regulation and procurement

Tick the box or value-add?

August 2016

The Cost of Governance Regulations in Procurement

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“History is the sum total of things that could have been avoided.”Konrad Muller

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A little known historical irony

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• The Merchant Shipping Act (UK) 1894 set the required number of life boats at a percentage of total persons for a size and class of vessel such as the Titanic.

• ‘Boats for all’ [is] one of the most ridiculous proposals ever put forward. (R.D. Holt, MP, partner in Alfred Holt & Co. shipowners, House of Commons,7 October 1912)…was the widely held view of global ship building fraternity of the time.

• The reason for this was that with Marconi Wireless, distress rockets, water tight bulkheads and other technological advances in ship safety-in-design rendered the total loss of vessel impossible.

• The Titanic actually carried 20 lifeboats with room for 1178 passengers and crew and was therefore compliant with the regulations concerning life saving equipment at sea!


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• Regulation, in its most general definition, is ‘the imposition of economic controls by government agencies on (usually) private businesses’ (Keeler and Foreman 1998, pp. 213–22)

• Governments have regulated businesses for as long as both have existed.

• Among the things regulated are price, quantity of goods, quality of goods, entry and exit of firms, and safety.

• Regulations belong to a class of economic institutions

• Institutions set the ‘rules of the [economic] game’• Institutions, such as regulation, matter because

they level the playing field.

What are regulations?

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The growth in regulation

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The cost of regulation

• While regulations help to create a level playing field for all economic agents there is a view that excessive regulation constitutes a tax on business.

• To put the cost of regulation into perspective:• Australia’s total tax take is around 31.5% of gross domestic product• Regulation has been estimated to be at least 8% of GDP• This “tax-slug” equates to some $16 billion per annum• The cost to each Australian is almost $826 per annum• In the US the regulatory tax burden is US$10,172 per household

Regulations do not exist in a vacuum, there is also the hidden cost of the bureaucracy:

• Monitoring Australia’s regulatory framework are some 30,000 staff costing $5 billion a year!

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• The negative effects of unnecessary and excessive regulation are well-documented:

• Red tape and regulatory burdens impede competition, innovation and productivity, and therefore aggregate output, income and employment.

• The Australian Bureau of Statistics (ABS) reports that 10% of Australian businesses regard government regulations or compliance as a barrier to innovation, and for firms with 5-19 employees, this number rises to 13%.

The cost of regulation

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• Following the collapse of Enron in 2001 and the associated Arthur Andersen accounting scandals, the US government brought in the Sarbanes-Oxley (SOX) Act.

• SOX is a piece of regulatory compliance designed to strengthen the internal financial controls that exist within public companies

• There is also a national supervisory body overseeing this regulatory framework

• Management face criminal penalties for filing false financial statements and a whole raft of other contraventions

• Whilst there has been praise for SOX in increasing investor confidence in financial reporting, criticisms has been widespread:

• Costly regulatory burden on companies• Reduced capital raisings and IPOs on US exchanges• Increased the cost of capital for US companies

How regulation retards business

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• In 2007, the Chamber of Commerce found that NSW had over 1,200 Acts – the highest of any State or Territory and nearly 400 more than Victoria.

• For FYE 2007, NSW enacted 653 new Acts and regulatory instruments, more than any other State or Territory and 442 more than Victoria.

• The number of pages of new regulatory instruments introduced for FYE 2007 was highest in NSW

• The Chamber’s October 2008 Red Tape Survey of around 2,500 businesses revealed that:

• 70% of businesses have been significantly or moderately impacted;• 20% spend more than 20 hours a week on compliance;• In the past two years, three-quarters of respondents have observed an increase in

the cost and time it takes to comply with regulations;• 60% identified a moderate to high level of red tape in dealing with the WorkCover;

and• One-third of businesses found that there is inadequate communication about

regulatory issues from the NSW Government, and that they rarely know about new developments and reviews.

