Part 4: Procurement, grants, and other funding arrangements

The range of funding relationships in the public sector

4.01
Public entities spend public funds in a range of ways. As well as using funds to carry out activities themselves, entities may buy goods or services from someone else, provide a grant or some other capacity-building support to another organisation or group, or some combination of these two. The differences between the various types of funding arrangements are not hard and fast; there is a spectrum of arrangements, rather than clearly separate categories. There is also a range of policies, procedures, and guidance available.

4.02
Our June 2006 good practice guide, Principles to underpin management by public entities of funding to non-government organisations, set out six overarching principles (see paragraph 4.05) that we considered public entities should use to manage going to non-government organisations (NGOs), regardless of whether the funding was as a grant or under a contract for goods or services. We also advocated a risk-based approach that would vary the attention given to the different principles according to the situation.

Principles relevant to all funding arrangements

4.03
Although that report was particularly focused on relationships with NGOs, in our view the six principles are relevant to all funding arrangements, whether grants or contracts and whether with NGOs or commercial organisations. In some sectors, there may be different sets of rules, procedures, or policies that govern how particular arrangements are to operate. For example, government departments are obliged and other public sector entities are encouraged to follow the Government’s Procurement Policy Framework, including the Mandatory Rules for Procurement by Departments (the Mandatory Rules), when they are purchasing goods and services over a certain value. Many public entities have their own policies or guidelines for administering grant programmes. Any such rules, procedures, or policies are likely to be consistent with these high-level principles and to prescribe practical steps or procedures to give effect to the principles. But some entities, although encouraged, are not required to follow the Government’s Procurement Policy Framework and the Mandatory Rules in their procurement or do not have procurement policies of their own, and not all entities have a clear framework for administering grants.

4.04
The fact that some funding arrangements are not covered by any explicit procedural requirements does not mean that there are no expectations around how entities manage such funds. In our view, all funding arrangements, and all rules, procedures, and policies governing them, should be consistent with the basic principles we have expressed. The arrangements should also reflect the practical need to take a risk-based approach to managing funding relationships.

Principles governing all funding arrangements

4.05
The overarching principles that we consider relevant to all funding arrangements are:

• Lawfulness. Public entities must act within the law, and meet their legal obligations.
• Accountability. Public entities should be accountable for their performance and be able to give full and accurate accounts of the use to which they have put public funds, including funds passed on to others for particular purposes. They should also have suitable governance and management arrangements in place.
• Openness. Public entities should be transparent in their administration of funds, both to support accountability and to promote clarity and shared understanding of respective roles and obligations between entities and any third parties entering into funding arrangements.
• Value for money. Public entities should use resources effectively, economically, and without waste, with due regard for the total costs and benefits of an arrangement and its contribution to the outcomes the entity is trying to achieve.
• Fairness. Public entities have a fundamental public law obligation to always act fairly and reasonably. Public entities must be, and must be seen to be, impartial in their decision-making. Public entities may also at times need to consider the imbalance of power in some funding arrangements, and whether it is significant enough to require a different approach to the way in which the relationship is conducted.
• Integrity. Anyone who is managing public resources should do so with the utmost integrity. The standards applying to public servants and other public employees are clear, and public entities need to make clear when funding other organisations that they expect similar standards from them.

Taking a risk-based approach

4.06
These principles are likely to require different responses in different circumstances. Sometimes one will be more relevant than another. Having the flexibility to adapt and tailor the management of the funding arrangement to the circumstances is the essence of what we have termed a risk-based approach. A “checklist” or “template” approach may often not be helpful if it is too prescriptive.

4.07
There will often be a range of ways to give effect to a particular principle. For example, being able to demonstrate that a particular purchase was value for money does not always mean that an entity has to go through a full competitive tender process for every purchase, unless required by the Mandatory Rules. Getting a number of quotations from different suppliers may be enough if the purchase is for relatively standard goods. In some circumstances, particularly if there is no effective market operating for the relevant services, it may be more appropriate to periodically review an arrangement and benchmark prices or costings in some other way. Approaching this issue at a level of principle means that we expect entities to be able to demonstrate how they have satisfied themselves that they are receiving value for money with a particular arrangement. We do not have a set expectation as to exactly how that should be done.

Work during 2006/07 on funding and procurement issues

4.08
The way in which public funds are administered through both grant programmes and procurement contracts is a regular cause of concern, and is frequently the subject of complaints to this Office. Substantial amounts of public money are involved. The Auditor-General is therefore overseeing an expanding programme of work to examine policies and practice in this area and to support wider government initiatives to improve performance.

