Summary and recommendations

Inquiry into the Ministry of Health's contracting with Allen and Clarke Policy and Regulatory Specialists Limited.

The Auditor-General decided in April 2005 to inquire into issues raised by the Hon Murray McCully MP about the contracting policies and procedures of the Ministry of Health (the Ministry).

In particular, the inquiry examined the Ministry’s contracting with 2 former employees (Matthew Allen and David Clarke) and the company of which they were the principals. In a related review, the State Services Commission investigated and reported (on 22 July 2005) on issues related to the preparation of responses by the Ministry of Health to Parliamentary questions lodged by the Hon Murray McCully MP about these contracts.

Between June 2001 and February 2005, the Ministry entered into 60 contracts with Allen and Clarke Policy and Regulatory Specialists Limited (Allen & Clarke). The total value of all contracts was around $1,362,000 excluding GST, with 32 of the contracts being for $10,000 or less. Only 4 of the contracts involved a contestable process. The other 56 contracts were awarded on a “sole provider” basis.

Our inquiry focused primarily on the Ministry’s contracting with Allen & Clarke, and our findings relate in the first instance to the management of contracts with that company. However, during the course of our inquiry, we found deficiencies in the Ministry’s procurement and contract management practices that extended beyond the contracts with Allen & Clarke, and in a number of the Ministry’s directorates. The report also addresses these concerns. The Ministry has been taking steps to improve its procurement and contracting policies and practices, but further work is required.

The Ministry of Health’s procurement and contract management policy and practices

Several policies have applied in the Ministry to the procurement and contract management process. There was considerable confusion within the Ministry about which procurement policy applied. Without both a good awareness of the policies and clear understanding of how they apply, there is a risk of an inconsistent approach to procurement, that doesn’t always conform to good practice.

The Ministry’s management of contracts was not consistent with good practice in significant respects, such as accountabilities for contracts, documentation of progress, performance and delivery, ensuring value for money, and systematic management of key information for all the Ministry’s contracting activities.

Our inquiry examined the period from June 2001 to February 2005. In 2002-03, the Chief Internal Auditor for the Ministry undertook a wider audit of the Ministry’s contracting performance and had findings very similar to our own. The Ministry told us about a number of important initiatives it has since taken, to address the 2002-03 internal audit findings. These include setting up a Contracting Support Office and a Contracting Advisory Group within the Ministry. These are positive steps, although it is too early to comment on this approach and whether it will improve the Ministry’s contracting practices. Another recent initiative is a comprehensive profile of competencies required by staff for contract management, and the introduction of module-based training. On 17 November 2005, the Ministry’s Executive approved a “refreshed” procurement policy, which will address several of the issues raised by our inquiry. It is important that the Ministry continues to monitor its progress on, and the effect of, these initiatives.

Contracts awarded to Allen & Clarke

Between June 2001 and 16 January 2002, the Ministry awarded 8 contracts to Allen & Clarke. At this time, both the principals were working for the Ministry on 3-year fixed term contracts. One of the principals – Mr Allen – was working only 30 hours a week, and used his spare time to work on the contracts. A ninth contract was awarded on 16 January 2002, the day before Mr Allen left the Ministry’s employment.

Mr Allen had informed the Ministry of his wish to work for the Ministry as an employee part-time while also carrying out contract work for the Ministry and other entities. Some Ministry staff were aware of the concurrent employment and contracting arrangements that were subsequently entered into. However, the Ministry’s procurement policies did not provide for such a situation arising, and the Ministry had not at the time developed its conflict of interest policy. Neither did the Ministry fully consider and apply its Code of Conduct, which contains relevant provisions.

We are satisfied that, although 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.

We found no evidence in the Ministry’s award of contracts to Allen & Clarke of any inappropriate relationships between the principals of the company and staff of the Ministry. Contracts were generally awarded to Allen & Clarke because of the principals’ experience in the specific areas of policy and regulatory advice, the principals’ and their company’s reputation for good performance, and their availability. Ministry officials spoke highly of the performance and quality of the services provided by Allen & Clarke.

The Ministry’s policy is silent about engaging contractors who are former employees of the Ministry. Conflict of interest disclosures do not appear to have been required of, or made by, either of the principals. To ensure that risks of actual or perceived impropriety in relation to such engagements are properly addressed, there should be policy and procedures to manage these situations. A policy on conflicts of interest which covers such arrangements has since been completed, and was agreed by the Ministry’s Executive Team on 17 November 2005.

Using a sole provider and ensuring value for money

The Ministry’s policies refer to the need for value for money, and promote contestability as the best means of achieving this. However, the Ministry adopted a non-contestable or sole provider approach to all but 4 contracts with Allen & Clarke. The Ministry’s procurement policy that applied to those 28 contracts of the Allen & Clarke contracts that had a value of more than $10,000 did not allow for a sole provider approach unless an exemption was sought and approved in accordance with the policy. However, 24 of the 28 contracts were not contested and, for most, approval for exemption from the policy was not obtained.

