Part 7: How was personal protective equipment procured?

7.1
The global pressure on PPE supply chains as a result of Covid-19 and concerns about access to PPE affected many countries. New Zealand was not alone in needing to rapidly buy PPE in a heated international market.

7.2
From our discussions with the sector, it was evident that the Ministry had difficulty responding to the increase in demand for PPE in the early period of the Covid-19 response.

7.3
The main factors for this were:

• As noted earlier, the Ministry did not have an overall view of existing PPE stock levels (DHBs’ normal operating stocks and the DHBs’ national reserve supplies, or of how much of that stock had expired), depletion rates, or usage. It needed this information to accurately forecast demand, which was changing daily. It also needed a process to ensure that the right volume of PPE went to the right place at the right time (to prevent shortages or, conversely, stockpiling).
• Demand for PPE was sensitive to changes in the clinical guidance provided for the use of PPE, and this changed frequently.¹⁶
• Some suppliers found it difficult to respond to the multiple orders DHBs were placing. Procuring agencies wanted a more co-ordinated approach to eliminate procurement competition between DHBs and shared service agencies.

7.4
In this Part, we look at how PPE was procured before Covid-19, the changes the Ministry made to this decentralised model during the Covid-19 response, and how effective those changes were.

7.5
We review the appropriateness of the Ministry’s use of emergency procurement during the pandemic. We also look at the extent to which the procurement strategy, if fully implemented, could have helped the Ministry and DHBs to better understand and mitigate procurement risk.

How was personal protective equipment purchased?

7.6
Before Covid-19, the model for sourcing and procuring PPE was largely decentralised. DHBs could use the Terms and Conditions and Pricing schedules agreed nationally by NZ Health Partnerships Limited, which provides shared administrative and procurement support services for DHBs, and Pharmac. They could also choose to procure regionally with other DHBs (for example, northern DHBs used HealthSource for procurement, supply chain, and logistics services) or for their own DHB.

7.7
In mid-2019, NZ Health Partnerships set up a national panel of eight suppliers to supply medical devices (including PPE) to the health and disability sector. It entered into a Master Agreement with each panel member. DHBs could use these national contracts to procure medical devices. Using the panels was not mandatory, and DHBs could choose to use a supplier of their choice if they preferred.

7.8
We reviewed a sample of the national contracts. The contracts required suppliers to be able to meet an increase in demand during an emergency and to use their best endeavours to source and ensure a continuous supply of PPE. Several suppliers were unable to meet the increased demand for PPE because of global demand, but the emergency provisions in the contracts could not be effectively enforced in such circumstances.

7.9
In line with the devolved model of stock management, DHBs had different inventory management practices and systems to manage routine clinical supplies (including PPE). They also used different factors to trigger procurement activity.

7.10
The Ministry told us that, early in the pandemic response, DHBs started submitting orders for PPE based on their estimates of what they needed.

7.11
We were told that HealthSource, which procures on behalf of the four northern region DHBs, placed an order for PPE worth $20 million. We were also told that it would have placed a further order for $10 million if this had not presented cash flow challenges.

7.12
Canterbury DHB told us that, because it was not allocated any supplies from the first distribution from the Ministry’s national reserve, it placed an order based on an estimated need for one million masks each day. If demand had matched Canterbury DHB’s original estimates, the DHB’s stock would have been depleted in two weeks. The DHB would also have faced cash flow challenges.

7.13
On 16 March 2020, Cabinet set up a $500 million contingency to cover the immediate costs of the Covid-19 public health response. On 16 April 2020, the Covid-19 Ministerial Group agreed that $200 million of the contingency would be allocated to PPE. That amount was based on a Ministry estimate that used Australia’s PPE estimates, adjusted for the New Zealand population.

7.14
The Ministry was concerned about the prospect of DHBs purchasing PPE independently and potentially competing with each other on volumes and price. There was also a risk that DHBs would experience cash flow challenges because of the large volumes of PPE that they needed to order.

What changes were made to procurement in the Covid-19 response?

7.15
To address these challenges, the Ministry implemented a more centralised model of procurement in March 2020.

7.16
At the beginning of April 2020, the National Health Coordination Centre, which led the health emergency response, set up a Health Regional Logistics group to co-ordinate processes related to PPE, respond to emerging risks, and make decisions about sourcing PPE.

