05 June 2018
Small business needs a fair go at getting government contracts
By Kate Carnell
I frequently argue the case for a level playing field when addressing small business and family enterprise issues. A prime example of the need to give small businesses a fair go is access to government and major commercial procurement.
This year’s budget provided a few opportunities for small businesses; giving them a better chance at securing government contracts and tackling illegal behaviour in our black market economy to address the devastating effects of phoenixing.
There is potentially millions of dollars’ worth of government procurement contracts in Australia for small-to-medium sized enterprises (SMEs) to capitalise on. Australian SMEs are 99% of Australian businesses, employing almost half of Australian workers and creating a substantial proportion of new jobs.
Statement of Tax Record
A 2018-19 budget initiative requires businesses tendering for Australian Government contracts over $4 million to have a statement of tax record (STR) from the ATO, from 1 July 2019. The statement will be based on details held in ATO systems, including information supplied by the taxpayer under the self-assessment system and declarations made by the taxpayer when requesting the statement.
A STR will strengthen the integrity of the supply chain in government procurement and will go some way to addressing phoenix behavior if a change of company requires a new STR.
The review of state and territory security of payments legislation by John Murray AM confirmed the very structure of the building and construction industry pushed risk further down the supply chain to small business subcontractors. And as we know, the construction industry has a track record of poor payment practices, insolvency and phoenixing.
I support the Murray Review recommendation that a deemed statutory trust model be applied to all parts of the contractual payment chain for construction projects over $1 million, plus a program of industry-wide education and training.
The government could lead by example as a model client and require statutory trusts for construction projects over $1 million. This would also help in establishing a national approach to security of payments.
Raising the procurement target
I would also like to see the government move quickly to implement the Innovation Science Australia recommendation to raise the procurement target to 33% of contracts by dollar value for Australian SMEs.
The current 10% target is low and unambitious when compared to targets set by overseas jurisdictions. The UK has a target of 33% of the value of government procurement spending going to SMEs (businesses employing 250 employees or less) by 2020.
While there are policy initiatives in place to assist our SMEs to participate in and benefit from government procurement, action on this needs to be sped up, to provide the intended economic benefit to small businesses from government procurement activity.
Access to major public projects
The government has also designed policies to increase the opportunities for SMEs in major public projects. However they do not track good commercial practice through the supply chain.
Commonwealth Procurement Rules state that risk should be borne by the party best placed to manage them. If there is inadequate due diligence during the tender stage, particularly financial due diligence, it can leave SME secondary subcontractors exposed.
A company entering voluntary administration or going into liquidation during a project frequently has outstanding payments. These payments include monies received but not paid to subcontractors. Cashflow is vital to small business success and is the leading cause of business insolvency.
As subcontractors are not employees their only choice is to register as an unsecured creditor and take what little cents in the dollar remain at liquidation. These small business owners are often unaware of, or do not understand, dispute processes and can lack resources to pursue their rights.
Engaging in contracts under $20m
SMEs attempting to engage in smaller government contracts face a barrage of barriers and impediments.
Small businesses do not always have the resources to complete burdensome tender or panel documentation. The use of panels, limited tenders and prequalified tenders reinforces the need for small businesses to have and maintain relationships with a government agency in order to win procurement contracts. However, small businesses are often ‘unknown’ to contract managers, who rarely look beyond the suppliers they usually interact with.
SMEs can be disadvantaged by being unable to offer the lowest price, even when the business is competitive overall and would succeed if broader value-for-money criteria were used.
Departments and agencies are also increasingly bundling work into larger contracts to streamline their internal processes. The consequence is contracts too big for small businesses. This results in small businesses not directly providing services to government, but being used as subcontractors or losing out on work entirely.
WTO Government Procurement Agreement
Australia is in negotiations to join the World Trade Organisation (WTO) Government Procurement Agreement (GPA). This membership would provide access for Australian firms to procurement markets of GPA members, most significantly the European Union.
The WTO GPA has the potential to benefit Australian SMEs, however it also brings with it certain risks. SMEs do not have the same capacity and economies of scale as larger companies to monitor overseas procurement markets and tender for government contracts.
Support should be provided for SMEs to access these government procurement markets. This could include an exemption for domestic priorities to allow governments to expressly consider bids from SMEs. While many SMEs have invested in acquiring Australian Standards, GPA members may require International Standards, so the ability to substitute should be considered.
These are just some of the issues attached to an ambitious program for 2018, to elevate small-business issues on the national policy agenda and encourage growth and prosperity within the ever increasing small business community.