Australia: Indigenous Procurement Policy: Are you IPP ready?

Last Updated: 20 October 2015
Article by Alexandra Wedutenko and Natasha Smith

Most Read Contributor in Australia, August 2016

Key Points:

There are some practical issues in complying with the new Indigenous Procurement Policy, and some areas which require further clarification.

The Indigenous Procurement Policy (IPP) commenced on 1 July 2015. It seeks "to stimulate Indigenous entrepreneurship and business development, providing Indigenous Australians with more opportunities to participate in the economy."

The IPP aims to drive improvements in Indigenous economic development and Indigenous employment by focusing on small to medium sized enterprises (SMEs), which dominate the Indigenous business sector.

Entities must consider the IPP for all procurements. Is your Entity IPP ready?

This article will identify some of the practical issues that procuring officers and Entities should be aware of in complying with the IPP, as well as to note some areas where clarification of the IPP would be beneficial to assist Entities to comply with the policy and what the likely impact on panel procurements will be.

The role of the procuring officer in IPP compliance

All officers who procure goods and services on behalf of an Entity must be familiar with the IPP and understand what their IPP responsibilities to assist their Entity to comply with it.

It is important to note that "procuring officers" (for the purposes of the IPP) are all officers of an Entity purchasing goods and services, regardless of their value, and regardless of how goods or services are procured (credit card, work order, contract etc.). Procuring officers are not necessarily just those officers designated as "Procurement Officers" within an Entity.

Procuring officers should be trained in the different elements of the IPP and how each element applies to procurements of certain values, how to confirm whether a procurement falls within a "Remote Area" and what they need to do as an individual assist the Entity in complying with its reporting requirements under the IPP.

Further, procuring officers will need to turn their minds to the nature of the method of procurement (open approach to market, limited tender, panel arrangement) and how the elements of the IPP are to be applied to the relevant method of procurement.

Compliance with the mandatory set aside: Contracts valued between $80,000 and $200,000

With the exception of certain types of procurements1, when procuring domestic goods or services which are valued between $80,000-$200,000 (GST inclusive) or procurements which are "Remote Procurements" (being a procurement exercise for a Remote Contract, which is a contract where the majority (by value) of the goods and services will be delivered in a Remote Area, as per the Indigenous Procurement website), procuring officers must apply the "mandatory set aside".

This means that for those classes of contracts to which the mandatory set aside applies, where a suitable Indigenous SME is identified and available to deliver the goods or services, that Indigenous SME must be awarded the contract.

In order to comply with the mandatory set aside requirements, a procuring officer will first be required to conduct a search for a suitable Indigenous SME to undertake the contract.

The IPP refers Entities to the "SupplyNation" directory in order to undertake this search, or alternatively, via other means, such as by consultation with the Indigenous Chambers of Commerce.

SupplyNation allows an Entity to search its database for Indigenous Enterprises (IE) which have registered with it, and provides the contact and company details of the registered IE. SupplyNation does not provide information on whether an Indigenous enterprise has the capacity, capability or experience to perform the services required by the Entity or whether an Indigenous enterprise satisfies the definition of an SME. The procuring officer will thus need to ascertain an IE's status. To do so the procuring officer may need to conduct and IE procurement prior to any general approach to the market (if any).

If the procuring officer ascertains that an Indigenous SME can deliver a value for money solution for the procurement of the goods or services, the Entity is required to offer the contract to that Indigenous SME. Thus the Indigenous SME gets a procurement priority. One of the difficulties for an Entity is how its procuring officers will know whether an identified Indigenous SME can deliver the goods or services on a value for money basis without requiring that SME to undergo a typical procurement process.

As noted above, where multiple Indigenous SMEs are identified as potentially being available to deliver the goods or services, the Entity is required to consider which (if any) of those SMEs will deliver the best value for money to the Commonwealth in delivering the goods or services.

The IPP guidance material specifies that a procuring officer must assess the suitability of the identified SMEs to provide the goods or services in a manner "commensurate to the scale, scope and risk of the procurement, and award the contract to the Indigenous SME that represents best value for money".

The IPP therefore appears to suggest that for each procurement to which the mandatory set aside applies, and where there is one or more Indigenous SMEs potentially able to provide the goods or services, Entities will need to run an IE procurement to evaluate whether the identified Indigenous SME(s) can provide value for money goods or services. This potentially means that Entities will be required to run two-stage procurement processes for all procurements to which the mandatory set aside requirement applies.

Accordingly, Entities will likely need to consider whether it is appropriate for their procuring officers to undertake a preliminary assessment of the Indigenous SMEs, a comparison against the non-Indigenous market for quality or price or whether a request for quotation, or indeed full RFT process is appropriate. While each Entity has autonomy to decide how its procuring officers are to assess value for money with respect to those procurements to which the mandatory set aside requirements apply, each Entity should take steps to ensure that the approach is applied consistently by its procuring officers. In this regard, Entities may consider developing an internal guide to applying the IPP to assist its procuring officers, or by running internal training and information sessions.

