Part 9: Procurement audit work and inquiries

Central government: Results of the 2007/08 audits.

9.1
This Part outlines the findings of our 2007/08 annual audit work on procurement policies and practices in government departments, Crown entities, State-owned enterprises (SOEs), and Crown Research Institutes (CRIs). We also summarise the findings of some procurement-related inquiries we carried out in 2007/08.

9.2
We report on the procurement of district health boards (DHBs) in Part 5 and tertiary education institutions (TEIs) in Part 6 of this report.

Background

9.3
Procurement is all the business processes associated with purchasing goods and services – from identifying needs to the end of a service contract or the end of the useful life of goods and resulting disposal of an asset.

9.4
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 values of individual contracts vary widely, many involve large amounts of money.

9.5
It is important that public entities have effective procurement policies, procedures, and practices in place. This ensures that public entities achieve best value for money from their procurement, while maintaining probity and public confidence.

Our recent work on funding and procurement

9.6
Because procurement is critical for public entities to be effective and efficient, it has been a focus of the Auditor-General’s work programme in recent years. In June 2008, we produced two good practice guides on procurement, which are available on our website (www.oag.govt.nz):

9.7
In recent years, we have completed several performance audits on grant programmes.1 We produced a good practice guide2 and a report on a performance audit on funding arrangements with non-government organisations.3 These reports are available on our website.

9.8
We have also increased our focus on procurement policies and practices in our annual audit and assurance work. As part of the 2006/07 annual audits, we asked the auditors of government departments, SOEs, Crown entities, and some other entities to review the entities’ procurement policies and practices, and to report any concerns.

9.9
Based on this work, we concluded that there was considerable room for entities to improve their procurement policies and practices. Most entities had policies and procedures in place. The entities had clearly based their policies on the core principles of value for money, fairness, and openness. However, more than half of the policies needed some improvement. We reported the results of this work in Central government: Results of the 2006/07 audits.4

9.10
Because of our concerns about these findings, and our continuing interest in procurement, we decided to carry out further work on procurement as part of the 2007/08 annual audits.

Annual audit work on procurement

9.11
As part of the 2007/08 annual audit, we asked our auditors to check whether public entities had procurement policies that were appropriate for their activities. We also asked our auditors to check whether the policies took into account the expectations in:

  • the policy principles set out in Government Procurement in New Zealand, a Policy Guide for Purchasers by the Ministry of Economic Development;5
  • the Mandatory Rules for Procurement by Departments endorsed by Cabinet in April 2006, which are compulsory for all government departments, the New Zealand Police, and the New Zealand Defence Force (other public sector agencies are encouraged to apply the rules as appropriate);6 and
  • the Auditor-General’s good practice guides.

9.12
Public entities’ procurement policies should cover:

  • the principles of procurement;
  • the legal and ethical aspects of procurement;
  • managing procurement risks; and
  • guidance on procurement planning and processes.

9.13
For some government departments, procurement is particularly significant to the department’s activities. In these cases, we asked the auditor to carry out more in-depth assurance work on procurement practice. We also asked our auditors of DHBs to carry out more in-depth work (see Part 5). Factors that indicate whether procurement is particularly significant include:

  • the degree to which the department procures its core areas of service delivery and production of outputs;
  • the size and complexity of procurement decisions;
  • the economic value of procurements;
  • the duration of contracts; and
  • the size of the department.

9.14
We asked the auditors to report any deficiencies in public entities’ procurement policies and practices to the public entity and to us.

Key findings on procurement policies and practices

Procurement policies

9.15
About 61% of government departments, SOEs, Crown entities, and CRIs had procurement policies that were appropriate for the size and nature of the entity, and met good practice.

9.16
Our auditors made recommendations for improving the procurement policies for most of the remaining entities. The recommendations ranged from fairly minor – such as including the next date to review the policy – to the need for an organisation to draft and implement a procurement policy.

