistance to the business community in relation to the Commonwealth’s procurement activities is provided by the Procurement Coordinator within the Department of Finance (Department of Finance, 2014b). The Coordinator is responsible for providing external parties with an understanding of the Commonwealth Procurement Framework, handling of certain complaints, monitoring issues related to Commonwealth Government procurement and reporting to the Minister for Finance on procurement matters.

Box 10.21.1: Procurement Connected Policies

Australian Industry Participation

  • Australian Industry Participation Plans for Government Procurement

Coordinated Procurement

  • Coordinated Procurement

Employment and Workplace Relations

  • Fair Work Principles
  • The National Code of Practice for the Construction Industry and Implementation Guidelines

Environment

  • Energy Efficiency in Government Operations
  • National Packaging Covenant
  • National Waste Policy
  • Australian Government ICT Sustainability Plan 2010-2015

Financial Framework

  • Commonwealth Fraud Control Guidelines
  • Issuing and Managing Indemnities, Guarantees, Warranties and Letters of Comfort
  • Procurement On-Time Payment Policy for Small Business
  • Australian Government Foreign Exchange Risk Management Guidelines and Finance Circular
  • National Public Private Partnerships Policy Framework and Guidelines
  • Competitive Neutrality Guidelines for Managers

Information, Communications and Technology

  • Limited Liability in Information and Communications Technology Contracts
  • ICT SME Participation Procurement Policy

International Obligations

  • Trade Sanctions

Legal

  • Legal Services Directions
  • Intellectual Property Principles for Australian Government Agencies

Security

  • Protective Security Policy Framework
  • Australian Government Information, Communications and Information Systems Security Manual

Social Inclusion

  • Commonwealth Disability Strategy
  • Workplace Gender Equality Procurement Principles and User Guide
  • Indigenous Opportunities Policy

Chief Executive’s Instructions provide a way for agency chief executives to apply any specific requirements beyond those contained in the financial management framework to the operations of their agency.

The Department of Finance provides Model Chief Executive’s Instructions that chief executives can choose to adopt, including a model for procurement processes. The degree to which Model Chief Executive’s Instructions are used is at the discretion of each chief executive (Department of Finance, 2014d).

The Department of Finance has recently developed a standard suite of contract documents for low risk procurements valued up to $200,000 for use across the Commonwealth (Department of Finance, 2014e). This builds on the previous standard suite of contract documents for low risk procurements under $80,000. Simplification of the liability, insurance and indemnity clauses is a key aspect of the suite (Department of Finance, 2013).

Bespoke requirements can often add significantly to contract costs while adding little to no benefit in achieving the outcomes sought.

A significant influence on Commonwealth Government procurement activity arises from international obligations. These are reflected in the Commonwealth Procurement Rules. The Free Trade Agreements and other international agreements also have the capacity to change procurement rules.

While the Commonwealth Procurement Framework and Rules provide a strong foundation, the Commission considers the procurement policies should be improved to provide a clearer focus on value for money and that a more professional approach to procurement and contract management should be promoted across all agencies.

Service delivery

In terms of service delivery, the government harnesses competition in a range of ways. At one end of the spectrum, some government functions have been fully corporatised – for example there are a number of Commonwealth companies operating as government business enterprises under the Commonwealth Authorities and Companies Act 1997.

However there is a range of other options. A recent report on diversity and contestability in the public service (Sturgess, G 2012) indentifies three principal alternatives:

  1. choice-based markets, where service beneficiaries are free to select from a number of approved suppliers using funds that have been supplied by government;
  2. commissioned markets, where providers tender their services to government through a competitive process and are contracted to deliver a public service as a monopoly for a term of years; and
  3. contestability, where the performance of service providers is benchmarked and they face the threat of competition if there is persistent failure to deliver.

Choice-based markets are effectively voucher systems. The National Disability Insurance Scheme has been established using this model – individuals receive funds that can be used to purchase services from various providers in the market.