Cutting red tape in NSW

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The Chamber of Commerce made six recommendations in 2008:1. NSW Government to commit to deregulation through binding quantitative targets to reduce

the overall stock of existing business regulation.2. NSW Government to adopt the internationally recognized ‘Standard Cost Model’, in order to

estimate and report systematically the financial costs incurred by businesses in demonstrating compliance.

3. NSW Government to restrict the net growth of new regulations by implementing a ‘one in, one out’ approach to regulating, similar to that already operating in Victoria and the United Kingdom.

4. NSW Government to explore opportunities to improve management, simplify Budget processes and reduce duplication by extending the process of agency rationalization.

5. NSW Government to make ministries and agencies more transparent and accountable, by specifying in the Budget both the quantity and cost of delivering major services, as well as their quality and timeliness.

6. NSW Government to align its procurement practice with that of the Victorian Government and other jurisdictions, by committing to pay small business suppliers within 30 days. There also needs to be a consistent whole-of-government policy on awarding penalties. The NSW Government should in addition nominate the minister and agency responsible for monitoring and enforcing the timely payment of private suppliers by NSW Government agencies.


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• By 2015, the NSW Government's $750 million red tape reduction target commitment was complete.

• From September 2011 to June 2015, the target was exceeded by $146 million, and reduced regulatory costs for business and the community by $896 million in annual terms.

• Across government there were 308 reforms over the same period. • A further 45 reforms from June to December 2015 generated an additional

$83.5 million in cost savings, bringing overall cost savings to $979.5 million.• The target supports the NSW Government's commitment to making it easier to

start and operate a business in NSW by reducing red tape. • This allows business to spend more time operating and expanding their

business, creating jobs and boosting productivity in NSW.• “One on, two off” policy ensures that Ministers carefully assess the need for

new legislation and forces reviews of existing legislation leading to a reduction in the overall stock of legislation.


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• NSW Procurement supports government agencies to meet business outcomes, maximise value for money and create a competitive NSW economy.

• It has been designed, through its structure and capabilities, to meet the demands of the NSW Government’s procurement reform agenda. Central to the reform program is the devolved procurement model.

• In accordance with the Strategic Directions Statements, the NSW Procurement Board is devolving responsibility for some whole of government contracts to individual NSW Government agencies with specialist knowledge of a category. Categories that are beneficial to the whole of government will remain the responsibility of NSW Procurement.

• NSW Procurement engages with industry to develop solutions that are outcomes driven. This approach helps to will inform strategies to reduce red tape and eliminate unnecessary costs associated with doing business with the NSW Government.

• However there is a level of regulation necessary to level the playing field for all suppliers to NSW Procurement.

Regulation and Procurement

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• Due to the devolving nature of Procurement each agencies approach may differ but the standard governance regulations suppliers of goods and services must include:

• WHS Management (including Workcover and SWMS etc)• Risk Management• Environmental Management• Quality Management• Industrial Relations Management• Asbestos Liability Insurance• Public Liability Insurance• Aboriginal Consultation (in construction projects)• Crowd and Security Managements (for events)

• All very costly and their production can have a significant (and uneven) impact upon the tender price offered to government.


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• At SHFA, there is a two stage process to each tender evaluation:• Stage 1: Assessment of qualitative aspects of the tendero Evaluation of capability and historyo Evaluation of governance requirements (e.g. are plans complete, do

they follow the standards etc)o Evaluation of management talento Is the reputation of the tenderer supportable?

• Stage 2: Pricing analysiso Is the price offered reasonable and fairo Given stage 1, does the pricing offer value-for-money?

• This process is used to eliminate selection bias and other discriminatory behaviour

• The winning tenderer may not have the lowest price which eliminates the cost of the regulatory burden.


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• SHFA engages in construction projects and staging state-significant events

• On the events side:• The governance requirements are not always met• Even large events like VIVID often provide incomplete documentation• Small “pop-up” style events provide nothing• All these events go ahead regardless…• In effect SHFA takes on the governance regulation at risk to itself• SHFA is embarking on a program to educate events vendors to help

improve the regulatory governance• It will use discriminatory pricing and other category management

techniques to drive behaviour• It is early days but the signs are encouraging!

Some real-world issues…

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Questions or comments?

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