Statutory Authorities Review Committee: Inquiry into the State Procurement Board
Thursday 26 September, 2019
I move this report on behalf of the committee, and I do so with, I would have to say, some enthusiasm. The State Procurement Board should form an important function for South Australia. Their management can achieve positive results for the government, taxpayers and local business. However, this is the second inquiry of the Statutory Authorities Review Committee into the State Procurement Board in the past four years. Both inquiries have stemmed from stakeholder concerns that public authorities may not be in full compliance with all State Procurement Board policies and guidelines. The result? Local businesses are denied a fair opportunity to tender and win government supply contracts in South Australia.
In my opinion, the opportunity cost of failing to award supply contracts to competitive local tenderers in South Australia is severely underestimated and misunderstood by procurement staff in this state. The engagement of businesses that source, employ and invest locally provides significant economic benefits back to our state through the multiplier effect. When local businesses win government supply contracts, they engage with other South Australian businesses to fulfil their commitments, in turn generating more local jobs. To explain it simply, local businesses that win government supply contracts plough the money directly back into the South Australian economy. Ultimately, taxpayer money supports the taxpayers and grows our economy.
On paper, the current procurement policies and requirements appear to support this goal. We have specific policy and procedural guidelines known as the Industry Participation Policy, commonly referred to as the IPP. The policy seeks to promote the inclusion of local industry participation by requiring that a minimum of 15 per cent weighting be given to businesses tendering for government contracts who participate in South Australia's local industry through supply inputs, employment or investment.
The relevant participation weighting is determined using an economic contribution test. It follows that the more local participation in terms of supply inputs, employment and investment the higher the weighting should be. However, the IPP is silent as to at which stage the 15 per cent weighting should be applied during a tender evaluation process. There is also minimal reporting on the application of the IPP.
The objects of the State Procurement Act 2004 include obtaining value in the expenditure of public money; providing for ethical and fair treatment of participants; and ensuring probity, accountability and transparency of procurement operations—all goals that the procurement board must have regard to in the administration of its functions.
Stemming from concerns that the IPP is not being applied correctly, the Industry Advocate has made continuous efforts to ensure the process of applying economic contribution tests is made simpler for procurement and agency staff. One measure has included a checklist to assist agencies in determining the appropriate weighting to give in terms of economic contribution. The checklist poses a number of simple questions, such as, 'Is the head office located in South Australia?' and, 'Is the product picked and packed in South Australia?' Next to each question there is a 'yes or no' box which can be checked. For each 'yes' answer, a 4 per cent economic contribution weighting is prescribed.
However, the evidence received by the committee throughout this inquiry has demonstrated that despite these measures agency staff appear to see procurement as a compliance exercise, as opposed to recognising the economic benefits to the whole of South Australia. Procurement staff are either not able to follow the complex myriad of procurement policies and guidelines that make up our procurement framework or they are simply choosing to solely rely on cost factors or rebates. This is enabling supply contracts to be won by large interstate companies, and our local South Australian businesses are not being given a fair go.
There are numerous examples of the IPP not being correctly applied. I will cite the Department for Education stationery procurement contract. One of the most concerning examples relates to the secondary procurement process undertaken by the Department for Education to secure a sole supplier of stationery from an across-government panel. This procurement was closely scrutinised by the committee with some interest, as the initial evidence indicated that there may have been inappropriate inducement practices used during the tender. The Department for Education explained that there was an arrangement which existed between the previous supplier where rebates were provided to the Dame Roma Mitchell Trust Fund, which is an unrelated third party, as a 'value-add' based on purchases made by the department.
The arrangement continued under the new contract, as the department thought it a 'natural progression' to keep it going. The committee heard that, at the initial stages of the secondary procurement, across-government supply panellists were sent an invitation to tender, which requested that panellists, and I quote:
…propose any enhancements, products or services that you are prepared to offer…on the basis of being the sole supplier for all Department of Child Protection and Department for Education and Child Development corporate worksites. Of particular interest to the department is the provision of assistance to the Dame Roma Mitchell Fund.
Representatives from the department reiterated to the committee that, following complaints and a subsequent recommendation from the Industry Advocate, a further letter was sent to panellists which revised the invitation to tender. Despite the revised invitation, procurement staff appeared to be entirely ignorant of the fact that the initial request for panellists to provide enhancements to an unrelated third party may have been inappropriate. In fact, the position was actively defended by procurement staff, with no concession that such an arrangement might have been inapt.
In addition to the debacle with value-adds, there were other concerning aspects of this procurement. The committee was provided with evidence showing that one local business was eliminated from the tender process for submitting a 'noncompliant tender', dubbed as such due to a mere six quoted items out of a list of 100 being deemed incomparable, that is, in terms of price, by the evaluation team.
One of the items deemed incomparable was a quote for a box of 100 tissues. Instead of quoting for a single box of tissues, the local supplier specified that their quoted price was for the supply of a carton containing 48 boxes of 100 tissues, a relatively minor discrepancy, one might think, in the context of an over $6 million supply contract. This is especially so given the price of a single box of tissues could be easily extrapolated from the information provided.
