Part 4: The Ministry of Health’s dealings with Allen & Clarke

• Concurrent employment and contract work
• Awarding contracts to former employees
• Use of sole provider approach
• Getting value for money in the contracts
• Compliance with delegations

4.1
In this Part, we discuss our expectations, findings, and recommendations in relation to the Ministry’s dealings with Allen & Clarke. In particular, we address these key concerns:

• the Ministry’s contracting with Allen & Clarke:
  • while the principals were employed by the Ministry; and
  • immediately after the principals had left the Ministry’s employment;
• the use of a sole provider procurement approach when contracting with Allen & Clarke;
• how value-for-money considerations were managed in relation to the Allen & Clarke contracts; and
• whether the Ministry complied with its internal financial delegation policies when it contracted with Allen & Clarke.

Concurrent employment and contract work

4.2
Concurrent employment and contracting arrangements can potentially give rise to performance issues, conflicts of interest, and probity concerns. These issues can be significant and any arrangements for concurrent employment and contracting require both careful consideration before they are agreed and careful management for the full period that they exist.

What we expect

4.3
We have separate expectations of both employees and employers who consider concurrent employment and contracting arrangements.

4.4
We expect an employee who is considering entering a concurrent employment and contracting arrangement to inform their employer of their intentions, and advise their employer of any potential conflicts of interest that may arise. This expectation is closely aligned to the Public Service Code of Conduct expectation that employees “should inform their chief executive where any actual or potential conflict of interest arises that impairs the full, effective, and impartial discharge of their official duties”.

4.5
We expect employers to ensure that:

• appropriate policies – such as a code of conduct, procurement policies and/or conflict of interest policies – are in place for approving and monitoring any concurrent employment and contracting arrangement;
• the procedures required by the policy are properly implemented, to ensure compliance;
• they have considered any potential conflicts of interest associated with an employee’s proposed concurrent employment and contracting arrangements; and
• they have considered any potential effect on the performance of the employee that might arise from concurrent employment and contracting arrangements.

What we found

4.6
Neither of the relevant policies (the 1997 policy and the November 2001/April 2002 policy) had provisions relating to concurrent employment. The Ministry did not have a conflict of interest policy in place at the time it contracted with Allen & Clarke. The Ministry subsequently issued a limited conflict of interest policy on 26 July 2004, in which it signalled that a full conflict of interest policy was being drafted.⁴

4.7
However, the Ministry has a Code of Conduct that applied throughout the time of its contracting with Allen & Clarke. It includes a general and typical provision requiring formal approval for secondary employment. This provision is usually applied to secondary employment with another organisation.

4.8
In considering the concurrent working relationship that existed, it is important to recognise the following sequence of events:

• On 28 March 2001, when Mr Allen resigned from permanent employment with the Ministry, he advised the Ministry of his desire to discuss other contracting opportunities.
• On 14 May 2001 Mr Allen began work on the JTA project with Medsafe, a business unit of the Ministry. He was employed for 30 hours a week for a 3-year fixed term.
• The company Allen & Clarke started contracting with the Ministry in June 2001. Between June 2001 and 16 January 2002, a total of 8 contracts were awarded to Allen & Clarke. We understand that Mr Allen undertook the work for these contracts. As noted above, Mr Allen was working 30 hours a week at that time on the JTA project. He told us that he used his remaining work capacity for the contract work. The 8 contracts did not involve work on the JTA project.
• On 16 January 2002 the first JTA contract was executed between the Ministry and Allen & Clarke. On 17 January 2002 Mr Allen ceased employment with the Ministry. Mr Clarke resigned from the Ministry a month later.

4.9
Some Ministry officials could not recall approval having been given for Mr Allen to undertake contract work for the Ministry. However, other officials told us that the Ministry was aware of the concurrent employment and contract work by Mr Allen at the time it occurred. As we note in paragraph 4.8, Mr Allen had advised the Ministry on 28 March 2001 that he would be willing to discuss such contracting opportunities with the Ministry. From our discussions with Ministry staff, the Ministry was aware of these intentions.

