23 March, 2018
One in every five Commonwealth contracts awarded under the Federal Government's Indigenous Procurement Policy is a building, construction and maintenance services sector contract. Now in its third year, the IPP aims to create employment and economic development opportunities for Australia's First Nations by stimulating and incentivising public and private investment in Indigenous enterprise.
A report released by the Department of Prime Minister and Cabinet in November 2017 has found that joint ventures can offer "genuine benefits" like skill development and capacity building for Indigenous business, while enabling their business partners to access greater Commonwealth procurement opportunities. The policy has exceeded its planned outcomes in the last two years, however the review noted that strengthened joint venture arrangements could achieve even stronger results, capturing higher value contracts and increased supply chain opportunities.
This alert considers how Indigenous and non-Indigenous enterprises can benefit from partnering together under the IPP.
What is the Indigenous Procurement Policy?
The IPP was introduced in July 2015 to leverage the Commonwealth's annual procurement spend toward Indigenous goods and services and, in turn, support the development of Indigenous business throughout the supply chain. Since its implementation, 4,800 contracts totalling A$594 million have been awarded to Indigenous enterprises across a wide range of industry sectors.
The IPP aims to create cultural and economic change through both voluntary and required procurement approaches. While a central priority is to support entrepreneurship and small to medium business development, partnering with Indigenous enterprises also opens a range of opportunities for Australian businesses more broadly, including benefits that extend beyond corporate social responsibility.
On 23 November 2017 the Department of the Prime Minister and Cabinet released a "Year one review of the Indigenous Procurement Policy" ("First Year Review") which concluded that the IPP had exceeded its planned outcomes in its first year. This success resulted in the government accelerating its targeted outcomes for subsequent years.
How do the Commonwealth Indigenous procurement targets operate?
The IPP applies to entities subject to the Commonwealth Procurement Rules, and leverages the Commonwealth's procurement spend toward Indigenous goods and services in three main ways:
- a target number of contracts per Commonwealth portfolio to be awarded to Indigenous business;
- a mandatory set-aside for remote area contracts and contracts valued between A$80,000 – A$200,000; and
- specified minimum Indigenous participation requirements in domestic contracts valued at or above A$7.5 million in certain industries, including building, construction and maintenance services.
A "domestic contract" is a contract that results from a procurement exercise conducted in Australia, even if some or all of the goods or services that are purchased may be used or delivered overseas.
Prior to the implementation of the IPP, Indigenous enterprises secured limited Commonwealth business. The Australian National Audit Office reported in July 2015 that just 120 contracts with Indigenous businesses certified through Supply Nation had been registered with AusTender since 2011.
In 2015, an initial procurement target under the new policy was set for 3 percent of all domestic contracts to be awarded to Indigenous businesses by 2020.
Each of the interim targets have been reached. In its first year, the original target of 0.5% of domestic contracts was exceeded. Following consultation, incremental targets were then brought forward to 2016-17. Subsequently, every Commonwealth portfolio has exceeded the original target of 3 percent:
| Year | 2015-16 | Age |
|---|---|---|
| Interim target | 0.5% | 1.25% |
| Actual | 2.9% | >3% |
| Number of contracts | 1,509 | 3,291 |
| Number of Indigenous owned businesses | 493 | 723 |
| Value | A$284.2 million total – an increase from $6.2 million in 2012-13. | A$309.8 million in total across all industry sectors, states and territories. |
The IPP targets are currently based on a percentage of the raw number of contracts awarded. This contrasts with similar policies in the United States of America where similar procurement targets are based on a percentage of the value of contracts awarded. The US Federal Government requires at least 23 percent of all annual Federal Government contracting dollars be awarded to small businesses, including 5 percent to what it terms "Small Disadvantaged Business". Small Disadvantaged Businesses are businesses that are at least 51% owned and control by socially and economically disadvantaged individuals, including those who identify as "American Indians", "Alaska Natives" or "Native Hawaiians".
As the Australian IPP matures, policymakers may consider following the US' example and shifting away from targets based on raw contract numbers to targets based on the percentage of contracting dollars awarded.
"What is an "Indigenous enterprise"
An Indigenous enterprise is a business that is at least 50 percent owned by Indigenous Australians. This may take the form of a company, incorporated association, trust, or a social enterprise or registered charity operating as a business.
Indigenous enterprises are encouraged under the IPP to register with Supply Nation, which provides registration and certification. In order to be eligible for Supply Nation certification, the business must provide evidence to demonstrate that it is:
- at least 51% owned by Indigenous Australian(s);
- managed and/or led by a Principal Executive Officer who is an Indigenous Australian;
- controlled by an Indigenous Australian with whom rests the key business decisions regarding the company's finances, operations, personnel and strategy;
- for profit – the company is not a registered charity and the company generates the majority of its revenue by providing goods or services;
- trading as a business with a minimum annual revenue of A$50,000.00 or a demonstrated recent history of trade (ideally, at least 6 months' trade history); and
- located in Australia.
Further information regarding registration and certification is available on Supply Nation's website.
Unregistered Indigenous enterprises are not precluded from being awarded work but may be required to provide further evidence of their Indigenous ownership such as statutory declarations or certification of Indigeneity from recognised Indigenous organisations (e.g. Land Councils).
In order to award work to an Indigenous enterprise that is not registered on Supply Nation's database, the procurement official must be satisfied that the enterprise is at least 50 percent Indigenous owned. This will often require the official to undertake additional verification, such as consulting registers maintained by the Indigenous Chamber of Commerce or the Office of the Registrar of Indigenous Corporations.
Why partner with an Indigenous enterprise?
