goods_and_service_procurement_practice_guide.doc

A supplier based overseas will most likely prefer to

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A supplier based overseas will most likely prefer to receive payment in their local currency. If they are paid in a foreign currency (i.e., Australian dollars), they will be exposed to exchange rate movements and cannot guarantee whether they will ultimately receive a fair price for their products and/or services. Similarly, a public authority may prefer to pay in AUD because it will have certainty over how much its purchase is going to cost and will not need to be concerned with movements in exchange rates and risk exceeding their budget. The party who pays/receives payment in their domestic currency has transferred the foreign exchange risk to the other party. Standard procurement templates request pricing in AUD as a default method of transferring foreign exchange risk to the supplier. However, as the value of exposure to foreign exchange risk increases, it is necessary to examine whether the State is receiving fair value for 67 Ver. December 2017 Appendix
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transferring the risk to the supplier as opposed to the public authority holding the risk and managing it through WATC. When can exposure to foreign exchange risk occur? There are several ways in which exposure to foreign exchange risk can occur when purchasing products and/or services. While the list below should not be taken as exhaustive, considering these scenarios should identify the most likely occurrences. Payment for products and/or services denominated in a foreign currency. Payment for products and/or services denominated in AUD but where the amount of AUD is conditional upon an exchange rate. Payment for products and/or services denominated in AUD but where the amount of AUD is conditional upon a price variation clause linked to an exchange rate. During a period of negotiation prior to agreeing a fixed AUD price where the AUD price is dependent on an exchange rate. Preliminary foreign exchange risk assessment It is preferable that the potential for foreign exchange risk is identified early in the procurement process. If material, purchases with significant or high foreign exchange risk may require a tailored approach to ensure that pricing information requested from respondents is suitable to make a fully informed value for money assessment. During the procurement planning phase, you should consider the following: Identify whether the products and/or services are originating from overseas. Is the supplier sourcing directly from overseas, or through several intermediaries? Suppliers who are sourcing directly from overseas are more exposed to foreign exchange risk and are more likely to pass this risk onto the public authority. Has market sounding identified terms of payment indicative of foreign exchange risk existing? For example, price variation clauses or indicative pricing subject to exchange rates.
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