In many industries, cooperation with the government is a major source of revenue. Indeed, government contracts and public procurement can be the lynchpin of a businesses’ success. And that’s evident by the huge economic significance of government contracts for businesses around the world. After all, the government spends billions of dollars on all kinds of transactions to facilitate its functioning — from military contracts to the purchasing of construction supplies and enlisting of computer maintenance services. Unfortunately, Australia has an endemic problem with the allocation of government spending — to put it mildly, the amount of administrative hurdles and other challenges make it impossible for small business to compete with larger companies for government contracts.
Small and medium-sized businesses do not get a fair chance
In almost every developed country in the world, small and medium-sized companies make up an overwhelming majority of all the businesses. And Australia is no different in this regard, seeing as Australian small and medium businesses represent a staggering 99% of all companies in the country.
Furthermore, these companies employ almost 50% of all the working adults in Australia, and constantly provide a steady stream of new jobs. However, you wouldn’t know this from their unequal representation in the percentage of government contracts. This is an issue that most industry stakeholders are silent about, seeing as their interests lay with the profits of the larger companies.
Still, it should be made more public that, historically, most government contracts are easily swiped by bigger corporations across all industries. Unfortunately, it seems that small and medium businesses don’t even get a fair chance. Kate Carnell, from the position of small business ombudsman, has recently revealed that there’s a huge disparity in the allocation of government funds.
Using data from 2018, she revealed that larger companies pocketed an astounding 74% of government contracts in that year, according to AusTender information. This means that small businesses manage to get just a quarter of all government funding!
Obstacles to growth
If you thought that these are all incredibly difficult contracts to win and that smaller companies wouldn’t be able to complete the job; that’s actually not the case. While it stands to reason that mom-and-pop joints wouldn’t be able to produce aircraft for the military — in reality, almost 95% of all government contracts aren’t that valuable or epic.
In fact, that huge majority of contracts is worth less than a million dollars; meaning that we’re talking about products and services that small businesses could easily provide. Even worse, half of all contracts are valued at less than $90,000; it’s abundantly clear that small businesses are getting much less than they realistically should.
The main reason why small businesses get pushed out of the public procurement market by the bigger companies is that the procurement process can be too strenuous. More specifically, one of the first parts of that process is the participation of a business on a panel; which can be prohibitively onerous and costly for a small company, without even being sure of a tender opportunity.
This has long been the predominant culture in government departments, and has resulted in a proclaimed aversion to risk — that could also just be an excuse to hand out valuable contracts to their contacts in major corporations. Thus, we can conclude that this is definitely a potential source of major corruption that impacts small business significantly.
What should be done
In order to make public procurement a more viable source of income for small business the government needs to make a conscious effort to stop favouring big business. The first step in this direction could be creating a dedicated procurement panel for small business — one that would manage contracts that are not valuable enough to be offered solely to bigger companies.
There are plenty of examples around the world of small and medium-sized companies thriving with the right access to government contracts; the German category of rich but small companies called the “Mittelstand” comes to mind. There, this sector makes up more than half of the GDP of the entire country. And similar economic growth could be experienced in Australia as well, if the government would cease burdening small businesses with administrative procedures.
Of course, larger companies may be able to offer lower operating costs than small businesses in a majority of cases. But that doesn’t mean that the government should always go for the absolute lowest cost. After all, this is not a great way to provide economic growth that’s largely dependent on the Australian small business community.
The procurement target
Currently, the preference of the Australian government towards big businesses is evident from the publicly touted procurement target. Namely, for years, the government had prescribed that a minimum of 10% of all government contracts should go to small businesses. Considering the data that we’ve outlined above, that’s simply not an acceptably high target.
While this has recently changed, and the current target is set at 20% — it definitely needs to go much higher. There are recommendations to raise this to 33% of all contracts, which is certainly a good start. Compared to other developed countries, this is a measly level of small business participation in government projects.
In order for small businesses to be able to grow and compete with larger international companies and local big corporations — the country needs to take a stand on protecting them in the public procurement process!