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AUG 12

Local preference in procurement still being overlooked

The lack of local preference in procurement from both central and local government has resurfaced in the Canterbury earthquake rebuild. Some firms in particular markets have seen some increase in activity, but overall it has been a slow process and the activity has been captured by a few of the Government’s preferred suppliers. This attitude towards procurement risks missing some of the wider benefits the rebuild could have for the economy.

As a kicker those firms who have attracted the lion’s share of the work are now recruiting staff at higher than market wages – this has the capacity to hurt some local firms and could leave shortages in skilled staff during the rebuild and when things begin to normalise.
There is also a big issue here at a national level.

With New Zealand’s small population it is difficult for firms to attain the scale necessary before entering into export markets. The one area such scale does exist is in the public sector where contracts can be large enough to help firms to achieve some scale and drive innovation. One way to kill local innovation is to demand in any tender that only ‘proven’ solutions should be offered. The scale issue makes it even more important for our government to get work done locally where possible.

An overvalued currency creates more pressure to buy imported products. Ultimately when the dollar falls local supply becomes more competitive, but if the capability has gone there will be no capacity to respond at that point - once gone, it is likely gone forever. Equally when tax and ratepayer money is spent locally, that sees the tax and rating base expand creating lower costs for all. The converse is also true leaving the remaining tax/rate payers to pick up the tab.

The total economic cost including broader spill over benefits must be considered rather than sourcing the lowest cost supply. The decision to source buses from China rather than a local supplier, Designline, was an example of this. A high exchange rate of course reduced the competitiveness of the local firm, but if you take a longer term view did it really benefit New Zealand?

Lifetime costs such as training, maintenance, repair and the spillover benefits from the protection of capacity and capability development are all criteria worthy of consideration in these decisions when tax payer and rate payer money is spent. When these factors are considered you start to build a different picture of what might be an appropriate threshold to look offshore.

It is worth noting that a margin of 25% in price was considered appropriate in the first Obama stimulus package.

It is short sighted and damaging across a number of dimensions to place contracts offshore on the basis of saving a quick buck. A longer term policy that considers the impact of transient issues like exchange rates, the development and support of capability in the economy, the maintenance of capacity in economy and the real cost of the decision should be weighed in the consideration. We could learn a lot from Australia where government contracts require the tenderer to show what they are doing for Australia in addition to responding to the direct needs of the tender.

tags: local preference, local procurement
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