Comment

Crampton: Skewing procurement

The Government's proposed changes to procurement rules could skew things so it ends up spending too much to achieve too little, writes Eric Crampton.

New Zealand gets a lot of things right that the rest of the world gets wrong.

Where other countries screw up their goods and services taxes by exempting politically sensitive goods, New Zealand’s GST raises a lot of money at a relatively low tax rate by maintaining a broad base without exemptions.

Where airports abroad have become unpleasant armed camps, New Zealand has largely avoided the costly security theatre that makes travel a nightmare while doing little to increase safety.

And where other governments wind up paying far too much for the goods and services they purchase because they try to use procurement policy to achieve a pile of objectives other than buying goods and services, New Zealand’s procurement rules have emphasised getting the best value for money – or trying to.

Well, at least so far. The Government’s proposed changes to the procurement rules suggest a substantial change in emphasis.

Good procurement rules matter. The Government currently spends about a hundred billion dollars per year, with about $41 billion buying goods and services from third parties.*

Getting a bit more value for money across all those contracts is important. If the Government spends too much on the things it buys, it can afford to buy fewer things – from school textbooks to hospitals.

When government procurement rules are skewed to achieve other objectives, the Government winds up spending too much to achieve too little.

Suppose the Government wanted to promote some socially worthy objective – say moving able beneficiaries into long-term employment. Is it really all that likely the best way of doing that is through procurement policies favouring firms hiring former beneficiaries? Or is it more likely that other policies are more cost-effective?

Skewing procurement rules also risks violating trade agreements that help New Zealand companies sell their goods and services to governments abroad.

New Zealand is party to the World Trade Organization’s Agreement on Government Procurement, which requires member countries to treat each other’s companies on a non-discriminatory basis. That provides New Zealand companies greater ability to tender for contracts in the European Union, Japan, the United States, Singapore, Taiwan and others. Setting rules to explicitly favour New Zealand companies here would hurt them abroad.

Proposed changes

The Government is consulting on proposed changes to procurement policy. The draft document adds rules requiring consideration of “broader outcomes” when purchasing goods, services or construction works. While these broader outcomes can include environmental, social, economic or cultural benefits, the document highlights four priority outcomes. Let’s take these each in turn.

Rule 17 requires agencies to consider how they can create opportunities for New Zealand businesses as part of their tendering. It recommends breaking larger contracts into smaller regional portions to enable smaller Māori and Pasifika businesses to compete. Or, if a contract cannot be split up, Rule 17 encourages engaging with larger suppliers about including smaller New Zealand businesses –particularly Māori and Pasifika businesses – into their supply chains.

Now there are real problems in government contracting that can make it tougher for Kiwi firms to make the grade. But skewing contracting and supply chains to favour some businesses over others seems a poor way of either contracting for goods and services, or of supporting business development more broadly.

We should hope that the Government would not prefer a bundle of small contracts if it increased overall costs. And we should also hope the Government is seeking solid advice from the Ministry of Foreign Affairs and Trade that none of this runs afoul of our WTO commitments.

Rule 18 requires that construction contracts weigh the bidder’s skills development and training practices and encourages opportunities “for targeted groups such as Māori, Pasifika and women to increase the diversity of the construction industry.”

It is not unreasonable to hope that any ramp-up of Kiwibuild, for example, could assist in providing apprenticeship roles for trade workers getting their start. But wouldn’t better policy encourage uptake of apprenticeships more broadly, whether or not the Government were the client?

Rule 19 requires suppliers ensure their own and their subcontractors’ compliance with employment standards and health and safety requirements.

But meeting employment standards and health and safety requirements is already the law. If the Government thinks those standards are not being met, is it better to build compliance into government contracts, or to hire labour inspectors to encourage compliance more broadly? And if the Government here wishes to go beyond legislated protections to “incentivise well-performing firms while ensuring they are not undercut by firms who have reduced costs through poor labour practices”, we might wonder whether the intention here is to put a thumb on the contracting scales for unionised firms.

Finally, Rule 20 requires that procurement furthers the Government’s low-waste and low-emissions goals. They provide, as example, prioritising low-emissions vehicles in government fleet purchases. But transport is part of New Zealand’s Emissions Trading Scheme (ETS), and any reasonable whole-of-life costing on vehicles should include fuel costs. Fuel costs already include the cost of carbon.

I understand Treasury warned that the draft procurement policy risks trying to achieve too many things at once – and especially in the absence of any ranking of those priorities.

The rule makes no difference because a whole-of-life costing would already prefer the lower emitting vehicles. But if a higher emitting vehicle had lower lifetime costs, that means the Government could likely do more good for the environment by buying the cheaper fleet, and putting the savings into buying back and retiring credits in the ETS. Again, the rule worsens value-for-money in contracting and does less good than more direct policies in achieving its other objectives.

None of this is rocket science. Using procurement policy to achieve other objectives means government does a worse job on procurement, and very likely could be using other policies to do a better job of achieving those other objectives.

I understand that Treasury warned that the draft procurement policy risks trying to achieve too many things at once – and especially in the absence of any ranking of those priorities. Unfortunately, the only Treasury contribution that made it into the Cabinet Paper was Treasury’s wish to include an additional objective: “that government suppliers be encouraged to adopt diversity and inclusion workforce policies and for those firms with boards – policies that support diversity of board members.”

When the Government is spending more than $40 billion a year, or about 40 percent of its budget, on contracted goods and services, we really need to make sure we’re getting value for money. Add a million here and a million there aimed at other objectives and pretty soon you’re talking real money. Real money that could do more good if put to better use.

* The figure of $41 billion on procurement comes from the Cabinet Paper. If the overall hundred-billion-dollar figure surprised you, you’re not the only one. The number I’ve carried around in my head, from 2015/16, is that Government spends about $86 billion per year. The 2018/19 budget is 19 percent bigger than 2015/16’s. Government can afford to spend a lot more when it never adjusts income tax thresholds for inflation and we eventually wind up having a 33 percent flat tax.

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