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Howe, John --- "The Regulatory Impact of Using Public Procurement to Promote Better Labour in Corporate Supply Chains" [2010] UMelbLRS 16

Last Updated: 6 April 2011

The Regulatory Impact of Using Public Procurement to
Promote Better Labour Standards in Corporate Supply Chains

John Howe[∗]

This paper was first published in K. Macdonald and S. Marshall (eds) Fair Trade, Corporate Accountability and Beyond: Experiments in Globalising Justice (Ashgate, 2010)

This chapter examines the potential of government procurement as a mechanism for improving job quality and alleviating poverty and proposes ways in which these mechanisms can be strengthened so as to make them more effective. The promotion of higher labour standards through government procurement is a ‘soft’ law mechanism that may appeal to governments at a time when economic globalization has, among other things, reduced the political willingness and ability of governments to safeguard the welfare of workers and communities through the maintenance of conventional labour law systems. In many developed economies, governments have reduced their traditional legal protection of labour rights and standards. Many developing countries maintain strong labour laws ‘on paper’ but lack resources, adequate institutional frameworks and, at times, the will to properly enforce labour standards. This chapter assumes, however, that governments have a crucial role to play in promoting and enforcing labour standards. The difficulties of enforcement and the high disincentives to compliance with labour laws for businesses mean that governments must find innovative ways to create inducements for more widespread compliance with labour standards. It is the contention of this chapter that promotion of existing labour standards or higher than existing legal standards through government procurement may be effective because it is responsive to existing power and resource distribution among economic and social actors (Ayres and Braithwaite, 1992; Teubner, 1983).
Poor job quality and labour abuses continue to be major causes of poverty and human degradation around the world. This is especially prevalent in developing countries. This is especially prevalent in developing countries. It is widely accepted that improvements in internal labour standards can assist the reduction of poverty in developing countries significantly (see, for example, DFID 2004). One response to the ‘ossification’ of labour law and enforcement (Estlund 2002) has been the proliferation of private or non-governmental labour regulation and governance. This has been exemplified by the actions of NGOs and trade unions to persuade and/or pressure multinational corporations to sign on to codes of conduct or other voluntary standards as forms of supply chain regulation, often within the rubric of ‘corporate social responsibility’ (CSR). As well as functioning to enhance domestic observance of better labour practices, these non-governmental approaches are commonly used to supplement international labour regulation of the operations of transnational corporations in developing countries.
Questions have been raised about the desirability and effectiveness of non-governmental regulation and CSR as a strategy for improving labour standards in the absence of state regulation (see for instance: Heeks and Duncombe 2003, 1; Utting in this collection). The challenge facing state and non-state actors willing to locate and hold businesses accountable to labour standards – whether these are enshrined in law, are above the floor of minimum standards, or are more aspirational goals – is the actual or perceived conflict between these standards and the main drivers of corporate business activity: profit-seeking and shareholder value (Parker 2007). This conflict is not easily overcome.
One mechanism by which governments can leverage corporate responsibility for labour standards without using mandatory legal regulation is through public procurement: making government purchases of goods and services conditional upon contractors and supply chains observing desired labour practices linked to job quality criteria. The significant role of governments as purchasers of goods and services provides the necessary economic leverage against corporate resistance, while being more politically palatable by avoiding the use of law to mandate broadly applicable standards. Procurement can be used to promote better labour standards domestically as well as allowing governments of developed countries to influence the observance of labour standards by businesses operating in developing countries.
Government procurement is an interesting site for analysis of labour regulation, as expansion in government purchasing is itself a symptom of the transformation of the state from ‘public provider’ of goods and services and direct regulator of corporate activity to a phase of ‘regulatory capitalism’ (Braithwaite 2005), where the state plays more of a role in enabling or facilitating economic activity and self-regulation. Examining government procurement as a technique of labour regulation is also an opportunity to reflect on the maintenance and extension of the notion of government as ‘model employer’ (McCrudden 2007).
The potential impact of government procurement as a mechanism for improving job quality and alleviating poverty is the focus of this chapter. While government procurement initiatives which seek to promote better labour practices in a domestic context will be considered, greater emphasis is placed on the possible use of procurement to promote better labour standards in developing countries. This chapter will examine various instances in which developed countries are linking procurement with supply chain governance mechanisms in order to reach suppliers in developing countries with lower living standards. One issue considered is the tension between social objectives and economic efficiency values inherent in any attempt to use government purchasing to address social concerns. This may bring procurement mechanisms into tension multilateral and bilateral ‘free trade’ agreements. Further, this chapter investigates the extent to which this mechanism of regulation is likely to be a legitimate and effective means of bringing about greater organisational commitment to better labour standards. In doing so, the chapter also analyses the actual and potential interaction between procurement and other strands of regulation and governance, including traditional state labour regulation and non-governmental approaches.

Government Procurement as Regulatory Technique
Government procurement can be characterised as a specific regulatory technique or approach available to the state. It can be distinguished from direct legal and private regulation or voluntary CSR. This chapter adopts a broad understanding of regulation

as any process or set of processes by which norms are established, the behaviour of those subject to the norms monitored or fed back into the regime, and for which there are mechanisms for holding the behaviour of regulated actors within the acceptable limits of the regime (whether by enforcement action or by some other mechanism) (Scott 2001, 331).
The focus of this chapter is on the role of the nation state in regulating labour standards. Regulation may, of course, occur ‘above and beyond the state’ (Morgan and Yeung 2007). The promulgation of labour standards by the International Labour Organisation (ILO) is an example of such international regulation. Some consideration will be given to the interaction between state regulation and regulation by the ILO later in this chapter.
