Why the Govt's $80k procurement threshold should be scrapped

The federal government’s $80,000 procurement threshold – marking the point at which agencies must take their purchases to the open market – clearly isn’t working, but the Commonwealth stubbornly refuses to tell the public why it remains in place.

The $80,000 mark, a demand of the Australia-US Free Trade Agreement (FTA), has long been a thorn in the side of both agencies and suppliers.

Underneath this sum, agencies can select vendors directly or by obtaining a set number of competitive quotes.

What happens above it is a burden on those who can least afford often lengthy and expensive open tender processes. And it's inconsistent application is unfair to the market as a whole.

This apparent under-performance prompted iTnews to lodge an FOI request for a copy of a 2009 review into the procurement rule led by the Department of Foreign Affairs & Trade (DFAT), examining the “net benefit” of this arrangement. 

The information arising from the review has only ever been provided by DFAT to Finance for internal use, and wasn’t even disclosed to the post-Gershon review team.

The report looks set to remain under wraps as well, at least until the equally secret Trans Pacific Partnership (TPP) negotiations are completed.

The Office of the Australian Information Commissioner (OAIC) has reviewed iTnews’ request, lodged in January 2013, and revealed that DFAT now “supports” its release – but not before the TPP is finalised.

To do so prior to the TPP's release could "cause damage to the international relations of the Commonwealth”, the OAIC warned.

Hopefully, once the TPP is completed next year, DFAT will be forthcoming with the report, because right now the rationale behind keeping the threshold is hazy at best (a pointless waste of time at worst).

Shifting procurement goal-posts

If the $80,000 open tender threshold, imposed in 2005, was adjusted for inflation it would stand at just under $100,000 now.

But it hasn’t been adjusted, meaning that a great deal less can be bought for this sum now than ten years ago when the goal posts were set.

Meanwhile, government agencies and large vendors not only continue to get around the $80K threshold through the use of ‘exemptions’, they have accelerated the rate at which they do so.

The AUS-FTA expressly provides ways to get around the open tendering demand under article 15.8 of the treaty.

These include some 16 carefully crafted exemptions, covering situations where:

• no tenders were submitted or none failed to comply with essential requirements
• no suppliers satisfied conditions for participation
• where goods and services happened to be unique to one supplier only and no suitable equivalence was possible;
• absence of competition for technical reasons;
• works of art;
• purchases on the commodity market;
• reasons of “extreme urgency” brought on by “events unforeseen” etc.

Back in early 2011 when iTnews first investigated the issue, we calculated that in the three years prior, 38 percent of the $8.35 billion that was spent on IT and telecoms (code 43000000) above $80k, or 41.5 percent of the contracts by number, was secured via a direct sales process rather than a tender.

This means agencies chose to purchase IT and telecommunications without going to open tender on almost as many occasions they went to open tender.

Now almost three years on, using the same methodology, total purchases by limited tender thanks to the use of an exemption has escalated from $3.2 billion to $9.8 billion (over the period 26 Jan 2011 to 13 Nov 2014).

In other words, 64 percent of all ICT purchases by value were exempt from the threshold.

While the average ICT contact value increased by 59 percent, over the same period open ICT tenders increased by 17 percent.

While the total proportion of direct (or limited tender) ICT deals increased only slightly from 42 percent to 43 percent, the average size of deals exempted from the $80K threshold more than doubled in value from $1.23 million (2007-2010) to $3.2 million (2011-2014).

The average size of open tender deals over $80K, on the other hand, declined from $2 million (2007-2010) to $1.5 million (2011-2014).

A burden on efficient procurement

Selling to the Commonwealth is far more expensive to vendors than selling to its state counterparts, who stick to much higher open tendering thresholds.

The level for NSW and Victoria Government is $150,000, $250,000 for WA and Tasmania, and $220,000 for South Australia.

The Commonwealth’s low benchmark was highlighted in the Gershon Review as a "significant burden" for many government agencies and suppliers, and a barrier to SMEs bidding for government work.

Either way, justification for the inconsistency and lack of transparency about the $80k procurement threshold remains one of the uber-secrets in the federal sphere.

This discourages SMEs, while large vendors can pass on the costs of tendering in their prices.

If DFAT and the Commonwealth can’t tell the public and the business community why it insists on retaining this inefficient and static measurement, it should stand up to our American partners and get rid of it.