Submission on Government Procurement Rules, 5th Edition
The Government tenders contracts collectively worth $50b a year and this is a powerful driver of jobs, enterprise and economic direction.
WEAll Aotearoa believes it is great to see the Government wants to make it easier for New Zealand businesses to win government contracts but it’s a step backwards to remove Living Wage and lower-carbon rules for procurement.
Submission from the Wellbeing Economy Alliance Aotearoa on the proposed Government Procurement Rules, 5th Edition
We are pleased to have this opportunity to offer feedback on the proposed fifth edition of the Government Procurement Rules prepared by the Ministry of Business, Innovation and Employment. As the Foreword states, “Government spends tens of billions of dollars on goods, services and works from business and third parties”. This expenditure, and the rules under which it is allocated, have profound impacts on the domestic economy, and therefore on the wellbeing of New Zealand residents and our natural environment.
Alfred Marshall began his famous textbook that founded neoclassical economics by stating: “Political economy or economics … examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being” (eighth edition published in 1920).
Marshall’s connection of economics to wellbeing is the same principle that motivates the Wellbeing Economy Alliance. As our research economist, Dr Paul Dalziel, states in his book on Wellbeing Economics, “The primary purpose of economics is to contribute to enhanced wellbeing of persons”. This principle is the foundation of this submission.
Procurement, Wellbeing and Failure Demand
Consistent with Alfred Marshall’s observation, the current edition of the Government Procurement Rules recognises that “Government procurement can make a vital contribution to the wellbeing of New Zealanders” (Foreword, p. 3).
The proposed fifth edition removes this sentence, but it is nevertheless true that the Government’s procurements profoundly influence the domestic economy and wellbeing. Our submission is therefore based on our analysis of how the changes outlined in this proposed fifth edition will impact on the economy, on the wellbeing of New Zealanders and on our natural environment.
A key concept in this analysis is known as ‘failure demand’. This has been summarised in a report prepared by the Wellbeing Economy Alliance global team as follows:
In pursuit of economic growth - a stated goal of almost all governments – harm is caused to people and the planet, including widening economic inequalities; high levels of insecurity, despair and loneliness; and the prospect of catastrophic climate breakdown and biodiversity loss. Governments then need to spend money to respond to these harms – which then becomes a justification for growth. In other words, we are caught in a cycle of paying to fix what we continue to break. This is known as ‘failure demand’.
The Foreword to the proposed fifth edition notes that the Rules “have been updated with a focus on economic growth, more transparency and strengthened accountability” (page 5). WEAll Aotearoa supports the intent to “create greater opportunities for New Zealand’s small and medium sized enterprises, including regional businesses” (idem), but care is required from procurement teams to avoid creating failure demand.
Public Value and the Charter
The Rules place a strong emphasis on public value. WEAll Aotearoa supports that emphasis. Public value is defined as getting the best possible result from procurement, using resources effectively, economically and without waste, and taking into account total costs and benefits of a procurement and its contribution to required results. This is presented in a diagram on page 7, where public value is shown to have three attributes: Good quality, Good outcomes and Good price.
We note the diagram makes a significant change from the same diagram in the fourth edition. The current diagram defines Good outcomes as: Seek to secure Broader Outcomes in all your procurement activities and ensure you have included Broader Outcomes in designated contracts (Rule 16). The proposed diagram gives a new definition: Deliver economic benefits to New Zealand in all your procurement activities.
A list of economic benefits to New Zealand is provided on pages 23-24. We note that it includes “the environmental benefit of the proposed solution to New Zealand” and “contributing to positive social and cultural outcomes in New Zealand communities”. WEAll Aotearoa strongly supports the importance of those benefits in their own right, without wanting to think of them as exclusively economic benefits.
We also note that the list of economic benefits removes all reference to the prioritised broader outcomes currently found in the fourth edition such as “improve conditions for workers and future-proof the ability of New Zealand businesses to trade” and “support the transition to a net zero emissions economy and assist the Government to meet its goal of significant reduction in waste by 2020 and beyond”.
The Government Procurement Charter sets out the government's expectations of how agencies should conduct their procurement activity to achieve public value. The current Charter directs agencies to seven priorities, one of which is removed in the proposed new Charter. The removed priority is Undertake initiatives to contribute to a low emissions economy and promote greater environmental responsibility. This priority currently requires agencies to “ensure that economic and social development can be implemented on a sustainable basis with respect for the protection and preservation of the environment, reducing waste, carbon emissions and pollution”.
Taken together, these changes reduce the imperative to use Government procurements to mitigate climate change, reduce environmental damage and improve conditions for workers. This will increase the amount of failure demand needing to be accommodated by the public purse, spilling over into areas such as public health and vulnerability to extreme weather events.