In seeking to influence behaviour through the establishment, monitoring and enforcement of norms, the state has a number of regulatory techniques and approaches available to it. Of these alternative techniques, ‘soft’ or ‘light touch’ approaches to regulation are distinguished from ‘hard’ legal or centred ‘command and control’ regulation – in which formal rules are created, monitored and enforced by the state through orders and sanctions – on the basis that the former are less reliant on government imposition of generally applicable mandatory legal standards as a means of regulating behaviour (Ogus 2001; Howe and Landau 2007). Moreover, it is recognised that regulation is ‘multifaceted, differentiated and increasingly “shared” by a range of public and private actors’ (Lucio and Mackenzie 2004, 78).
Approaches vary and are rarely mutually exclusive across this spectrum of labour regulation. Many initiatives rely on government deployment of its wealth resource to secure behavioural change in order to avoid the use of ‘hard’ law. Such initiatives include attaching conditions to procurement contracts and offering of financial incentives or rewards in return for desired behaviour (Howe 2006). Some approaches employ ‘meta-regulation’ – in other words, facilitation of ‘co-regulation’ or corporatist arrangements and/or ‘self-regulation’ by requiring or encouraging firms and stakeholders to develop standards of behaviour which are better than state sanctioned minima (Parker 2007). Another broad area of government action is use of information and education strategies designed to encourage the adoption of decent work practices by presenting socially responsible or ethical practices in a way which suggests consistency with ideals of good corporate (self-)governance (Weiss, 2002). Information strategies include those which impose public disclosure requirements on firms, including ‘triple bottom line’ reporting, as well as dissemination of voluntary codes of practice, and ‘best practice guidelines’ or ‘case studies’.
There is a growing interest in alternatives to command and control regulation, including public procurement, such as government ‘drivers’ of CSR (Moon, 2004; Barnard, Deakin and Hobbs, 2004). This extends to consideration of the role that some of these regulatory approaches might take in influencing the labour practices of multinational corporations beyond the borders of the host state (Cooney, 2004). CSR tends to encapsulate voluntary initiatives, or at least initiatives adopted by companies as a result of pressure from social movements rather than as a result of government regulation. The basic assumption of CSR campaigns is that enterprises will respect labour standards if this respect is shown to be a relevant factor in maintaining or enhancing competitiveness and higher productivity. However, while ‘command and control’ regulation frequently fails to ensure that corporations comply with important social policy goals, it is also true that many corporations, when left to their own devices, fail to take CSR seriously (for example Cooney 2006; Jones, Marshall and Mitchell 2007; McBarnet 2007, 14). This failure is exacerbated when it comes to corporate responsibility to employees, where studies have suggested that employers will often conceive of CSR as ‘incorporating a set of external issues concerning the image and reputation of the company rather than the issue of its employment conditions’ (Barnard, Deakin and Hobbs 2004, 30). The difference between voluntary CSR and light touch regulation, such as the use of targeted monetary incentives, is the role the state plays in seeking to steer or leverage corporate governance to internalise public policy goals. An example of this is the goal to procure better labour standards through the different tools at its disposal.
Soft or light touch approaches to state regulation have become increasingly popular with governments in the era of regulatory capitalism. It is arguable that this is because, in the context of economic globalization and increased competition among nation states for private investment, governments are either fearful of, or ideologically opposed to, the use of command and control regulation, for fear of causing corporate flight. Light touch regulation is seen as more consistent with the ‘business case’ for social responsibility. Moreover, soft forms of regulation are not always subject to the same jurisdictional and/or constitutional limitations as more formal law. However, they do represent a continuing role for government in the establishment of norms and mechanisms for securing compliance with those norms. The key issue here is whether these alternative forms of regulation are effective. Do they induce the desired responses from firms?

Evaluating Procurement as Regulation
There are a number of different criteria by which different regulatory techniques and systems can be evaluated. In this chapter, the potential impact of procurement as a technique for promoting better labour standards will be assessed in terms of the overlapping concepts of effectiveness and legitimacy.
We can anticipate that asking contractors to ensure that their transnational supply chains comply with specified labour standards might meet some resistance. While the incorporation of labour standards into government procurement programs will have at least some symbolic significance, empirical studies of regulation have consistently established that it cannot be assumed that state promulgated standards will be effective, even where they are backed by penalties and other sanctions for non-compliance. It is therefore worthwhile thinking about ways in which procurement might be designed in order to maximise effectiveness.
Regulatory scholars and scholars influenced by discourse incorporating systems theory argue that regulation is more likely to be effective if used in a manner which is reflexive or responsive to existing power and resource distribution among economic and social actors (Ayres and Braithwaite, 1992; Teubner, 1983). These discourses reflect some common themes. One of the most significant of these is the contention that state regulation is simply one of a number of interacting and competing regulatory systems (Cooney 2006). Many scholars have argued that states should be seeking to harness or enlist these non-state systems in order to achieve public policy objectives, rather than seeking to interfere with or override those systems, because the latter approach is frequently ineffective in changing non-state behaviour. In other words, government should ‘work with the grain of things’, seeking to shape and steer forms of private ordering or self-regulation, such as corporate governance. It should not demand change through mandatory legal regulation or ‘command and control’, which is prone to avoidance (Braithwaite 2005; Cooney 2004; Arup 2001).
In doing so, regulation should be designed to facilitate or encourage ‘de-centred’ models of regulation, whereby non-state actors are responsible, empowered participants in norm creation, implementation and monitoring and enforcement (Black 2001). Indeed, it has been argued that an important criteria of effectiveness in any regulatory regime is its legitimacy, in the sense that it is ‘worthy of public support’ (Baldwin and Cave 1999). While this can be assessed in a number of ways, I will argue in this chapter that the legitimacy and therefore the effectiveness of any government policy will be influenced by the quality of public deliberation and participation by various stakeholders when determining regulatory objectives and the mechanisms for achieving those objectives (Vincent-Jones, 2006).
Some models which draw on these ideas are based on ‘enforced self-regulation’ or ‘co-regulation’, where ‘instead of insisting on corporate compliance with state-mandated rules, governments can instead require corporations to institute internal systems designed to promote socially desirable outcomes’, often with mandatory involvement of stakeholders (Cooney 2006, 194-195).
