Part 1: Introduction

Using “functional leadership” to improve government procurement.

1.1
In this Part, we discuss:

What is procurement?

1.2
Procurement is more than just "buying something". It includes all the processes and decisions involved in public organisations1 acquiring goods, services, works, and construction from a supplier.2 Procurement could be part of a wider commissioning process that could include in-house provision of services, co-designing services with stakeholders, joint ventures, or some other method for achieving public organisations' strategic goals.

Procurement functional leadership

1.3
Procurement is the process that public organisations use to acquire different kinds of goods and services to support the work of local and central government. We want New Zealanders to get the best possible outcomes from the spending of public money by having a high-performing and accountable public sector.

1.4
The Ministry of Business, Innovation and Employment (MBIE) estimates that a public organisation spends an average of 39 cents of every dollar on procurement. Using 2015/16 financial data, we estimated that total procurement spending for local and central government in that year was $42 billion.

1.5
In 2009, the Government started work on reforming the way that public organisations manage procurement. The main goals were to:

  • increase performance, add value, and maximise results;
  • create an environment for New Zealand businesses to succeed; and
  • unlock cost savings.

1.6
Ministers wanted public organisations to treat procurement as a strategic activity focused on outcomes, rather than as requirements that they need to comply with. Cabinet's view was that good procurement practice at the start of a project meant public organisations could consider the full range of opportunities, maximising the potential of delivering the highest possible savings and value.

1.7
In September 2012, the Government introduced procurement functional leadership. Cabinet expected the Procurement Functional Leader to improve government procurement by collaborating with public organisations and taking a "centre-led" approach. Ministers expected that strongly aligned support from central agencies (particularly the State Services Commission and the Treasury) would be critical to achieving a major change in the way public organisations did procurement. Ministers said that, to be successful, central agencies and the Procurement Functional Leader would need to use a different style of leadership.3

Agencies involved in improving government procurement

1.8
The State Services Commissioner is responsible for functional leadership, which Cabinet defined as leadership aimed at:

  • securing economies or efficiencies across departments;
  • improving services or service delivery;
  • developing expertise and capability across the Public Service; and
  • ensuring business continuity.

1.9
The State Services Commission supports the State Services Commissioner in their role. Cabinet authorised the State Services Commissioner to appoint functional leaders.4 The State Services Commissioner has appointed MBIE's chief executive as the Procurement Functional Leader since 2012.

1.10
The State Services Commissioner has also appointed functional leaders for:

  • government property – also MBIE's chief executive;
  • occupational health and safety – Mr Ray Smith;5
  • Government Chief Data Steward – Statistics New Zealand's chief executive; and
  • Government Chief Digital Officer – the Department of Internal Affairs' chief executive.

1.11
In this report, we include the State Services Commissioner when we refer to the State Services Commission.

1.12
In 2012, MBIE set up New Zealand Government Procurement (NZGP) to have operational responsibility for improving government procurement. In this report, when we refer to NZGP we include the relevant deputy chief executive and MBIE's chief executive because they authorise NZGP's work and decisions.

1.13
NZGP started with about 30 staff. In April 2016, MBIE's chief executive became responsible for government property functional leadership. This meant that new staff transferred to NZGP from the Ministry of Social Development, resulting in a larger group called New Zealand Government Procurement and Property.

1.14
In 2018/19, New Zealand Government Procurement and Property received nearly $30 million in funding from public organisations and through Crown revenue. At 30 June 2019, it had 129 positions, including 14 staff working only on property functional leadership and seven procurement vacancies.

1.15
The four largest teams in New Zealand Government Procurement and Property are responsible for:

  • all-of-government contracts,6 projects related to government property functional leadership, and a project addressing all-of-government risk financing and insurance (59 staff);
  • business systems and data; strategy, planning, reporting, and governance; communications and engagement with public organisations through account managers (21 staff);
  • improving procurement capability in public organisations (17 staff); and
  • providing procurement consultancy services to public organisations on a cost-recovery basis (15 staff).

1.16
The other 17 staff are responsible for management, procurement legal advice, and policy, including providing the procurement policy framework (government priorities, rules, guidance, and templates). In Appendix 1, we provide more information about New Zealand Government Procurement and Property's structure and activities, staffing, and funding.

1.17
Public organisations get goods, services, works, and construction from suppliers. Public organisations are responsible for their procurement decisions. Since 2013, chief executives must consider matters relating to the collective interests of government and stewardship of the Crown's medium- to long-term interests.7 This requirement supports the need to collaborate on procurement.