Another consequence of undertaking the mandatory set aside process that procuring officers should be aware of is the impact it will have on a procurement timetable. Procuring officers should factor enough time into each procurement timetable to attend to assessing multiple responses for value for money in the event that multiple Indigenous enterprises are identified as potentially being able to deliver the goods or services.

Entities will also need to ensure that there are sufficient internal resources available to undertake the mandatory set aside process for all relevant procurements and to attend to the relevant reporting obligations.

It is possible that Entities might set up their own IE Panels to satisfy their needs. This would assist to speed up the procurement process.

What about compliance with the IPP under panel arrangements?

Many Entities will have established panel arrangements to procure goods and services that are required by an Entity regularly, or in large quantities, in order to be able to procure those goods and services from suppliers who have been evaluated as providing value for money. The purpose of this is to streamline the procurement process for these goods and services by Entities.

The above IPP discussion would appear to apply to Panels. Thus even if an Entity has established a panel arrangement for the supply of goods or services, the Entity must first apply the mandatory set aside process, or the minimum requirements as the case may be, before it can order goods or services from its panel suppliers.

A risk here is that, in the event that a business missed out on obtaining a place on a panel, that business could use the IPP as a way to bid for work, at the expense of those suppliers who were successful in obtaining a place on the Panel, by setting up a joint venture with an IE.

In this case, and in particular with respect to the mandatory set aside requirements, the procuring officer would need to consider the IE for the contract, and award the contract if found to be suitable and value for money, before established panellists are approached for the work.

A potential risk here is that suppliers may not be attracted to tender for positions on panels if they do not think that there is a reasonable chance of obtaining work under the panel as a result of the mandatory set aside. Another area of concern is the potential exploitation of IE by other businesses through commercially inequitable joint ventures or subcontracts.

Similarly, where the procurement from the panel exceeds $7.5 million and where more than half the value of the order for services is being spent in a relevant industry sector, it is likely that the Minimum Requirements will apply to the procurement (see below). Further, if the goods or services are required in a Remote Area, then the Minimum Requirements for High Value contracts in Remote Areas will also likely apply.

Compliance with the minimum Indigenous participation requirements: High Value contracts

Entities are required to include minimum requirements for employing Indigenous Australians and using IEs in the contractor's supply chain in certain Commonwealth contracts. These mandatory minimum requirements are referred to in the IPP as the "mandatory minimum requirements for Indigenous participation" (Minimum Requirements).

The intention of requiring Entities to apply the Minimum Requirements in the relevant contracts is to ensure that Indigenous Australians gain skills and economic benefit from some of the larger pieces of work that the Commonwealth outsources.

There are two ways in which the Minimum Requirements can be applied in the relevant contracts. The contractor, in consultation with the purchasing Entity, can opt to apply either the "contract based requirements" or the "organisation based requirements". Under each of these options, the contractor can then opt to apply either the employment requirement or the supplier use requirements, or a combination of both of these requirements.

High Value Contracts and relevant industry sectors

The Minimum Requirements apply to "High Value Contracts" (contracts delivered in Australia that are valued at $7.5 million (GST inclusive) or more), where more than half of the value of the contract is being spent in one or more of the following industry sectors:

  • building, construction and maintenance services;
  • transportation, storage and mail services;
  • education and training services;
  • industrial cleaning services;
  • farming, fishing, forestry and wildlife contracting services ;
  • editorial, design, graphic and fine art services;
  • travel, food, lodging and entertainment services; or
  • politics and civic affairs services.

These industry sectors are based on the United Nations Standard Products and Services Code (UNSPSC) but are otherwise not defined. The Department of Prime Minister and Cabinet (PM&C) has released a list of goods and services that fall within each of the identified sectors.

However, this list does not provide any further definition or guidance regarding the types of goods and services which are intended to be covered in the list; nor does it provide any guidance as to goods and services which would fall outside of those listed.

For example, "site preparation services" is included under "building construction and support and maintenance and repair services". Site preparation services potentially covers a very broad range of services (surveying services, demolition services, land clearing and earthworks, civil engineering works, debris removal and query design or heritage advice etc.), though no guidance is provided as to the scope of the services intended to be covered by "site preparation services".

Procuring officers will need to be aware of the types of goods and services listed in the UNSPSC and will need to undertake an examination of the goods or services they are procuring to ascertain whether they fall within this list. Without further guidance in relation to the types of goods and services covered in the categories in the list, the interpretation of the list is somewhat unclear. Accordingly, Entities should seek to ensure that procuring officers interpret the list in a consistent manner. To assist in this, an Entity may prefer to maintain a register or record of contracts that it enters into which exceed $7.5million and the decision and reason for decision regarding whether that contract is a "High Value Contract" for the purposes of the IPP.

High Value Contracts and Remote Areas

A further requirement of the Minimum Requirements is that, where a component of a High Value Contract is to be delivered in a Remote Area there must be a contractual requirement that ensures that the contract delivers "significant Indigenous employment or supplier use outcomes in that area".