It is important to note that theories of responsive or reflexive regulation do not necessarily leave development of these internal systems entirely in the hands of non-state actors. Barnard, Deakin and Hobbs have argued that ‘[a] crucial aspect of reflexive law is that it involves not simply an attempt to delegate rule-making authority to self-regulatory mechanisms such as collective bargaining, but also an effort to use legal norms, procedures and sanctions to ‘frame’ or ‘steer’ the process of self-regulation’ (Barnard, Deakin and Hobbs 2004, 4).
This would not necessarily require legislation. It has also been suggested that states can facilitate development of internal systems, involving multiple stakeholders, by deploying their wealth resource as an incentive to corporations to internalize public policy norms, or more democratic decision-making processes (Parker 2002, 29; Cooney 2004).
What else is likely to be effective in convincing an organization to embrace public policy goals and values such as improvement of labour standards? Johnstone and Jones suggest that the answer to the more general question of regulatory effectiveness lies in regulation which is constitutive at the level of the firm (Johnstone and Jones 2006). Their study of OHS, dismissal, discrimination and sexual harassment regulation suggests that constitutive regulation exists where ‘demands are placed on employers to discover and understand regulatory requirements, engage appropriate personnel (including advisers), establish and implement appropriate policies and procedures, and monitor and evaluate the implementation of those procedures to ensure that the organization complies with these regulatory requirements’ (Johnstone and Jones 2006, 501).
Finally, it must be born in mind that pluralism in regulation will not necessarily be productive and effective. The overlaying of procurement or other alternative regulatory approaches over existing mechanisms of labour regulation may lead to ‘regulatory collision’ which undermines the objective of using procurement in this way (Johnstone and Mitchell 2004). Design of regulation must take account of the potential for unproductive regulatory conflict if it is to be legitimate and effective.

Procurement as a Form of Labour Regulation
Government procurement is an extremely significant area of government economic activity. The OECD estimates that globally, public procurement expenditure accounts for 15 percent of the world’s Gross Domestic Product (OECD 2005, 35). In Australia alone, it has been estimated that the Commonwealth Government annual procurement budget is in excess of $16 billion dollars, a figure which does not take into account State and Local Government procurement expenditure (Cooney 2004, 340). In larger economies, the government procurement budget is of course even more significant. For example, while annual central government expenditure in the UK amounts to £15 billion, total public sector procurement exceeds £150 billion (Bell and Usher 2007). The extent of public procurement is in itself a sign of the transformation in government. Governments have moved away from direct provision of many goods and services, and are instead purchasing those services from the private sector.
While it might be argued that the immediate purpose of procurement is the purchase of goods and services necessary for government administration, and that this is largely an economic purpose which should be subject to evaluation by economic efficiency criteria, government procurement, as a form of social regulation, has a long history. Particularly since the early 20th century, if not earlier, procurement has been used to regulate labour practices, and governments in many countries continue to do so, including Australia, Canada, the United States and the UK (McCrudden, 2007).
The ILO has promoted the inclusion of labour considerations within public procurement contracts since the late 1940s. The Labor Clauses (Public Contracts) Convention 1949 (No. 94) provides that all public procurement contracts awarded by central public authorities must include clauses ensuring wages, hours of work and other conditions of labour which are no less favourable than those established for work of the same character in the trade or industry concerned, in the district where the work is carried out (ILO 1949; ILO 2008).
This latter requirement begs the question of the reach of labour regulation through procurement. Given that this chapter is concerned with the use of procurement as a tool for achieving better labour standards and alleviating poverty, it will distinguish between procurement used to achieve better labour conditions in the ‘home’ country, and procurement seeking to influence labour standards in other countries where labour and living standards are poorer than in the home country. For this reason, the chapter will focus on developments in Australia, the United States and the United Kingdom.
This chapter presents evidence that public procurement is not extensively used as a form of labour regulation (see also ILO 2008). Before examining the way in which procurement is used to regulate labour practices, it is first necessary to consider some of the different forms and geographies of procurement, as well as how it might be used to achieve social objectives. Government procurement can be categorised according to whether it is public works, goods or services that are purchased (McCrudden 2007). This categorisation will be relevant to whether procurement can be used to influence labour standards, and the extent of regulation possible. For example, procurement of public works such as construction will normally be limited to domestic companies and workers. In this context, linking labour criteria to procurement will only impact on the conditions of domestic workers. Procurement linkages with labour standards concerning the purchase of public works and services are relatively common. However, where governments purchase goods such as equipment, clothing, stationary and so on, suppliers of those goods may have sourced products or components from overseas. It is within this context that governments of developed economies can influence labour conditions in developing countries most strongly. Yet, as will be shown, this is also a difficult proposition for governments, and examples of linkages between goods procurement and labour standards are relatively rare.
There are two ways in which governments can procure goods so that they promote better labour standards. Firstly, governments can simply procure goods which are certified as ‘fair trade’ or ‘ethically produced’ by a recognised certification agency. Fair trade certification would normally require compliance with at least the core labour standards (Bell and Usher 2007, 9). Of course, there is only a limited range of goods attracting fair trade or some other recognised certification and governments are also significant purchasers of services. Secondly, governments can require contractors supplying goods to comply with specified labour standards, in the same way that they might regulate the supply of services.
Assuming that a government takes the latter approach to achieving social objectives through goods and services procurement, there are three stages at which governments can impose labour standards: qualification or eligibility to tender for a government contract; the tender assessment process; and the contractual requirements imposed on the successful tenderer (McCrudden 2007).
By imposing standards as ‘qualification’ criteria, Government can restrict the tendering process to those companies that already comply with social objectives such as labour standards, thus providing an incentive for companies wishing to obtain government contracts to observe the desired minimum standards. There are various ways in which governments can integrate labour standard considerations into the tender assessment process. A programme could identify a quota of contracts which are ‘set aside’ for contractors of a particular type. There may be a ‘price preference’ for certain types of contractor, where, for example, the bid submitted by bidder A, although higher than that of tenderer B, is regarded as equal to that of B if A undertakes to implement a particular social policy. The past practice or the willingness of a past bidder to implement the social objectives may be taken into account as a ‘tie-breaker’ where otherwise equal tenderers are in competition. Alternatively, the social criteria may be either just one consideration to take into account, or determinative where tenders are otherwise equal. Another approach may be to ‘offer back’ to preferred tenderers, allowing them to match the lowest bid of the non-preferred tenderer.
