The Commonwealth Government is taking steps to "strengthen" the Indigenous Procurement Policy by tightening the eligibility criteria for First Nation businesses as part of its public consultation process.

Under the current federal Indigenous Procurement Policy (IPP), three per cent of all contracts and 1.75 per cent of the value of all contracts must be awarded to businesses at least 50 per cent owned by Indigenous people.

Since its inception in July 2015, the IPP has generated $7 billion in government spend with Indigenous businesses, with more than 47,500 contracts being awarded to more than 3,000 Indigenous businesses.

The federal government said in a statement that by reviewing the eligibility criteria for Indigenous businesses to access the IPP, it would ensure First Nation businesses get the opportunities the policy was set up to deliver.

As part of the consultation process – which is open to the public for comment until March 1, 2024 – the government will also require First Nations businesses be majority owned and controlled by Aboriginal people.

Under the IPP, a First Nations' company is defined as a business with at least 50 per cent Indigenous ownership.

The review of the IPP will be welcomed by academics, First Nation businesses and the Greens who have all called for an overhaul of the policy.

In March, Yamatji-Noongar senator and Greens' First Nations spokesperson Dorinda Cox, told National Indigenous Times the IPP needed to be revised, as the policy targets were not ambitious enough.

Supply Nation chief executive Kate Russell recently told NIT that while the IPP had enabled growth in the Indigenous economy, the policy could be refined and improved.

"Supply Nation has long advocated for and supports additional measures to protect the integrity of the Indigenous business sector and will continue to work with the Government to implement and deliver on any amendments to the IPP," Ms Russell said.

The federal government said it was also going to tackle the ongoing issue of black cladding, which is reportedly rorting Indigenous businesses out of tens of millions of dollars of taxpayer-funded contracts each year from companies claiming to be majority-owned and operated by Aboriginal and Torres Strait Islander people.

Black cladding is when non-Indigenous companies boost their Indigenous shareholder base or claim to be First Nation businesses in a bid to win government contracts.

Northern Territory senator Malarndirri McCarthy said the consultation process would provide valuable insights to ensure economic benefits are flowing to First Nations people, businesses and communities.

"The Indigenous Procurement Policy is about working in partnership with First Nations people and businesses to boost self-determination, economic empowerment, and employment opportunities," she said.

"The Albanese Government's commitment to strengthening the Indigenous Procurement Policy will mean more opportunities for First Nations businesses and greater progress toward Closing the Gap.

"Indigenous businesses across the country have demonstrated their ability to consistently deliver high-quality work for government".