Outsourcing and competitive tendering are examples of commissioned markets. This is a common form of competition in the Commonwealth Government, as evidenced by the procurement arrangements discussed above.

Genuine contestability is less common. While user charging is widely employed, it is not often part of broader benchmarking and contestability arrangements.

Outsourcing

Large scale outsourcing of complex and sensitive services did not begin in Australia until the late 1980s when the Hawke Government called for an increased focus on regulation and competition consistent with broader microeconomic reform (MacDermott, K 2008). This was followed by mandating market testing for support functions through the Defence Commercial Support Program, and then the commercialisation of the Department of Administrative Services. The agenda was extended in 1995 to the market provision of services and choice for citizens with the National Competition Policy. The preference for competitive contracting for the delivery of Commonwealth services became official policy in the first term of the Howard Government.

Since the mid-1990s, organisations have been contracted into areas of government activity characterised by risk, sensitivity and complexity. In some cases, new competitive markets have been created such as the Jobs Network (now Jobs Services Australia).

User charging

The Commonwealth Government sells a variety of goods and services (including charging for regulatory services) to the public and businesses ($20.3 billion) and to each other ($8.6 billion). Charging arrangements are thus an important source of revenue. They can also result in better resource allocation, as only those that use a government activity pay for it, rather than the broader public (that is, all taxpayers). Charges also provide price signals that deter over-use of government services.

The majority of charging ($12.2 billion) relates to the commercial operations of government business enterprises (GBEs), such as Australia Post and Medibank Private. Generally, the government expects these bodies to price efficiently and earn a commercial return.

Of the remaining $16.7 billion dollars in user charging activity in 2011-12, the Australian Government Cost Recovery Guidelines covered only $2.1 billion (Chart 10.21.1 refers). Generally, charging between government entities, industry levies, commercial charging by agencies which are not classified as GBEs and charges that rely on taxing powers fall outside the scope of the Guidelines.

Chart 10.21.1: User charging, 2011-12

This chart shows show the main categories of government charging discussed in the text. It illustrates that less than half of government charging occurs within a clear set of policy guidelines - either cost recovery or commercial charging.

Source: Commonwealth Consolidated Financial Statements 2011-12 and Department of Finance.

Trends

Procurement and outsourcing activity is captured in AusTender. During 2011–12, Commonwealth Government agencies reported 82,301 contracts through AusTender, with a total value of $41.8 billion. This was an increase since 2010-11, when there were 79,286 contracts reported with a total value of $32.6 billion (Department of Finance and Deregulation, 2013).

Services procurement accounted for 55.3 per cent of the total value of contracts and 59.2 per cent of the total number of contracts in 2011‑12 (Department of Finance and Deregulation, 2013).

Defence sector procurement accounted for 47 per cent of the total number of recorded contracts and 55 per cent of the total value of recorded Commonwealth Government procurement in 2011-12 (Department of Finance and Deregulation, 2013).

Commonwealth agencies entered into $32.3 billion (78.0 per cent) of Australian supplied contracts and $9.1 billion (22.0 per cent) of overseas supplied contracts in 2011-12 (Department of Finance and Deregulation, 2013).

The largest three categories of procurement in 2011-12 were (Department of Finance and Deregulation, 2013):

  • management and business professionals and administrative services (20.4 per cent);
  • commercial and military and private vehicles and their accessories and components (18.7 per cent); and
  • structures and building and construction and manufacturing components and supplies (11.0 per cent).

From 2005-06 to 2012-13, Commonwealth sales of goods and services grew on average by 4.7 per cent per year in real terms. As a result sales of goods and services increased from 5.0 per cent of all revenue to 5.9 per cent now (see Chart 10.21.2).

Chart 10.21.2: Commonwealth Revenue

This chart shows that sales of goods and services have increased in real terms over the period from 2005-06 - and more rapidly than taxation revenue.

Source: Consolidated Financial Statements, various.

