Part 3: Reconciliation process for 2023/24

3.1
In this Part, we describe:

• how Oranga Tamariki planned to achieve savings for 2023/24 through reconciliation;¹³
• correspondence about the reconciliation process with providers and the Minister in March 2024;
• providers' reactions to the approach to reconciliation; and
• the results of the reconciliation process for 2023/24.

Planning to achieve savings for 2023/24 through reconciliation

3.2
In February 2024, Te Riu was briefed on a plan to recover under-utilised funds from providers to contribute to achieving baseline savings in 2023/24.

3.3
Māori, Partnerships and Communities advised Te Riu that, although recovering funding for under-utilisation was an annual business-as-usual contract management activity, the recovery process "has been strengthened because of the criticality of managing within baselines for this financial year".

3.4
Māori, Partnerships and Communities also said that "All options will be canvassed with a focus on realising every available underutilisation whilst at the same time, maintaining good relationships with our provider workforce."

3.5
At that time, Oranga Tamariki estimated that, based on reporting from providers from 1 July to 30 November 2023, this new approach would affect 98 contracts with 82 organisations.

3.6
Te Riu was told that Māori, Partnerships and Communities regional managers and its National Operations Team had recently implemented changes, including "declining all requests [from providers] to repurpose underutilisations to other service lines" (which it had previously allowed).

3.7
However, it is unclear whether staff communicated this change to providers before having individual discussions about the amounts they wanted to recover.

3.8
Māori, Partnerships and Communities also advised Te Riu that it had set up regular staff meetings to maintain progress and confirm the value of under-utilisations "in real time".

Communication about the reconciliation process

3.9
On 27 March 2024, the Deputy Chief Executive, Māori, Partnerships and Communities emailed all providers to update them on Māori, Partnerships and Communities' work on the annual contracting processes for 2024/25, the move from Fee for Service arrangements to Outcome Agreements (where relevant), planned updates to contracts' terms and conditions, and the reconciliation process for 2023/24.

3.10
The email from the Deputy Chief Executive, Māori, Partnerships and Communities said:

It's also important to let you know that we have initiated the annual reconciliation process. If you have an identified underutilisation, my team will be in touch to confirm this with you and to discuss full recovery.

3.11
The messaging in this communication was informed by the "Partnered Spend Communications Strategy" (the Communications Strategy), dated 27 March 2024. The Communications Strategy estimated that, based on reports from providers after the second quarter of the year, the 2023/24 under-utilisation amount for the Māori, Partnerships and Communities and Service Delivery groups was $18.5 million.

3.12
The Communications Strategy instructed Oranga Tamariki to state in external communications that reconciliation was a business-as-usual process. The media team acknowledged that people might consider that savings targets were driving the process. However, it said that communications should be clear that these were standard annual processes.

3.13
On 27 March 2024, Oranga Tamariki briefed the Minister about its planned reconciliation process and its communications plan. The briefing said that Oranga Tamariki carried out reconciliation every year but that its contractual terms meant that it could not always recover the full amount.

3.14
Oranga Tamariki indicated that it was looking to strengthen these terms in the future, that it would seek full recovery wherever possible now, and that providers "may view this as a reduction in funding and frontline services".

Starting the reconciliation process

3.15
After emailing providers, Oranga Tamariki began to implement its planned approach to reconciliation.

3.16
We understand that Oranga Tamariki used utilisation rates for the first three quarters of 2023/24 to determine the amount to be repaid – rather than, for example, looking at providers' performance over the whole financial year as it normally did.

3.17
Oranga Tamariki had said internally and to the Minister that it would seek to recover as much funding as possible between utilisation and the full amount funded. Once Oranga Tamariki agreed an amount with a provider, it recovered the funds by deducting them from its payments to the provider for the fourth quarter of 2023/24.

3.18
National Office led reconciliation discussions with "the top" 35 largest providers. This later increased to 44 providers after requests for additional support from regional offices.

3.19
Oranga Tamariki staff and providers described difficult meetings trying to agree on the amounts to be recovered. We were told that meetings were particularly difficult when Oranga Tamariki suggested that a provider's reserves indicated that it had not spent money on providing services for Oranga Tamariki.

3.20
Staff also indicated that the concurrent restructure resulted in the loss of regional staff whose in-depth knowledge of providers would have helped with this process. Providers echoed these sentiments, and several told us that they felt that some staff they dealt with had a poor understanding of their services and associated costs.

3.21
On 11 April 2024, the Deputy Chief Executive, Māori, Partnerships and Communities emailed regional staff to reinforce that he expected full recovery. He also reiterated that regional staff no longer had the same discretion as they had previously had (for example, to allow funding to be redistributed from under-delivered services to those that the same provider over-delivered).