However, the approach of many Australian governments, for example, is to include labour standards as one of a number of different criteria, including value for money, upon which tenders will be assessed, without clear weighting given to each element of the criteria (Howe and Landau 2007). Such an approach leaves considerable space for labour-related considerations to be subsumed within, or overlooked by, government administrators under pressure to secure best value for money, which is assessed narrowly in terms of the cheapest available price.
Alternatively, governments and their procuring agencies can require successful tenderers to demonstrate ongoing compliance with labour standards as a performance condition of the contract. Contracts might provide a mechanism for monitoring of compliance, such as contractor reporting, and termination of the contract can be used a penalty for non-compliance, thus aiding enforcement of any labour-related conditions.
Of course, the effectiveness of all of these approaches will depend on the veracity of information provided to procuring authorities and on the adequacy and effectiveness of monitoring mechanisms. This issue will be discussed later in the chapter, as it is a consideration which also arises in relation to non-governmental mechanisms for promoting better labour standards.
Another consideration here is the role of law in relation to public procurement and labour standards. ILO Convention 94 assumes that ratifying states would enact legislation to regulate the social aspects of public procurement. However, in the jurisdictions I have examined for the purpose of this chapter, including Australia, the US and the UK, it is apparent that where social criteria are incorporated into public procurement, this is achieved through administrative action and contract rather than through legislation.
Assuming that labour standards are included in public procurement tender assessment and contractual performance criteria, there are two broad types of labour standard which may be linked to public procurement programmes (Howe 2006). Firstly, procurement may be used as a method of enforcing existing legal obligations either domestically or in a supplier’s host country; that is, as a supplement to existing mechanisms for enforcement of minimum rights and standards set by legislation and/or applicable industrial instruments, including ILO conventions or the ILO’s Core Labour Standards (CLS). Secondly, procurement may be used to advance desired modes of labour relations above and beyond those required by applicable laws. Thus, for example, while a country may not have a legally enforceable right to collective bargaining, recognition of trade unions and the practice of collective bargaining may be encouraged through procurement.

Incidence of Public Procurement as a Form of Transnational Labour Regulation
In Australia, public procurement by the Commonwealth and the various State governments and their agencies is governed by a complex web of policies, frameworks, codes and guidelines (see generally Howe and Landau 2007, 373-380). In each jurisdiction, there is a broad procurement policy or framework that sets out general principles applying to government procurement contracts. Both Commonwealth and State governments include at least some labour conditions in their procurement criteria. In the case of Victoria, one of the broad policies requires all businesses that tender for government contracts to adhere to an ‘ethical employment standard’ (Victorian Government Purchasing Board 2003). Queensland and Victoria also have codes of best practice that set out specific labour standards and industrial relations practices with which all businesses in particular industries that tender for government contracts must comply. For example, Queensland has codes of practice for the building and construction industry, call centres and the clothing industry (Howe and Landau 2007). In NSW, since 2005, there has been a single code of practice governing all types of government procurement which sets out standards of behaviour expected of government agencies, tenderers, service providers, employer and industry associations, and unions (Howe and Landau 2007).
While both Commonwealth and State governments in Australia use public procurement as a means of promoting labour standards, their policies differ according to the type of contract or firm to which the policy applies, the precise standards promoted, the sanctions imposed for breach, and the use of monitoring mechanisms (Howe and Landau 2007). In the case of State governments, compliance is limited to onshore businesses – participation in procurement is not made dependent on offshore suppliers meeting labour standards. The recently elected Rudd Labour Government has committed to an ‘ethical procurement policy’ which will require major suppliers to the Commonwealth ‘to ensure compliance with [ethical] procurement policies by all sub-contractors involved in the principal's supply chain to the Commonwealth’ (ALP 2007). The Rudd Government is yet to provide details of how this policy will work in practice.
Beyond this commitment, there have been only isolated examples of procurement policies in Australia which have extended to offshore labour used in the production of goods. In the lead-up to the Sydney Olympic Games in 2000, the Sydney Olympic Games Organising Committee (SOCOG), the NSW Labor Council and the Australian Council of Trade Unions (ACTU) agreed to a ‘Code of Labour Practice for Production of Goods Licensed’ for the Games (SOCOG 1998; Webb 2001). The Code required all manufacturers or suppliers of licensed products to certify that they and their contractors and subcontractors (not limited to ‘onshore’ businesses) met specified minimum labour standards. These standards included not only core labour standards such as prohibition of child labour and respect for freedom of association and collective bargaining, but also required payment of ‘fair wages’ (at least complying with legal or industry minimum standards, and ‘sufficient to meet basic needs and provide some discretionary income’), that hours of work were not excessive, and that a ‘safe and hygienic working environment ... be provided’ (SOCOG 1998). The Victorian Government agreed to similar guidelines to ensure that official clothing and other merchandise for the 2006 Commonwealth Games in Melbourne was sourced ethically (ACTU 2006).
Queries have been raised about how far even these rare examples went in terms of ensuring that goods sourced for the respective Games were produced in conditions which met the agreed minimum standards. After the SOCOG Code was agreed to, unions raised concerns about whether all licencees’ overseas manufacturers (mainly in China and Fiji) had been inspected for compliance. SOCOG initially refused ACTU permission to send a representative to inspect conditions in overseas factories, or even to provide information regarding contractors and subcontractors of licencees (Webb 2001, 213). While SOCOG eventually withdrew its objections and provided unions with a list of known contractors and subcontractors, unions lacked necessary resources to carry out on-site monitoring.