When put to procurement staff, questions were batted away by arms-length positions such as, 'It is considered a normal process that tenderers make sure that their offers are compliant,' and, 'There was ample opportunity for our tenderers to make inquiries, if required.' Keeping in mind the overwhelming evidence of this inquiry and previous inquiries, which suggest issues with procurement arise largely due to the complexity of tender processes, these attitudes simply provide further support for the notion that agency staff see procurement as merely a compliance exercise instead of an opportunity to secure value for our state.
Despite the six minor incomparable items, the Department for Education was still quite easily able to estimate the overall 12-month usage cost of the items listed by the local supplier in question. Interestingly, the overall 12-month cost came in at approximately $24,000 more than the eventual winner of the contract, both projected to cost in the $200,000 figures. Accounting for the necessary IPP weighting of at least 15 per cent, which would have been applied to the local supplier in lieu of industry participation, that local supplier should have been in with a real chance of securing the sole supply contract. Instead, it was eliminated from the process altogether for six out of 100 quoted items being deemed noncompliant.
Considering the legislative objects of the State Procurement Act, the specific aim of the IPP, and the incredible economic benefits to be reaped from engaging local suppliers, it is extremely difficult to imagine how a business with extensive local industry participation who has quoted within approximately 6 per cent of the cost of the winning tender could have possibly been eliminated for misquoting six items out of 100 items. The committee was also advised that those 100 items made up only 40 per cent of total spending, leaving the remaining 60 per cent of purchases open to price gouging, safeguarded only by the fact that such purchases are subject to the across-government contract pricing, which is not monitored for compliance.
It may be worth pointing out at this point that the eventual winner of the contract in question was, in fact, a large interstate company which, coincidentally, offered the requested value-add in the form of rebates to the Dame Roma Mitchell Trust. The committee also heard that the winning company was perceived by panellists of the across-government contract to be the preferred supplier for agencies prior to the commencement of the secondary procurement.
I move on to another example of SA Health uniforms. Another concerning example of the way the agencies apply IPP weightings relates to a tender for the supply of uniforms to SA Health. The committee received evidence from a Ms Ann Thomas, the previous local supplier to SA Health for 70 to 80 per cent of their uniform requirements. She explained a tender process that did not take the IPP into account until phase 3 of the evaluation. Ms Thomas claims that this resulted in a swift elimination at phase 1 of the evaluation process, despite being the successful supplier of uniforms to SA Health for over 15 years.
The committee received evidence that suggested that the tender process was flawed, and heard claims that it seemed biased towards interstate and national companies. Ms Thomas explained that she was told by a senior SA Health procurement employee two years prior to the tender going to market that the future tender would go to a large interstate company. The tender also included an unusual and unrealistic request for 650 free sample uniforms, which would not be returned.
Ms Thomas told the committee she was informed by SA Health that her company, Image Wear, had been eliminated from the tender prior to formal short-listing occurring and prior to the 15 per cent IPP weighting. As a result of losing the contract to supply uniforms to SA Health, Ms Thomas sold the remaining business as it was no longer viable—another blow to South Australian jobs and to local industry. Ms Thomas made a formal complaint to both SA Health and the State Procurement Board, resulting in two different investigations into the tender process.
SA Health was able to provide the committee with an extensive response to questions. It explained its reasoning for the process and structure of a procurement acquisition plan, which was also approved by the State Procurement Board. However, this revealed that only a qualitative desktop evaluation was undertaken at phase 1 of the tender, where the overall capacity and capability of the bidders for the supply of uniforms was assessed, before requesting sample uniforms from the short-listed suppliers.
The IPP weighting was not applied until after the uniform trials at phase 2 of the procurement evaluation, as it was thought that applying the IPP weighting at phase 1 would have distorted the actual capacity and capability assessment. In Image Wear's case, it seems extremely unusual and rather confusing that they were eliminated from the tender during the capability to supply uniforms phase, considering that they had successfully been supplying SA Health's uniforms for the previous 15 years.
It was reiterated by SA Health that, if Image Wear had proceeded in the evaluation process, their pricing for the total contract value over the seven-year contract period would have been substantially higher than that obtained from the successful vendor. However, this appears to be yet another example of procurement staff focusing too heavily on short-term price considerations as opposed to long-term value for money for South Australia. Whilst Image Wear's total contract value over seven years may have been more expensive, the flow-on effects and benefits to the South Australian economy would have undoubtedly exceeded this.
After receiving a formal complaint from Ms Thomas, SA Health engaged KPMG to provide an independent assessment. KPMG found that the process undertaken was equitable and consistent with SA Health's and the board's procurement requirements. A complaint was then escalated by Ms Thomas to the board for consideration. The board appointed an independent person to investigate the complaint on its behalf, which ultimately resulted in the outcome remaining unchanged.
This leads back to the heart of the issue we are facing here. Whilst both investigations apparently lead to a finding that policies and processes had been followed, it is not acceptable that the policies and procedures are leading to these kinds of outcomes. A supplier to SA Health of 15 years eliminated at the capability phase of a tender is truly astonishing and unacceptable.