Opportunities for partnership with Indigenous enterprises are often overlooked and underutilised. Supply Nation submitted to the NSW Standing Committee on Economic Development in Aboriginal Communities that including Indigenous businesses in state supply chains will advance and build capacity. This has been demonstrated by the Commonwealth's IPP, which saw procurements with Indigenous businesses increase from just A$6.2 million in 2012-13 to A$284.2 million in the first year of the policy alone. Anecdotally, the IPP has also encouraged a renewed focus on engagement and partnership with Indigenous enterprise in private sector procurement.
Australian building and construction businesses have been the most responsive to the policy, with 20.7% of all contracts awarded under the IPP falling into the building, construction, and maintenance service sectors – well ahead of all other industry sectors. Partnership can enable greater access to Commonwealth procurement opportunities, and these opportunities will broaden as businesses in the building and construction industry increasingly engage with the IPP.
How to approach partnering with an Indigenous enterprise?
The IPP aims to incentivise the inclusion of Indigenous enterprises at all levels of the supply chain, and there are a range of ways in which businesses can practically approach partnership. Alongside requirements under mandatory set-asides, the following types of contracts will count toward the target, regardless of contract value:
- Direct contracts with an Indigenous enterprise;
- Subcontracts with an Indigenous enterprise, where the subcontract directly relates to the goods and services being contracted by the Commonwealth entity; and
- Direct contracts with an incorporated joint venture, where the joint venture is at least 25 percent Indigenous owned.
Contracts valued under A$10,000 and purchases made from Indigenous enterprises using a government credit card are also recognised under the IPP because these transactions promote immediate opportunities for smaller Indigenous enterprises to gain government contracting experience. However, these smaller contracts must be manually reported by the procuring agency to the Department of Prime Minister and Cabinet in order to count these contracts towards the target as these transactions are not recorded in AusTender.
Subcontracts
The recognition of subcontracts under the IPP is intended to increase the uptake of Indigenous enterprises into supply chains. In practice, contracts and subcontracts count towards the procurement target as follows:
- A contract with an Indigenous enterprise counts as one contract towards the target;
- A contract with a non-Indigenous enterprise which, in turn, subcontracts part of the goods and services to an Indigenous enterprise counts as one contract towards the target;
- A contract with an Indigenous enterprise which then subcontracts part of the goods and services to another Indigenous enterprise will count as two contracts towards the target.
Multi-year contracts
To encourage Commonwealth entities to enter into longer term contracts of a higher value, multi-year contracts can also be counted towards the target for each year that the Indigenous enterprise receives revenue under the agreement.
Joint ventures
While the structure and business model of Joint Ventures (JVs) vary greatly, they are a legitimate means of partnering with an Indigenous enterprise and stand to benefit both parties when entered into in the spirit of the IPP.
The IPP counts contracts with incorporated JVs towards the target where an Indigenous enterprise has at least 25 percent equity in the venture. This is intended to incentivise greater inclusion of Indigenous enterprises throughout the supply chain.
In addition to certifying Indigenous enterprises, Supply Nation regulates industry practice by certifying JVs eligible to be counted under the IPP. Supply Nation requires the JV to be at least 51 percent owned by Indigenous Australians, whether via a cumulative shareholding or direct individual shareholding, more than double the IPP requirement.
Although the criteria that Supply Nation applies to certify JVs (51 percent) is more stringent than that required by the IPP itself (25 percent), Supply Nation's criteria is driven by the market and reflects community concern about promoting genuine partnerships with Indigenous organisations in the spirit of the IPP.
Comprehensive information about Supply Nation's JV certification criteria is available here. Supply Nation's requirements include that key business decisions about JV's finances, personnel, operations and strategy must be made by an Indigenous Australian(s), must be For Profit and must trade as a business in its own right with a minimum annual revenue of A$50,000.00 and a demonstrated recent history of trade (ideally at least 6 months). The JV must also be able to demonstrate commercial independence, which Supply Nation defines as follows:
"To be commercially independent, a joint venture must reflect a collaboration of the joint venture parties' resources, skills and assets and not totally or fundamentally depend on non-commercial relationships and use of resources (e.g. equipment, personnel, facilities, financial or bonding support) with another non-Indigenous enterprise or enterprises to deliver its core service offering(s)".
Indigenous businesses reported to the First Year Review that the benefits of undertaking a JV include enhancing capability through training, mentoring and work experience through a larger business, and subsidising high capital costs – especially in industries requiring significant investment in stock, equipment, or delivery networks.
Model clauses
With the introduction of the IPP, the Department of the Prime Minister and Cabinet published model clauses to assist businesses in IPP tender and drafting processes. The Department has subsequently issued and updated a range of resources including guidelines for business' approach to the market, template Indigenous participation plans to be included in tender response forms, as well as drafting guidelines for procurements involving contracts that do not use the Commonwealth contracting suite or that are not high value contracts, high value contracts, and remote area contracts.
Other Procurement Policies
State governments have increasingly followed the Commonwealth's example and adopted their own Indigenous procurement policies which operate in relation to state government expenditure. State Indigenous procurement policies now exist in New South Wales, Victoria, South Australia and Queensland, while an Aboriginal Procurement Policy is due to commence in Western Australia from 1 July 2018. The structure and the detail of these policies, including the role and threshold of any procurement targets, varies significantly between states.
The assistance of Elizabeth Pearson and Ling McGregor in the preparation of this alert is acknowledged gratefully.
For further information, please contact:
Alex Hartmann, Partner, Baker & McKenzie
alex.hartmann@bakermckenzie.com