9.17
The auditors recommended to about 13% of the entities that they improve their procurement policies to reflect the Auditor-General’s 2008 good practice guide. This guide highlights two parts of procurement: strategic procurement planning, and sustainability in procurement. Public entities need to consider these to keep their policies in line with recent changes in procurement practice. In other cases, the reason to update the policy was to ensure that there was a clear overall objective for procurement, and a set of overarching principles to guide the process.

9.18
The most common criticism was that the procurement policies did not cover all the aspects of procurement that reflect good practice. Notable areas for improvement included:

  • the principles of procurement, legal and ethical aspects of procurement, risk management, and guidance on procurement planning and processes;
  • administration costs;
  • the receipt, security, opening, and reporting of tenders;
  • when a closed tender or proposal may be used;
  • a clear policy statement on the entity’s relationship with the market to plan market effects into the procurement process;
  • specific guidance on the principle of confidentiality; and
  • cross-references to other related policies.

9.19
About 8% of entities that we reviewed had not implemented a procurement policy at the time of the 2007/08 annual audit. For Crown entities, this increased to 11%. Our 2007/08 audit work on TEIs (see Part 6 of this report) found that a few TEIs also had no procurement policy in place.

9.20
For most entities that do not yet have procurement policies in place, procurement is not a significant activity. However, we still expect these entities to draft and implement procurement policies and procedures that reflect the value and risk of their procurement practices. These policies and procedures need to be appropriate to public entities’ business objectives and operations. A procurement policy should help a public entity to meet ethical standards and act with integrity when procuring goods or services. We have recommended to most of these entities that they implement a procurement policy.

Procurement practice

9.21
Our most common concern about procurement practice in the public entities we reviewed was a lack of documentation of the procurement process. For example, the auditor of a relatively large public entity commented that:

... there is generally poor documentation covering the planning, management, evaluation, and review activities. ... There did not seem to be the most basic items of procurement documentation provided.

9.22
The documentation for procurement processes was not always consistent or easily retrievable, and the approval for the procurement was not always filed.

9.23
Poor documentation of a procurement process could put an organisation at risk if there were legal or other challenges. Poor documentation often makes it more difficult for an organisation to account for its activities if questions arise. Also, the Public Records Act 2005 requires public entities to maintain full and accurate records in keeping with normal, prudent business practice.

9.24
The value and risk of the procurement will determine the nature and amount of documentation that is desirable. However, a public entity should always keep adequate records to:

  • show that it followed appropriate processes;
  • show that it identified and appropriately managed any potential conflicts of interest;
  • respond to queries from unsuccessful suppliers;
  • record the outcome of meetings during the procurement process;
  • provide evidence of its activities and decision-making for accountability and audit purposes; and
  • plan any subsequent procurement.

9.25
Our review of procurement practices also found that public entities were often not consistently applying procurement policies. In one case, the scope of business and project planning varied between different procurement activities without any rational process to determine what was appropriate. In other cases, the lack of consistency was between different groups within the same entity. Clear processes and accessible guidance can help ensure that the procurement policy is consistently applied and is able to support effective decision-making throughout the organisation.

9.26
Government departments received more recommendations for improving procurement practices than Crown entities, SOEs, and CRIs. Specifically, government departments need to improve their conflicts of interest procedures and maintain entity-wide contract management systems.

9.27
A centralised contract management system allows senior management to monitor the nature, size, and compliance of an entity’s contracts. In one case, a department had a well-structured contracts register, but was not collecting data so that it could monitor procurement entity-wide. This restricted the department’s ability to take a more strategic approach to procurement.

9.28
About 9% of government departments, SOEs, Crown entities, and CRIs need to improve staff training and experience in procurement. In some cases, staff did not know that procurement policies existed or where to find them. Staff training in procurement is a critical part of implementing a procurement policy. Increased staff awareness of good procurement practices can lead to improved quality in procurement activities.