This raises a number of questions. In particular:

  • what is meant by "significant" employment or supplier use outcomes? and
  • what happens in the event that there are no IEs in the Remote Area at the time of the procurement process, but an IE is established after a contract is awarded that may have been able to provide the goods or services?

The IPP guidance material suggests that in determining what requirement would deliver a "significant" Indigenous employment or supplier use outcome, the purchasing Entity and the contractor are to have regard to the size of the local Indigenous population relative to the non-Indigenous population, as well as to the nature of the goods and services being contracted.

Accordingly, it appears that the purchasing Entity and the contractor are to use their discretion when formulating the contractual terms which govern the Minimum Requirements for High Value Contracts in Remote Areas, though no substantive guidance is provided in this regard.

To assist procuring officers, to apply the requirements of the IPP consistently with respect to High Value contracts in Remote Areas, an Entity may again prefer to maintain a register or record of contracts that it enters into which meet this criteria and what contractual terms were agreed to between the parties in this regard.

The IPP guidance material does not consider the situation where an IE is set up after contract award and it is unknown what the Entity's or the contractor's responsibilities are with respect to complying with the IPP in this regard. As such, to account for such a situation, it may be useful for a contractor's Indigenous Procurement Plan to specify that the contractor will review the market at certain times during the contract and assess whether new Indigenous enterprises can be awarded work under the head contract. However, it is possible that this will have implications for other subcontractors, as well as implications for the Entity with regards to the contract charges. If this is an issue for an Entity, the Entity may benefit from conducting a risk assessment in this regard, to ascertain the likely impact of such a requirement in an Indigenous Procurement Plan.

As above, it may be useful for Entities to maintain a database of the decisions made by the Entity regarding IPP issues, copies of previous risk assessments and examples of agreed Indigenous Procurement Plans to assist the Entity to make consistent decisions with respect to the Minimum Requirements.

Approach to market documentation and contract templates

As well as ensuring that procuring officers are trained in the requirements of the IPP, Entities need to ensure that their approach to market documentation, and relevant contract templates have been updated to include the requirements of the IPP.

PM&C has released "model clauses" for insertion into approach to market documentation and contracts for procurement that are not High Value Contract and do not use the Commonwealth Contracting Suite, as well as for those procurements which fall within the definition of High Value procurements.

Entities will need to ensure that the clauses are adapted to suit the language used in its template documentation (eg. Tenderer v Respondent; Supplier v Contractor etc.).

Reaching (and exceeding) the Portfolio Target: Reporting requirements

Each entity is required to report to PM&C on its compliance with the IPP so that PM&C can report publically on the Commonwealth's achievement of its target of 3% of Commonwealth contracts to be awarded to Indigenous businesses by 2020.

In order to reach this target, PM&C has established interim targets for each financial year to 2019-2020. PM&C has calculated a "Portfolio Target" for each Entity to strengthen accountability across the Commonwealth.

PM&C will cross-reference all contracts reported on AusTender with Indigenous businesses registered on SupplyNation to calculate the number and value of contracts each Entity awards to Indigenous businesses.

However, Entities should be aware that there are a number of types of contracts which are not reported on AusTender which will count towards their Portfolio Target which will need to be reported manually to PM&C. These contracts include:

  • Subcontracts with Indigenous enterprises. 
  • Contract with Indigenous enterprises valued at less than $10,000.
  • Purchases from Indigenous enterprises using a credit cards. 
  • Contracts with Indigenous enterprises which are not registered with SupplyNation.
  • Multi-year contracts with Indigenous enterprises for second and subsequent years (the contract will be reported through AusTender for the first year only).

The timing of reports due to PM&C vary depending on the IPP element being reported on. It will therefore be important that Entities implement robust internal reporting practices to ensure that:

  • Procuring officers correctly report all relevant contracts on Austender, so that these contracts are counted towards their Portfolio Target by PM&C, as well as to satisfy the reporting requirements for compliance with the mandatory set aside.  
  • Procuring officers routinely and correctly report all other contracts manually to PM&C for inclusion in the Portfolio Target count, as well as to satisfy the reporting requirements for compliance with the mandatory set aside. Entities may prefer to nominate a single business area as the information collection point for this information within the Entity to allow for a streamline and accurate reporting procedure at the relevant times over a year to PM&C.
  • Contractors and contract managers are aware of, and comply with, the reporting requirements of the contractor against is compliance with its Indigenous Participation Plan and mandatory minimum requirements (at least quarterly reporting). Entities should consider whether contract templates and internal contract management manuals need to be amended to reflect/enforce the reporting requirements.

In turn, an issue for PM&C will be for it to track real IE involvement to ensure that IE are really benefiting from skills development as a result of the new IPP.

 

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Footnote

1 procurements to which paragraph 2.6 or 10.3 of the Commonwealth Procurement Rules apply; and 2.procurements where the purchase is made through a mandatory whole of government procurement arrangement or through a departmental panel arrangement that is specified as an exclusive purchasing arrangement; and 3. procurements where the purchase is made using an exemption to Appendix A of the Commonwealth Procurement Rules other than exemption 17, Annexure A of the Rules.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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