More innovative developments have taken place in other developed countries. The incorporation of social policy goals including labour standards within public procurement has long been a matter of debate within the European Union (McCrudden 2007). Several countries have legislation which requires or allows government purchasers to include labour clauses in government contracts. Belgium, Finland and Austria have especially strong requirements regarding these labour clauses (ILO 2008, 37). However, these requirements are largely concerned with domestic labour conditions. There is also evidence of some European countries reducing their commitment to attach labour criteria in procurement contracts. For example, a recent ILO study found that France had ceased to apply the ILO Convention in relation to procurement (ILO 2008, 19).
In terms of the use of procurement to regulate labour standards across transnational supply chains, the most significant developments have been in relation to legal changes allowing government purchasing of certified fair trade products in several European countries, including Belgium, Italy and the United Kingdom (Fairtrade 2007; European Fairtrade Association 2007).
There is a growing interest in the incorporation of labour standards into procurement by all levels of government in the UK (Bell and Usher 2007; Fairtrade 2007). The Office of Government Commerce provides guidance to UK purchasing authorities on the incorporation of social criteria including the ILO CLS and other ‘employment issues’ into different stages of the procurement process (Office of Government Commerce 2006). Actual implementation of labour standards through procurement in the UK still seems to be largely at the discretion of individual government departments and agencies. While some UK government departments and some local governments have committed to purchasing fair trade certified products (Fairtrade 2007), there is less evidence of more widespread inclusion of labour criteria in the purchase of goods and services.
Use of procurement to regulate labour standards beyond the borders of the purchasing country appears to be more common in the US, where federal legislation requires labour clauses to be included in federal contracts for services and manufactured goods (McNamara-O’Hara Service Contract Act 41 U.S.C. 351; Walsh-Healey Public Contracts Act 41 U.S.C. 35). However, it is at State and local government level where innovation in relation to transnational labour regulation has occurred. Many of these innovations are a result of the activist network Sweatfree Communities persuading many US State and local governments to adopt ‘sweatfree’ procurement policies in relation to garment purchasing. Sweatfree Communities recommends that States and cities in the US require suppliers of apparel, footwear and laundry services to comply with some basic labour standards. These include the ILO’s core labour standards, but also any ‘applicable local laws’ in the country where the manufacturing takes place, whether the US or another country (Sweatfree Communities 2006). Sweatfree Communities argues that, if possible, procurement contracts should also require compliance with a ‘non-poverty wage’ rather than the legal minimum wage. This is because legal minimum wages in many countries do not necessarily provide sufficient income to allow workers and their families to avoid poverty. Sweatfree Communities suggests that in countries other than the US, this would be the wage and benefit level to raise a family three out of poverty based on the national standard of living index for that country.
According to Sweatfree Communities, six States and 38 cities in the US have adopted some form of sweatfree procurement policy (Sweatfree Communities 2007). While the content of each State and city’s policy varies, most require that contractors at least comply with legal minima. Some States (including California, Illinois, New Jersey and Pennsylvania) and cities have adopted the non-poverty wage standard. The city of Los Angeles’ Sweatfree Procurement Ordinance (Ordinance No 176291, adding Article 17 to the Los Angeles Administrative Code, Div. 10, Ch. 1) applies to all contracts for material, supplies, equipment and laundry services where the value of the contract exceeds US$25,000 and the term of the contract is in excess of three months. Under the Ordinance, contractors with the city must sign a City Contractors Code of Conduct, whereby the contractor promises to ensure compliance with ‘all human and labor rights and labor obligations that are imposed by treaty or law on the country in which the equipment, supplies, goods or materials are made and assembled’. In addition, for contracts involving the procurement of ‘garments, uniforms, foot apparel and related accessories’, contractors must ensure that contractors are paid a ‘procurement living wage’ (Sec. 10.43.3.D, Los Angeles Administrative Code, Div. 1, Ch. 1). For countries outside the US, the relevant city agency ‘shall establish a procurement living wage which is comparable to the wage for domestic manufacturers as defined above, adjusted to reflect the country’s level of economic development by using the World Bank’s Gross National Income per capita Purchasing Power Parity index’ (Sec. 10.43.3.D, Los Angeles Administrative Code, Div. 1, Ch. 1). Successful contractors are required to ‘take good faith measures to ensure that, to the best of the contractor’s knowledge, the contractors’ subcontractors also comply with the City’s Contractors Code of Conduct’. The City of LA has also entered into an agreement with an NGO, the Workers Rights Consortium, to carry out monitoring of compliance with the Code. This arrangement will be discussed in more detail later in the chapter.
Thus it appears that there is a growing interest in the use of procurement by governments in developed countries to influence labour standards in developing countries. However, as discussed in the following section of the chapter, there is a lack of empirical evidence regarding the impact of these policies. Are these policies merely aspirational statements by governments in developed countries under pressure from labour and fair trade activists, or are they designed and resourced to be legitimate and effective forms of regulation?

Studying the Impact of Procurement as Labour Regulation
In this section, consideration is given to whether procurement is or can be an effective mechanism for promoting better labour standards. In doing this, it is necessary to outline some of the obstacles to successful use of procurement as labour regulation. Drawing on the regulation and governance literature and assessments of non-government labour regulation, this chapter then outlines some possible strategies for the effective and legitimate use of procurement to promote better labour standards in developing countries.
Possible Barriers and Limitations to Use of Procurement
Any study of the impact of procurement as labour regulation must take account of any relevant barriers or limits to this approach, whether legal, political or economic. The first limitation is a powerful conventional wisdom that procurement is a commercial function of government which must be carried out efficiently in order to ensure ‘value for money’ for taxpayers (McCrudden 2007). Value for money is often assessed in narrow cost-benefit terms, that is, choosing the contractor that will provide the best service at the lowest cost to the public purse, thus excluding consideration for social concerns. Even where governments adopt an ethical purchasing policy, purchasing officers may give such policies very little weight compared to value for money criteria.