4.10
When the Ministry responded to Mr Allen’s advice that he wished to undertake secondary employment, it told him that he needed his manager’s permission and that any secondary employment must not conflict with the Ministry’s interests. Mr Allen acknowledged that direction in writing. We did not find any evidence that the approval required for secondary employment under the Code of Conduct had been obtained. Nor did we find evidence of any subsequent reviews and approvals in relation to conflicts of interest arising from secondary employment.

4.11
The Ministry did not fully apply its Code of Conduct in this instance. The Ministry should have more fully considered the risk of any actual or perceived conflict of interest or impropriety in establishing concurrent contracting and employment arrangements with Mr Allen and Mr Clarke.

4.12
We are satisfied that, though Mr Allen was contracting with the Ministry while working for the Ministry as an employee, the nature of the outputs provided in each case was different. In other words, Mr Allen was not contracted to provide the same outputs that he was concurrently employed by the Ministry to provide.

4.13
We received unconfirmed assertions that there were other instances of concurrent employment and contract work with other persons working for the Ministry. The Ministry later told us that it had reviewed the current situation and found no existing instances of concurrent employment and contract work.

4.14
We note that the Ministry has reviewed the application of its Code of Conduct provision regarding secondary employment. It has developed a conflict of interest policy to ensure that the risks associated with concurrent employee/contractor relationships with the Ministry are considered. The policy requires approval by the Director-General for such arrangements on a case-by-case basis.

Awarding contracts to former employees

4.15
The primary concern underlying the original questions from Mr McCully was whether Allen & Clarke had been given favourable treatment in obtaining contracts because of the principals’ status as former employees.

What we expect

4.16
Public entities often find that former employees have knowledge and experience that the entity may need to use. However, engaging former employees as contractors raises risks of actual or perceived impropriety in procurement situations. Policy and procedures need to recognise these risks and provide guidance on managing these situations appropriately.

4.17
In order to minimise the risk of actual or perceived impropriety in such procurement situations, we expect public entities to be able to demonstrate that:

• the employee had departed under normal circumstances (as opposed to departing from an organisation for performance, disciplinary, or similar reasons, and being re-engaged as part of a negotiated exit package); and
• the benefits to the employer of re-engaging the former employee as a contractor can be objectively justified.

What we found

4.18
We did not find any evidence to suggest that inappropriate relationships existed between the principals of Allen & Clarke and staff of the Ministry that might have affected the Ministry’s awarding of contracts to Allen & Clarke.

4.19
Contracts were generally awarded to Allen & Clarke because of the principals’ and their company’s experience in the specific areas of policy and regulatory advice, their reputation for good performance, and their availability. Ministry officials spoke highly of the performance and quality of the services provided by Allen & Clarke.

4.20
However, we did identify the following areas of concern:

• Neither the 1997 policy nor the November 2001/April 2002 policy deals with the engagement of contractors who are former employees of the Ministry.
• In our discussions with Ministry staff, we were given oral explanations as to why Allen & Clarke was engaged after the principals’ resignations. However, we found no documentation to demonstrate that the Ministry had specifically considered any perceived or actual risks inherent in that approach. Given that the principals were – among other things – to work on contracts associated with the JTA project – a project they had previously been employed to work on in the Ministry, the risk of a perception of impropriety arising in the award of the JTA contracts would have been high.
• Conflict of interest disclosures do not appear to have been required of, or made by, either of the principals.

4.21
We consider none of these to be good practice. However, we note that the Ministry has since reviewed its policy.⁵ The “refreshed” policy specifically requires staff to comply with its new Conflicts of Interests Policy.

Use of sole provider approach

4.22
A public entity has considerable discretion as to how it procures goods or services. However, when conducting procurement processes, the public entity must treat all parties involved in those processes fairly, and manage its resources effectively and efficiently.

What we expect

4.23
Non-contested procurement from a selected supplier (“sole provider procurement”) should be justified only in certain circumstances, for example where:

• tendering is not practicable – for example, in an emergency;
• the required goods or services are available from only one source, or only one supplier has the capacity to deliver at the time required, and this can be adequately attested;
• standardisation or compatibility with existing equipment or services is essential, and can be achieved only through one supplier;
• there is a legal requirement or directive to use one supplier;⁶ or
• the cost associated with any other form of procurement would be out of proportion to the value of the procurement or the benefits likely to be gained.