4.09
In June 2006, we published the good practice guide on funding arrangements with NGOs (see paragraph 4.02), and earlier that year we completed a performance audit on the administration of grant programmes by the Foundation for Research, Science and Technology. In 2006/07, we followed that up with a performance audit of Te Puni Kokiri’s administration of grant programmes, and began a performance audit to examine the Ministry of Health’s funding arrangements with NGOs. At the request of the Minister of Health, we also carried out a performance audit of the conflict of interest procedures of the three district health boards in the Auckland region, after the successful judicial review challenge to a major procurement decision by those entities.

4.10
Procurement is a specific and significant subset of the general area of funding arrangements. It covers all business processes associated with buying, spanning the whole cycle from identifying needs to disposing of the product or completing all the service requirements. Given that broad definition - and the wide range of public activities that are achieved through, or supported by, procurement in some form - it is an activity that is critical to the effectiveness and efficiency of public entities. In the last year, procurement has featured more strongly in our annual audit work, a number of inquiries, and in some special studies and reviews.

Annual audit work on procurement

4.11
We asked our auditors of government departments, State-owned enterprises, Crown entities, and some other entities to examine aspects of procurement as part of the 2006/07 annual audits. Specifically, we asked these auditors to review the entity’s procurement policies and some aspects of practice, and to report any concerns.

4.12
We also continue to provide ongoing assurance services, outside the annual audit process, about specific procurement processes and the development or review of organisational policies and procedures on procurement to a wide range of public entities.

Our findings on procurement policy and practice

Annual audit work

4.13
Based on the work during the annual audits in the last year, we consider that there is considerable room for improvement in entities’ procurement policies and practices. On the positive side, most entities have policies and procedures in place, and these policies were clearly based on the core principles of value for money, fairness, and openness. But more than half of the policies we looked at in our annual audits needed some improvement.

4.14
Our main findings on procurement policies were:

• Responsibility for maintaining the policy was often not clearly assigned, with a number of policies not being updated for recent developments (such as the introduction of the Mandatory Rules).
• A number of policies contain requirements that vary from established good practice.
• Many policies did not adequately address legal aspects, such as applicable legislation, the risk of judicial review, the nature of process contracts, and intellectual property.
• While most policies referred to conflicts of interest, many policies did not recognise the different aspects of conflicts of interest and how they should be managed.
• A number of policies referred to the importance of concepts such as “whole of life cost” and “value for money” without defining these terms or being clear what they mean in practice.
• Many policies had limited or weak coverage of important matters (including the hierarchy of methods for procurement, the purposes and limitations of each stage of a multi-stage tendering process, the evaluation of tenders and evaluation methods, managing late tenders, risk management, good record-keeping, and the elements of a procurement plan).
• Many policies were silent on a number of important aspects (such as how exceptions to policy should be managed, the need for business cases for high value or complex procurement, the risks of fraud and corruption, the engagement of ex-employees as contractors, confidentiality obligations, controls needed for communications with tenderers, the rolling over of existing contracts, and handling complaints).

4.15
Our main findings on procurement practice - the way decisions are actually made - were:

• Despite having developed a procurement policy, a number of entities did not have enough support in place to ensure good procurement practice (for example, not enough staff or staff without required expertise, and lack of information systems or management processes to carry out and monitor practices).
• Procurement was sometimes done on a case-by-case basis, without taking a strategic or organisation-wide approach.
• In some entities, compliance with their procurement policy was weak -
• procurement practice did not follow the requirements of the policy. For example, in one case the policy generally required competitive procurement, but in practice competition was avoided.
• In some cases, there was a lack of documentation of tender or procurement processes, creating difficulties for any subsequent reviews or defending any challenges.
• Problems have arisen in a number of individual procurement exercises (such as not enough attention to the timely management of conflicts of interest, or the handling of specific circumstances such as late tenders).

4.16
As noted, procurement is a major activity in the public sector. Many public services are achieved through, or with the support of, contracted suppliers of goods and services. Although the value of individual contracts varies widely, many involve substantial amounts of money. We are therefore concerned with these findings, which show substantial room for improvement.

4.17
We have provided individual feedback to entities about the areas where procurement policies and/or practices need to improve. We expect that those entities will work to address their deficiencies in the coming year.

4.18
We will also be continuing with our own programme of work on procurement and other funding arrangements with external parties, to support entities as they work to improve their own systems and practices and to deepen our scrutiny of funding systems.

Inquiries

4.19
We regularly receive requests for inquiries into the procurement processes and decisions of public entities. Often the request comes from a tenderer disappointed with the outcome of the process. We do not formally inquire into all such matters. Rather, our usual approach is to briefly review the process that the entity followed, to decide whether there are any issues that warrant more formal examination. We are more likely to initiate an inquiry in cases where our initial review suggests that there may be systemic issues with the entity’s practices that require further examination than in cases where we identify a one-off concern.

