Part 2: Background to the 2024/25 contracting round

Oranga Tamariki: Inquiry into procurement and contract management.

2.1
In this Part, we describe:

  • the scale of contracting with providers;
  • what Oranga Tamariki and providers told us about its approach to procurement and contract management before the 2024/25 contracting round;
  • the financial pressures in the contracted services budget;
  • the preparation Oranga Tamariki did in late 2023 to inform its planning for 2024/25;
  • the changes in strategic direction and need to achieve savings that informed the 2024/25 contracting round; and
  • decisions Oranga Tamariki made in early 2024 about how to achieve a change in strategic direction and make savings in 2023/24 and 2024/25.

About contracts with social service providers

2.2
Oranga Tamariki administers a significant budget for contracting with providers. In 2023/24, Oranga Tamariki spent about $537 million contracting with about 550 providers to deliver a broad range of services.4

2.3
The types of services that Oranga Tamariki provides under contract are broadly:

  • care and care support;
  • youth justice;
  • intensive interventions (for example, family group conference co-ordination);
  • transitional services (for example, transitioning from care to independence);
  • family and sexual violence services; and
  • early support and prevention (for example, educational programmes and counselling services for children and their families, and other family support).

2.4
Oranga Tamariki has 10 strategic partnerships with iwi and Māori organisations. To partner with, and invest in, these strategic partnerships, it has set aside separate funding under its "Enabling Communities" work. The goal of this work is to devolve resources and decision-making powers to its strategic partners to help prevent children from needing state care.

2.5
Most services were contracted under an Outcome Agreement for three years, but some providers were on annual contracts. We heard that, because the contracts' expiry dates were staggered, about one-third of contracts came up for review every year.

2.6
Most contracted services were administered by the Māori, Partnerships and Communities group within Oranga Tamariki. After an organisational restructure in 2024, this group is now called Enabling Communities & Investment.

2.7
The Service Delivery group, now called Tamariki and Whānau Services, also administered contracted services. Before February 2024, many of the contracts that Service Delivery administered were under Fee for Service arrangements (see paragraph 4.7), including interim care arrangements for children.5

2.8
As the main government funder of services where employees carry out social work tasks, Oranga Tamariki was designated as the lead funding agency for the social sector pay equity settlement process in 2022.6

Procurement and contract management practices before 2024/25

2.9
In our interviews with staff and providers, we heard that the social sector had been concerned about procurement and contract management for many years.

2.10
We were told that Oranga Tamariki often made decisions about contracts late in the financial year. Providers' contracts were also almost always rolled over without an open, competitive, and transparent procurement process. Some providers had held contracts with Oranga Tamariki (and its predecessors) for many years without any formal testing of the market.

2.11
We understand that Oranga Tamariki generally relied on the ability to opt out of the Government Procurement Rules for the provision of welfare services by the government.7

2.12
Providers' performance reporting periods varied (for example, some were quarterly or six monthly). Their reporting obligations typically contained a mixture of quantitative data (for example, the number of full-time equivalent staff the service employs or the number of visits to whānau it has made), along with a qualitative report to provide context and insight.

2.13
Providers told us that their relationships with the Oranga Tamariki regional staff responsible for contract management were the main strength of its contract management practice. We were told that interactions with these staff were, on the whole, professional, constructive, and respectful.

2.14
Oranga Tamariki also generally saw these relationships as a strength, although some staff at National Office said that close relationships could make it difficult for regional staff to be part of decisions that might negatively affect providers.

2.15
Both Oranga Tamariki and providers highlighted events in 2022/23 as important context for the 2024/25 contracting round.

2.16
In the 2022/23 contracting round, Oranga Tamariki sought to reduce its spending on contracts by about $20 million. Oranga Tamariki had documented lessons from this contracting round, including that:

  • the process was difficult for staff and placed a strain on relationships between regional staff and providers;
  • consistent key messages and a clear process would have helped frontline staff to explain why the funding changes were needed; and
  • the tension in relationships with providers prevented a clearer focus on the strategy Oranga Tamariki wanted to pursue and affected the exercise's effectiveness.

2.17
Oranga Tamariki made commitments to providers after that contracting round, including that it would communicate and engage with affected providers better.

