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10.3 Outsourcing, competitive tendering and procurement

For 30 years, competitive tendering and contracting (or outsourcing) has been a key method of delivering many public services.

It has two worthwhile intrinsic features. First it requires government to provide a clear definition of the services involved and second it periodically opens delivery to non-government suppliers.

Benefits of outsourcing include increased flexibility in service delivery, greater focus on outputs and outcomes rather than inputs, and the incentive for private sector suppliers to provide innovative solutions and savings.

However, there can be significant costs, including those associated with contract specification, the competitive tendering process and ongoing contract management and monitoring. It is also necessary to strike the right balance on accountability, privacy, probity and consumer protection.

Outsourcing and contestability are well recognised for their potential to increase government efficiency. Key questions for the Commission are how much outsourcing and contestability already occurs, in what areas, and where are the future opportunities.

Community expectations are increasing for more effective service delivery as well as improved coordination and collaboration, both within the Commonwealth Government and between the Commonwealth, States and Territories, businesses and community organisations.

The Commission has been advised that there is currently no 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 states ‘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’.

The Commission considers governments should continue to harness the benefits of outsourcing.

Decisions to outsource should be made with reference to a broadly accepted set of principles, with appropriate safeguards to both protect the rights of citizens and provide potential contractors with fair opportunities to compete.

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.

A successful approach to outsourcing will require an improvement in the expertise of the public service in contract management.

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 private or non-government organisations.

Areas for early consideration may include Air Services Australia, the administration of parliamentarians’ entitlements and the outsourcing of payment services.

The Commission considers Commonwealth procurement policies should also be improved.

The Commonwealth Government spends around $40 billion on procurement per year, ranging from around 40 procurements of more than $100 million in value to around 58,000 procurements of less than $80,000 in value. While value for money is the core principle underpinning government procurement policy, significant opportunities exist to improve efficiency and effectiveness and to take a more strategic approach.

There are currently 24 procurement related policies in operation. They range from Coordinated Procurement to Australian Industry Participation Plans and include various environmental policies, such as the National Waste Policy.

While some are directly related to procurement activities, others have no connection with procurement and seek to put into effect other policy objectives (including equal opportunity employment objectives). These policies contribute a significant amount of red tape for both business and government, are often of questionable benefit and can run counter to the principle of value for money.

The Commission considers Procurement Connected Policies should be abolished as procurement practices are already subject to the normal laws of Australia. They also represent unnecessary red tape and can be an inefficient means of meeting broader policy objectives at high cost to business.

A more strategic approach to procurement is also needed to provide value for money. The interpretation of value for money should reflect a more rigorous and sophisticated approach that looks beyond simple cost per day or cost per unit. A better approach would take into account outcomes, benefit and importantly risk relative to price.

Associated with this reform is a need to build the skills and capabilities of the public sector to enhance competencies around good contracting.

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. Current departmental Chief Executive’s Instructions can add unnecessary requirements, which merely duplicate the Commonwealth Procurement Rules or lead to overly cautious processes. For example, some agencies appear risk averse in dealing with potential suppliers during tender processes – in part due to overly restrictive probity and legal advice.

In addition, bespoke requirements often significantly increase contract costs while adding little to achieving the outcomes sought. Accordingly, there should be greater use of standardisation and reduced use of bespoke requirements.

The Commission has also been asked to examine opportunities for greater application of user charging arrangements to the activities of government. This is another area where improved guidelines are required.

As shown in Chart 10.1, Commonwealth entities sell a variety of goods and 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 also result in better resource allocation, as only those that use a government activity pay for it, rather than the broader public. Charges also provide price signals that prevent over-use of government services.

The majority of charging ($12.2 billion) relates to the commercial operations of government business enterprises, such as Australia Post or 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 in 2011-12, the Australian Government Cost Recovery Guidelines covered only $2.1 billion.

Chart 10.1: 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; Department of Finance.

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

Recommendation 59: Outsourcing, competitive tendering and procurement

Governments should continue to harness the benefits of outsourcing where the benefits outweigh the risks. The Commission recommends that the Government:

  1. re-establish competitive tendering and outsourcing guidelines that reflect contemporary and best practice contract management processes;
  2. base procurement decisions on value for money at all times by abolishing Procurement Connected Policies;
  3. taking a more strategic and professional approach to procurement and contract management;
  4. make greater use of standardised contracts for procurement; and
  5. develop a whole-of-government user charging framework that improves efficiency, accountability and transparency.