Improvement in procurement policies

9.29
During 2007/08, more government departments had improved their procurement policies than any other group of public entities we reviewed. About 23% of government departments had improved their procurement policies since 2006/07. These results are pleasing. Our review of procurement policies and practices in DHBs also identified pleasing improvements (see Part 5).

9.30
However, we are concerned that two public entities had not improved their procurement policies despite our recommendations for improvement during 2006/07. We have raised this with the management of these entities, and reported to the relevant Ministers and select committees. We have made further recommendations for improvement and will follow up on them in the 2008/09 annual audit. We expect to see improvements in the coming year.

Procurement matters raised in inquiries

9.31
We regularly receive requests for inquiries into the procurement processes and decisions of public entities. Often the request comes from a tenderer who is disappointed with the outcome of the process. We do not formally inquire into all such matters. Our usual approach is to briefly review the process that the entity followed to decide whether we see any need to carry out an inquiry. We are more likely to carry out an inquiry if our initial review suggests that there may be systemic problems with the entity’s practices than in cases where we identify an isolated concern.

9.32
If we decide to inquire into a procurement issue, we will look at the process the public entity followed but not the merits of the decision. 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 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.

9.33
During 2007/08, we received 13 requests for inquiries into procurement matters in central and local government, and the health and education sectors. We carried out inquiries into six of these. Most commonly, the requests for an inquiry were about managing conflicts of interest during the procurement process. Sometimes the concerns were based on perceived, rather than actual, conflicts of interest. However, they are a timely reminder to everyone involved in a procurement process to be aware of possible conflicts of interest and to manage them transparently.

9.34
We carried out an inquiry into a procurement matter that covered concerns about conflicts of interest and inappropriate practice. A DHB had set out to initiate a joint venture arrangement for service delivery, but this fell through. The DHB proceeded to negotiate new contracts with the current provider. We considered that, at this stage, the DHB should have moved to a competitive tender process. In the health sector, the potential for conflicts of interest is high because of the limited number of experts available. This makes it more likely that these experts will have multiple interests in the sector. In this case, the conflicts of interest of a medical specialist were not well managed. The specialist should not have participated in strategic and decision-making discussions.

9.35
Part 10 includes a summary of the results of an inquiry into the Police procurement for stab resistant body armour.

Concluding comments

9.36
Overall, we are pleased to see an increase in the number of entities with procurement policies that are appropriate for the size and nature of the entity, and meet good practice. We expect to see entities continuing to improve their policies as they update them to reflect the Auditor-General’s 2008 good practice guides. We also expect those entities that do not yet have a procurement policy to implement one.

9.37
As updated policies are rolled out, entities should familiarise staff with the principles of procurement, the contents of the policy, the need for complete documentation, and the requirement to consistently apply the policy.

9.38
We intend to maintain our level of activity on procurement issues. Procurement policies and practices in the public sector need to improve continuously. The Finance and Expenditure Committee was interested in our work on procurement during the consultation on our 2008/09 work plan. As part of the 2008/09 annual audit, we will follow up with public entities on their progress with implementing our recommendations to improve their procurement policies and practices. We are also considering extending our review of procurement policies and practices to other sectors during future annual audits.

9.39
We are also carrying out a performance audit of DHB procurement. This includes examining procurement practices in detail, including funding arrangements with non-government organisations within selected DHBs.

9.40
Since the release of our 2008 good practice guides, we have taken the opportunity to promote and explain how to apply the guides to a number of audiences. We will continue to support our good practice guides and our audit work in the coming year.

1: For example, New Zealand Trade and Enterprise: Administration of grant programmes (2004) and Te Puni Kōkiri: Administration of grant programmes (2007). For the full range of reports on funding and grant programmes, visit our website – www.oag.govt.nz.

2: Principles to underpin management by public entities of funding to non-government organisations (2006).

3: Managing funding to non-government organisations – from principles to practice (2008).

4: See “Part 4: Procurement, grants, and other funding arrangements”, pages 33-40.

5: See www.med.govt.nz.

6: The rules are available at www.med.govt.nz.

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