From the perspective of contractors, if procurement imposes too great a cost on a business in terms of compliance with labour standards then legitimacy of the procurement criteria will be undermined. Businesses may agree to labour standards, yet fail to comply with those standards in practice, especially if there is inadequate monitoring and enforcement by government or its agents.
Another (related) potential restriction arises from the promotion of competition and free trade, both at domestic and international regulatory levels. For example, in Australia the Trade Practices Act 1974 (Cth) (‘TPA’) has been identified as a potential restriction on the capacity of a State government to use procurement to impose social obligations on businesses supplying goods or services to the government (Queensland Government 2006, 8.4). A number of commentators, however, have suggested that the TPA does not apply to public procurement (for example Seddon 2004, Ch. 6). Nevertheless, doubts about the extent of the TPA’s application may be a reason for State government hesitation to strengthen labour conditions attached to public procurement policies.
Perhaps more significantly, both multilateral and bilateral free trade agreements and regulatory frameworks have been identified as restrictions on the use of procurement to ‘discriminate’ between businesses on the basis of labour standards, such as the World Trade Organisation’s Government Procurement Agreement (GPA). Once again, the restrictions posed by such rules may be more perceived than real. In the EU, both the EU Treaty and the EU Public Procurement Directive 2004 are intended to assure free movement of goods and services and non-discrimination against contractors on grounds of national origin. This has not prevented national governments of member states from including labour standards as part of public procurement processes (Bovis 2007).
Another possible difficulty with the use of procurement as labour regulation pertains to the potential for regulatory complexity which may undermine the legitimacy and effectiveness of procurement as a mechanism for promoting better labour standards. Where used domestically to improve labour standards by requiring firms to adopt labour standards and/or employment practices ‘above the floor’ of standards set by statute, labour criteria in procurement contracts add another layer of regulation to what is, in Australia at least, an already complex area.
The use of procurement as a form of transnational regulation of labour standards in developing countries also raises a number of concerns. Some of these barriers are legal, in the sense that there may be constitutional or other jurisdictional limitations on some levels of government seeking to influence labour standards in another country. Other challenges relate to possible unintended consequences of a relatively developed country seeking to raise labour standards in a developing country. Many of these have been canvassed in relation to non-government regulatory mechanisms – for example, that any standards set through procurement contracts must be sensitive to local conditions. Governments must be sensitive to the possibility that requiring supplier businesses to observe higher labour standards than is their customary practice could lead to a loss of jobs by workers in developing countries, resulting in those workers being ‘squeezed’ into worse jobs as a result (Heeks and Dunscombe 2003; Doorey 2005, pp 386–387).
Further concern expressed with respect to private regulation such as supply chain regulation through codes of conduct is that such initiatives crowd out or undermine domestic labour law and labour regulation institutions in developing countries (Heeks and Duncombe 2003). The same concern could be raised in relation to attempts to use procurement as a form of inter-state labour regulation.
Many of these challenges can be overcome through appropriate regulatory design and implementation. The next section provides an evaluation of some existing procurement policies and includes an assessment of how procurement processes could be designed to enhance legitimacy and effectiveness. This requires an extensive combination of public and private regulatory approaches and mechanisms.
Procurement Strategies for the Legitimate and Effective Promotion of Better Labour Standards
Accepting the desirability of public procurement as a tool for promoting better labour standards, it is important to give careful consideration to its design and implementation. Failure to do so may cause it to be ineffective or have unintended consequences, such as where the intended beneficiaries of these initiatives end up worse off than they were beforehand (Doorey 2005, 358). This has been previously discussed above. Moreover, the literature on regulation canvassed earlier serves to reinforce that unless policy places demands on organisations to take compliance seriously, these approaches are likely to be nothing more than window dressing.
There are a number of elements that must be considered in the design of a legitimate and effective procurement process: firstly, agreement on appropriate labour rights and standards to be enforced through the procurement process; secondly, the disclosure of information; and third, an adequate system of monitoring and enforcement of the agreed norms and standards. This last element of regulatory design may be reformed by the experience of non-governmental mechanisms of international supply chain regulation and ‘ethical trade’ initiatives.
Firstly, to ensure the legitimacy of any use of procurement to promote or secure better labour rights and standards, government must work responsively with their own financial officers, trade unions and their international affiliates, the ILO, relevant NGOs and potential contractors to agree on appropriate labour rights and standards to be incorporated into eligibility criteria, tender assessment processes and the actual contracts themselves. These standards must be adaptive to local regulation and labour market conditions.
There have been a number of different approaches to this challenge incorporated into voluntary codes of conduct or firm/industry-level CSR initiatives (for example Nike and Reebok) and ‘multi-stakeholder’ non-government regulatory schemes. Many of these initiatives are prepared in consultation with business, trade unions and NGOs, and thus reflect the core ILO Conventions. An example of such a scheme is the OECD Guidelines for Multinational Enterprises (for an overview, see Cooney 2004) Some require compliance with the labour law of the country where work is performed, however, minimum labour standards, especially wages, in developing countries may not be sufficient to serve as a mechanism of poverty alleviation. Thus, while there is concern that labour standards in codes of conduct are not so high as to have unintended consequences, they should not be so low as to be ineffective in improving working conditions.
The LA City Sweatfree Procurement Ordinance discussed above is an example of a responsive approach to this aspect of the procurement challenge. Where it addresses labour standards of sub-contractors in countries other than the US, the Ordinance requires compliance with local minimum standards. However, it also requires payment of a ‘procurement living wage’ assessed on the basis of local conditions.
The second element of a legitimate and effective procurement regime is a mechanism to ensure information disclosure by contracting companies regarding the companies and factories in their supply chains, as well as information concerning compliance with set labour standards down the supply chain (Cooney 2004). If government is to ensure that only companies with suppliers observing the minimum standards are considered for government contracts, there must be some mechanism by which companies must provide this information, and where it is subjected to some sort of monitoring and accountability process. Such a process would prompt firms to give consideration to the regulatory purposes behind such a requirement, which might encourage the internalisation of these norms. Furthermore, it allows for verification of compliance by independent monitors. Returning to the example of the Sweatfree Procurement Ordinance, it appears that contractors with the city must provide a list of their suppliers and the location of any worksites used in the supply of goods and materials (WRC 2008). The city can then require that contractors ensure that monitors can access those businesses and sites to monitor compliance with the labour standards set under the procurement Ordinance.
