Opinion on impact of carbon price on procurement

By Ruth Bayley, CEO of Australian Association of Procurement and Contract Management

The impact of the carbon price on prices paid for goods and services is a risk. Like any contract or procurement risk, it is helpful to decide, at strategy level, how to manage the risk and put in place appropriate contract clauses and contract management strategies or approaches.

Is it the suppliers who should take 100 per cent of the risk? In which case, contract clauses with fixed prices to be paid for goods and services mean that any input cost increases, in the short term at least, would fall on the supplier and have to be absorbed by them, not passed on to the buyer. This makes it very easy for you to manage your budget as you’ll know what to expect to pay.

It is likely as the suppliers get smarter about the true impacts of the carbon price on their business, they will pass on any higher costs when they re-tender for work. So it is likely that over time, the amount you pay for goods and services will increase to accommodate the effects of the carbon price on each of the businesses you deal with.

The down side of this is that if input costs go up too much relative to a fixed price contract, or what they buyer is willing to pay in later tendering rounds, then suppliers will then have an incentive to look for other opportunities to recoup their financial position (ie some may take short cuts).

This ultimately means an increase in the contract management burden to ensure that you get what you expected. If input costs go up enough, some businesses may simply close up and this leaves you with strategic sourcing and supply risks. It is also not a good look in terms of PR “Scrimpy council/government/big business causes small business to close” is not a good newspaper headline.

Is it the buyer who should take 100 per cent of the risk? Using contract clauses allowing the supplier to adjust their invoices for the impact of the carbon price (eg similar to labour rate rise and fall clauses or exchange rate variation clauses) – in which case your costs are likely to go up, by an amount that you cannot determine in advance and at times that you do not control.

Not a recipe for sound financial management and very hard to prepare and adhere to budgets! But likely to be very popular with suppliers, and maybe for some goods and services, where you are relatively small in comparison to the market power of a dominant supplier (eg Microsoft, Qantas, Telstra/Optus) you may have no choice but to accept their contractual terms, or at least only a limited ability to negotiate on this.

Most likely the risk should be shared somehow between the parties. This will most likely lead to something like periodic reviews of prices on a contract – maybe three monthly or six monthly and if the supplier can substantiate their input cost increase, then an agreed percentage of that (such as 50:50) could be passed on to the buyer.

This is probably fair and will lead to a better perception of “we are all in this together”, but still makes budgeting harder than a fixed cost approach. It can also lead to increased argument over the adjustments and so on, but can also improve relationships and really get the parties working together. Similar to gain sharing or opportunity or alliance contracting.

More Need For Market Research

The aim of the carbon price is to encourage suppliers, through market pressure, to find and offer newer and more innovative goods and services that have a lower carbon footprint. If they do this, their carbon price impost will be lower or non-existent, and cleaner greener suppliers should therefore have a cost advantage that should eventually see them get more business. This is a nice idea, and may eventually happen, but raises some other issues to think about.

Most greener products/services currently cost more to supply, and it is not yet clear how the higher cost of these products would be offset by the carbon price impost on less acceptable products. I think the government’s long term aim is that greener products would become cheaper (as they would not carry the same level of carbon price as an input cost to be passed on, and as demand for them increases leading to economies of scale in production and supply) and so over time, these would be preferred. I think this is a relatively longer term thing and definitely would not happen in the first year or two.

There may be savings in the future for buying organisations that have set aside funding to support innovation or environmentally friendly procurement as these become cheaper over time. However, it seems likely to me that if government wishes to support innovation, that will not stop, and there will always be opportunities for government to lead the way to help new ideas get a place in the mainstream.

Therefore, procurement officers probably need to be doing more market research than they might have in the past to keep checking what is happening in the market and whether prices of particular goods and services are rising or falling. New products and services could also be expected to enter the market place as well, so things will be dynamic and this is definitely not the time to be issuing very long term contracts or to just keep buying what you have always bought from the people you have always bought from.

Corporate Social Responsibility

What is the role of government, local government or business in implementing corporate social responsibility (CSR) concerns through its procurement spend?

CSR is a really hot topic in procurement as spenders of taxpayer or shareholder money try to ‘do the right thing’. Certainly environmental responsibility is a big part of what is expected by the community, but so is fairness, and also using procurement spending to provide opportunities for Australian businesses to grow and contribute to their communities through the provision of jobs.

Many of these objectives are in tension, especially in times of very tight budget constraint. For example, imported products that do not carry any carbon price impost may now be or soon become cheaper than local products.

Organisations do not have to always buy the cheapest products; for example, the government’s ‘value for money’ criterion in procurement has always allowed for the consideration of other factors, such as CSR, sustainability and buying local. However, anecdotal evidence says in today’s tight financial environment, many public and private sector organisations see this as ‘nice to have’ but not very likely if they can get a cheaper product or service (even if that is less ‘responsible’).

So in my opinion, until CSR is actually valued, rather than just being something people like to talk about, it’s possible that the carbon price may lead to the purchase of actually less responsible goods and services. Buying organisations may like to address this problem explicitly through their procurement policies and budgetary processes giving real impact to value for money, not just lip service or ‘cheapest complying’ tender evaluation.

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