The Size Of Government Procurement For Small Business

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1 Policy 2014 SMALL BUSINESS HIGHLIGHTS Increase the portion of government procurement undertaken by small businesses by $300 million per annum by the end of our first term, over and above the $200 million increase in domestic procurement already signalled. Build on the New Zealand Institute of Chartered Accountants proposal of no more than one hour, one return and one payment each month for income tax and GST compliance. Redirect resources to tackle unnecessary red tape. Introduction Every day, New Zealand s small business owners take personal risk to improve their own financial situation, that of those they care about, and New Zealand as a whole. Often the risks taken are suitably rewarded, but too many of our small businesses are unnecessarily disadvantaged by a business environment that is stacked against them without obvious reason. Too often the rules are to nobody s advantage. New Zealand s future prosperity depends upon our ability to adapt and change, to build on our skills, anticipate and meet future market needs. Small business enjoys a reputation for being innovative and fleet-footed. A thriving small business sector is part of a successful future. Labour believes a more diversified economy is a part of a more prosperous future. It is likely that growth in emerging sectors will involve the growth of small businesses. Right now, too many small businesses are struggling. In each of the last four years, more small businesses have ceased trading than have been created. Whether this statistic reflects an increased risk aversion, challenges raising capital, or something more benign, there is no doubt that many small business people can see how their lives could be made easier and more productive through a government more responsive to their needs. Greater priority for small business Representation within MBIE will be required at a higher level with consideration given to a stand-alone unit responsible for assisting agencies to achieve the Government s procurement targets, one-door offices in the regions, and Labour s objectives with regard to small businesses in general.

2 Procurement Government procurement is a tool used by many of the countries we compete with to develop diversity and strength in their small business sectors. Many successful New Zealand companies got their start via government procured contracts. Better than grants and subsidies, government contracts provide income, experience and a track record that can be marketed internationally. Government procurement presents significant business opportunities for small businesses. Government departments, crown agencies and state-owned enterprises procure a wide range of goods and services from the private sector. Examples of government procurement include contracts to build new schools and roads, and contracts to run employment and training programmes for the unemployed. An additional benefit for small businesses of having government contracts is it provides crucial experience of a demanding customer, which can provide credibility to other clients. This is particularly relevant to winning contracts in Asia where a working relationship with government is viewed positively. Clearly government procurement offers a significant means of boosting the growth of small businesses, without significant upfront expenses. But their small size presents a number of hurdles that make it difficult for them to successfully engage in bidding for government procurement contracts. Key amongst these are: Small businesses have less time and fewer resources to carry out complex bidding processes that involve a lot of documentation and compliance checks Since many tendering costs are fixed, small businesses face disproportionately high costs in comparison with larger enterprises Government agencies may be reluctant to consider new suppliers as they have established relationships with existing large suppliers, and Pre-qualification requirements can act as a barrier to small businesses tendering, for 1 example, the need to have a certain number of financial reserves. These hurdles are widely recognised and many governments around the world have made efforts to reform their procurement systems to help improve small businesses ability to bid and win contracts. Setting a goal for the share of procurement contracts awarded to small business is one of the most common and high-profile policies used overseas. Increase the portion of government procurement undertaken by small businesses by $300 million per annum by the end of our first term, thereafter increasing by 1% per annum until a target of 20% is reached (and review thereafter) For this purpose we are defining small business as enterprises with fewer than twenty employees. The $300 million increase outlined above will be over and above the target of $200 million extra domestic procurement from government bodies having to consider the wider economic and fiscal impacts when choosing suppliers, as announced in our Manufacturing Economic Upgrade. Between the two policies, Labour aims to deliver half a billion a year in extra government procurement going to New Zealand firms. 1 These were among a dozen key hurdles outlined in House of Commons (UK) All-Party Parliamentary Small Business Group, Report on SME Access to Public Procurement, April 2009,

