“Protection racket”: SMEs lose out as procurement panels benefit Big 4 consultants, says parliamentary report

A key system connecting the private sector to lucrative government contracts operates as a “protection racket” to the detriment of small and medium businesses, a new parliamentary committee report says, with one procurement expert saying changes proposed by the committee could be “life changing” for SMEs.

The Joint Committee of Public Accounts and Audit tabled its report on Commonwealth procurement practices on Wednesday, after a lengthy inquiry into a system responsible for $80 billion in taxpayer spending each year.

It raised concerns about how the federal government ensures it gets value for money, and how businesses are selected to carry out big-ticket government projects.

“Systemic issues” were identified in four of the five major government contracts assessed by the Australian National Audit Office as part of the inquiry, said Labor MP Julian Hill, the committee chair.

“Especially significant were consistent failures to demonstrate value for money, conduct procurements in line with ethical requirements or keep adequate records, and substandard contract management,” Hill said.

Of particular note to the committee was the use of procurement panels — groups of private businesses vetted and appointed to supply goods and services to government departments for a set period of time.

Some of the Committee’s most scathing opinions were directed at the panel system, which Hill described as an “uncompetitive rort”.

While the panel system is designed to facilitate competition for government contracts among businesses, “a small number of suppliers are dominating the contracts awarded through them,” the Committee found.

It considered how the Big 4 consultancies — KPMG, Ernst & Young, PricewaterhouseCoopers, and Deloitte — were turning their considerable resources to procurement panels to snap up available government contracts.

Small businesses without the time or administrative know-how needed to compete may be frozen out of government contracts because of that imbalance, it added.

The Committee noted evidence that “panels are often exhibiting and may be facilitating concerning levels of market concentration and anticompetitive behaviour”.

“Instead of assisting small and medium enterprises to compete for government work, panels are too often funnelling work to a small number of large companies.

“Panels should not continue to be a protection racket to channel work to the Big 4 consulting firms.”

The report levelled 19 recommendations to the federal government and Commonwealth agencies, including a number of reforms to the panel system.

Recommendations could make panels “far more accessible” for SMEs

Some of the recommendations put forward by the Committee would have major benefits for small businesses if implemented, said Thomas Pollock, managing director of Gov Ready, a consultancy helping SMEs win government contracts.

Speaking to SmartCompany on Thursday, Pollock distanced himself from the claim panels operate as a “protection racket”, saying small business representation on panels and access to relevant tendering information has greatly improved over the past 30 years.

Even so, some of the new proposals would bring about welcome change to the system, he said.

The report noted that some panels are refreshed infrequently, baking big businesses into the system while making it harder for small businesses to apply.

Recommendations to refresh the panels every two years, and to allow new applicants to seek entry at any time, would be “life changing” for small businesses, Pollock said.

“There would be so many more small businesses, and a lot of our clients as well, that would benefit from it if those policies are implemented, if the resources were put to bringing those policies for life,” he said.

“That would be amazing, because it will be no longer the case of, ‘Oh shit, we missed out on that panel, we have to wait another four years for it to come back up.'”

“Who even knows if the business will still be around in four years? So that would be that would make panels far more accessible to small business.”

The report also called out “single-sourcing” from panels, stating that offering back-to-back contracts with an incumbent supplier is “poor procurement practice and should be avoided if at all possible”.

The claim cuts to a core small business complaint.

Even if a small business makes it to a procurement panel, government agencies are still free to hand contracts to incumbent competitors operating with massive administrative advantages.

“Competition on panels and new market entrants should be supported,” the report says.

Each panel procurement process should have a minimum of three tenders put forward, “and one of those should at least be a small business,” Pollock added.

“If it’s just going to one [tender], then I have no doubt that a lot of public money is being wasted.”

Pollock also backed the Committee’s recommendation that the public service empowers a dedicated stream of procurement experts — so long as they have actual experience running a small business, he said.

Separate SME-focused inquiry now underway

While the Committee report takes a broad view of the Commonwealth procurement system, a more focused inquiry, dedicated to the small business experience, is also in progress.

Led by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), the inquiry aims to investigate the issues keeping SMEs from taking a bigger share of the procurement pie.

While SMEs make up the vast majority of businesses in Australia, the ASBFEO estimates they were awarded 55% of government contracts by volume in 2021-2022.

Stakeholders are invited to share their views with the ASBFEO, before it provides its report to the federal government in December.