The use of the sole provider approach raised the issue of whether the Ministry had clearly demonstrated value for money with its procurement. We found limited documentation justifying a sole provider approach to the contracting with Allen & Clarke. 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, we were unclear how the Ministry satisfied itself about the performance of this sole provider, and there was no evidence that the Ministry kept a formal record of contract performance.

In addition, many contracts were awarded to Allen & Clarke on the basis of agreed hourly rates rather than a fixed price. Although the hourly rates for the services provided by Allen & Clarke were similar to the hourly rates for other contracts for services in the Ministry, we were not satisfied that the Ministry had a well-established practice of negotiating rates where sole provider procurement was proposed. We found it difficult to accept that the principle of value for money had been properly demonstrated in the practices adopted by the Ministry.

We were particularly concerned about a series of contracts entered into by the Ministry for the Joint Therapeutic Agency project (the JTA project). The first of these contracts was awarded to Allen & Clarke in January 2002. The contract was awarded on a non-contestable basis, and payments were made on an hourly rates basis. The value of the contract was $109,511. Three further contracts with Allen & Clarke in 2003 and 2004 had a combined value of more than $430,000, giving a total for the project of more than $539,000.

We had 2 concerns. First, there was no contestability for these contracts, either at the start of the JTA project or when it was extended, despite advice from the Ministry’s internal auditor on 19 December 2003 that “once the current phase of the work is completed, and at a point convenient to the Ministry – we should not continue with Allen & Clarke without testing the market through a tender process”. Second, there appeared to be a lack of succession planning and risk management by the Ministry, both with the initial contract, and at the extension of this project during the next 2 years.

In a number of instances, contracts with Allen & Clarke were renewed without any apparent re-examination of value for money or having gone to the market. This is not good practice. We would expect the Ministry to have examined why the extension was needed (especially as the contracts were usually on an hourly rate), to have evaluated the value for money, and to have reconsidered the alternatives to external contracting as the investment in such contracting increased.

Recommendations to improve the Ministry of Health’s procurement and contract management

The approval of the Ministry’s “refreshed” procurement policy has a bearing on several of our recommendations. This approval happened after we completed our inquiry, but before our report was finalised. We have nevertheless made our recommendations, while acknowledging the Ministry’s initiative in the main body of our report.

We recommend that the Ministry of Health:

  1. review awareness and understanding of the Ministry’s procurement and contract management policy and procedures of all staff involved in procurement and contract management;
  2. ensure that the contract management competencies required of staff include a thorough knowledge of the Ministry’s procurement policies and procedures;
  3. assign responsibility for ensuring that all its contract monitoring processes are observed, and appropriate documentation retained, for each contract;
  4. ensure that its policies on contract monitoring practices are followed in all of its contracting activities;
  5. take a systematic approach to maintaining key documentation for individual contracts, and ensure that this documentation is readily accessible for contract management purposes and complements contract information held electronically;
  6. urgently review its electronic management of contract information with a view to introducing a system or systems that will ensure that all appropriate information on the Ministry’s contracts is readily accessible to support good contract management, and that the information is available for contract management purposes throughout the Ministry;
  7. keep under review the procurement and contract management framework, and accountabilities within the Ministry, and ensure that its Contracting Support Office and Contracting Advisory Group can lead Ministry-wide improvements and maintain appropriate oversight of those policies and procedures throughout the Ministry;
  8. apply its Code of Conduct and new Conflicts of Interests Policy to ensure that the risks associated with concurrent employee/contractor relationships with the Ministry are well-managed;
  9. provide appropriate guidance to staff involved in the procurement of goods and services on the policies and procedures that apply to engaging contractors who are former employees of the Ministry;
  10. consider its procurement policy for low value contracts, to ensure that consideration is given, among other things, to the cumulative value and number of contracts with a sole supplier when deciding on an appropriate procurement approach;
  11. ensure that, when a decision is made to engage a sole provider, the business case to support this method of procurement is fully documented and records of the procurement decision-making process are maintained, and that this decision is reconsidered if it is proposed to roll over the contract with a sole provider;
  12. carry out a formal, written end-of-contract performance assessment for all contracts for services the Ministry has entered into, and provide that feedback to the contractor;
  13. actively negotiate hourly rates or costs when entering into a contract, as is required under its current procurement policies, and maintain a record of the negotiation process (which is particularly important when a sole provider procurement approach is adopted);
  14. evaluate the effectiveness and efficiency of the contractual arrangement and the performance of a contractor before a contract is renewed or rolled over;
  15. consider developing strategies for expanding the contracting market where appropriate, in the Ministry’s own interest and to support the growth and development of new providers;
  16. require approval for all departures from the procurement policy; and
  17. make its managers aware that their financial delegations apply only to procurement undertaken in accordance with the Ministry’s procurement policy.
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