Theo Gibbons, Adam Triggs | Government contracts are doled out in a bad way

Every year the federal government spends more than $550 billion on cash transfers, goods, services and salaries. We pay a lot of attention to the amount it spends and what it buys. We pay much less attention to how it spends that money and what the rules around that spending do to the economy.

This is a problem, and the e61 Institute has showed why. We collected nine years of data on which businesses receive government contracts.

We then matched this data to a firm-level dataset to see who these businesses are and what characteristics they have.

The results aren't good. Turns out, the federal government's decisions around spending are making Australia's competition problems worse.

Australia's competition problem is as follows: there isn't enough of it. Our industries have become more concentrated, fewer new firms are being created and the firms at the top are more likely to stay at the top and remain unchallenged.

The federal government should be using its chequebook to help alleviate these problems. Unfortunately, it's doing the opposite.

The data highlights that most government contracts go to old businesses rather than new ones. More than 66 per cent of government contract funding in 2022 went to businesses more than 15 years old. Only 11 per cent of contract funding goes to start-ups: businesses younger than two years old. This has worsened considerably since 2014.

Worse still, the government favours the same old firms. More than 80 per cent of government contracts by value have gone to businesses that have previously received other government contracts in last three years.

There isn't a level playing field for government contracts between new and established business.

This is problematic because it is new businesses which are responsible for most of the job creation and innovation in the economy, not old businesses.

We should be encouraging new businesses to compete for contracts and yet the current system is designed against this end. If the government wishes to foster competition for contracts, there are three key flaws that should be addressed.

The first is that the bureaucracy and administrative burden of working with the federal government is so mindbogglingly cumbersome that most small businesses struggle to engage with them.

To do work for the federal government you need to be on a government panel. There are multiple panels so, even if you're on a panel, you're probably not on the right one. Getting on panels can take years and the paperwork is huge, and ongoing.

This is a huge barrier to entry for small and new businesses. The system therefore favours and enriches the big old corporates who have the time and resources to jump through pointless hoops.

The second problem is that government is needlessly slow on payments. Anyone in business knows that cashflow is king. If you get the timing wrong on your cashflow or your cashflow gets interrupted by something out of your control, your business is in trouble.

A simple way the government can support small and new businesses (other than allowing them to compete for their fair share of government contracts) is to pay them more regularly and pay them on time.

The government did this during COVID-19. The Department of Defence, for example, increased the frequency of its payments to suppliers to support their cashflow during the pandemic. Once the pandemic subsided, however, they reversed the decision and went back to their old ways.

The final flaw is that the way in which the government spends money makes the economy less dynamic. When the Australian economy gets hit by shocks - like COVID-19, Chinese trade restrictions or a financial crisis - it does an amazing job adjusting to the shock.

Gin distilleries made hand sanitiser during COVID-19. Our agriculture sector found new customers when hit by Chinese trade restrictions. Our exchange rate fell during the Asian and global financial crises, allowing our exports to be cheaper than those from other countries.

At the forefront of this dynamism are the young businesses willing to strategically adapt to the changing economy. The government should be using its cheque book to support this.

But it doesn't.

When a crisis hits and we desperately need firms to shift production and start producing different things, the government should have flexibility built into its contracts - called contingency contracting - so that firms can play to their strengths and do what they need to do.

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This isn't what we have. Instead of being flexible, businesses remain tied-in to contracts with the government even though they might prefer to be doing more productive things elsewhere for other people and for more money.

The government could do much better. Simple, commonsense changes in how the government spends its $550 billion each year can have big impacts for the economy. While money doesn't grow on trees, supporting new businesses to grow and compete is low-hanging economic fruit.

The government should dramatically reduce and streamline the bureaucracy around government procurement. It should pay its suppliers more quickly to bolster their cash flow and it should utilise contract flexibility to support dynamism in the economy.

These changes would allow young businesses to thrive and ensure that the Australian economy is more resilient than ever.

It's great that the government talks about the importance of start-ups, competition and dynamism. It would be even better if they did something about it.