7.17
The Health Regional Logistics group included the assigned procurement leads from individual DHBs, NZ Health Partnerships, and HealthSource (for the northern region). The group provided national and centralised co-ordination and distributed the workload for sourcing and procuring significantly higher volumes of PPE.

7.18
PPE was separated into categories, and procurement leads were assigned to oversee sourcing and procurement of each category. This group reviewed the status of stock on order, national stock management, and distribution.

7.19
We understand that procurement leads were assigned based on whether the agency had the appropriate structure, capacity, and capability to respond to large requests rapidly. This approach required good co-ordination between the procurement leads when engaging with suppliers, particularly if the same supplier was providing several different types of PPE from different categories.

7.20
The Ministry instituted a process that required written approval by a Ministry official with the appropriate financial authority before an order for PPE was placed. We consider that this approach is in line with the Ministry of Business, Innovation and Employment’s emergency procurement guidance.

7.21
The procurement leads used their individual procurement teams to source and procure additional PPE through their existing supplier networks. They looked to existing suppliers under contract (although with substituted PPE products at times) and new suppliers.

7.22
They considered importing products and domestic manufacturing capability (where the company was already set up for manufacturing and could increase capacity quickly). Other agencies, such as the Ministry of Business, Innovation and Employment and the Ministry, also suggested potential suppliers (including importers and brokers).

7.23
Because global demand was increasing significantly, procurement leads worked quickly to source as much appropriately certified PPE as they could (factoring in lead times and, to a lesser extent, prices). When deciding whether to use new suppliers, procurement leads considered:

• whether the supplier could provide the appropriate product standard certification and product specification testing documentation; and
• the volumes of PPE that the supplier could deliver, the price (although price was less of a consideration), and whether it was readily available in New Zealand or needed to be transported here, in which case transport options and costs were considered.

7.24
Suppliers were notified that they had 30 days in which to notify their products to Medsafe (all suppliers have to record details about medical devices, including PPE that is being supplied in New Zealand).¹⁷

Was the use of emergency procurement processes appropriate?

7.25
During Covid-19, some procurement was carried out under emergency procurement provisions.¹⁸ The Ministry of Business, Innovation and Employment’s Quick Guide to Emergency Procurement outlines flexibilities to procurement processes that agencies can use in an emergency situation instead of normal procurement procedures.

7.26
Agencies have to confirm agreements with suppliers in writing. This can take the form of a simple Government Model Contract available on the Ministry of Business, Innovation and Employment’s website or, if time does not allow this, confirmation by email. This confirmation need only include basic information, such as what is being delivered, to what specification, when, where, by whom, the price, and any other charges (such as freight and insurance).

7.27
Agencies have to balance the need to act without delay against meeting their public sector obligations to act lawfully, reasonably, and with integrity. Procurement decisions still need to be justified.

7.28
We consider it appropriate that the Ministry carried out procurement activities under these emergency provisions. The Ministry will need to determine when it is appropriate for it to transition to the post-emergency reconstruction phase, as described in the Quick Guide to Emergency Procurement.

Personal protective equipment price increases

7.29
The emergency procurement provisions recognise that, although price will be a factor when selecting suppliers, the overriding consideration must be the immediate provision of relief (in this instance, the continuous supply of all categories of PPE).

7.30
We understand that assessing the reasonableness of quoted prices for PPE during the pandemic was challenging. Existing national contracts provided a base comparison for prices, but prices for almost all categories of PPE had increased.

7.31
The increased global demand for PPE, and face masks in particular, made it more difficult and more expensive to source. Surgical masks, which had cost 4-8 cents each in 2019, now cost 90 cents to $1 each on the international market. The Ministry told us that there were similar price increases for other PPE categories.

7.32
The Ministry told us that unprecedented global demand for PPE, a dramatic increase in the cost of raw materials, and other input costs increased supply prices. As a result, many suppliers were unable to meet contracted prices, and the Ministry had to absorb the cost increases.

Due diligence and quality assurance

7.33
We looked at the due diligence and quality assurance processes to assess the quality and safety of PPE that had not been used in New Zealand previously.

