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The new Government Procurement Rules will NOT lead to more “wins” for Kiwi software businesses

The opportunities for Kiwi software businesses have been deteriorating rapidly as DIA’s “all of Government” arrangements with multinationals begin to bite.  This was described in our Trojan Horse posting in April, and opportunities have been further reduced by the just-signed Cloud agreement offered through SAP Australia.

Minister Parker reinforced the NZ Government position of “supporting New Zealand digital technology firms by providing a level playing field for New Zealand firms to compete for government business” last week at the launch of “From the Knowledge Wave to the Digital Age” (page 44).

Summary of the Problems

There are many aspects of the 4th Edition of the new procurement rules published by MBIE, including the intent stated at the start of the document and some of the rules themselves, that NZRise members fully support.

However, this edition continues to permit exclusion of NZ software businesses by:

  • the use of “all of Government” contracts, made possible by the permitted Rules Exclusions, creating pseudo-monopolies for multinationals
  • issuing a single tender for a single supplier of bundled software products (such as ERP systems)
  • requiring an existing, working interface to a specified multinational’s system (often not an open standards interface)
  • the use of anti-SME contractual terms and conditions.

The new Rules are a step in the right direction, but they haven’t addressed the already known opt-out and exclusion clauses, or the mandated use of foreign supplier products.

The Rules do not address ways that Government agencies create barriers and exclude Kiwi businesses. These include:

  • a required $25M guarantee (for many projects)
  • extreme “risk-shifting” terms and conditions
  • moving forward high cost activities to the start (rather than the end) of the tender process.

All of which create extremely high “cost of entry” barriers into tenders, favouring those with deep pockets and deterring New Zealand owned businesses.

Detailed Analysis

Areas of concern for New Zealand owned digital technology (primarily software) businesses are contained in (but not limited to) the following:

Rule 3 – NZRise members are concerned by the implications of Rule 3. We understand that this rule is designed to treat all businesses fairly and to ensure NZ meets obligations to trade agreements. We are however concerned that a government with the intention to provide a level playing field for NZ owned digital technology businesses – and stated on many occasions “increase access to Government contracts for NZ owned companies” – has designed a rule that will result in the opposite result.

We also note this rule (Rule 3) could also undermine an agencies’ ability to avoid procuring from foreign suppliers with adverse employment or environmental practices.

Rule 14.9 – enables Government agencies to opt out of the procurement rules via several means, many of which have severe impacts for Kiwi software businesses. These include:

  • b.i – where the tender has been advertised in the last 12 months. This is too long for the IT sector where change can happen in as little as days
  • c.i, 9.c.ii and 9.d – which permit exclusions on the basis of perceived ‘no real competition’, a decision to remain with one single uncontested supplier or the decision to expand on an existing supplier presence without testing the market
  • i – through established Secondary Procurement processes, which now account for a significant proportion of government ICT purchases

Rule 58 – mandates the use of All-of-Government contracts which for ICT are largely dominated by multi-national vendors. This creates a monopoly and creates another barrier for Kiwi software businesses.

Rule 28.3 – allows government agencies to implement pre-conditions for bid respondents, but does not include a review mechanism to ensure that the pre-conditions are not discriminatory.  For example, how can the “financial capability” pre-condition be prevented from becoming another anti-SME barrier (eg requiring the supplier to hold a significant cash position as a bid compliance requirement)?

In other areas the new Rules don’t answer significant questions around the eligibility and adequate capability of Kiwi digital technology businesses:

Rule 17 – refers to “designated contracts” and “guidance” that exist to create opportunities for NZ businesses.  As we write this, the detail has not been published, so cannot be reviewed.

Rule 20 – requires government agencies to support the procurement of low emissions and low waste goods, services and works.  How will this be applied to foreign suppliers where their supply chain is largely invisible?

There are also opportunities for the new Rules to provide further safeguards for Kiwi businesses:

Rule 24 – requires government agencies not to get advice from suppliers with a commercial interest in the contract opportunity.  This Rule should also apply to Consultants and Contractors engaged by an agency, where they have relationships with, or a vested interest in, certain prospective suppliers being successful in the tender.

What’s the Solution?

The new Rules still leave Government agencies with more than enough “wriggle room” to exclude Kiwi software businesses.  Preventing this requires monitoring, oversight and enforcement; NZ software businesses don’t gain anything by criticising tenders after the tender has been awarded so we are seeking a proactive solution.

Digital Technology use in government is continuing to increase, large transformation projects are predicted to be on the rise, our proposed solution below is designed to provide monitoring, oversight and enforcement of the rules – what we are proposing is not intended to add cost overhead, it is intended to encourage less waste, improve outcomes and ensure the government reaches its goals of creating a level playing field for NZ owned companies.

Software Tender Review Board

Software procurement is not a simple process  so an integral part of a new monitoring regime should be a Software Tender Review Board.  As a first step the Board should look at major awards of software by government over the past three years to assess the balance between NZ and overseas software suppliers, the decision processes used and the implications for the NZ software industry.  Based on this, the Board could consider whether changes to software procurement could better support development of the NZ economy.

A well balanced board should be made up of public and private sector representatives who have experienced  large software projects failure, and how smaller innovative projects can be successful. The board would need a mandate to provide advice to agencies prior to tending, provide oversight and – if MBIE do not hold the mandate of enforcement – provide the role of enforcing the rules of sourcing.

We will continue discussions with Government representatives on this recommendation and provide updates.

Any questions please contact the co-Chairs of NZRise – Victoria MacLennan or Breccan McLeod-Lundy

 

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