4.24
The low value of individual contracts does not of itself remove the need to consider contestability. Value for money could still be achieved with low-cost approaches such as seeking quotations. Where sole provider procurement is repeatedly used with one provider, we would expect consideration to be given to the cumulative value of the contracts when considering the cost of alternative forms of procurement.

What we found

4.25
The Ministry’s 1997 and November 2001/April 2002 policies both emphasised the need for a competitive approach to procurement, and set out the method options and the financial thresholds that applied to the options. The November 2001/April 2002 policy included a specific provision requiring a written request for exemption where it was proposed not to follow the policy. Non-contestable and sole provider procurement would have required such an exemption.

4.26
However, the Ministry adopted a sole provider procurement approach for 56 of the 60 contracts awarded to Allen and Clarke between June 2001 and February 2005. Twenty-eight of these contracts had a value of more than $10,000 and were therefore subject to the full provisions of the Ministry’s procurement policy. Four of the 28 contracts were contested in accordance with policy. The other 24 contracts were not contested and, for most of them, an exemption from policy was not obtained.

4.27
Thirty-two contracts had a value of $10,000 or less. None of these contracts appears to have been contested.

4.28
As noted in paragraph 3.13, the Ministry’s policy is silent on the approach to be taken with low value procurement. We do not consider the low value of these contracts precludes the necessity for a contestable approach, and would have expected to see some consideration given in this case, and in the Ministry’s policy generally, to the cumulative value of contracts, and to low-cost ways to achieve contestability.

4.29
One contract that was not contested was of an urgent nature as a consequence of a Ministerial request. The use of a non-contestable approach was appropriate in this circumstance, and allowed for under the November 2001/April 2002 policy.

4.30
If anything, the approach the Ministry took to contracting with Allen & Clarke was more consistent with the old HFA policy. This policy had no formal application to the contracts with Allen & Clarke. Nevertheless, the sole provider procurement approach referred to in that policy appears to have guided Ministry staff in the contracting with Allen & Clarke between 2001 and 2005. This may be a reflection of the level of staff familiarity with the HFA policy – some had been employed by the HFA before it merged with the Ministry.

Adopting the sole provider procurement approach

4.31
In most instances, we were unable to establish the Ministry’s reasons for adopting a sole provider procurement approach. We were told that the expertise, performance, and availability of Allen & Clarke, and the unavailability of other specialists in the market, were the main reasons for engaging Allen & Clarke. However, it was unclear how the Ministry had reached this conclusion.

4.32
During an interview with the principals of Allen & Clarke, we were told that, for some of the sole provider work that Allen & Clarke had undertaken for the Ministry, there had been other specialists in the market capable of undertaking the work. For example, for one of the 4 contracts that were competitively tendered, both Allen & Clarke’s tender and that of another potential contractor were highly regarded in the evaluation. From the evaluation report for this contract, it was evident to us that Allen & Clarke was awarded this contract, appropriately, on merit. However, the tender did confirm that there were other competent potential contractors for some of the work.

4.33
We were particularly concerned about a series of contracts entered into by the Ministry for the JTA project. The first of these contracts was awarded in January 2002 on a non-contestable basis. Payments were made on an hourly rate basis, and the value of the contract was $109,511. Three further contracts were awarded in 2003 and 2004 on a non-contestable basis, with a combined value in excess of $430,000. The provisions of the November 2001/April 2002 policy should have applied to these contracts.

4.34
It was explained to us during an interview with a Ministry official that, because of the experience of Mr Allen and Mr Clarke with the JTA project, the Ministry wished to ensure continuity of their involvement. To achieve this, the Ministry agreed to enter into a contract with Allen & Clarke. The Ministry official advised us that the resignations of Mr Allen and Mr Clarke had come as a surprise to the Ministry, and the Ministry felt it had no choice but to re-engage them on a contract basis.

4.35
However (as noted previously in this report), we found evidence that Mr Allen and Mr Clarke had been looking for opportunities to build a consultancy business and that this was known to the Ministry. The Ministry should, therefore, have been well aware of the risk of their resignations and the likely effect of that on the JTA project. The necessity to enter into a non-contested contract in January 2002 suggests a lack of succession planning and risk management by the Ministry.