7.34
Procurement leads carried out due diligence checks of suppliers and products from overseas manufacturers at pace to avoid losing potential PPE supplies. Those checks included understanding the supplier’s quality control processes and, where possible, receiving confirmation about the supplier and its facilities from an independent source.¹⁹

7.35
Significant volumes of PPE were manufactured in China. The Chinese government provided assurances about the quality of its PPE products.

7.36
To accelerate clinical testing of new PPE, procurement leads sought manufacturers’ standard and certification documents and testing results before the product arrived in New Zealand.

7.37
Procurement leads reviewed these documents and made a recommendation. They did this without a sample of the product. This is not normal practice, but it was considered necessary in the circumstances to accelerate the process and secure the product.

7.38
HealthSource facilitated this process for masks, gowns, and protective eye wear through a group in the Northern Region Health Coordination Centre. Other procurement leads ran a similar process using their own internal specialist teams, including Infection Prevention and Control teams for new products from existing suppliers or new products from new suppliers.

7.39
Once the PPE was delivered to HCL, HealthSource visually inspected (but did not clinically test) a sample of products on behalf of all DHBs before it was released for distribution to DHBs.

7.40
HealthSource told us that it understood that once the PPE was distributed to DHBs, they could carry out their own fit testing of masks before distributing the masks further.

7.41
New Zealand regulates the supply but not the safety of medical devices (which includes PPE). Suppliers and domestic manufacturers are required to notify the medical devices, the risk classification, and the intended use of the devices to Medsafe within 30 calendar days of devices being supplied.²⁰ Suppliers are required to maintain records so that, if a product recall is needed, they can identify who they have supplied the products to.

7.42
During the Covid-19 response, the Ministry decided that, in exceptional circumstances, a lack of registration would not preclude the supplier from being considered, and it made arrangements for products to be registered while the order was filled or when the product arrived in New Zealand.

Procurement strategy

7.43
The health and disability sector relies heavily on a global supply market, and understanding supply chain risk and vulnerabilities is critical. Covid-19 has highlighted the extent of several vulnerabilities with the supply chain. These included limited domestic manufacturing capacity, shortages of raw materials to manufacture PPE locally and internationally (some countries would not permit the release of raw materials), and reliance on countries whose production capacity was disrupted by shutdowns resulting from the pandemic.

7.44
Other issues included the limited supplier market – such as single or limited suppliers for some products (such as isolation gowns), global price wars because of escalating demand, e-commerce difficulties with overseas suppliers, and overseas border restrictions affecting logistics.

7.45
The Ministry of Business, Innovation and Employment’s Quick Guide to Emergency Procurement advises agencies to consider contingency planning for providing goods and services if an emergency, supply shortage, or other unforeseen event arises. The Quick Guide to Emergency Procurement states:

The level of forward planning should reflect the strategic importance of the good or service, the risk of an emergency, and the cost of any contingency measures. The approach taken should be balanced, practical and fiscally responsible, and may be part of a wider risk management strategy.²¹

7.46
In our view, given that it was foreseeable that PPE would need to be procured during a health emergency, the Ministry and the wider health and disability sector should have done work to better understand the risks and vulnerabilities of the supply chain for PPE in an emergency.

7.47
The health and disability sector has a DHB Procurement Strategy (the Strategy), supported by a DHB National Procurement Policy and a Health Sector Operating Model. The Strategy is clear that, to get the full benefits of collective procurement, the health and disability sector requires robust data, an agreed catalogue of goods and services, robust business processes, robust product management practices, clinical engagement, and trusted reporting to support good decision-making.

7.48
Some aspects of the Strategy have not been fully implemented. These aspects could have supported the health and disability sector to better understand and manage the risks that emerged during the Covid-19 response. These include:

• clarifying the roles and expectations of DHBs for procurement activity in an emergency, monitoring sector procurement behaviour, and providing feedback;
• fully implementing the Health Finance Procurement Information Management System (for national visibility of procurement activity);
• developing Supplier Relationship Management Frameworks nationally and regionally; and
• preparing a catalogue of common products.

7.49
We understand that a review of the Strategy and the Policy is planned. We expect the review to consider lessons from Covid-19.

