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Procurement, productivity and public value

Following engagement with a range of contractors in New Zealand, I was recently reading the New Zealand Productivity Commission’s report “Productivity by the numbers” July 2023, and two things stand out that echo what we heard from contractors as part of the Deloitte Construction Pulse Check 2023:

1.   Innovation and investment are key to lifting productivity; and

2.  Productivity requires a long-term commitment.

New Zealand’s productivity has been low for the last 50 years, but what is particularly concerning is the gap that has opened between New Zealand and many of the other OECD countries, meaning we are relatively worse at getting outputs from our inputs. Currently, the major cause of GDP growth in New Zealand is immigration and working longer hours. Our GDP per hour worked is lower now relative to OECD benchmarks than in 1970.  New Zealanders have some of the highest average hours per employee, this can negatively impact multiple factors, including mental and physical health, which in turn limit our ability to innovate.

The construction industry is one of the largest employers in the country with high employment growth (over 2% per year), but its annual labour productivity growth is averaging around 1%, putting it behind manufacturing, agriculture, forestry, fishing, retail – the list goes on.

If innovation and investment are key to lifting productivity, and productivity requires a long-term commitment, then we must consider whether the approach to procurement in New Zealand is acting as a handbrake, rather than accelerator for productivity.

Project by project procurement is not a long-term commitment. It rarely rewards innovation as typically neither buyers nor contractors are eager to spend the upfront capital needed to innovate for a single project. We use competitive tension of individually procured projects as the backbone to demonstrate public value, but it’s short-sighted, and a long-term drag on our potential. We need to re-examine public value, and how a revised procurement approach could contribute to long-term productivity growth.

By establishing long-term performance-based contracts, including KPI’s around productivity improvement (amongst other factors), clients can start to drive sector improvements. If securing the next 3-year contract, and the next contract after that, relied on improved efficiency, the construction sector would find innovative ways to deliver. These types of contracts create an environment where it is in the best interests of the contractors to invest in improvements to processes, systems, or tools that deliver projects more efficiently while maintaining quality standards. This then reduces costs and improves profitability, while minimising risks associated with longer programmes. The innovations from these contracts may then flow into the broader market.

Where clients do not have the committed pipeline to enable long-term contracts, changes can still be made to the procurement process to help drive productivity improvements. The typical approach is to issue an RFP, with a proposed delivery date, and often the programme is assessed as part of the methodology - we don’t truly value or reward approaches that will improve on that delivery date. In some cases, shorter programmes are looked at sideways, with a “do they really understand this project?” raised eyebrow. Non-price attributes in an RFP tell the market what clients perceive as most important. By applying a lens of “what it is we want from innovation,” the questions can be better framed around “what systems, processes or tools have you developed or learned from previous projects that will improve efficiency on this project, without sacrificing quality, to deliver better public value?”

True public value should be measured in improvements over time, contribution to the sector, and innovation that reduces the hours being worked by Kiwis, bringing them back in line with their counterparts overseas. Procurement drives innovation, innovation drives productivity, productivity helps drives public value. If we want more hospitals, schools, and railroads, then we need to develop ways to get more outputs from our inputs. We need to innovate, and it all starts with buying what we value.