Part 6: Relational purchases

6.1
In our overarching guide, we have minor relational purchase and major relational purchase categories for procurement. We have established these categories to recognise situations where a contract may not fit the conventional market model because:

• there is not an effective or meaningful market to provide the goods or services; or
• the strategic importance of the goods or services, or of the relationship with the provider, is such that the objectives of the procurement may not be achieved through the market.

6.2
These two factors may be more often present for public entities that often purchase goods or services that are essential to the delivery of public sector (and implicitly non-market) services, are highly specialised, or are provided by non-commercial and public interest bodies such as non-governmental organisations.

6.3
Other factors that might suggest a relational purchase include the nature of the goods or services purchased, the duration of the relationship between the public entity and external party, the relationship between the public entity or external party and an end user (such as a person receiving health care or other social services), and the specialist nature of the goods or services. For some external parties, there may be other policy goals that are relevant and would suggest a relational approach, such as a goal to support the development of a strong and stable non-government organisation or civil society sector, or a goal to develop strategic relationships or build capacity in some part of the wider state sector.

6.4
In such situations, conventional market-based systems for managing a contract may not be appropriate or particularly effective. It may be more useful to give greater weight to the relationship or strategic dimensions of the contract and to develop other systems to manage the dimensions usually managed by competitive market mechanisms.

6.5
Common examples of minor relational purchases include contracts to purchase policy or other advice from specialist advocacy or special interest representative groups, highly specialised professional advice, small and specialised research work, or the supply of minor health services or a niche product for a particular and unusual requirement.

6.6
Common examples of major relational purchases include residential care or other social support services where the funding arrangement may need to provide stability for end users over many years, major and long-term research contracts, or significant professional or consultancy relationships.

6.7
There can be some overlap between major conventional contracts (where an effective market is present and used) and major relational purchases. The growing pattern of managing major contracts through more strategic arrangements, such as alliancing and public private partnerships, have a lot in common with major relational purchases, even if they are developed in the market context.

6.8
It is important that public entities recognise that using relational contracts depends on the characteristics of the market and the desired relationship with the supplier. If either of these change, more conventional contracts may be more appropriate.

Partnering and project alliances

6.9
Partnering and project alliances between public and private sector organisations are gaining in popularity as an approach to procuring major infrastructure projects and related services in the public sector.

6.10
Partnering refers to mutually beneficial commercial procurement relationships between public and private sector parties that involve a collaborative approach to achieving public sector outcomes. The two main variables in a partnering arrangement are:

• the type of the relationship between the public and private sector parties; and
• the nature of the outcome and how it is to be achieved.

6.11
In a project alliance, the public and private sector parties (often referred to as “participants”) work together as an integrated team to deliver a specific project where their commercial interests are aligned with actual project outcomes. The team is selected on a “best-for-project” basis and is provided with incentives to achieve high performance. All members commit to working through collaboration, innovation, and mutual support. This arrangement requires:

• performance obligations to be stated as collective rather than individual obligations, with an equitable sharing of risk and reward, and adoption of a “no blame, no dispute” culture;
• governance of the project by the project alliance board (or equivalent), including representatives from all parties, with agreement that all decisions must be unanimous;
• day-to-day management of the project by a project team that operates as a separate entity from each of the public and private sector parties involved in the alliance agreement; and
• a transparent and “open-book” approach towards all financial matters, including cost and profit.

6.12
The process for selecting alliance participants is normally based on quality criteria alone.

6.13
We have reported on partnering and project alliances in our publication Achieving public sector outcomes with private sector partners, which can be found on our website (www.oag.govt.nz). Public entities should refer to that report when considering what guidance they need to include in their policies and procedures. The report includes guidance and advice on:

• the need for leadership, expertise, and market development;
• considering partnering or project alliancing as a procurement choice; and
• managing those types of contracts.

Contracting for services with non-government organisations

6.14
A public entity may enter into both conventional and relational purchases with non-government organisations. These guidelines cover the more conventional contracts. A public entity looking to fund relational arrangements with non-government organisations should also refer to the Treasury’s Guidelines for Contracting with Non-Government Organisations for Services Sought by the Crown and our good practice guide Principles to underpin management by public entities of funding to non-government organisations.