Our observations

7.50
Procurement is an important part of any strategy to ensure continuity of supply of PPE in an emergency, so understanding and mitigating supply chain risks is critical. The Ministry understood this in 2006 when it contracted QSi to domestically produce N95 and general purpose surgical masks to offset risks with sourcing them internationally.

7.51
Demand for PPE during Covid-19 differed significantly from DHBs’ usual demand for PPE and from the assumptions that the level of national reserves supplies were based on.

7.52
The decentralised model of procurement was designed to operate in normal circumstances and for localised emergency responses, but it did not work well for supporting a national emergency with global supply chain implications.

7.53
The Ministry’s ability to quickly mobilise resources and co-ordinate sourcing and procurement activity was adversely affected by a complex and decentralised procurement model, a lack of an operational plan for emergencies, and a lack of information about PPE at a national level.

7.54
This prevented the Ministry from making informed decisions quickly. It lacked information about PPE on hand, usage rates, demand, and criticality. This information would have helped ensure that the right product was provided to the right people, at the right place, at the right time. In our view, the Ministry should have prepared an operational plan as part of the preparation for any pandemic, rather than trying to plan as the pandemic was unfolding.

7.55
We consider there was not enough planning and risk management for the PPE supply chain. Before Covid-19, not all categories of PPE were recognised as a critical medical device in an emergency that needed a strategic procurement approach.

7.56
As a result, the Ministry had not identified supply chain risks and vulnerabilities, and responsibility for managing supply chain risk remained decentralised and unclear. Further work needs to be done to assess supply chain risks to assist in planning for future events.

7.57
It is unclear whether the pre-existing sourcing arrangements could have met the demand for PPE that was forecast through pandemic planning, let alone the demand that arose during Covid-19. The Ministry recognised a need to centralise the procurement process and did so quickly. The new process proved agile enough to respond to the increasing demand for PPE.

7.58
Procurement activity outside of existing contracts with suppliers was carried out as emergency procurement. By its nature, emergency procurement has to be rapid and agile. It achieves this by speeding up or removing aspects of the normal process. To meet the objective of rapidly securing supply, some risks have to be accepted that would be managed differently in normal circumstances. During the Covid-19 response, these included:

• making upfront payments to secure PPE;
• carrying out limited due diligence checks on new suppliers and their facilities;
• accepting supplier terms that may not under normal circumstance have been accepted;
• accelerating the product standard and certification acceptance and testing processes by reviewing suppliers’ certification documentation and product testing results without inspecting a sample of the physical product; and
• not testing whether equipment would fit before committing to ordering products not previously used.

7.59
In the circumstances, it was entirely appropriate for DHBs and other procuring organisations to use emergency procurement provisions to source goods quickly, and the actions taken were justifiable on the grounds that the usual procedures would have prevented them from delivering adequate and appropriate PPE to the people who needed it. We are satisfied that the risks were given due consideration by individuals and groups well placed to consider those risks. The Ministry made decisions based on the best information available at the time and the circumstances it faced.

7.60
We identified some risks in the accelerated testing and product acceptance processes for new suppliers and new PPE. Due diligence processes for PPE sourced from new suppliers and for new PPE products did not include the usual level of quality assurance. We are not in a position to assess the level of risk that this posed, but this risk was knowingly assumed given the pressing need to source and procure PPE in an extremely competitive global market.

7.61
In our view, the Ministry could usefully consider how to mitigate product quality risks when procuring PPE in emergency situations.

7.62
As we set out in Part 2, we recommend that, in the future, health emergency plans include how procurement should be carried out during a response.

16: See Part 3, which outlines the clinical guidance issued and the main changes to the guidance for the community sector on what PPE should be used and when.

17: Suppliers must notify the devices they supply in New Zealand to the WAND (Web Assisted Notification of Devices) database run by Medsafe.

18: An emergency is defined as a sudden unforeseen event that can result in injury, loss of life, or critical damage to property or infrastructure.

19: This confirmation was typically sought by requesting importers and brokers with agents in those countries to visit factories and inspect the production facilities and products.

20: Established under the Medicines (Database of Medical Devices) Regulations 2003.

21: See the Ministry of Business, Innovation and Employment, Quick Guide to Emergency Procurement, Wellington, page 1.