Levelling the playing field

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Nick Inskip

Commentary

By HERA industry development general manager Nick Inskip

Local industry is well used to contract conditions when tendering, and to the fact that the project owner will typically retain part of the payments due to the vendor as security against the proper completion of the work being undertaken. This is a cost factored into the price that local industry quotes when tendering.

It’s a cost of doing business in the New Zealand market that industry must accommodate and it is equally applied to all local tenders, so it’s usually accepted as fair and in that regard, local suppliers are competing on a level playing field.

Most of the major infrastructure projects in New Zealand are connected in some way to government, which isn’t a surprise since government makes up a large portion of our economy and you wouldn’t expect them to support any process that unfairly discriminated against New Zealand industry as suppliers on projects paid for with public money. However, the increasing trend for procurers to seek the ‘cheapest’ option has seen the development of some bumps in the playing field that would be quickly rolled flat if it was a cricket ground.

The problem comes from the fact that when procuring from offshore suppliers, there is no requirement placed on the foreign company to include the costs of retention monies in their tender price. This immediately gives them a cost advantage that rolls up into the price they quote, helping them undercut local suppliers. It also means that while a local supplier has every incentive not to cut corners and to make every effort to make sure their performance is up to standard so they get the retention monies paid to them, that kind of incentive isn’t there for foreign suppliers who typically require payment before shipping.

It also means that there is little opportunity for redress when a piece of equipment made offshore arrives and is found to be substandard. In fact, where initial price is seen as the major driver of procurement and where there are no perceived consequences, there is also the opportunity for an offshore procurer who realizes that they can trim the price they submit by omitting to do something which may not be readily apparent if inspected before shipment.

An example of this could be that they paint an item of plant in the open rather than in a climate-controlled environment, or only provide one coat instead of two of paint, or even undertake sandblasting to a standard lower than specified. These kinds of practices can reduce their costs and hence the price they submit, and with no consequences such as forfeiting retention monies, there is no incentive against cutting corners.

These risks are widely understood and many governments around the world put in place mechanisms to address them, such as requiring a completion bond from foreign suppliers to projects funded with public money. In practice this has the same effect as retention monies in providing an incentive to ensure corners are not cut and that foreign suppliers are not advantaged over local suppliers.

The issue becomes more complex where a government or government entity appoints a ‘prime contractor’ who does not require a cascading of completion bonds to foreign suppliers. In this case, however, the foreign supplier is immediately advantaged and any pretense of a level playing field disappears. It can be argued that the prime contractor accepts the risk, so there is no risk to government, but that isn’t the point. The point is that by omission of the requirement to cascade completion bonds to foreign suppliers, local industry is immediately discriminated against.

While this is probably not deliberate, it is a reality, as is the risk that with no consequences for a foreign supplier, they will cut corners which might not show up until the item supplied, is a few years old and unlike a local supplier, they have no local reputation at risk.

So we need Government and related entities to act now to flatten out the pitch and make sure the game is fair for local industry.

If you wish to comment on this piece, contact me at 09 262 4750 or email [email protected]

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