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Brief Counsel

To buy or not to buy New Zealand

01 September 2011

When a large, procurement contract is awarded overseas, there is often a public backlash.  Two recent examples are KiwiRail’s decision to source its rolling stock from China and the RSA’s decision that the iconic ANZAC day poppy would also now be imported from China.  Cost was an important factor in both decisions.

Often the debate is particularly intense when a government agency is involved, provoking calls for the public sector to pursue a “Buy NZ” policy. 

So what are the facts?

Current procurement policies

Those running government tenders and evaluating bids already have the power to assess the benefits of using local suppliers.  It is simply a matter of rating, within the overall tender evaluation, whether the New Zealand bidders can offer a ‘home game advantage’ - or, more precisely, calculating the acknowledged benefits that can flow from using local suppliers.

This is not to say that a government tendering authority could or should specify the use of local businesses as part of a government tender process.  New Zealand’s international trade obligations, the government’s published procurement policy (outlined in guidelines published by the Ministry of Economic Development) and the good practice guidelines published by the Auditor General (and applying to all public entities, including Crown entities), would in all likelihood prevent the specification of local content and/or suppliers in a public sector tender document.

Seeking value for money

At the heart of all government tendering procedures is an obligation to seek “value for money”.  This is a nebulous concept, with both New Zealand and international case law suggesting that the phrase is meaningless in the absence of explicit criteria against which it can be measured.   

Fortunately, however, in relation to government procurement, such criteria do exist.  The procurement guidelines published by the Office of the Auditor General state that:

Value for money means using resources effectively, economically, and without waste, with due regard for the total costs and benefits of an arrangement, and its contribution to the outcomes the entity is trying to achieve. In addition, the principle of value for money when procuring goods or services does not necessarily mean selecting the lowest price but rather the best possible outcome for the total cost of ownership (or whole-of-life cost). Value for money is achieved by selecting the most appropriate procurement method for the risk and value of the procurement, and not necessarily by using a competitive tender.

Clearly the New Zealand Government has adopted a broad whole-of-life cost and quality approach to this concept (which accords with the government’s international trade obligations).

The OAG guidelines note (at page 13) that the government expects its departments to conduct all their procurement within the framework of the policy principles set out in the MED Guidelines.  (The OAG Guidelines, by contrast, tend to focus on the practicalities associated with the selection of purchasing methods.)  The MED policy principles are summarised as follows:

  • value for money over whole-of-life
  • open and effective competition
  • full and fair opportunity for all eligible suppliers
  • improving business capability, including e-commerce capability
  • recognition of New Zealand’s international trade obligations and interests, and
  • requiring sustainably produced goods or services whenever possible, having regard to economic, environmental, and social impacts over their life cycle.

Impact of international trade obligations

Some, but by no means all, of the free trade agreements (FTAs) to which New Zealand is a party contain mutual commitments to conduct government procurement in accordance with the principles of transparency, value for money, open competition, due process and non-discrimination.  Examples are the “P4” Agreement with Brunei Darussalam, Chile and Singapore (which is the foundation for the expanded Trans-Pacific Partnership negotiations also involving the United States, Malaysia, Vietnam, Australia and Peru), and the recently signed Closer Economic Partnership Agreement with Hong Kong.

However, other New Zealand FTAs, such as those with China and the ASEAN countries, do not include a government procurement chapter.   New Zealand is also not a party to the WTO Government Procurement Agreement, though it is an observer.  Where government procurement obligations apply, government tendering authorities cannot usually specify or prefer local content or otherwise favour local suppliers in a discriminatory fashion.

It is worth noting that the awarding of a contract to a non-New Zealand supplier does not necessarily mean the loss of local jobs.  A look at the international companies already in New Zealand shows that many source their workforce locally and grow their business, creating further local employment.

Assessing commercial and practical advantages

Our FTA commitments do not preclude the commercial and practical advantages of buying locally produced goods and services from being included in the overall “value for money” assessment of a tender. 

The MED Guidelines explicitly identify these potential benefits (at page 8) as follows:

  • a better price and total or whole-of-life ownership cost
  • better through-life support (e.g. better availability of spare parts and after sales service)
  • shorter supply lines and/or delivery lead times
  • reduced inventory costs
  • reduction or elimination of exchange rate risks
  • easier and cheaper communications/transport
  • simpler and cheaper contract administration and dispute resolution
  • greater scope for co-operative and innovative product development and influence over the supply base
  • continuity of supply and more direct control over orders 
  • goods/services better adapted to local conditions, and
  • better knowledge of the producer’s reputation and reliability.

The extent to which local supply can be given due weighting through the value for money analysis is best summarised in the MED Guidelines (at page 8) where they state:

In general, it will often make good business sense, in terms of value for money and a reliable supplier base, that goods and services should be sourced from local suppliers where the necessary standards of competitiveness, quality and availability are met.

The Government’s procurement policy does not give preference or weighting to local content in itself.  Similarly, there should be no discrimination on the basis of ownership of a supplier or preference for domestic equity in itself.  Having given domestic suppliers full and fair opportunity and assessed any commercial and practical value for money advantages associated with local supply, agencies should buy from the best source available, according to their own judgement of all costs and benefits. 

Other initiatives

The MED is developing a number of initiatives to improve the procurement process, some of which will have the effect of allowing smaller New Zealand suppliers to either band together to form consortia or to participate as subcontractors in a tender led by an international supplier.

Examples include:

  • adding a section to the Government Electronic Tenders Service (GETS) which will allow suppliers to express their interest in participating in a tender before the official Request for Proposal is announced
  • pushing total cost of ownership as part of good procurement practice, and
  • building competency in this area by putting procurement on the immigration skills shortage list.

Our thanks to Siobhan Hale for writing this Brief Counsel. For further information, please contact the lawyers featured.