2.18
Oranga Tamariki also engaged Deloitte New Zealand (Deloitte) to review its social services procurement operating model. Deloitte's report identified several areas where Oranga Tamariki was doing well. However, it also highlighted an extensive set of risks and made recommendations for addressing them – including the need to prepare a strategic procurement plan.8

2.19
During our inquiry, staff were unclear about the status of the work to implement Deloitte's recommendations.

Financial pressures in the contracted services budget

2.20
Oranga Tamariki told us that, in late 2023, it was forecasting that its 2023/24 spending would go over budget and it was at risk of breaching its appropriations.

2.21
Oranga Tamariki had set a budget envelope of $490 million for contracted services in 2023/24. This was based on the previous year's $537 million spending, less savings from the 2022/23 line-by-line review and a reduction to provide funding for Oranga Tamariki's Enabling Communities prototypes.9

2.22
However, in September 2023, the Finance Team identified that $537 million had been committed in contracts, including $27.9 million of contracts that had been entered into without an identified funding source.

2.23
Although the Finance Team identified $22.5 million in one-off funding to add to the budget (taking it to a one-off total of $512.5 million), this still left potential overspending of more than $24 million in 2023/24.

2.24
In September 2023, Oranga Tamariki also received an additional $40 million for 2023/24 to provide for social sector pay equity funding.

2.25
We understand that Oranga Tamariki had passed on pay equity funding to eligible providers through one-off grants. However, it intended to build pay equity funding into the contracts with eligible providers at an estimated cost of more than $50 million a year in and from 2024/25.

Preparation for the 2024/25 contracting round

2.26
In August 2023, Oranga Tamariki set up a Partnered Spend Investment Approach Taskforce (the Taskforce) to complete a review of its contracted services' value for money and effectiveness.

2.27
The Taskforce reported to an internal governance sub-committee (Mana Ōrite) and the primary governance group in Oranga Tamariki (Te Riu), which is made up of the Senior Leadership Team.

2.28
The Taskforce and other staff briefed Mana Ōrite and Te Riu about the contracting round in September and November 2023.

2.29
The Taskforce advised that it had identified opportunities to reduce the amount Oranga Tamariki spent on contracted services by up to $50 million in 2024/25 and later years, in part by removing or reducing unused or under-utilised services. The Taskforce told Te Riu that it had reviewed a selection of programmes and provided Te Riu an assessment of the available evidence about the effectiveness of these programmes, noting that there was varying quality of evidence. The Taskforce also provided a risk assessment of different savings options and implementation time frames.

2.30
The Taskforce also told Te Riu that it had reviewed providers' spending and identified under-utilised funding for 2023/24.10 Oranga Tamariki intended to recover as much of this funding as individual contractual arrangements permitted. The Taskforce said that it had "carefully considered the impact on tamariki, whānau and communities of this approach". In its view, the impact would be minimal given the focus on under-utilisation. However, although the paper indicated that the Taskforce had reviewed a selection of providers, it was otherwise unclear how it assessed the potential impact.

2.31
Māori, Partnerships and Communities said that it intended to review all contracts before 31 December 2023 to give providers enough notice of any intended changes. It also intended to make several changes to processes. These included:

  • changing its processes for approving and varying contracts;
  • centralising its contracting processes to improve their quality, consistency, and timeliness;
  • introducing new contract clauses that would require providers to submit copies of audited annual financial statements and, in some instances, detail on the cost of services;
  • improving the information that it would use to make future decisions on contracts; and
  • improving the reporting system and information received from providers.

2.32
We also heard that, around this time, some Oranga Tamariki staff had formed a narrative that some providers had "done well" from Oranga Tamariki funding and were not providing services.

2.33
We understand that Oranga Tamariki intended to review its pricing model and individual provider funding, but this did not happen. Oranga Tamariki told us that, after looking at providers' financial information on the Charities Commission website and providers' utilisation data, it formed a view about whether some or all of the money held in providers' reserves had come from funding that was meant for contracted services.11 However, as we mention in paragraph 6.47, Oranga Tamariki did not test these assumptions directly with providers.

2.34
Te Riu said that the time frames for making the changes to processes were challenging and that early engagement with providers and partners was crucial.

2.35
Te Riu also said that the Deputy Chief Executives for System Leadership, Māori, Partnerships and Communities, and People, Culture and Enabling Services would work together to provide advice to the Chief Executive on assessing contracts, preparing a communications approach, and assessing the risks of savings and opportunities for reinvestment and capability-building in the organisation.