Competition and Productivity
The Rules set out five principle of Government procurement (pp. 13-14). The second principle is Be fair to all suppliers, which beings with the following bullet point: “Create competition and encourage capable suppliers to respond.” This is unchanged in the proposed fifth edition.
As a general observation, firms can compete in one of two ways. First, a firm can aim to compete on cost by paying lower wages or having lower regard for environmental impacts. This form of competition imposes social and environmental costs on workers, residents and taxpayers which the firm does not pay, giving rise to failure demand. Second, a firm can aim to compete on productivity, by investing in new technologies and processes to deliver more value per hour of work. This form of competition contributes to rising living standards as productivity increases.
It is vital for flourishing communities that businesses are encouraged to compete on productivity, and not on cost.
Government procurement rules are particularly important. This is because Government contracts are highly desirable because of features such as Rule 36 that requires prompt payment to suppliers. Firms are typically well incentivised to compete for Government contracts, which means the Government can leverage its procurements to encourage capable suppliers who compete on productivity. The scale of Government procurement each year means this leverage can produce economy-level impacts on productivity.
WEAll Aotearoa notes that the Context section of the proposed Rules states that following the rules is essential “to provide open and fair competition that supports innovation and helps create a competitive, productive supply base in New Zealand. Having made that statement, however, the Rules themselves make no reference to productivity performance in any of its text, not even as an example of an important opportunity to deliver economic benefit to New Zealand under Rule 8.
We do not need to tell the Ministry about the overwhelming importance of productivity performance for living standards, yet productivity appears to have played no role in defining economic benefits and public value in the diagram on page 7 of the proposed fifth edition. WEAll Aotearoa submits that this is a major omission.
Environmental Standards and Living Wages
New Zealand’s first emissions reduction plan identified the role that Government procurement rules can play in supporting New Zealand’s transition to a net-zero-emissions economy by prioritising low-emissions and low-waste goods, services and works. Removing rules around electric or hybrid electric vehicles and five-star rated government buildings that are cleaner and more efficient will ultimately cost the taxpayer more. We also note that climate targets are permissive considerations under section 5ZN of the Climate Change Response Act 2002.
WEAll Aotearoa recommends that the Government Procurement Rules must ensure firms do not compete on cost by reducing their contribution to New Zealand’s climate targets (or other environmental standards). Instead, the Rules should promote competition on productivity by firms adopting new technologies that meet environmental standards as part of their offer to Government.
The current edition of the Rules defines a broader outcome headed Improving conditions for New Zealand workers (Rule 19). Under that heading, “all public service departments must include requirements in their cleaning, catering and security guard contracts that workers undertaking these services are paid, at a minimum, the New Zealand Living Wage, with annual increases”.
WEAll Aotearoa recommends that the Government Procurement Rules must ensure firms do not compete on cost by paying wages for these services below the Living Wage. Instead, the Rules should promote competition on productivity by firms adopting new technologies and efficient work practices as part of their offer to Government.
Further, if workers are paid less than the Living Wage, by definition they are not earning enough income for their family to live well. This means they and their children will be unwell, which will spill over into poorer educational outcomes and greater public health expenditure. This illustrates the principle of failure demand. WEAll Aotearoa strongly supports the current Living Wage requirements under Government Procurement Rules.
Summary of Recommendations
WEAll Aotearoa supports the strong emphasis in the proposed Rules on public value.
WEAll Aotearoa supports the importance of environmental, social and cultural benefits in their own right.
WEAll Aotearoa supports proposed Rule 8.3(d) and recommends progressive progressive targets for Māori and Pasfika businesses be reinstated.
WEAll Aotearoa recommends that the Charter should continue to include a requirement for agencies to undertake initiatives to contribute to a low emissions economy and promote greater environmental responsibility.
WEAll Aotearoa recommends that it is vital for flourishing communities that businesses are encouraged to compete on productivity, and not on cost.
WEALL Aotearoa recommends that, consistent with the previous recommendation, the Rules must reference productivity performance as an example of an important opportunity to deliver economic benefit to New Zealand under Rule 8.
WEAll Aotearoa recommends that the Government Procurement Rules must ensure firms do not compete on cost by reducing their contribution to New Zealand’s climate targets (or other environmental standards).
WEAll Aotearoa recommends that the Government Procurement Rules must ensure firms do not compete on cost by paying wages for cleaning, catering and security guard services below the Living Wage.
Conclusion
WEAll Aotearoa thanks the Ministry of Business, Innovation and Employment for the opportunity to submit on this proposal. We would be happy to answer any questions about any aspect of our submission.
