Part 3: The Ministry of Health’s approach to procurement and contract management

• Approach to procuring goods and services
• Approach to contract management
• Internal audit report 2002-03

3.1
During our inquiry, we identified a number of general issues in relation to the Ministry’s procurement and contract management policies and procedures.

3.2
In this Part, we discuss our expectations, findings, and recommendations in relation to these issues. We also consider a Ministry internal audit report that is relevant to our findings.

Approach to procuring goods and services

3.3
Public entities, and in particular government departments, are responsible for considerable amounts of public funds that are used to provide public services. It is important that appropriate policies are in place to govern the use of these resources.

What we expect

3.4
A public entity should have explicit procurement policies and procedures. Publishing and following an unambiguous policy reduces the risk of challenges to the decision-making process. It also helps retain credibility with suppliers. Clear procedures can help ensure that the procurement policy is consistently followed.

3.5
A public entity’s policies and procedures should clearly identify the circumstances in which each type of procurement method applies.

The policies that applied

3.6
The Ministry had procurement policies in place throughout the period of contracting with Allen & Clarke. These policies were as follows:

• Guidelines for Engaging and Managing Consultants (effective from 1 July 1997) (the 1997 policy).
• Procurement of Goods and Services (effective from November 2001).
• Procurement of Goods and Services (this replaced the November 2001 policy, and was in effect from April 2002 to the present time).

3.7
The policy Procurement of Goods and Services (effective from November 2001) and the policy that replaced it (effective from April 2002) are virtually identical. We refer to these 2 policies together in this report as “the November 2001/April 2002 policy”.

3.8
There was also a draft policy dated November 2003, Procurement of Goods and Services, which the Ministry does not appear to have used.

3.9
We also found a policy that the HFA had published for its procurement of health and disability funding, effective from 30 March 1999. The policy was entitled Health Funding Authority Quality System: Contracts Policy Manual with Associated Guidelines for Contestable Processes (the HFA policy).

3.10
The HFA was disestablished under the New Zealand Public Health and Disability Act 2000, and its functions were merged into the Ministry in 2001. As Allen & Clarke had not undertaken any contracting for the HFA, the HFA policy was not directly relevant to our inquiry. However, the policy appears to have remained available in the Ministry after the merger, and former HFA staff were aware of it. There were, therefore, features of it that may have had some bearing on the approach that was taken by the Ministry to some of its contracting with Allen & Clarke.

3.11
The 1997 policy applied to the engagement and management of consultants, as opposed to the later and broader policy, which applied to the procurement of goods and services. The 1997 policy was applicable to the first 4 contracts awarded to Allen & Clarke – those entered into before November 2001 – none of which was a contested contract. The 1997 policy was replaced by the November 2001/April 2002 policy, which was applicable to the subsequent contracts.

3.12
The November 2001/April 2002 policy applies to departmental output expenditure, and to non-departmental outputs where the expenditure is not for health or disability services. It applies to “all those involved in the procurement of goods and services or contracting for the Ministry of Health where the value of those goods and services exceeds $10,000”. It also sets out monitoring requirements for contracts that are of a value between $10,000 and $25,000, and more than $25,000. Less demanding requirements apply to contracts in the $10,000-$25,000 range.

3.13
The November 2001/April 2002 policy is silent on the matter of contracts with a value of less than $10,000. For these lower-value contracts, the procurement approach appears to have been at the discretion of managers who held the requisite delegated financial authority.

What we found

3.14
The November 2001/April 2002 policy states that it applies to all departmental output expenditure, and to non-departmental expenditure except for health- and disability-related expenditure.

3.15
However, there was confusion within the Ministry about what policy applied to some of its procurement of non-departmental services, namely some of the expenditure that the Ministry “inherited” with the merger of the Ministry and the HFA, and which was previously covered by the HFA policy.

3.16
Some Ministry officials we spoke to said that the HFA policy applied to non-departmental expenditure, some that there was no applicable policy for non-departmental expenditure during the period of contracting with Allen & Clarke we examined, and others (including the Director-General) that the November 2001/April 2002 policy applied. In our view, there was an inconsistent understanding of the applicability of the policy.

3.17
There was also a general lack of awareness among officials we spoke to as to what the November 2001/April 2002 policy actually required for procurement. Most of the officials we interviewed did not have a copy of the procurement policy, and were somewhat vague as to where they might locate a copy. We were left with serious doubts as to the adequacy of the dissemination of procurement policy information within the Ministry, despite the Ministry’s introduction of a contract management training module for managers.

3.18
In the absence of both a clear understanding about the applicability of the policy and good awareness of requirements of the policy, there is a risk that an inconsistent and inappropriate approach might be taken to procurement (as demonstrated by our findings in Part 4 of this report).

Approach to contract management

3.19
We identified a range of issues in relation to the Ministry’s management of contracts for services generally, including contracts with Allen & Clarke. Our concerns arose in the following areas:

• the level of staff competence in contract management;
• the approach adopted for monitoring contracts; and
• the processes for managing key contract information.

Staff competence in contract management

3.20
Contract management is a specialised task – it requires a certain skill set and approach that must complement a public entity’s contract management policies and procedures.