2.36
We understand that the Taskforce was disestablished in November 2023.

Directions from the incoming Government

2.37
On 27 November 2023, a new Government was sworn in. The incoming Government made two significant policy decisions that were relevant to this inquiry. These were about the strategic focus for Oranga Tamariki and the need to achieve savings.

2.38
Oranga Tamariki told us that it received a clear direction from the Minister for Children (the Minister) that Oranga Tamariki needed to focus on its core purpose. Staff told us that they understood this to mean that Oranga Tamariki should focus on about 4000 tamariki for whom it has statutory care responsibilities. Oranga Tamariki also told us that its strategic direction involved a strong emphasis on maintaining family violence and sexual violence services for tamariki.

2.39
In response to our draft report, the Minister told us that the direction provided for contracted services was not about achieving a savings target but about ensuring that the services funded by Oranga Tamariki were delivering outcomes sought, that the services were connected to its core business, and that there was not duplication of services.

2.40
In December 2023, the Treasury issued guidance for departments that provided an overview of the Budget 2024 process and how to submit Budget initiatives.

2.41
The guidance said that Cabinet had agreed to a baseline savings target of 6.5% for most agencies and 7.5% for agencies with more than a 50% increase in fulltime-equivalent staff since 2017/18. Oranga Tamariki was required to meet the 6.5% baseline savings target.

2.42
In Budget 2024, Oranga Tamariki's total appropriated baseline funding decreased by $56.5 million, from $1,584.4 million in 2023/24 to $1,527.9 million in 2024/25.

Response to the change in direction

2.43
In early 2024, Oranga Tamariki set out to achieve these baseline savings. It aimed to make them primarily from an organisational restructure and its contracted services budget, including recovering funding from providers in 2023/24 (see Part 3) and reducing contracted services in 2024/25 and beyond (see Part 4).

2.44
The organisational restructure ran in parallel to the 2024/25 contracting round and was finalised in July 2024. The new structure changed how the teams responsible for contracting were resourced and structured.

2.45
Oranga Tamariki told us that the restructure reduced the number of staff working on contract development and management by about 50%.12 Affected staff included contract managers in the regional offices. We discuss the impact of this in Part 6.

4: This figure does not include social sector pay equity funding of about $40 million, which was sometimes included in documentation.

5: Oranga Tamariki defines a "Fee for Service" arrangement as "Any arrangement that is for the provision of social sector services where an alternative contracting arrangement is not in place. This includes both Interim Care Arrangements and ad hoc service provision." Another way of describing it is a system where a provider of a service is paid for each unit of service provided.

6: In July 2022, Cabinet agreed to set up a fund to enable the settlement of a pay equity claim for employees of five large providers carrying out social work tasks. Cabinet agreed in November 2022 to extend the pay equity settlement to all workers carrying out social work in the wider social services sector. The new pay rates under the extended settlement took effect on 1 July 2023.

7: In certain circumstances, a public organisation can opt out of applying most of the Government Procurement Rules. For example, public organisations can opt out of the Rules for the provision of certain types of health services, education services, and welfare services. See (3)(k) of "Rule 12: Opt-out procurements", at procurement.govt.nz.

8: An organisation's strategic procurement plan might include, for example, its vision of the outcomes it wishes to achieve, the types of procurement it does, the value and risks associated with the procurement, and an analysis of the market it procures from.

9: These prototypes help Oranga Tamariki to test its approach to decentralising funding to iwi Māori and other communities. See, for example, "Community-led contact centre goes live in Whakatāne" at orangatamariki.govt.nz.

10: The term "under-utilised" or "under-utilisation" describes where a provider has not provided the full level of service that Oranga Tamariki has funded it for. Oranga Tamariki has also used similar terms to express this, such as "under-delivery", "under-performance", and "underspend". We use "under-utilisation" to recognise that there might be a variety of reasons why service provision might not match the funding provided.

11: In its documentation, Oranga Tamariki used the terms "retained earnings", "underspends", and "surpluses" to refer to funds that it considered had not been spent on services. We use the term "reserves" to describe financial reserves a provider might have without implying a reason why that might be the case.

12: Before the restructure, four fulltime-equivalent staff were responsible for preparing contracts and 70 fulltime-equivalent staff were responsible for managing contracts, mostly in the regions.