Queensland’s new protectionist procurement policy, Buy Queensland, was the subject of discussions today between Australia’s and New Zealand’s Trade Ministers, Steve Ciobo and Todd McClay (see this AAP report). You may recall that late last month the Queensland Government announced the new Buy Queensland policy, whereby it will unashamedly favour local businesses in procurement, giving an excessive weighting (up to 30%) to the criterion of whether a supplier is Queensland based. The policy means that an interstate or foreign supplier could deliver a far superior bid on all the other criteria (e.g. proposed technique, value for money) but still lose the tender.
Superficially, Buy Queensland looks like it is doing Queenslanders a huge favour, but it isn’t. First, it is shielding Queensland businesses from the invigorating effects of competition which ultimately reduces prices for consumers and makes our economy more productive. Second, it risks retaliation from trading partners, including our trans-Tasman cousins in New Zealand, who buy around $1 billion of Queensland’s merchandise exports each year (see chart below). Regrettably, Buy Queensland violates economic and trade agreements Australia has had with New Zealand for at least two decades (see this Sky News report).
Sure, there may be examples of poor procurement decisions where an overseas supplier was chosen largely on the basis of price—reference has been made to the New Generation Rolling stock constructed in India—but price alone should never have been the sole criterion. The problem in such cases was a poor procurement process, not a lack of discrimination in favour of Queensland firms. The Buy Queensland policy means we could end up with perverse outcomes, where some local suppliers that are lower quality and more expensive than interstate or international suppliers are chosen due to the heavy weight given to being a local supplier.
The Buy Queensland policy will make Queensland taxpayers worse off, through higher prices for goods and services purchased by the government, and it risks turning Queensland into a national laughingstock. Under our federal system of government, and under our Constitution, the Commonwealth has the right to make trade agreements with our countries. State Governments cannot unilaterally decide to ignore those agreements.
The State Government will no doubt come under heavy pressure from the Commonwealth Government, which is currently being lobbied by the NZ Government, to amend the policy. Last Friday morning, there was an extraordinary interview on Steve Austin’s 612 ABC Brisbane program in which NZ Trade Minister McClay referred to the Queensland Government’s new policy as “crazy” (see this ABC News report). As an economist and a strong believer in free trade, it is hard to disagree with his assessment.
In 2015, the Queensland Competition Authority devoted a weighty chapter of its Industry Assistance Review Final Report to State Government procurement policy. Unfortunately, the QCA’s strong advice against preferential procurement policies such as Buy Queensland has been ignored by the Government. The QCA observed (on p. 309):
Preferential procurement policies can protect local businesses from international competition, increase procurement costs leading to higher taxation, and disadvantage businesses with higher productivity…
… Public sector procurement decisions should be guided by a single objective — achieving value for money in procurement. Broader economic, social and environmental objectives are best addressed through other policy instruments.
Nick Behrens of Queensland Economic Advocacy Solutions has pointed out substantial flaws with the Buy Queensland policy, and has offered some excellent suggestions regarding how it can be improved:
Queensland Procurement Strategy needs work
There are much better options than giving such a high weighting to being a local supplier. These include greater efforts to train small businesses in preparing tenders for government work, which a lot of small businesses find daunting. In its Industry Assistance Review Final Report, the QCA noted (on p. 309):
…where procurement policies focus on providing information and improving participation in public procurement it may heighten the competitiveness of tender processes and result in improved value for money for taxpayers.
Also, the Government could encourage it agencies to break up government projects being contracted out as much as feasible, so that Queensland small and medium-sized businesses have a greater chance of picking up at least some of the work. A good example of this approach is provided by the Townsville City Council’s new Haughton pipeline duplication project (see this Townsville Bulletin report).
The Government should revise its procurement policy along these lines. Alas, the current Buy Queensland policy is indefensible, and it needs to be reviewed and revised urgently. The Government should cooperate with the inevitable, because the policy cannot and ultimately will not survive in its current form.
It’s difficult to find good research on this but not sure why? When I looked at this previously related to similar local council preferential procurement policy there was nothing for Australia. Research in the USA appears to indicate results similar to tariffs where preferential policies over or about 10% start to produce negative outcomes.