What we expect

3.21
A public entity should have staff who are trained and experienced in the systems, policies, and procedures that apply to each type and level of procurement it undertakes.

What we found

3.22
The November 2001/April 2002 policy has a provision for Ministry employees involved in procurement processes to have the necessary competencies for the type and level of procurement.

3.23
In recognition of the need for competent staff, the Ministry has implemented a number of initiatives. These include writing a comprehensive profile of competencies required for contract management, and introducing module-based training for staff. The Ministry requires staff involved in contract management to undertake its course “Contract Management 101”. These are useful and important initiatives.

3.24
However, as discussed in paragraphs 3.14 to 3.18, we found a general lack of awareness by Ministry officials about the particular requirements of the Ministry’s procurement policy. It was also apparent from our interviews with Ministry officials who had undertaken the training that it had not provided them with a good knowledge of the Ministry’s own procurement policies and procedures, although material was included in the training. Consequently, the Ministry has the dual dilemma of lack of clarity about the applicability of the policy, and limited knowledge by staff of the policy that does exist.

Contract monitoring

3.25
Contract monitoring by a competent contract manager is essential to ensure that a public entity delivers a contracted service efficiently and effectively, the associated risks are managed, and effective communication is maintained between all parties.

What we expect

3.26
A public entity should monitor a contractor’s performance to ensure that it meets all standards in accordance with the contract. The extent of monitoring undertaken, and the amount of resources applied, should depend on the level of risk and the nature of the goods or services. Documenting the contract’s progress, performance, and delivery is essential to good contract management. This is necessary to verify the service delivery against the requirements of the contract, and to confirm effectiveness, performance, and value for money.

3.27
A public entity should assess the contractor’s performance against criteria that it has:

• included in its policies and procedures;
• developed as part of the specification for the procurement;
• included in the tender documents; and
• if contract negotiations took place, confirmed during the negotiations.

3.28
The monitoring procedures should enable an entity to:

• take prompt action if a contractor’s performance falls below the agreed criteria;
• make the contractor aware of problems as they occur – in writing, if necessary;
• clearly identify issues to be addressed by all parties, providing an opportunity for the contractor to improve performance during the period of the contract; and
• collect information to inform any subsequent extension or renewal of the existing contract, or the contractor’s suitability for any other engagement.

What we found

3.29
With one exception, the contract files we looked at for the Allen & Clarke contracts did not contain contract monitoring information, such as documentation of the contract progress, performance, or delivery. We were advised that monitoring information is recorded in the Contract Management System (CMS) that is used for many of the contracts for non-departmental outputs. (The CMS is discussed further in paragraphs 3.35, and 3.42–3.47). However, the Allen & Clarke contracts were generally managed outside the CMS.

3.30
We were told that the Ministry implemented an extensive project in 2004 to improve its contract monitoring practices. This project had been completed before our inquiry took place, but its effects were not apparent for the contracts and timeframe that we considered in our inquiry. For example, we were told by some of those interviewed that accountability was not clearly assigned in all contracts, and that it was therefore unclear who was responsible for the management of and reporting on the contract. Furthermore, the contract improvement project largely relates to contracts managed through the CMS. We consider there would be benefits for the Ministry if it were to extend this project to cover all of its contracting activities.

Managing contract information

3.31
Our concerns about managing contract information focus on:

• the management of documentation relevant to the contracts in question; and
• the use of an appropriate solution to facilitate information management.

What we expect

3.32
Public entities need to maintain complete information about the procurement of services and the management of subsequent contracts for services.

3.33
Good practice would usually involve the assignment of responsibility for each contract to a contract manager, who would ensure that all the contract management processes are observed and the appropriate documentation retained for each contract. We also expect to find files with a record of each contract at a level of detail appropriate for the value of the contract and the level of risk involved in the contract, and to ensure its good management. This information would be readily accessible for contract management purposes.

3.34
The records maintained for the contracts may include information on:

• the procurement process (including the tender process or the justification for using a sole provider approach, tender evaluation, the recommendation of a preferred candidate, and negotiation and award of the contract);
• the cost of the project;
• technical aspects, including standards of reliability, safety, availability of equipment, and other performance criteria; and
• performance against specifications, allocation of resources, and other contractor evaluation reports.

What we found

3.35
As mentioned in paragraph 3.29, the Allen & Clarke contracts were generally managed outside the CMS. Given this situation, we expected that an alternative manual-based system of filing and recording contract information would have been used. Such systems, if well managed, are quite adequate for these purposes.

3.36
The Ministry did not maintain contract-related files for its contracts with Allen & Clarke. For each contract, we were presented with files that had been created recently and specifically for the purposes of our inquiry. Many files were incomplete in terms of what would normally be considered good practice for the documentation of a commercial undertaking. Many files contained minimal information, and the documentation that did exist was often a miscellaneous collection of e-mail messages and contract agreements, some of which were unsigned.

3.37
Even the files for significant contracts were almost completely devoid of business case, tender evaluation (where applicable), rate negotiation, progress and completion reports, and performance- or payment-related documentation – information that is required by the November 2001/April 2002 policy.

