Market observers may be surprised to learn ICT spending in the Federal market increased in the first half of the 2008-09 financial year.
Intermedium data shows the value of contracts reported in the July – December 2008 period was slightly higher than the same period the previous year. However, this is somewhat misleading.
Closer examination shows Defence awarded three large contracts to just two vendors, clouding the fact the rest of the market slowed significantly. Excluding the Defence contracts (valued at $437 million), the value of Federal Government ICT spending may be down as much as $1 billion in the 12 months to December 2008, compared with the same period the previous year.
ICT tenders are also down. Intermedium research shows the number of ICT tenders issued by Federal agencies in the period July – December 2008 was down almost 20% on the same period the previous year, and is exhibiting a prolonged downward trend.
While the commercial sector is increasingly impacted by the Global Financial Crisis, the initial downturn in the Federal Government market is due to internal factors.
The impact of the Gershon Review began to bite early in 2008, continuing the market slowdown that started around the election and change of government. This slowdown in activity continued during the Review, and until the recommendations were accepted by the Government in November. Upon taking office, the Rudd Government immediately announced the introduction of an additional 2% efficiency dividend, cutting existing agency operating expenditure for the remainder of 2007-08. In the May 2008 Budget, the Treasurer announced extension of the 2% efficiency dividend would apply for 2008-09. The effect of the efficiency dividend is to reduce discretionary operating expenditure.
In many agencies, cuts to ICT may have made a disproportionate contribution towards achieving agency cutbacks required to meet the increased efficiency dividend imposed early in 2008. ICT seems to have been viewed as an easy target for cuts to discretionary spending.
A feature of the market during the first half of the financial year is a decline in the value of IT Services contracts. This category is the “bellwether” of ICT activity, particularly as it includes IT contractors.