Part 1: Introduction

Public sector purchases, grants, and gifts: Managing funding arrangements with external parties.

Why do we need an overarching guide?

Public entities use public funds in a range of ways. As well as funding their own activities, they may also buy goods or services from someone else (often called procurement), provide a grant or some other support to another organisation or group, or use some combination or variation of these.

Governments all around the world have developed new ways to deliver services and to work with their communities, other levels of government, business, and non-government organisations. This has changed the range of ways in which public funds are used. An increasing proportion is now spent through funding arrangements with individuals or organisations outside public entities, such as commercial providers or non-government organisations. In this guide, we use the term “external parties” to describe all those individuals and organisations.

For public entities, this can be a confusing area. There is a complex mix of different organisations, types of funding arrangements, and procedural rules and requirements. It is not always clear what rules or expectations apply when, and we often get asked:

  • Does it matter whether something is a grant or a contract? If so, what difference does it make?
  • When does a procurement policy apply? Are there any equivalent rules if it does not apply?
  • Should we manage everything as a contract?
  • Should we do anything different if we are contracting with a non-government organisation?

This guide aims to provide some clarity, by explaining:

  • how the different processes and expectations fit together;
  • what the basic principles are; and
  • what choices public entities need to make when they plan for, and enter into, any kind of funding arrangements with external parties.

This guide should also give entities a clearer understanding of the expectations that we apply when we assess the conduct and performance of public entities (whether in the course of annual audits, performance audits, other assurance work, or inquiries). It is important that the public sector auditor is able to provide assurance about the management of funds going to external parties, whether through purchasing contracts, grants, or gifts, as well as about funds used by public entities to provide services in other ways.

In essence, we expect public entities to be able to satisfy themselves that:

  • they are spending public money carefully; and
  • they are properly managing the process for spending it.

Spending money carefully involves the ability of the public entity to account for what the money is being used for, as well as an assessment of effectiveness, efficiency, and value for money.

Properly managing the process for spending money involves looking at whether the public entity made decisions lawfully, fairly, and in keeping with good administrative practice, ethical requirements, and the entity's own policies.

What this guide covers

This guide focuses on situations where a public entity decides to provide funds directly to an external party to achieve a particular purpose. Common examples are purchasing goods or services (large and small), grants, and donations. The external party may be a commercial organisation, a non-government organisation, another public entity, or some other private body. The aim of this guide is to help public entities make informed decisions and manage risks when funding an external party.

Part 2 describes the basic principles that we expect to be reflected in the management of all funding arrangements with external parties, and indeed any use of public funds.

In Part 3, we set out our expectation that public entities will take a strategic approach to planning and managing the different funding arrangements they will need. In this Part, we suggest beginning with the public entity's broad strategic goals and business plans, before considering the need for specific strategies on procurement or other funding arrangements that are critical to the public entity's activities. We also encourage public entities to think strategically about what they are trying to achieve before entering into particular funding arrangements.

Part 4 sets out the range of funding arrangements that public entities commonly have with external parties, as well as the different kinds of external parties that the public entity might enter into such arrangements with. These arrangements range from major purchasing contracts of a generic commercial nature to simple grants that are tantamount to gifts.

Part 5 discusses a range of factors that public entities can usefully consider when choosing what type of arrangement will best suit particular initiatives. The factors include the purpose or goal, risk, the overall relationship with particular external parties, and the value of the funding arrangement.

Part 6 applies this general approach, and the principles, to the practical business of planning and managing funding arrangements. It explains how the principles and choices a public entity makes affect the way it manages a particular funding arrangement. This Part also sets out our high level expectations for different stages of the life cycle of each type of funding arrangement.

Part 7 discusses the various sources of guidance for public entities to get more detail on requirements and expectations in different situations.

What this guide does not cover

Our guide does not consider:

  • funds used to provide goods or services directly (for example, through salaries and other internal costs);
  • subsidies such as government contributions for general practitioner visits (where the individual citizen chooses which general practitioner to see and the government automatically pays a proportion of the cost); or
  • benefits and other entitlements where the payment is automatic and required as a matter of law if the necessary conditions are met; or
  • equity transactions, such as the investment of Crown funds in the shares of State-owned enterprises.

These situations do not involve the exercise of discretion, or choice, by the public entity in the same way as decisions to purchase goods or services, or to provide grants, do.

This guide covers those transactions between public entities that are effectively the same as transactions with a private organisation to purchase some form of goods or services, or to provide a grant to support the organisation or an activity. This guide does not cover funding arrangements associated with the distribution of funds through the appropriation system, for example, or equity or other ownership investments by public entities.

Relationship with other sources of guidance

We have issued several good practice guides on different aspects of funding arrangements with external parties. They include guidance on procurement, relationships with non-government organisations, public private partnerships, conflicts of interest, and sensitive expenditure. We have also published a number of reports on performance audits and inquiries that examine these issues.

Other organisations have also produced guidance and rules. In particular:

  • the Ministry of Economic Development oversees the government's procurement policy and Mandatory Rules for Procurement by Departments – central government agencies are bound by these, and other agencies are encouraged to consider them; and
  • the Treasury has published Guidelines for Contracting with Non-government Organisations for Services Sought by the Crown.1

Part 7 contains more detailed discussion, and a list, of the major sources of rules and advice that public entities should be aware of (and may be required to follow) when they prepare their own policies and operating procedures for managing funding arrangements with external parties.

This guide is designed to overarch these various sources of rules and guidance. It explains the overall conceptual framework that various funding arrangements operate within from an accountability perspective. It complements the government's policy principles, which reinforce some aspects of this guidance (such as the principles of value for money and fairness) and emphasise some other policy matters that are outside our mandate (such as encouraging effective competition and improving business capability).2

This guide does not displace any particular legal or other rules and requirements that apply to different public entities. Rather, it shows the context of those particular requirements. In areas not covered by more detailed guidelines or requirements, the principles in this guide should be taken into account for decision-making.

1: The Treasury (2003), available at

2: For further information, see

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