Government procurement from MSMEs

Public procurement refers to the whole purchasing process – from identifying what is needed to determining the best suppliers to delivering the supplies to the right place at the right time for the best price and ensuring that all this is done fairly and openly.95 The complexity of public procurement is also shaped by the various stakeholders involved in the processes and the system. Multiple interests in public procurement systems are held not only by public procurement officials and suppliers but also by policymakers, oversight bodies, bidders and citizens. Governments are increasingly using public procurement as a strategic governance tool for promoting inclusive and sustainable growth while ensuring value for money. For example, public procurement represents approximately 12 per cent of gross domestic product (GDP) and 29 per cent of total government expenditures in OECD countries;96 as such, its potential impact on a range of policy objectives is significant.

MSMEs can play a pivotal role in helping governments ensure that the benefits of globalisation, open markets and digitalisation are broadly shared across societies. Subsequently, governments should strive to provide supportive business conditions, including public procurement, that allows MSMEs to achieve their growth potential by participating in domestic and global value chains. 

The public sector, in many cases, is an important market for MSMEs. Therefore improving public procurement practices by removing obstacles and boosting the involvement of MSMEs is a key priority. Developing a more MSME-friendly approach to public procurement means MSMEs can maximize their job creation, growth, and innovation potential. If properly designed, MSMEs in public procurement schemes can result in higher competition for public contracts, leading to better value for money and efficiencies for contracting authorities. The strong involvement of MSMEs in public procurement allows unlocking this potential for the economy. It also allows contracting authorities to broaden their potential supplier base considerably, enhancing competition on public contracts and counterbalancing dominant market players.97

Also, the government bidding process means that firms incur threshold administrative or ‘fixed’ costs not associated with production costs of goods or services. This disproportionately affects MSMEs as a proportion of their total financial and staffing resources, compared to larger firms.98 In Australia, the government has taken steps to develop implementation mechanisms to support SMEs in public procurement (see Box 11 below).

Box 11. Public procurement framework to support MSMEs in Australia

Australia supports MSMEs in public procurement through several provisions embedded in its national policy framework. These provisions – put in place by the Department of Finance – aimed to facilitate SMEs to access public contracts, ensuring a level playing field for all economic operators, and accessing a better range of solutions and a diversity of goods and services:

  • The Commonwealth Procurement Rules (CPRs) advocates fair procurement practices enabling SMEs the opportunities to compete for jobs. The CPRs also include the Australian Government’s commitment to sourcing at least 10% of procurement by value from SMEs and allow direct procurement from SMEs with at least 50% indigenous ownership, so long as value for money is achieved.
  • The Australian Government’s payment policies provide that payments cards (e.g. credit cards) are the preferred method to pay suppliers for amounts valued below AUD 10 000, and require a maximum payment term of 30 days for contracts valued up to AUD 1 million.

The Commonwealth Contracting Suite (CCS) provides standardised procurement documentation for procurements under AUD 200 000. The CCS can also be used for low-risk contracts valued up to AUD 1 million.

Several guidance materials have been prepared by the Department of Finance to support implementation of the policies to promote SMEs in public procurement. They are actively communicated to different stakeholders including procuring entities and suppliers through diverse means – including the Department’s website, newsletter and public blog. Furthermore, training for public procurement officials focuses on engagement with suppliers, including applying the appropriate procurement practice that does not unfairly discriminate against SMEs. In addition,  the Australian Government also participates in relevant trade shows and hosts supplier events, as appropriate, to develop the capabilities of suppliers.

Furthermore, the Australian Industry Participation (AIP) National Framework, applicable to large Commonwealth tenders (of AUD 20 million or more), requires successful tenderers or panelists to prepare and implement AIP Plans. An AIP Plan promotes the benefits of looking at Australian SMEs as potential suppliers rather than solely relying on established supply chains when buying goods and services for the project.

Source: Australian Government Department of Finance (n.d.), Statistics on Australian Government Procurement Contracts, https://www.finance.gov.au/procurement/statistics-on- commonwealth-purchasing-contracts/.

To integrate MSME consideration into public procurement policies, policy makers need to recognise the certain challenges, especially regarding the potential conflict of such policies and strategies with the primary procurement objective, which is to deliver goods and services necessary to accomplish the government’s mission in a timely, economical and efficient manner. While the need to develop the policies and strategies had been widely agreed upon, establishing the exact measures to establish and the means for implementing them have been more challenging issues. MSMEs often find the complexity of the public procurement system and its processes the primary challenge. However, MSMEs are disproportionately affected due to their internal constraints in terms of financial, technical and administrative capacities to access procurement opportunities, prepare tender documents, apply the procedures and execute the contracts. Governments have been addressing these challenges by revising legal and regulatory frameworks and adopting various measures and approaches (Figure 2 below). The most widely adopted procedures involve ensuring that MSMEs are aware of tender opportunities and competent MSMEs have a fair chance of competing for government contracts.

Resources

95OECD (2015), Going Green: Best Practices for Sustainable Procurement

96 OECD (2015) Public Governance Reviews, SMEs in Public Procurement: Practices and Strategies for Shared Benefits

97OECD (2017), Public procurement for innovation : good practices and strategies., OECD Publishing, Paris,

98 ADB. Strategic Importance of Public Procurement, p. 10.