The mandate for procurement functional leadership

1.18
There are about 3600 public organisations. Of these public organisations, 135 are mandated public organisations as at 6 September 2019.8 Mandated public organisations must apply NZGP's procurement policy framework for all procurement. This includes complying with the specific rules for spending that is greater than specified dollar values. Mandated public organisations must use NZGP's all-of-government contracts unless there is a good reason not to.

1.19
Mandated public organisations include government departments, non-public service departments (such as the New Zealand Police and the New Zealand Defence Force), and Crown entities, including district health boards and Crown research institutes.

1.20
Cabinet did not set up NZGP to be a regulator. Although NZGP can influence mandated public organisations to comply with the procurement policy framework through its leadership and the State Services Commission's support, it cannot enforce compliance.

1.21
Non-mandated public organisations, such as local government organisations, are encouraged to apply the procurement policy framework because it is considered to be good practice and represents government policy.

What we audited

1.22
We audited procurement functional leadership to find out whether it is achieving benefits and is fit for purpose and to recommend improvements where relevant. We looked at whether:

  • NZGP's strategic goals for improving procurement were clear;
  • NZGP's activities deliver on the strategic goals;
  • NZGP had suitable performance indicators to monitor its work and progress towards the strategic goals;
  • NZGP reports on performance in improving government procurement; and
  • NZGP and the State Services Commission review the system's effectiveness and efficiency.

How we carried out our audit

1.23
To carry out our audit, we looked at documents supplied by the public organisations involved in our audit, information on websites, and interviews. Our focus was on NZGP, but we also spoke to the Treasury, the Department of the Prime Minister and Cabinet, and six mandated public organisations of different sizes and types. The six public organisations we selected were the Ministry of Social Development, the Ministry of Education, Fire and Emergency New Zealand, the Ministry of Foreign Affairs and Trade, the Ministry for Culture and Heritage, and the New Zealand Antarctic Institute.

1.24
In Appendix 2, we provide more information about how we carried out the audit, including the people we spoke to and some of the international information we found useful.

What we did not audit

1.25
We did not audit:

  • functional leadership for government property;
  • the adequacy of individual all-of-government contracts;
  • public organisations' management of contracts for significant services;9
  • the adequacy of the procurement policy framework, which is made up of the Government Procurement Rules: Rules for sustainable and inclusive procurement (4th edition 2019) and related guidance and templates (collectively, the Rules) or earlier versions of the Rules;
  • public organisations' application of the Rules; or
  • procurement for activities funded through the National Land Transport Programme.

Structure of this report

1.26
In Part 2, we discuss how NZGP performs its leadership role, stakeholder engagement, and the State Services Commission's role in supporting NZGP.

1.27
In Part 3, we discuss the essential elements for transparency and accountability for procurement functional leadership, including strategy, planning, monitoring, and reporting.

1.28
In Part 4, we discuss areas where NZGP needs to do more work to achieve the full benefit from the activities that it delivers.

1: Public organisations include government departments, Crown entities, schools and universities, district health boards, port companies, airport companies, State-owned enterprises, Crown research institutes, statutory bodies, licensing trusts, local councils, and council-controlled organisations.

2: Office of the Auditor-General (2018), Introducing our work on procurement, Wellington.

3: Offices of the Minister for Economic Development and the Minister of State Services (2012), Government procurement functional Leadership SEC (12) 90, at procurement.govt.nz or www.ssc.govt.nz.

4: CAB Min (12) 16/10, Better Public Services: Suite of seven papers, at www.ssc.govt.nz.

5: Mr Smith is currently Director-General of the Ministry for Primary Industries. The functional leadership role stays with him.

6: The procurement.govt.nz website describes an all-of-government contract as "a type of approved collaborative contract. [All-of-government contracts] establish supply agreements with approved suppliers for selected common goods or services purchased across government". About 3% of total government procurement spending is through NZGP's all-of-government contracts. There are 19 of these contracts for common goods and services such as electricity and gas, travel management, banking, office supplies, and rental vehicles. A full list of current all-of-government contracts is available at procurement.govt.nz.

7: The requirement was introduced through an amendment to the State Sector Act 1988. See State Services Commission (2013), Annual report for the year ended 20 June 2013, at www.ssc.govt.nz, page 11.

8: See the list of mandated public organisations at procurement.govt.nz.

9: The Auditor-General's 2019/20 annual plan discusses the further work we plan to do on contract management. See Office of the Auditor-General (2019), Annual plan 2019/20, Wellington.