Part 9: Our work on procurement

9.1
The term procurement covers all of the business processes associated with buying something. It spans 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 procurement, or supported by it in some form - procurement is an activity that is critical to the effectiveness and efficiency of public entities.

9.2
During 2007/08, an increasing proportion of our work involved consideration of how public entities are going about the business of procurement:

• Annual audit work already involves some examination of procurement processes. During the past two years, we have begun a more in-depth programme to systematically assess the quality of procurement policies and practice as part of that annual work. To date, this work has focused on central government entities, but we intend to expand it to other sectors, including local government, in future years.¹
• Our programme of performance audits in recent years has included several projects looking at the management of funding arrangements, whether grants or purchase arrangements. During 2008/09, we are carrying out a performance audit examining procurement practices in three district health boards. We intend to maintain a focus on procurement issues in our performance audits in future years.
• Most of the work of our Special Assurance Services group involves providing assurance or comment on how major procurement processes are being carried out, in all areas of central and local government.
• Many of the requests for inquiries that we receive involve procurement processes of some kind. In the local government sector in particular, these requests often relate to major infrastructure or development projects, and result from public concern about how local authorities are making decisions and managing risks for contracts of substantial value. Our work on the early stages of the Dunedin Stadium project was one example.² Another was a review of the process for ending a substantial contract for providing regulatory services in Queenstown.³
• In June 2008, we also produced two new good practice guides on procurement, as discussed in paragraphs 10.03 to 10.08. These are available on our website, and outline our expectations of how all public entities will manage procurement activities in future.

The two new good practice guides

9.3
For public entities, procurement and the different types of funding arrangements can be a very confusing area. There is a complex mix of different organisations involved, types of funding arrangements, and procedural rules and requirements. It is not always clear what rules or expectations apply when. We are often asked questions such as:

• 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?

9.4
We have therefore updated our 2001 good practice guide on procurement, and reissued it in June 2008 under the title Procurement guidance for public entities. At the same time, we produced a new guide entitled Public sector purchases, grants, and gifts: Managing funding arrangements with external parties.

9.5
We use the phrase "funding arrangements with external parties" to cover all types of procurement and purchasing (large and small), grant funding, and gifts. We intend it to include any situation where an entity is handing public money over to someone else in some form to achieve its goals. The "someone else" in this transaction might be a private company, a non-government organisation or charitable trust, an individual, or another public sector organisation.

9.6
The new, more general guide explains the range of funding arrangements that public entities commonly enter into, and how to think about which type of arrangement suits a particular circumstance. It provides a funding framework that aims to clarify:

• 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 funding arrangements with external parties.

9.7
The procurement guidance sits underneath that overall funding framework and gives more specific advice and guidance on how to purchase goods and services and run procurement processes. The main difference from our 2001 guide is that the focus now is on encouraging entities to think strategically - the emphasis is on "doing it smarter" rather than on complying with standard processes or checklists. The guidance now also explicitly acknowledges a much wider range of circumstances than straightforward commercial procurement in a market situation, and recognises that general tendering processes will not always be the best way to manage a purchase.

9.8
Tendering will often be a safe and proven way to ensure a fair process and value for money. Much of the guidance is about the detail of how to run an effective and appropriate tendering process. But the guidance also acknowledges that tendering processes can sometimes be counter-productive or involve excessive compliance costs. It encourages public entities to think about their circumstance and to match the process to the practical context. When they do so, however, it is important that they are able to articulate the reasons why they decided to take a different approach. They should also be able to demonstrate how the different approach enabled them to address the basic public sector principles that we list below in paragraph 9.11.

Two basic questions

9.9
In essence, we expect public entities to be able to satisfy themselves and the public on two simple questions:

• Are they spending public money carefully?
• Are they properly managing the process for spending it?

9.10
Spending money carefully involves the ability of the public entity to account for what the money is 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 makes decisions lawfully and fairly, and in keeping with good administrative practice, ethical requirements, and the entity's own policies.

Six basic principles

9.11
We have therefore set out six basic principles that we consider relevant to the use of all public funds.

• Accountability - public entities should be accountable for their performance and be able to give complete and accurate accounts of how they have used public funds, including funds passed on to others for particular purposes. They should also have suitable governance and management arrangements in place to oversee funding arrangements.
• 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 external 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. Where practical, this may involve considering the costs of alternative supply arrangements.
• Lawfulness - public entities must act within the law, and meet their legal obligations.
• Fairness - public entities have a general public law obligation to 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 they conduct the relationship.
• Integrity - anyone who is managing public resources must 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.

9.12
The new funding framework explores what these principles mean in practice for a range of different types of funding arrangements and during the life cycle of each of those arrangements.

Some practical considerations

9.13
We have deliberately set out the principles at a high level. They are a starting point, and a reminder of the basic obligations on those spending public money. For any particular public entity or situation, the principles need to be applied flexibly and practically, to achieve the goals of the public entity or of the particular funding arrangement through the most sensible means. We have previously described this as taking a risk-based approach.

9.14
For example, the principle of accountability at its simplest means that a public entity has to be able to explain what public money has been used for. For very minor and simple purchases, this may require no more than a receipt for a bottle of milk or a note on the back of a taxi receipt recording the purpose of the travel. For major contracts, much more detail would be needed to reflect the same principle. A new information technology system, for example, would need a fully developed business case, formally documented approvals at the appropriate level, detailed contracts, ongoing and systematic monitoring of progress under the contracts, and full documentation of the whole procurement process.

9.15
When deciding how to give effect to these principles in any particular situation, public entities should consider:

• The goal - it is important for the public entity to focus on what it is trying to achieve. Process should not dominate at the expense of the outcome.
• Simplicity and proportionality - the requirements put in place for the funding arrangement should be as simple and practical as possible, considering the amounts involved, the complexity, and the level of risk. It is appropriate to consider compliance costs for the parties, and seek to reduce them where possible.
• The context - the arrangements need to fit with the overall context of the funding arrangement, including any more general relationship that the external party has with the entity or with other relevant public sector organisations.
• The risk - public entities need to identify risks in or around the funding arrangement and to consider how to manage those risks. This should not be seen as encouragement to be overly risk averse. The key is to get the right balance between risk and expected benefit, and to do so deliberately.
• The nature of the parties - the needs and standards of public entities (for example, for accountability or transparency) may be quite different from those that the external party usually encounters. Equally, the external party's needs may be quite different from those of the public entity. For example, a non-government organisation may have unique obligations to constituent groups or members. Relationships are likely to proceed more constructively and effectively if each party understands the needs of the other and the consequences of those needs for them.

Application to local government

9.16
We developed the previous 2001 guidance with a focus on central government. Although in practice the advice in it was often relevant to local government, in formal terms the 2001 guide stated that it did not apply to that sector. This has changed with the new guidance. We have written it at a level of general principle and practical advice that is equally applicable to central and local government entities. The expectations set out in the new guidance will provide the basis for our future audit and assurance work in all public sector entities.

1: The results of the first year of work, in 2006/07, are summarised in Central government: Results of the 2006/07 audits (2008), Part 4, "Procurement, grants, and other funding arrangements", available on our website - www.oag.govt.nz.

2 See Inquiry into Dunedin City Council and Otago Regional Council's funding of the proposed stadium (September 2007), available on our website at www.oag.govt.nz.

3 See Queenstown Lakes District Council - regulatory and resource management services ( September 2007), available on our website at www.oag.govt.nz.