This last point brings us to monitoring and enforcement of labour conditions in procurement contracts. Once again, the legitimacy and effectiveness of procurement processes to promote better labour standards would be enhanced by the involvement of stakeholders in the monitoring and enforcement of standards (Vincent-Jones 2006). Evidence suggests that the procurement process must incorporate specifications regarding monitoring and enforcement of compliance with the agreed labour rights and standards in order to maximise effectiveness. Such a monitoring regime is built into the Sweatfree Communities procurement ‘Toolkit’, (Sweatfree Communities 2006). Monitoring might take the form of an audit of factory compliance with specified standards as part of the tender assessment process, or monitoring of ongoing compliance with labour standards agreed to in procurement documentation. Ideally, these processes should supplement or complement private monitoring by trade unions and NGOs, ILO and local labour regulation in order to maximise the legitimacy of monitoring activity (Kolben 2007). Specifications must also ensure that firms take responsibility for implementing internal planning and management processes which emphasise the importance of compliance with labour criteria in procurement contracts (Graham and Woods 2006, 878). In other words, although governments cannot be expected to devote significant resources to monitoring compliance with labour standards as part of their procurement functions, they can encourage development of self-regulatory mechanisms and draw on non-government monitoring and evaluation mechanisms by requiring contractors to agree to monitoring by trade unions, local government agencies or independent auditing bodies.
Again, the Sweatfree Procurement Ordinance provides an excellent example of this approach being used in relation to procurement initiatives. By engaging the Workers Rights Consortium (WRC) as an independent monitor of compliance with the Ordinance, the City has adopted an innovative model of private monitoring. The approach of the City of LA also provides the most detailed assessment of the impact of procurement as mechanism for transnational labour regulation, as the WRC has recently completed a monitoring report in relation to compliance with the Ordinance by a major supplier of garments to the city.
The WRC is a non-government organisation formed in the US in 2000 as a result of protests by students that official University apparel in the US was being produced in sweatshop conditions (for a detailed explanation and analysis of the WRC, see Barenberg 2007). The WRC both develops and monitors codes of practice designed to ensure that participating universities and colleges source their official garments from ‘sweatfree’ global supply chains. Mark Barenberg has argued that ‘the WRC has developed the most effective, transparent, and “participatory” model of transnational labour monitoring’ (Barenberg 2007, 38). According to Barenberg, this is largely because the WRC maintains its independence from employer and trade union interests in the apparel industry in terms of its governance structure and funding sources, and by engaging to the greatest possible extent with local workers and communities in carrying out factory monitoring in developing countries (Barenberg 2007).
By engaging the WRC to carry out monitoring of compliance with its Ordinance, the City of LA has implemented this model in a procurement context (WRC 2008; City of Los Angeles, undated). In late 2007, the WRC carried out an ‘assessment’ of an apparel factory in Phnomh Penh, Cambodia, owned by a Taiwan-based multinational corporation, New Wide Garment (NWG). Williamson-Dickie, a major supplier of ‘Dickies’ brand garments to the City of LA, had named NWG as one of its suppliers, and as a result NWG was subject to the city’s Sweatfree Ordinance. According to the WRC, NWG employs approximately 1,400 workers at its Cambodian factory, more than 90 per cent of them women.
The WRC’s assessment was based on interviews with the management and the company’s ‘code of conduct compliance officer, ‘in-depth’ interviews with 31 NWG production employees, review of factory documentation including payroll records, employment contracts and personnel policies, and a physical inspection of the factory. Unfortunately, the WRC’s assessment report does not provide much information on the composition of the team used to conduct the assessment. Previous analysis of the WRC’s activities in relation to the monitoring of the WRC Code for University purchasing suggests that the WRC is intended to maximise local participation in the assessment. In addition to including locals in the assessment team, the WRC would normally engage with local labour ministries, tribunals and other officials, as well as building the capacity of local NGOs (Barenberg 2007, 41).
WRC found that the factory was not complying with the LA Sweatfree Ordinance in a number of respects. Some of these were instances of non-compliance with Cambodia’s own labour legislation, including unlawful discrimination against pregnant workers, unlawfully long probationary periods, failure to provide sick leave and breach of Cambodia’s freedom of association protections. The WRC also found that while NWG paid workers the minimum salary permitted by Cambodian law, this was below the Procurement Living Wage required by the Ordinance. The WRC estimated the Cambodian living wage at US 63c per hour, or roughly $130 per month under the terms of the Ordinance. Workers were being paid between $50–62 per month.
Under the terms of its agreement with the City of LA, the WRC held discussions with NWG and it agreed to address some of the violations identified in the assessment. For example, the company agreed to adopt a policy of non-discrimination against pregnant workers. Unresolved issues were addressed by the WRC in the form of recommendations to the City of LA. Interestingly, the WRC was careful not to recommend that the City of LA require NWG (through Williamson-Dickie) to increase wages to meet the Procurement Living Wage. The WRC recognised that a wage increase could only be achieved if NWG’s customers were willing to pay significantly higher prices for its product. Instead, it resolved to hold discussions with the city regarding this issue.
There are a number of conclusions which can be drawn from this discussion regarding the ways in which procurement mechanisms are implemented and enforced. There are risks associated with this mechanism for the alleviation of poverty and the promotion of higher labour standards. The first is that even after contractors have agreed to ensure compliance with specified labour standards throughout their global supply chains, many are still likely to be non-compliant as the NWG example shows. The second is that in the absence of monitoring, this is likely to continue notwithstanding that the head contractor has legal obligations to the contrary. However, when combined with independent and rigorous monitoring of compliance by contractors’ supply chains, procurement can have an impact on labour standards in developing countries. The WRC assessment report suggests that workers at the NWG factory would enjoy improved working conditions as a result of the assessment, including, at the very least, a higher level of employment security. At least some of the employees of NWG may enjoy a less precarious existence as a result of the LA Ordinance.
