Mr John Alexander OAM MP
The House of Representatives Standing Committee on Infrastructure, Transport and Cities
PO Box 6021
Canberra ACT 2600
Dear Mr Alexander,
Inquiry into procurement practices for Government-funded Infrastructure I wanted to draw your attention to a serious issue we are seeing in our business, which is impacting a large number of SME businesses across Australia and pushing them out of contention for large stimulus project contracts.
In New South Wales alone, the State Government has committed to a guaranteed $100 billion infrastructure pipeline over four years in response to COVID-19. In addition we have the Australian Federal Government’s $110 billion, 10-year infrastructure pipeline. I absolutely applaud what the Governments have done during the pandemic. Opening up big business opportunities and government contracts to SMEs can be game changing for any business, as well as the businesses that work for them down the line.
However, there is an emerging requirement for SME subcontractors to large infrastructure and mining projects, to provide bank guarantees, performance or surety bonds on work to be completed. In the past, businesses were required to agree to retention clauses, where somewhere around 10% of their earnings were held back by the main contractor – the guarantees are now in addition to this.
Invariably the surety amount is circa 10% of a contract. As many of these contracts can be $20+ million and run over a two-year period, the ability for most SMEs to have $2 million to put away for two years is limited. The problem compounds if they are working on several projects at once.
We see this as an enormous bottleneck to the great work of the Government to stimulate the economy with infrastructure projects. The injection of +$10 billion out to Tier One construction groups (with the view that this will flow to Tier Two and Three groups) means that potentially small businesses will need to collectively find $1 billion in guarantees to be able to work on the projects – a request that simply can’t be fulfilled.
This problem is also compounded by the market for surety bonds becoming tougher. Most insurers are now requiring evidence of three years trading with revenues greater than $20 million and each being profitable – seemingly a very difficult hurdle for many SMEs.
With everything going on with COVID-19, this issue may not have been anticipated. However, we believe it is something that should be addressed if the SME market is to participate effectively in the stimulus program. While the initiatives offer great opportunities for SMEs, they may unfortunately be in vain if the performance bonds and bank guarantees status quo continues. We are already witnessing a detrimental impact on a number of our successful clients.
We have already endeavoured to raise this issue through letters to local MPs and discussions with business media. Unfortunately we have not had much success in gaining attention for this very important issue nor affecting change. Again, we appreciate that the pandemic is swallowing so much of everyone’s time.
However I would very much welcome the opportunity to discuss this with any interested parties. Should you wish to do so, please contact me directly at your convenience. I can be reached on 0458 888 460 or email@example.com
Chief Executive Officer