Issues

Procurement

Invariably, government procurement is guided by rules. The Commonwealth Procurement Rules focus primarily on value for money, however the simplicity of this focus is undermined by the accretion of additional requirements. The 24 Procurement Connected Policies represent a significant amount of red tape for business and government. Many of these duplicate existing legislation or other guidelines and they can also run counter to the core principle of value for money. Procurement policies and practices should not be used to progress broader social objectives.

There can also be overlap between agency Chief Executive’s Instructions and the Commonwealth Procurement Rules, adding to complexity. In some instances chief executives add requirements beyond the Model Chief Executive’s Instructions that are not necessary, possibly due to risk aversion.

While the Commonwealth Procurement Rules and their predecessors have specified that agencies should assess the risks affecting their procurements, cultural factors affect the approach to risk. It appears that agencies can be risk averse in their selection of bids, providing a systemic bias against small and medium enterprises. At the same time they can exhibit a preference for more technologically risky options, increasing the possibility of both cost and schedule over-runs.

Competitive tendering and outsourcing guidelines

The Commission understands that there is no existing formal, structured approach at the Commonwealth level for the consideration of what services should be contestable and, if warranted, outsourced.

Instead, directions are set by the Australian Government Procurement Statement, which require that ‘the Government will only contract out when it is in the public interest, having regard to such considerations as the quality and accessibility of services and the implications for affected public sector employees’ (Australian Government, 2009).

User charging framework

There is an assortment of fees, industry levies, monetary penalties and transfer pricing arrangements within government that lack an overarching policy framework.

While the cost recovery guidelines are currently being reviewed by Finance, these only cover a small part of Commonwealth charging. A policy framework that covers all forms of charging would be desirable. This could improve the transparency of government operations and help ensure that charges are being applied in a consistent and efficient way.

Potential areas for reform

Competitive tendering and outsourcing guidelines

The Commission considers that governments should actively harness the benefits of outsourcing and seek opportunities to pursue outsourcing within a framework of benefits and costs.

Taxpayers and the broader community would generally benefit from the establishment of a comprehensive framework for managing service delivery, which ensures that:

  • decisions to outsource are made with reference to a broadly accepted set of principles;
  • appropriate safeguards protect the rights of citizens and at least maintain the quality of service; and
  • the public service demonstrated a high level of expertise in contract management.

Decisions on outsourcing should also take account of the interests of stakeholders, for example those in rural and remote communities who may be concerned about the effect of (or lack of) competition in the local community.

It is also important not to be limited by ‘convention’, but to look for where new and emerging capabilities and market changes may foster opportunities for outsourcing that were previously unavailable. For example, traditional government monopoly service providers should be reassessed in the context of relevant industry developments with a view to encouraging contestability. This may lead to considerations of whether to privatise relevant entities that operate in a competitive or regulated market or partially privatise contestable elements of government activities.

Areas for early consideration in relation to contestability may include Airservices Australia, administration of parliamentarians’ entitlements, and payment services.

It will also be important to retain an open mind on the types of services, including services that are regulated by government, that have the potential to be delivered by the private or non-government organisations.

The emergence of cloud-based services is a market change that has created an opportunity to outsource an organisation’s needs – not just in terms of ICT systems but also in large‑scale business process outsourcing. In many ways, this new model is challenging the existing outsourcing providers and allowing organisations to make more informed decisions about what functions can be undertaken by another party, or where they might leverage intellectual property or capability.

Importantly, the nature of the services that can be provided by the Cloud allow organisations to rapidly scale up (and down) based on demand, without needing to make long-term contractual commitments or investments. The model also provides much greater flexibility in terms of changing organisational structures and business mergers and acquisitions, such as machinery of government changes.

