Favouring local suppliers

By Caroline Boot, Clever Buying

The recent outcry in Dunedin following replacement of a local (and Council-owned) landfill operations company with an out-of-town supplier re-opened a can of procurement worms. Council was adamant that they would not favour local suppliers, and they just selected the best company for the job, through a fair tender process. Critics pointed to the wider impacts of that decision, with imminent job losses and loss of Council revenue resulting in clear adverse economic and social effects resulting from that decision.

There are two clear sides to this debate, and each has its merits. On the face of it, procurement decisions should be about getting the best value for ratepayer dollars, which we all know are under constant strain. But the bigger picture reveals that there are wider community impacts that may, in some cases, outweigh the short-term advantages of a cheaper supplier from out of town.

How can Councils deal with these conflicting interests, and where can they get guidance from? In this article, we look at our own government’s position as well as some overseas models, and compare the approaches taken by different NZ Councils.

Our government’s Rules of Sourcing are a little ambiguous in their interpretation of this issue on a national level. While Rule 1 (the government’s Five Principles of Procurement, which are supposed to be followed by all government organisations including local government) states that agencies should “Treat all suppliers equally - we don’t discriminate”, and Rule 3 states that agencies should not apply 'offsets' (e.g. weighted evaluation criteria that favour local content or give local suppliers a price preference), Rule 1 also requires us to “make balanced decisions - consider the social, environmental and economic effects of the deal”.

So, while we should treat an out-of-town (or international) supplier the same way as we treat a local (or NZ) supplier, we also should be thinking about the potential social and economic impacts if the contract is awarded to a company outside our area. Tricky.

It’s an interesting debate on an international scale. While the impacts of free trade agreements world-wide are supposed to be binding and far-reaching, in practice, there are many anomalies. Controversy has raged over the past few years in just about every trade zone, with the WTO rules and other macro-economic trade agreements being tested against initiatives such as ‘Buy British’; the Australian Made Campaign; and of course, closer to home, the ‘Buy New Zealand Made’ initiative. 

The Trump administration has clear objectives to protect USA business through the “Buy American: Hire American” mantra. In Fiji, it’s mandatory in some sectors to include a scored section in Requests for Tender that asks how suppliers will facilitate skills transfer to local personnel over the course of the contract. So, there is huge precedent at an international level for protecting commerce within your home region.

In Australia, particularly in remote areas, it’s commonplace for Councils to favour local suppliers – but the crux is that this is done in a transparent and well-justified manner.

Typically, a discount of anywhere between 5 - 20% is applied to prices from local suppliers to recognise the economic benefits that using a local supplier (or at least one that will support local employment) will bring.

So why wouldn’t Councils also aim to support their own regional economic zones by favouring local suppliers? And what precedents are out there for Councils to use to stress-test their views on this?

In New Zealand, attitudes to this among Councils are varied. While some Councils, like Dunedin CC, are adamant that they are not concerned about the origin of their suppliers; others  have clear policies to provide mechanisms that enable those that provide additional value within the local community to score higher in the non-price attributes.

Many smaller Councils are feeling the squeeze at present with plentiful work available in the contracting sector, resulting in fewer suppliers bidding for projects and therefore less competition. For those Councils, attracting new suppliers lessens the opportunity for monopolies to form; helps maintain a healthy competitive market; and ensures best value for money in the future.

Protecting and encouraging local industry is a key component of many Councils’ economic policies, and is clearly stated in their strategic documentation. But Councils can rightfully be criticised if they try to favour local suppliers in a manner that’s not transparent and built into the tender process.

So, what’s the right balance; and how can Councils implement that through effective, yet fair procurement practices?

To attract new players into your region, but at the same time protect local industry, you’ll need to make it clear to tenderers that you value any support that they can provide for local businesses and communities. You’ll also need to make it clear that this is relevant to Council and contract outcomes, and it will be directly translated into the scoring of their tenders.

Provided there is clear linkage to Council policy and/ or benefits to the contract, there’s no justifiable reason why Councils can’t include scored criteria that focus on areas that will provide obvious benefits on the contract for local involvement. For example:

  • What opportunities will your company provide for supporting local suppliers and subcontractors through this contract?
  • How will your resourcing of this contract help to engage unemployed people in our communities?
  • It will be mandatory for the successful supplier to set up an office/ depot within 5 km of the town centre (to meet required response times). Describe your proposed office location.

The most important thing to decide on is first, whether your Council policies should or shouldn’t include reference to supporting local industry. Then, if you do decide this is part of your Council’s policy, then it’s essential that this is done in a transparent and objective manner which is built into your procurement plan, the questions asked in your RFT, and your fact-based evaluation criteria.

Caroline Boot is a director of Clever Buying, an organisation dedicated to procurement training, NZQA procurement qualification assessment, and providing support for tender evaluators throughout New Zealand and internationally.