4.36
This situation became even more acute with the further JTA contracts that were entered into as an extension of this project during the next 2 years. Again, there was no contestability for these contracts, despite advice from the Ministry’s internal auditor during this period that contestability should be considered.

4.37
The Ministry accepted these shortcomings in its practice, but reiterated that its current guidelines on contracting require business cases for all procurement of more than $10,000, and that records be kept. Its “refreshed” policies, procedures and guidance material will continue to make those points, and to emphasise that business cases need to be reviewed at the time of any extension.

Continuing the sole provider procurement approach

4.38
It was also unclear how the Ministry satisfied itself about the performance of Allen & Clarke to justify continuing the sole provider procurement approach. The November 2001/April 2002 policy specifically refers to the need to provide a contractor with feedback on its performance under the contract. Good practice would usually require a formal, written end-of-contract performance assessment, with feedback to the contractor.

4.39
Ministry officials told us that the documenting of contractor performance has not been their usual practice. Instead, informal e-mail and verbal advice has been provided to contractors. Allen & Clarke confirmed that it had often received such informal e-mail and verbal feedback on its assignments. Ministry officials spoke highly of the performance and quality of the services provided by Allen & Clarke. We viewed e-mail messages from Ministry officials to Allen & Clarke that described its services on a number of contracts as excellent.

4.40
However, Allen & Clarke advised us that, on a number of occasions, they had specifically asked the Ministry to formally record the company’s performance. It appears that the Ministry did not do so. As a consequence, the Ministry does not have a documented formal record of performance, available to all the Ministry’s contracting staff, to use as a basis for repeatedly contracting with Allen & Clarke as a preferred sole provider.

4.41
The Ministry accepted these shortcomings, and told us that the requirement for post-contract performance assessment was specifically included in its “refreshed” policies.

Getting value for money in the contracts

4.42
The use of a sole provider procurement approach raises questions about whether the Ministry has demonstrated it got “value for money” by contracting with Allen & Clarke. This proposition applies to any contracts with an external provider.

What we expect

4.43
We expect all public entities to adopt and be able to demonstrate a value-for-money approach when procuring goods or services. By “value for money”, we mean the best possible outcome for the total cost of ownership. Value for money does not necessarily mean selecting the lowest price. Rather, public entities should achieve the right quality, quantity, and price, at the right place and time.

4.44
We would expect value-for-money considerations to be a key part of negotiations between a public entity and a prospective contractor before a contract is entered into or renewed.

What we found

4.45
The 1997 and November 2001/April 2002 policies promoted contestability as the best means of achieving value for money in the Ministry’s procurement processes. However, as we discuss in paragraphs 4.26 and 4.27, a sole provider approach was adopted for the majority of the contracts with Allen & Clarke. Many of these contracts also required the contractor to be reimbursed on the basis of time on the project, at agreed hourly rates. A budget limit was often also written into the contracts.

4.46
The 1997 and November 2001/April 2002 policies required the Ministry, when it enters into a contract, to actively negotiate the hourly rates or cost to ensure value for money. We found little evidence that the staff directly involved in the procurement were aware of, or sought information on, typical hourly rates applying in the policy and regulatory advisory market. One Ministry official told us that information of this nature was available to his Directorate’s Funding Board. However, other Ministry officials told us that they had no knowledge of any information of this nature. On reviewing the contract files and interviewing Ministry officials, we found limited evidence that negotiation of hourly rates or costs had taken place.

4.47
Allen & Clarke provided information demonstrating that it had often provided quite detailed proposals for the work it had been engaged in, and that there had been negotiation of rates on occasions.

4.48
However, the evidence provided by the Ministry was insufficient to satisfy us that it had a well-established practice of negotiating rates where sole provider procurement was proposed. We concluded that, at best, there was an inconsistent approach to hourly rate negotiation for all the contracts with Allen & Clarke. Further, hourly rates need to be considered in the context of time taken, and there was insufficient information in this respect for a view to be formed on value for money.

4.49
During our inquiry we found that the hourly rates proposed by Allen & Clarke and agreed to by the Ministry for the period in question were similar to the rates for contracts for services provided by other consultants to the Ministry at that time. However, there was no documentation to demonstrate that the Ministry had considered the value for money aspect of the Allen & Clarke contracts. We therefore find it difficult to accept that the principle of value for money had been properly demonstrated in the practices adopted by the Ministry.