Abolish Procurement Connected Policies

The Commission considers that the Procurement Connected Policies should be abolished. These policies represent unnecessary red tape and can be an inefficient means of meeting broader policy objectives at high cost to business. Some merely duplicate the normal laws of Australia. In some cases, the underlying policy should also e reassessed, with a view to ceasing – in particular:

  • Australian Industry Participation Plans for Government Procurement;
  • Commonwealth Disability Strategy;
  • Fair Work Principles;
  • ICT SME Participation Procurement Policy;
  • Indigenous Opportunities Policy;
  • National Packaging Covenant;
  • National Waste Policy;
  • Procurement On-Time Payment Policy for Small Business; and
  • Workplace Gender Equality Procurement Principles and User Guide.

Professionalise procurement and contract management

A successful approach to outsourcing requires a step-up improvement in the expertise of the public service in contract management.

Finance could develop panels of professional contract negotiators or managers that other agencies could draw upon, as well as agencies ensuring that officers involved in large or complex procurements and contracts are accredited procurement or contract management professionals. This would be through attainment of relevant Certificates or equivalent recognised prior learning. ‘Large or complex’ could be defined the same way as for the establishment of a review process, discussed above.

The Commission considers that a more strategic approach to procurement could be fostered through enhancing the role of the Australian Government Procurement Coordinator in the Department of Finance.

Such an enhanced role could see the establishment of a process for Finance – or other designated bodies – to assess evaluation reports for large and complex procurements – typically those with a contract value over $10 million.

This threshold would strike an appropriate balance between addressing procurement risks and adding cost burden to agencies. For example, in 2011‑12 there were 432 procurement contracts worth more than $10 million. This represents just 0.5 per cent of the number of procurements but 66.9 per cent of the overall value (Department of Finance and Deregulation, 2013).

Similarly, proposals to change an existing procurement contract for such procurements with an aggregate value over $10 million could also be included in this assessment process, to prevent agencies from submitting multiple changes under $10 million.

This oversight function could continue until the agency has met requirements for ‘earned autonomy’. Autonomy could be earned by having a certain number of evaluation reports agreed by the Department of Finance in a set time period.

This enhanced approach would not replace the accountability of chief executives of departments and agencies being required to promote the proper use of Commonwealth resources. The Department of Finance — or another independent party where appropriate — would validate the report. Agencies could be exempted from this process through earning autonomy – for example through receiving a certain number of positive evaluation reports agreed by the Department of Finance (Finance) in a set time period.

Taking a more strategic approach should also provide the opportunity to strike the right balance between risk management and the effectiveness and efficiency of procurements.

Standardisation

There should be greater use of standardisation and reduced use of bespoke requirements. Use of the standard suite of contract documents developed by Finance for low risk procurements valued up to $200,000 should be made mandatory for all agencies.

There are important preconditions for effective outsourcing, which include reaching agreement on standardising, consolidating and streamlining systems and processes. As such, to inform the viability of the outsourcing option, the Government should move to introduce:

  • a clear expectation that all support services (such as human resources and IT) be provided in the most efficient and effective manner;
  • a requirement that all new policy proposals, including for the delivery of services or regulation, and capital replacement to assess whether these may be contested and the viability of the outsourcing option (and if not, explain why not);
  • greater standardisation in administrative processes (particularly common processes such as finance, payroll and registry-like functions), the level of service provided and the extent to which ‘self-service’ can be available; and
  • development of a roadmap of potential outsourcing opportunities across the Commonwealth, including in the context of shared-services.

Box 10.21.2 provides further details on implementing a more strategic and professional approach to project and contract management.

Box 10.21.2: Procurement and contract management implementation notes

The Department of Finance could promote a more professional and strategic approach to procurement and contract management in agencies, including through:

  • enhancing the role of the Australian Government Procurement Coordinator in the Department of Finance to assess evaluation reports for large and complex procurements (typically those with a contract value over $10 million) as well as proposals to change an existing procurement contract for such procurements (with an aggregate value of contract changes over $10 million)
  • developing panels of professional contract negotiators or managers, including from the private sector, which agencies could draw upon; and
  • requirements for officers involved in large or complex procurements and contracts to be accredited procurement or contract management professionals.