4.20
If we decide to inquire more fully into a procurement issue, we will look at the process followed by the entity, but not the merits of the decision itself. It is not our role to second-guess whether an entity made the “right” decision. Our work usually ends when we advise the complainant and the entity of our views on the issues that we have examined. However, we may also follow up on the matter during the next annual audit if we have recommended that the entity consider changes to its systems and policies.

4.21
In one case, we were asked to consider a completed tender process by an unsuccessful tenderer. The tenderer raised concerns about predetermination and procedural defects, and asked that we set aside the process and the outcome. The Auditor-General has no capacity to overturn a decision, or to provide redress to an unsuccessful tenderer, and we explained this to the correspondent. We met with the entity to understand fully the process they had followed. They had previously instructed an independent consultant to review the tender process and we reviewed the consultant’s report. It identified some areas where ongoing improvement was needed by the entity. As a result of those preliminary enquiries, we decided that there was no need for us to investigate further. We did, however, ask the entity’s auditor to keep us informed on the entity’s progress with the issues raised in the consultant’s report.

4.22
In another case, we received a request to inquire into a tender process where it was alleged that the entity selected a company that was not the cheapest, and did not follow relevant policies. We reviewed the tender process and were satisfied that these concerns were unfounded. As part of our review, however, we identified a number of issues that we considered needed to be addressed to improve future tender processes. These included concerns with staff of the entity accepting gifts from the incumbent supplier that were not declared, acceptance of a late tender without supporting explanation, and a lack of documentation including evaluation working papers. We advised the entity of these matters.

4.23
Other concerns that are often raised with us include:

• lack of a business case for the services required;
• limited knowledge about the business needs or applications;
• the tender specifications being written to suit one vendor; and
• the outcome being predetermined.

4.24
Conflict of interest questions also arise regularly, particularly in sectors where the pool of people with relevant specialist knowledge is small. In many cases, a review of the relevant files is able to demonstrate quickly that concerns are unfounded. This highlights the importance of entities maintaining systematic processes and records in procurement matters.

Other developments in procurement

4.25
Central government is placing increasing emphasis on procurement, recognising its contribution to economic development and its role in achieving sustainable business development. Public entities should be aware of the Government Procurement Policy Framework, including the Mandatory Rules and minimum standards for sustainable procurement. These are binding on government departments. Other public entities will be bound to the extent that the Crown Entities Act 2004, other legislation, or their own specific enabling legislation requires them to comply with or take account of such policies. Those entities not formally bound by government policies are nevertheless expected to have regard to them as a source of sound guidance. Individual entities remain responsible for their own procurement decisions. Up-to-date details of current government policies, as well as guidance and other information on procurement, can be accessed at www.procurement.govt.nz.

4.26
The Ministry of Economic Development (Government Procurement Development Group) is responsible for co-ordinating whole-of-government procurement, developing best practice capability, and administering the Government Electronic Tenders Service. It is leading a strategic whole-of-government approach to procurement and the improvement of current practice across the public sector. Specific activities are directed to increasing procurement capability and capacity, including training in best procurement practice in government and industry.

4.27
Recent developments include the completion of the Australian and New Zealand Government Framework for Sustainable Procurement, the adoption of minimum standards and targets for certain categories of goods and services, and other activities within the Sustainable Government Procurement Project. Requirements to provide full and fair opportunity to domestic suppliers have also been strengthened.

4.28
In May 2007, Cabinet agreed in principle that a single procurement policy be extended to agencies beyond core departments, subject to appropriate mechanisms for implementation. The Ministry of Economic Development will work with key stakeholders in raising awareness and will advise entities on the application of the single procurement policy including sustainability requirements as and when implemented.

Our continuing interest

4.29
The Auditor-General is continuing to build a programme of work involving procurement, grants administration, and other funding arrangements. We have extensively revised our 2001 publication Procurement: A Statement of Good Practice over the last year, and intend to replace it later this year with a new good practice guide. The new publication will complement our 2006 good practice guide, Principles to underpin management by public entities of funding to non-government organisations.

4.30
When conducting the 2007/08 audits of most public entities in the central government sector, our auditors will review at a high level each entity’s procurement policy to ensure that it takes account of the Government’s policy framework, applicable rules, and good practice guidance, and will report any deficiencies.

4.31
These reviews will be conducted at a more detailed level for those government departments and district health boards where procurement is significant to the entity’s activities. In addition, the auditors will review the information systems and processes for procurement decisions and will review a sample of these decisions to determine whether the entity is applying its procurement policy in practice.

4.32
We will also continue with a programme of performance audits on procurement, grants, and other funding arrangements in their various forms.