4.50
Six contracts had been rolled over into new contracts, or existing contracts had been extended, apparently without any re-examination of value for money or having a contestable tender process. Staff offered a number of explanations for this, including the impracticality of engaging a new contractor part-way through a project, budget limits having been reached necessitating a new contract, and unanticipated changes in the scope of the work.

4.51
While the rollover of contracts may have been necessary in some instances, we noted that the Ministry’s 2002-03 internal audit report (see paragraph 3.49) commented unfavourably on this practice elsewhere in the Ministry’s contracting.

4.52
In our view, the Ministry should have in place a procedure for ensuring that the effectiveness and efficiency of the contractual arrangement and the performance of a contractor have been evaluated before a contract is renewed or rolled over.

4.53
The situation with all 4 contracts for the JTA project discussed in paragraphs 4.33-4.36, and the 6 other contracts with Allen & Clarke discussed in paragraph 4.50 that were rolled over or extended, raise several concerns about:

• the Ministry’s compliance with its own policy;
• its risk management practices;
• the possibility of a lack of planning by the Ministry in its procurement arrangements;
• the Ministry’s inability to properly forecast the scope of work;
• how the Ministry ensures value for money; and
• whether there was any intention to circumvent budget or financial delegation limits.

4.54
The Ministry accepted these shortcomings, and told us that the requirement for evaluation of a contractor’s performance before a contract is renewed or rolled over was specifically included in its “refreshed” policies.

4.55
We noted that the internal audit report of 2002-03 referred to the opportunity that contestability provided to “grow the market”. We also noted that the redundant March 1999 HFA policy specifically referred to competition as “an essential element in the efficient working of markets for goods and services”.

4.56
Even if there did not appear to be other specialists in the market capable of undertaking some of the services provided by Allen & Clarke, it would be in the Ministry’s interests to expand the market of potential providers. This would have the benefit of helping to ensure value for money and “levelling the playing field” for other potential participants.

4.57
There are a number of recognised strategies for doing this, such as providing an opportunity for new or emergent providers to tender for small contracts. However, we did not identify any practice or operating culture in the Ministry relating to this.

Compliance with delegations

4.58
For government departments, there are limits on the authority of chief executives to commit to particular types of expenditure. These delegations raise specific issues for public entities.

What we expect

4.59
We expect public entities to comply with any applicable financial delegations when they procure goods or services. A public entity must also comply with legislation that:

• limits its procurement authority; or
• governs its internal delegation practices.

What we found

4.60
The financial delegations applying to Ministry staff are set out in a Delegations Policy document dated October 2002. This document sets a $250,000 limit to the amounts that may be approved by Deputy Directors-General for departmental output expenditure contracts and non-departmental output expenditure contracts except those for the provision of health and disability services.

4.61
All of the contracts awarded to Allen & Clarke were within this delegation limit. We were satisfied that the Ministry’s financial delegations policy had been complied with in the awarding of contracts to Allen & Clarke.

4.62
However, one significant issue did arise in relation to delegations. The November 2001/April 2002 policy stated that, whenever it was proposed not to follow the policy for procurement, a written request for exemption must be made to the Group Manager, Corporate and Sector Finance. We did not find any evidence of this having occurred for most sole provider contracts awarded to Allen & Clarke.

4.63
Often, we found evidence of contract approval by a manager, but no evidence of a specific exemption from the policy. There was a practice of approving the procurement, provided it was within a manager’s financial delegation, regardless of the fact that it was non-compliant with the policy.

4.64
The Ministry told us that its current policies and guidance contain the expectation that all staff with delegations be aware of all current Ministry and government policies when making any financial decisions. It intends to strengthen this statement to refer explicitly to the “refreshed” procurement and contracting policy.

4.65
The Ministry will need to reinforce to staff that delegations apply only to procurement that is within policy, and that where the procurement is outside policy, some other process will need to apply to both the procurement action and the application of delegations.

4: This policy has since been completed, and was agreed by the Ministry's Executive Team on 17 November 2005.

5: The new policy was approved on 17 November 2005.

6: For example, legal services from the Crown Law Office.