Beware of overusing Indigenous business targets

The Indigenous business sector is booming. But recent calls for more targets to boost Aboriginal companies must be treated with caution. Targets will never be the ultimate solution and can cause a range of problems that undermine their very purpose.

The use of targets to stimulate small and minority businesses has grown significantly in recent decades. Across the world, governments are seeking to stimulate economic development and achieve social objectives through tools such as procurement set-asides and quotas.

When the federal government introduced its Indigenous Procurement Policy (IPP) in 2015, it was believed that awarding three per cent of Commonwealth procurement contracts to Indigenous businesses would help alleviate the notable economic disparities faced by Aboriginal and Torres Strait Islander people.

Relative to the perverse effects of welfare dependency, the IPP is built on a good foundation — the value of work. Work has numerous socio-economic benefits that extend right to the heart of solving Indigenous disadvantage.

However, the targets in the IPP and those proposed in recent reports should not become the defining factor for Indigenous business growth. History tells us that government targets for certain businesses sectors can have some unintended consequences.

The use of preferential business targets and procurement rules could impede innovation and create a situation of dependency. While many small to medium sized enterprises will use such assistance as a boost to launch their products and services onto the open market, others might view government procurement as a safety net.

Research from the United States and Canada suggests that such dependency can be fatal. Minority businesses who relied on the government for more than 25 per cent of their sales reported lower sales income and were significantly more likely to go out of business within four years.

Relying on the state as a source of business also leaves SMEs highly vulnerable to changes in policy and government. One need only look at the potential crackdown on the up to $700 million in expenditure on external consultants for government as an example of this. More than 13 per cent of companies listed on Supply Nation’s Indigenous business database in 2017 were in consultancy and professional services. Many are undertaking work for the government and would be susceptible in the event of policy change.

The number of Indigenous consultants points to another problem caused by business targets. When targets are introduced, business people will gravitate to where the money is.

The government spends billions of dollars a year procuring construction services, and hundreds of millions more on consultancy work. In 2015-16 more than 70 per cent of IPP contract spend was awarded to Aboriginal businesses in these industries.

Many of these are new businesses, created to take advantage of the policy. As a result, there can become a glut of supply in a particular industry. Analysis of preferential procurement rules in the United States suggested that, because of the overabundance of tendering minority companies, a Hispanic or black business was actually up to 14 per cent less likely to win a contract than before the policy came into effect.

This is reinforced by the rational conservatism of government procurement. Taxpayer dollars should be spent as efficiently and effectively as possible. Why take a risk with a new and unknown supplier when you can choose a trusted business that has performed for you in the past?

This then begs the question, what are the targets for? The stated intention is to help Indigenous small business grow. However, of the $119 million in major construction contracts awarded under the IPP in 2015-16, 63 per cent went to just four large suppliers.

Supporting Indigenous Australians’ integration into our economy is essential. However, it is equally essential not to overdo targets.

For the IPP and other proposed policies to succeed, the approach must be balanced. Improve transparency by publishing data that proves contracts are awarded on a value-for-money basis, and ultimately ensure the Aboriginal suppliers can benefit from the same competitive forces that drive innovation and cutting-edge development in the rest of the market.

Charles Jacobs is a policy analyst at the Centre for Independent Studies.