Are local preference policies achieving their goals for supporting small businesses?

Local councils across Australia are committed to fostering economic growth by supporting local businesses. One of the most widely adopted strategies is the implementation of "local preference" weightings in procurement evaluations. The goal is to prioritise businesses that operate within the council’s region, helping to keep money circulating in the local economy. But is this method truly effective in achieving its intended outcomes? Or could councils be doing more to provide genuine, long-term support for local businesses?

The Challenge of Defining "Local"

One of the most immediate challenges with local preference policies is defining what actually constitutes a "local" business. In practice, councils typically rely on geographic boundaries to determine whether a business qualifies as local, awarding extra points or applying a pricing discount during the evaluation process. But defining “local” isn't always straightforward.

For instance, a company might be headquartered in a capital city but have a significant workforce in regional areas. Should this company be considered local? On one hand, the jobs and wages stay within the community, and the business might engage local suppliers for materials or services. On the other hand, if profits are funnelled back to a head office in Sydney or Melbourne, how much of the economic benefit truly remains local?

Conversely, small family-run businesses operating from within the community might struggle to compete even with the added local preference weighting. These smaller suppliers often lack the capacity to deliver on larger contracts, or they may struggle with navigating complex procurement processes.

This raises a crucial question for councils: Is the intent to promote local employment, local ownership, or both? Without a clear and consistent definition, local preference policies can create ambiguity, leaving some businesses—who arguably support local economies—excluded, while others with minimal local presence take advantage of the system.

The Risk of Exploiting Local Preferences

An even greater challenge arises from businesses that seek to exploit local preference policies without genuinely benefiting the community. It’s not uncommon for companies to establish satellite offices or use post office boxes within a council area, solely to qualify as local. This practice undermines the intention of local procurement policies and takes opportunities away from genuinely local businesses.

Additionally, companies headquartered in major cities might win contracts by listing local subcontractors or casual employees, which superficially meets the criteria for local preference. However, these arrangements often fall short of creating sustainable economic growth, as profits and decision-making authority remain centralised in the capital cities. While local workers may be employed, the broader benefits of ownership, reinvestment, and long-term development stay far from the communities' councils are trying to support.

Local Preference Alone Is Not Enough

While the concept of local preference is well-intentioned, it is a blunt tool that fails to address many of the nuanced needs of small and regional businesses. Local preference policies may give a short-term advantage to some businesses, but they don't always translate into long-term economic development or capacity building for local suppliers. In fact, these policies often create a false sense of achievement, where councils can claim to support local businesses without addressing deeper structural issues that limit local business growth.

Councils need to ask whether simply giving a business extra points on a tender evaluation is enough. Could they do more to develop a genuinely competitive local supply base, one that doesn’t need preferential treatment to succeed?

Shifting Focus: Support Policies Over Local Preferences

Instead of focusing primarily on local preference weightings, councils could adopt a broader, more strategic approach to supporting local businesses. Here are several ways councils could better equip small businesses to succeed in both local and external markets:

1. Building Capacity and Training Local businesses often struggle to meet the demands of council procurement due to a lack of understanding around processes and compliance requirements. Councils can bridge this gap by offering training programs that focus on how to prepare competitive tenders, comply with regulatory standards, and deliver quality services at scale. By investing in the capacity of local businesses, councils empower them to compete not just locally but in broader markets, creating more sustainable economic development.
2. Encouraging Collaboration and Partnerships For smaller businesses, winning large contracts is often beyond their immediate capabilities. Councils can encourage the formation of consortia or joint ventures, where local businesses pool their resources and expertise. This would not only increase the chances of local businesses winning contracts but also foster stronger local networks, which can have a multiplying effect on the local economy.
3. Clear and Transparent Communication Many local businesses are unaware of upcoming tenders or find themselves overwhelmed by complex procurement documentation. Councils can enhance support by ensuring better communication with local suppliers, providing early notice of procurement opportunities, and offering one-on-one sessions to guide them through the tendering process. Better engagement will help businesses understand what councils require and how they can meet those needs more effectively.
4. Streamlining Procurement Processes Small businesses are often deterred by lengthy, complicated procurement processes that can feel disproportionately difficult compared to the size of the contract. Councils could simplify their procurement practices for smaller contracts, making it easier for local businesses to bid without being bogged down by excessive bureaucracy. This could also involve reducing the administrative burden and red tape, which often favour larger, more established businesses.
5. Prompt Payment Terms One of the most direct ways councils can support small and local businesses is by paying invoices promptly. Late payments are a common issue for small suppliers, who often operate on tight cash flow margins. Delays in payment can jeopardise the financial health of small businesses, limiting their ability to reinvest in staff, resources, or new opportunities. Several forward-thinking councils have already implemented 7-day payment terms for small suppliers. This practice not only strengthens local businesses but also fosters trust and a more positive working relationship between councils and suppliers.

Supporting All Suppliers for Genuine Economic Development

Supporting local businesses does not mean creating a system where they are artificially advantaged. Councils need to foster an environment where local businesses succeed based on merit and competitiveness. This can only be achieved through comprehensive support policies that develop the capacity of local businesses, offer them fair opportunities, and ensure they have the tools and resources to grow.

Local preference policies, while helpful in the short term, don’t address the root of the issue. If councils truly want to foster economic growth, they must shift their focus from preferential treatment to empowering local businesses with the skills, resources, and opportunities they need to compete on a level playing field—whether the competition is local, national, or international.

Rethinking Local Business Support

The question councils should ask is not just how they support local businesses through procurement preferences, but what more can be done to support the long-term growth of these businesses. The solution lies in shifting from a mindset of "preference" to one of "support". Councils can lead the way by providing local businesses with the skills, training, and opportunities needed to grow sustainably, while also ensuring that procurement processes are fair and transparent for all suppliers, both local and non-local.

As economic development staff and local suppliers alike will agree, true economic growth happens when local businesses are empowered to succeed not just in their hometowns, but in the broader market as well. Let’s rethink how we define and achieve support for local businesses—by building their capacity, streamlining processes, and fostering genuine economic development.