3 It is worth noting that a small business goal does not necessarily entail extra cost to the crown. A report by the UK House of Commons All-Party Parliamentary Small Business Group noted that in some cases small business can offer more innovative responses and adapt 2 faster to the changing needs of public departments. The small business procurement goal will cover both prime government contracts and subcontracted work. Initially, pending further analysis by officials, it would only be applied to Public Service Departments, the New Zealand Defence Force and the New Zealand Police. In its broadest definition the total annual government expenditure via procurement is an 3 estimated $30 billion, but only approximately $14 billion of this can be reasonably made subject to a small businesses goal. Moreover, we need to be cautious about how reliable the top-down National Accounts-based data is for any practical definition of procurement. We are somewhat limited by the lack of detail in the procurement data around the proportion undertaken by small businesses. For this reason our initial target is more conservative that it would otherwise be. It will be implemented on a bottom-up agency-by-agency basis, prioritising those agencies with large procurement budgets, and getting them to set targets around proportions of new procurement going to small business. Labour will also: Mandate the collection of accurate statistics about small business procurement Ensure preference for small business is given for suitable contracts valued at less than $10,000 Ensure tenders from large firms are viewed more favourably if small business subcontractors are included in project delivery. Tax compliance Overly burdensome tax compliance must be addressed. It is an avoidable drag on the productivity of our small businesses. New Zealand is lagging behind other countries when it comes to tax simplification which can be done on a revenue-neutral basis. 4 build on the New Zealand Institute of Chartered Accountants proposal of no more than one hour, one return and one payment each month for income tax and GST compliance. also consider alternatives to the provisional tax regime and explore options around the taxation of the smallest businesses, including the treatment of assets. Unnecessary Red Tape Unnecessary red tape slows productivity and causes perverse outcomes. Too much regulation has become out of date as industries have changed and businesses have evolved. 2 Ibid., Pg.6 Estimate based on data from OECD National Accounts. 4 Now part of Chartered Accountants Australia and New Zealand. 3

4 Reprioritise within MBIE so that more resources are directed towards combing legislation for redundant and archaic requirements and law with unintended consequences. Where possible, industries will be delegated greater scope for selfregulation while ensuring appropriate safeguards are in place. Work towards one-door offices making business easier in the regions Most small business people have an us against them story in relation to central government. This results from a growing compliance burden and the ongoing challenge of negotiating between silos in the public service. Labour wants to ensure a more seamless experience for small business, where there is no wrong door to good advice and small businesses feel central Government is on their side. work with EDANZ, Chambers of Commerce and other interested parties to establish a more effective central Government presence in each of the 14 Economic Development districts in New Zealand. The challenges of dealing with central Government will be reduced as the responsibility of small businesses is shared with a central Government insider. The regional representatives will be accommodated within existing EDAs and will be accountable to a beefed up small business team within central Government. The service will build on existing strengths in each region to minimise overheads and avoid duplication. It will be important to recognise the contributions already made by chambers, EDAs and other existing organisations. This initiative is designed to grow their contribution, not encroach on their patch. This initiative will dovetail in with Labour s focus on the regions. We will put the money in to lift our regions to their full potential. Labour will work in partnership with each region to develop a Regional Growth Plan. These plans will identify the opportunities and barriers to growth, as well as practical measures to create a step-change for each region s economy. Labour is going to back Regional Growth Plans through a $200 million Regional Development Fund that will help pay for capital investments that will upgrade regional economies in line with their plans. Providing small businesses with help to support youth High unemployment and a lack of opportunity is denying hope to young people in the regions and forcing them to leave for the big cities. introduce, as a core element of a Youth Employment Package, Kick Start Apprenticeships for youth on the Unemployment Benefit, involving a $9,100 subsidy (the equivalent of the dole payment) to employers willing to offer a permanent full time job. This will provide a number of small businesses with help to take on young staff.

5 Garage Grants Many of the most successful companies in the world, including Apple, Microsoft and Facebook, were born in garages, basements and student dormitories. The variety of grants available from MBIE and NZTE as well as Labour s R&D tax credits are generally not accessible to those with a creative idea who are just starting out. Garage Grants will enable and support entrepreneurs in transforming their clever idea into something big. Successful applicants will receive individual training, mentoring and support from successful entrepreneurs, with up to $10,000 to build the first product and start the business. This contestable fund of $3.2 million over four years will be administered through the Ministry of Business, Innovation and Employment and via existing accelerator programmes.