Now, what of the State Procurement Board's role in all of this? As mentioned earlier, the State Procurement Board is responsible for overseeing procurement with specific regard to: obtaining value in the expenditure of public money; providing for ethical and fair treatment of participants; and ensuring probity, accountability and transparency in procurement operations. However, it seems that at every step of the process the board is failing to provide any useful contribution to the oversight or improvement of the procurement process.
Through the examples I have just outlined, we can see that agencies are being tasked with the responsibility of overseeing their own procurement processes. The board's view was that agencies should be afforded flexibility to undertake procurements because the agencies understand their specific business needs. Whilst I do understand this to be true to some extent, it still raises the question: what then is the board's role here if procurement is left entirely to agencies?
If we consider the complaint which was escalated to the board by Ms Thomas in relation to the SA Health procurement, an independent person was appointed to investigate this complaint on the board's behalf. What then is the board's role here if it is not even capable of investigating its own complaints?
As a result of the findings and recommendations of the committee's previous inquiry in 2015, the board was scheduled to reappear before the committee one year after the tabling of that report. The meeting occurred on 3 April 2017. Shockingly, not one member of the State Procurement Board was present before the committee on that date. Instead, a number of departmental employees were sent to appear on the board's behalf. Those representatives advised the committee that the chairperson, Ms Nicolle Rantanen, was unavailable at the time.
At one point during the present inquiry, the same chairperson of the State Procurement Board explained to the committee herself that she does not have the capacity to dedicate the required time to the board's work during office hours. This is because she is also the current Acting Public Trustee. So some two years on from the previous inquiry little appears to have changed. I admire Ms Rantanen's efforts, after hours, to put work into the State Procurement Board, but surely it requires somebody who can perform those duties during working hours.
It is also worth noting that the committee's previous inquiry resulted in the establishment of a position for an across-government chief procurement officer, which was intended to play a significant role in determining how procurement is undertaken and to improve consistency across the Public Service. The role was delegated extensive responsibility and power to perform integral functions. However, this position has remained vacant since approximately November 2018, pending the outcome of an inquiry being commissioned by the Productivity Commission, thus leaving those functions to be supported by roles within government services in the meantime.
With regard to the current inquiry terms of reference and findings, the present inquiry's terms of reference required the committee to look at the State Procurement Board with a focus on:
- the scope of the State Procurement Act 2004 (SA);
- current state procurement processes and practices;
- small and medium-sized business participation in government procurement; and
- any other relevant matters.
Having considered the State Procurement Board against these terms of reference, and the evidence which I have outlined today, the committee finds that the board is not in a position to adequately achieve its functions to enable the necessary balance required for local business participation in government tenders and provide value for money for the state. The committee is of the view that merely recommending an update to their policies, as was attempted after our last inquiry four years ago, will not go far enough in ensuring the board is performing the statutory functions for which it was established.
As such, the committee is recommending, among other things:
- that the State Procurement Board be abolished, along with all associated guidelines, policies and legislation;
- that instead, an office of the chief procurement officer be established, where the chief procurement officer reports directly to the Treasurer to advise and support South Australian procurement;
- that procurement evaluation panels include a representative from the area of services to be provided (for example, a marketing representative for the Communication Services Panel);
- that the new state procurement framework/strategy provides a clear definition of 'value for money'; and
- that the Treasurer amend the Industry Participation Policy and its procedural guidelines to include that all agencies report on their IPP obligations in their annual reports to the Treasurer and to the Office of the Industry Advocate, including their obligation to invite a local business to quote when an open tender process has not been conducted.
The new proposed framework is similar to that in existence in Queensland, which also operates without an independent statutory board. Under the Queensland structure, the Chief Advisor-Procurement is positioned between the relevant minister and the Government Procurement Committee, together with an industry advisory group, which sit alongside each other. A diagram of the Queensland structure can be found on page 29 of the committee's final report.
The committee considers a new model would provide an opportunity for the state government procurement strategy to align directly with the government's growth agenda. It would allow for a focused full-time office of the chief procurement officer, who is able to work closely with the Office of the Industry Advocate and is dedicated to ensuring a cohesive and effective procurement strategy.
In conclusion, I would like to thank all of the witnesses and the members of the Statutory Authorities Review Committee: the Hon. Justin Hanson MLC, the Hon. Dennis Hood MLC, the Hon. Frank Pangallo MLC and the Hon. Irene Pnevmatikos MLC, together with committee secretary Mr Peter Dimopoulos and the committee's research officer, Mrs Lisa Baxter, for their efforts and contribution to this inquiry.
This inquiry has been a long time coming. It is meant to deliver meaningful outcomes for those long-suffering South Australian businesses that ultimately feel the sense of frustration of being excluded from business opportunities with the state government that they should rightfully have. I hope this report receives the consideration and respect it is due.
I hope that in future, when a business unfairly misses out on providing goods and services to the state government, there is somebody they can go to who actually has some teeth and can drill down and find out why those, who I believe to be, mid-level public servants do not take into consideration the harm they are doing to South Australian jobs, to South Australian employment and to South Australian businesses by not paying due respect to South Australian business opportunities.
Click here to read more...