3.38
Officials involved in contracting with Allen & Clarke confirmed that it was not their usual practice to maintain individual contract files either in the traditional hard copy form or electronically.

3.39
We understand that some documentation had existed and might have been filed on subject-related files, but this documentation was not readily accessible for each contract in our inquiry. We were told that some information might have been lost with the passage of time. However, because of the practices noted throughout this report, we concluded that much of the expected documentation probably never existed.

3.40
This situation appeared to extend wider than the contracting with Allen & Clarke. The Ministry told us that a lot of contracts are filed by provider or project rather than by contract. Despite this, there does not appear to be a systematic approach to maintaining key documentation for individual contracts for all the Ministry’s contracting activities. The absence of a systematic approach, particularly to contracts of substance, does not accord with good contract management practice.

3.41
The Ministry told us that it is part of the business plan of its new Contracting Support Office to work with directorates to put together sensible filing structures.

3.42
The CMS is essentially an electronic system for filing contract agreements, arranging payments, and recording contract monitoring information. The CMS is not being used for all Ministry outputs. The Ministry told us that it does not run contracts funded as departmental outputs through the CMS, as that would result in mixing departmental expenditure with the non-departmental expenditure of the DHBs.

3.43
We did not examine DHB expenditure. But the consequences of the Ministry not having an effective and comprehensive system covering all its contracting are illustrated by the following example.

3.44
When we began our inquiry, we understood from the response given by the Minister of Health in answer to a Parliamentary question that the Ministry had entered into 42 contracts with Allen & Clarke between 2001 and 2004. However, during the course of our inquiry, the Ministry identified a further 18 contracts. The Ministry asked Allen & Clarke to assist in the identification of the contracts. A number of contracts, although quite small in value, were identified only as a result of Allen & Clarke’s assistance. The absence of readily available information for the Allen & Clarke contracts impeded the Ministry’s efforts to respond to our inquiry, and compromised its ability to demonstrate the adequacy of its contracting practices. An electronic system of recording contract information for all contracts would have greatly assisted the Ministry’s response.

3.45
We understand that the CMS allocates a unique contract number for each contract, which then provides the mechanism to link various contract-related documents, such as agreements, invoices, payment records, and reports. However, as noted above, this system is not used for all Ministry contracts, and was not used for the Allen & Clarke contracts. The absence of an effective management system, that allocates contract numbers or the use of a register for all contracts, is a significant shortcoming in the Ministry’s present contract management arrangements.

3.46
We note that the present CMS may have some shortcomings. Ministry officials expressed some concern to us during interviews about perceived difficulties with the present CMS. Our review of documentation relating to the Ministry’s contract monitoring project (see paragraph 3.30) showed that some directorates within the Ministry have been reluctant to fully adopt the CMS because of their concerns about the system.

3.47
The Ministry told us that it commissioned work in April 2005 to identify the best options for Ministry-wide electronic contract management. The resulting options were under consideration at the time of writing our report.

Internal audit report 2002-03

3.48
During 2002-03, the Ministry’s Chief Internal Auditor undertook an audit of the Ministry’s contracting performance. The audit focused on the Ministry’s contracting for non-departmental outputs, with objectives to review and evaluate the performance of a number of Directorates in concluding agreements and monitoring contractor performance. One hundred contracts were selected for the audit from the Ministry’s Directorates.

3.49
Some of the more significant findings from this audit were:

• Directorates were making limited use of the CMS (see paragraph 3.46 above).
• Directorate staff said they were aware that Ministry guidelines for procurement existed, but believed that they did not apply to non-departmental output services.
• Although asked, other Directorate managers did not indicate what, if any, contracting guidelines they used.
• Where policies existed within a Directorate, they were not consistently followed.
• The vast majority of agreements audited were rollover variations to existing agreements or new agreements with preferred providers that were not contested.
• There is no mechanism in place, or used by any Directorate, to challenge or contest the current preferred providers of the majority of non-departmental output services.
• A commercial approach to negotiation for the purchase of non-departmental output services was not widely apparent during the audit.
• Since the majority of agreements audited were rollover variations, the evidence observed of negotiations was merely of an administrative nature.
• A frequent approach cited by managers was for them to advise providers that the Ministry had a specific amount of funding available, and to ask providers to tell the Ministry what they would deliver for that funding.
• 33% of agreements were adequately monitored.

3.50
We obtained this internal audit report at a late stage in our inquiry, at a time when our initial findings had been identified. The findings of the 2002-03 internal audit and our own findings are very similar.

3.51
The Ministry told us that it treated the internal audit report’s concerns seriously, and that the report led to a wide-ranging review of contract management, together with a focus on continuous improvement. We accept that the Ministry implemented a number of important initiatives to address the 2002-03 audit findings, but the expected improvement has not yet been achieved.

3.52
We understand that the Ministry has now established contract management infrastructure and accountabilities which include the Contracting Advisory Group and the Contracting Support Office. The Ministry has an opportunity to make the Contracting Support Office a “centre of excellence” to lead the much-needed improvement in the Ministry’s contracting practices.

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