The LA Ordinance appears to represent a rigorous and comprehensive model combining public and private regulatory mechanisms which could be applied more widely within the procurement context. It involves a mechanism which is not reliant on self-regulation, but rather relies on the Ordinance and Code to force contractor companies to engage with the sweatfree norms not only within the contractor company, but also across that company’s global supply chains.
The appointment of a well-resourced, independent monitor ensures that demands can be placed on contractors and their suppliers to engage with the relevant labour standards. It also seems that the WRC is able to work closely with local groups, thus maximising legitimacy and effectiveness of the relevant code or policy by ensuring that extensive evidence of compliance is collected. However, the approach of engaging with local workers, communities, and officials also ensures that monitors are sensitive to local conditions and perspectives in terms of the course of action which is recommended.
A report by the City of LA’s City Administrative Officer to the Chair of the Housing, Community and Economic Development Committee estimates that the annual cost to the City of engaging the WRC would be in the sum of $50,000 (City of Los Angeles 2003). It is therefore an approach which requires the expenditure of significant resources. As noted earlier, it is questionable whether many governments would be willing to commit such resources to monitoring sweatfree procurement policies. In Australia, the Sydney Olympics example reveals that even where a policy is agreed upon, resourcing for adequate monitoring and enforcement does not form part of the arrangement. That role is left to NGOs and trade unions which have many different limitations on their resources. The alternative is to rely on self-monitoring of supply chains by contracting companies, which on its own has also proved to be unreliable (Barenberg 2007; Graham and Woods 2006; Locke, Qin and Brause 2007).
What happens when contractors and their suppliers are found to be non-compliant with labour standards in procurement contracts? One of the advantages of government procurement over non-government supply chain regulation with respect to labour standards is the extent to which effective sanctions are available. In most cases where government procurement contracts impose labour standards, a basic sanction for non-compliance will be cancellation of future contracts and ineligibility for future government contracts (see, for example, the LA Sweatfree Procurement Ordinance). For many businesses, especially those dependent on government buyers to provide a market for their goods, exclusion from government contracts on the basis of failure to comply with labour standards may be a significant penalty. This nevertheless requires a commitment from governments to enforce sanctions where breaches are discovered in relation to suppliers who have been long-term, preferred contractors, or where suppliers are few and far between.
Procurement must be used to supplement existing forms and processes of regulation and avoid overriding or conflicting with existing mechanisms. A combination of public and private regulation has been shown to be effective in securing actual outcomes in terms of better labour standards (Weil and Mallo 2007). Thinking about effective strategies for promotion of labour standards through procurement also requires engagement with the literature on private regulation and monitoring in this area. To some degree, when considering government purchasers as supply chain regulators, there is a significant overlap with supply chain regulation by private purchasers in terms of the issues which must be confronted.
In concluding this discussion, I am not suggesting that effective and legitimate use of procurement to promote better labour standards is a technocratic process of optimal regulatory design. The barriers and challenges laid out in the previous section of this chapter – whether real or perceived – present a significant obstacle to the development and implementation of procurement policies linked with labour standards. In some contexts, especially in Australia where the use of procurement to secure better labour standards is relatively under-developed, an incremental approach to the implementation of these ideas is most likely the best that can be expected.
A relatively straightforward option for governments to implement in the short term is to require factory list disclosure as a condition of eligibility and as a tender condition for procurement contracts. That is, companies wishing to tender for government work could be required to disclose a list of the names and addresses of the factories which form part of the corporation’s supply chain (Doorey 2005; see also Kolben 2007). This proposal does not require that companies provide information regarding the labour standards observed by supplier factories, or that contractors allow monitoring of compliance down their supply chains. However, Doorey, the proponent of this approach, argues that the factory list disclosure proposal could address some of the barriers to enforcement of labour standards. It is an important first step which assists overcome the some of the expenses of collecting compliance information. Doorey argues that disclosure of both supplier factories and their level of compliance can in fact lead to some of the harmful unintended consequences for workers described earlier (Doorey 2005, 384–388). By limiting disclosure to the list of supplier factories, there is a lower cost to both the potential contractor and the government because of the relative ease of providing this information and the reduction in monitoring requirements. According to Doorey, the information can nevertheless empower the state and local workers and institutions in a way which does not force workers to be involved in something which may ultimately disadvantage them.

This chapter has outlined several ways in which government procurement can be used to achieve better labour standards and alleviate poverty in developing countries. Governments in developing countries can use public wealth to leverage greater compliance with labour standards by contractors using suppliers in developing countries. Achieving greater compliance with standards, including the payment of a ‘living wage’, will hopefully contribute to poverty reduction in those countries.
There are, however, a number of obstacles to the effective use of public procurement as a mechanism for the improvement of labour standards. The first is to persuade governments to think beyond ‘value for money’ in the context of procurement, or at least to see good labour practices in supply chains as an economic benefit rather than a cost. However, even where governments have incorporated labour standards into their procurement policies, there is very little evidence to show that these policies are actually effective in ensuring compliance. Only by having adequate disclosure and monitoring arrangements will it be possible to ensure that procurement policies are having any effect.
It is important to place public procurement as labour regulation in perspective. There are natural limits to the reach of procurement as a regulatory tool – it only has the potential to impact on workers employed by companies which choose to contract with government, and their suppliers. Even where the challenges facing this particular approach to labour regulation are overcome, it is important that procurement be seen as a step along the way in the achievement of better labour standards in developing countries and not the ultimate goal.

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[∗] Centre for Employment and Labour Relations Law, Melbourne Law School. I would like to thank Ingrid Landau for research assistance and discussion of ideas. I am also grateful to Shelley Marshall and Kate Macdonald for helpful comments and discussions.

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