Part 2: Our expectations

Electricity Commission: Contracting with service providers.

2.1
In this Part we discuss our published guidelines, and those of the Ministry, relating to sole source procurement. We set out our expectations, and indicate whether the Commission met them.

Our procurement guidelines

2.2
In June 2001, we published Procurement – A Statement of Good Practice⁸, which sets out our expectations of a public entity when it is purchasing goods or services. The guidelines state -

Procurement from a selected supplier, without inviting competing tenders from any other suppliers, should be the exception rather than the rule, and should be justified only in certain limited circumstances.⁹

The Ministry’s procurement guidelines

2.3
The Ministry’s document Policies and Procedures for Buying Goods and Services for the Ministry of Economic Development refers to sole source procurement as “selective purchasing”. It notes that -

Selective purchasing is the exception, not the norm. Where a manager considers a selective purchase is appropriate, it must be endorsed by the Deputy Secretary/General Manager and the decision must be well documented. The selective purchase method should only be used in the following circumstances:
for one-off purchases of goods or services of minor value (threshold $5,000 plus GST) where competitive purchasing procedures would not be cost-effective, and where a period supply contract is not appropriate;
when stores or services are available only from a specific source of supply (such as proprietary brands where there is no technically acceptable equivalent);
when a supplier has unique expertise or knowledge;
where compatibility/standardisation with existing equipment (or office furniture/fittings) is required;
when acquiring spare parts or accessories for existing equipment;
for development or prototype work;
when a tender for other stores or services has recently been accepted from a supplier; or
when making purchases from a public auction or from another government department or agency.
Selective purchase may also be appropriate if a successful tenderer fails to supply. In these circumstances, it can be appropriate to approach one of the unsuccessful tenderers on a selective-purchase basis.

Our expectations with sole source procurement

2.4
Both these publications have helped to shape our expectations of the steps that a public entity should follow in opting for sole source procurement. Our expectations are:

Expert advice on procurement options. We would expect to see an analysis of the different procurement options, and why sole source procurement was the preferred one. In the case of new service provider contracts for the Electricity Commission, this analysis was not undertaken.
Capability assessment of potential suppliers. We would expect to see evidence of analysis to determine if a market (or possible market) existed. If so, we would expect a capability assessment of the potential suppliers that make up that market (public entities should consider a Request for Proposal to test for this). In the Commission’s case, timing was a significant issue and therefore the pool of potential suppliers may have been limited. Regardless, an analysis of the capability of those suppliers should have been undertaken, but was not.
An analysis of industry or market expectations. Where appropriate, we would expect an analysis of the expectations of the parties likely to be affected by the service or good procured. In the Commission’s case, the views of existing industry participants on what they needed from the service providers could have been taken into account. This analysis was not undertaken.
An analysis of key risks. As sole source procurement should be “the exception, not the norm”, we would expect an analysis of the main risks associated with this option, and how those risks would be managed. It might consider issues such as minimising conflicts of interest. Again, this analysis was not undertaken.
An analysis of current provider performance. Where an existing provider is reappointed to deliver a service or provide a good, we would expect to see an analysis of that provider’s performance before any contracting decisions were made (a due diligence process may be appropriate). No analysis was undertaken, and all existing providers were reappointed to deliver services to the Commission.
An analysis of cost versus benefit. We would expect to see a documented analysis of the cost versus the benefit of retaining (or the feasibility of replacing) an existing supplier. Such an analysis would have helped the Ministry and the Commission to explain why sole source procurement was a suitable option. Again, no analysis was undertaken.

2.5
The Commission’s procurement decision was not well documented, even though good practice requires that all procurement decisions be well documented. A public entity using sole source procurement for significant contracts – which are likely to involve public scrutiny, and possibly review by other agencies – should exceed the usual standard, not fail to meet it.

8: Available from www.oag.govt.nz. See also Appendix 4.

9: Page 36.

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