In implementing the Commission’s recommendation in relation to abolishing the abolition of the Procurement Connected Policies, there would be a need to consider:

  • the abolition of policies that impose an unreasonable burden on business for little or no policy outcome, such as the Australian Industry Participation Plans for Government Procurement; and
  • where the Procurement Connected Policies are of only a routine nature relating to procurement processes – such as fraud control guidelines – these should also be removed from the procurement rules and managed in policy guidance provided by the responsible agencies.

Greater use of contract standardisation could include ensuring that Chief Executive’s Instructions are not used to add unnecessary complexity, with procurement guidelines to include appropriate probity rules that strike a balance between risk management and procurement efficiency. Wherever possible, specification for goods and services should be fit for purpose, without bespoke requirements unless absolutely essential.

Increased use of standardisation could also be undertaken through mandatory use of the standard suite of contract documents developed by Finance for low risk procurements valued up to $200,000.

User charging framework

An overall user-charging framework would ensure government charges are appropriately set and consistent. This would include consideration of the overall efficiency and economic impact of charges and better transparency and consultation in planning and implementing charges.

References

Australian Government 2009, Australian Government Procurement Statement, Statement by the Hon Lindsay Tanner MP, 28 July 2009, Canberra.

Department of Finance 2008a, Procurement Connected Policies, viewed January 2014, <http://www.finance.gov.au/procurement/procurement-policy-and-guidance/buying/policy-framework/procurement-policies/principles.html>.

Department of Finance 2008b, Procurement Coordinator, viewed January 2014, <http://www.finance.gov.au/procurement/procurement-coordinator/>.

Department of Finance 2008c, Whole-of-Government Procurement Contracts, Arrangements and Initiatives, viewed January 2014, <http://www.finance.gov.au/procurement/wog-procurement/>.

Department of Finance 2008d, Finance Circular 2011/05 – Chief Executive’s Instructions, viewed January 2014, <http://www.finance.gov.au/publications/finance-circulars/2011/05.html>.

Department of Finance 2008e, Have your say: The new procurement suite helping Suppliers and Government do business, viewed January 2014, <http://www.finance.gov.au/blog/2013/11/06/have-your-say-new-procurement-suite-helping-suppliers-and-government-do-business/>.

Department of Finance and Deregulation 2012, Commonwealth Procurement Rules, viewed January 2014, <http://www.finance.gov.au/procurement/procurement-policy-and-guidance/commonwealth-procurement-rules/>.

Department of Finance 2013, Submission to the Finance and Public Administration Legislation Committee Inquiry into Commonwealth Procurement Procedures, December 2013.

Department of Finance and Deregulation 2013, Data Mining and Analysis of AusTender Data 2011-12, Protiviti Risk and Business Consulting, Internal Audit.

Department of Foreign Affairs and Trade 1997, Australia New Zealand Government Procurement Agreement, viewed January 2014, <https://www.dfat.gov.au/fta/anzcerta/downloads/anzcerta_1997revised_npa.pdf>.

Department of Foreign Affairs and Trade 2014, Australia’s Trade Agreements, viewed  January 2014, <http://www.dfat.gov.au/fta/>.

Grahan, M and Scarborough, H 1997, Information Technology Outsourcing by State Governments in Australia, Australian Journal of Public Administration, Vol. 56, Issue 3.

Industry Commission 1996, Competitive Tendering and Contracting by Public Sector Agencies, Australian Government Publishing Service, Melbourne.
MacDermott, K 2008, Whatever Happened to Frank and Fearless? The Impact of New Public Management on the Australian Public Service, ANU E Press, Canberra.

Sturgess, G 2012, Diversity and Contestability in the Public Service Economy, Sydney.

Verspaandonk, R 2001, Outsourcing – For and Against, Parliamentary Library, Electronic Issues Brief 18, 2000-01, Canberra.

OECD 2013, Government at a Glance 2013 – Country Fact Sheet: Australia, viewed January 2014, <http://www.oecd.org/gov/GAAG2013_CFS_AUS.pdf>.