3.22
Oranga Tamariki staff and providers told us that, despite statements about reconciliation (and recovery of funding) being a business-as-usual process, it was clear that it was taking a "starkly different" approach to that taken in previous years.

3.23
Staff and providers told us that Oranga Tamariki had not carried out reconciliation in a consistent or disciplined way for many years. For example, we heard that, previously, Oranga Tamariki:

• had not necessarily expected providers to reach 100% of all their agreed deliverables to retain all of their funding;
• often took an overall view of service provision – for example, if a provider reported under-utilisation of one service line but over-utilisation of another funded service, Oranga Tamariki generally allowed funding to be redistributed and did not seek to recover funding for the under-utilised services;
• did not seek to recover any funding from providers during periods of the Covid-19 pandemic; and
• had a variety of contractual terms that often required providers to report little, if any, of their financial information and use of funding.

Providers' reactions to the reconciliation process

3.24
Te Pai Ora SSPA began hearing from providers about the reconciliation process. We heard that the concerns raised by providers included that the approach to reconciliation was new, that it had not been adequately communicated or consulted upon, and that the process did not appear to be consistent or clear.

3.25
The approach to reconciliation placed an immediate strain on providers who had planned their finances and those who used some of the funding they received from Oranga Tamariki for costs such as staff contracts, property leases, and other running costs.

3.26
Some providers disputed the amounts Oranga Tamariki sought to recover and its assumptions that their reserves derived from unspent Oranga Tamariki funding. For example, one large provider told us that Oranga Tamariki sought to recover hundreds of thousands of dollars despite issues that the provider raised. These included that:

• the provider forecast that it would achieve 100% utilisation for one affected service type by the end of 2023/24; and
• information held by Oranga Tamariki about the provider's delivery and costs was inconsistent with the information that the provider held.

3.27
Another large provider said that Oranga Tamariki told them that, as part of contract negotiations, it wanted to review their "substantial reserves" and how Oranga Tamariki would "reinvest" these funds. The provider's response to Oranga Tamariki noted that its service revenue from the contract with Oranga Tamariki was managed separately to its other finances. The provider also emphasised that its reserves had come from many years of good financial management, including asset management and investment, and that it needed its reserves to operate safely in case of changes in funding.

3.28
Providers also explained that they were required to hold a certain amount in reserves to meet social services accreditation standards.

3.29
Oranga Tamariki updated the Minister on 7 June 2024, saying that it was close to finalising the reconciliation process but that providers had been "sensitive to this process" and had needed "greater transparency". Oranga Tamariki said that the process was resource intensive and that this had delayed the 2024/25 contracting process.¹⁴

Results of the reconciliation process for 2023/24

3.30
Where it was agreed that a provider would repay an amount, Oranga Tamariki deducted that amount from its payments to that provider for April-June 2024. We were told that, in some instances, Oranga Tamariki withheld payments – including for services that both parties agreed had been provided – until it agreed the amount to be repaid.

3.31
As at 20 June 2024, Oranga Tamariki still owed payments to 41 providers that had been due on 20 April 2024. The payments amounted to almost $14 million. Oranga Tamariki documentation indicated that most of these payments were overdue because reconciliation amounts had yet to be agreed or it was awaiting sign-off on a contractual variation. Oranga Tamariki told us that there might have been other reasons for withholding payments, including that it needed to receive reporting from the provider before it could release payment or there were services being provided outside of contract.

3.32
We understand that some providers successfully disputed the amount of funding Oranga Tamariki sought to recover on the basis that the process Oranga Tamariki used to calculate it was inconsistent with the contract's terms.

3.33
Using the information available to us, Oranga Tamariki recovered about $20-$22 million from providers. However, the disputes, the protracted nature of the negotiations about reconciliation, and inconsistencies in documentation make it difficult to confirm the amount.

3.34
The delays in completing the reconciliation process meant that the process began to overlap with discussions about contracts for 2024/25. Staff told us that reconciliation and discussing new or varied contracts with providers would usually have been separate processes.

3.35
However, the processes merged in 2024 because of the different approach to reconciliation, the time it took to receive the data needed for this, and difficulty agreeing with providers the amounts to be recovered.

3.36
As a result, there was no "clear air" between the processes. This contributed to a lack of timely communication, delayed decision-making, and ultimately damaged relationships between Oranga Tamariki and providers.

3.37
We discuss our views on the reconciliation process in Part 6.

13: The term "reconciliation" describes the process that Oranga Tamariki uses to reconcile the amount of funding that it has paid a provider for services in advance with reporting about services provided in the relevant period. The term also refers to the process Oranga Tamariki uses to seek to recover funding that it considers has not been needed and/or used for the contracted services.

14: The update also said that a Centralised Contracting Team had been set up as a result. We discuss this further in paragraphs 4.28-4.59.