New Zealand Context - Part two: Government contracting policy and philosophy
Government procurement policy and practice
There are three key government documents dealing with procurement policy and the implementation of that policy:
- Government Procurement in New Zealand - Policy Guide for Purchasers, Ministry of Economic Development, Regulatory and Competition Policy Branch, July 2002.
- Procurement: A Statement of Good Practice, Office of the Controller and Auditor-General, June 2001.
- Guidelines for Contracting with Non-Government Organisations, The Treasury, 2003.
Each government department is expected to develop their own procurement policy in line with these documents.
1. Ministry of Economic Development (MED) - Government Procurement Policy
Key extracts from the policy:
"This policy guide is intended to help government departments and other taxpayer funded agencies to support the government's procurement policy. It is hoped that State-Owned Enterprises and local government authorities will also base their procurement approach on this guide."
"... this guide generally does not set down prescriptive purchasing rules or procedures."
The guide forms the basis for individual department's procurement policy development. These policies vary but MED report that most have incorporated the principles in the MED document.
"New Zealand's government procurement policy is based on the commercial principle of best value for money through competition, including full and fair opportunities for domestic suppliers...Responsibility for procurement procedure and decisions is devolved to the individual departments or agencies.
Guiding principles of the government's procurement policy are:
- best value for money;
- open and effective competition;
- full and fair opportunity for domestic suppliers;
- improving business capabilities, including e-commerce capability; and
- recognition of our bilateral obligations to Australia (CER) and Singapore(CEP) and our trade policy interests in open and transparent government procurement markets.
"The Government expects its agencies to be fair but demanding buyers..."
MED provides government agencies with a list of things to consider when assessing providers. For example:
- reduced inventory costs
- easier cheaper communications/transport.
There is nothing in the guide about any assessment of employment practices or the capability of the providers' employees.
Potential providers obtain procurement information through the Industry Capability Network New Zealand (ICN) and the Government Electronic Tenders Service (GETS).
ICN maintains an industry capability register, linked electronically to a similar one in Australia and can advise buyers of any potential competitive
New Zealand and Australian suppliers. It has an advisory and information role only. All departments must notify ICN of their intention to procure supplies or goods for use within New Zealand involving expenditure of departmental Vote funds above a value threshold of $50,000 excluding GST.
In addition, all publicly available opportunities (calls for registration of interest or tenders) are required to be listed in GETS (in addition to other advertising) irrespective of whether the procurement exceeds the $50,000 threshold.
Contracts for the "provision of public health, education and social welfare services" are exempt from the requirements to notify the ICN reflecting the fact that the policy is more focussed towards the purchase of goods rather than services - although it is this policy that informs government department's purchase of cleaning services.
MED is undertaking a review of the implementation of the Government Procurement Policy. It is concerned with how effective the implementation of current government procurement policy is rather than the policy itself. MED anticipates that, "There is likely to be scope within the existing policy framework for better performance both in terms of improved value for money for government and increased participation by New Zealand firms, including SMEs. The review will also consider the role of government procurement in supporting innovation in the New Zealand economy in response to a report by the Innovation Working Group. Firms can be stimulated to innovate by demand, in particular by sophisticated and demanding customers."
The use of the contracting process to support other government goals (innovation and SME development) is in addition to requiring agencies, "...to ensure that their procurement is consistent with environmental policies of the Government." A key mechanism for this is Govt3. This is a voluntary programme aimed at helping government agencies improve the environmental sustainability of their activities, including the eco efficiency of their buying practices. Govt3 stands for three pillars of sustainability: environment, social and economic. The project is led by the Ministry for the Environment in conjunction with the Energy Efficiency Conservation Authority. There are 35 participating government agencies.
The Ministry for the Environment has worked with New Zealand Police to create the first syndicated contract[11] for the procurement of vehicles that includes key performance indicators designed to reduce environmental impact.
The inclusion of environmental considerations, the promotion of innovation in providers and the support of SME as desirable features to consider in provider selection provide a precedent for the use of funding contracts to promote bigger/other government goals.
2. Office of the Controller and Auditor-General: Procurement Good Practice
The original guide was produced in 1995 and updated in 2001. Further updates are in process.
The Guide has three parts[12]:
- Overriding considerations that a public entity should consider
- Step by step guide to each part of the procurement process - overall principles of good practice and information a public entity might include in its own manual
- Discussion of particular types of procurement, e.g. engagement of consultants, sole source situations etc. More of these issues are being developed.
Key extracts from the policy:
"This publication is a statement of good practice. It is not a set of rules. We suggest that each public entity uses the statement as a benchmark for its own procurement policies and procedures and as a guide to what its own procurement manual should contain. In our role as the auditor of public entities, we would expect to find that an entity's procurement policies and procedures compare favourably with this statement."
"This publication is designed for use by any public entity, as defined in the Public Audit Act 2001 - except for local authorities and entities under their control."
"A public entity has considerable discretion as to how it procures goods or services. However, each entity has a responsibility to manage its resources in an effective and efficient manner. Applying this principle may involve assessing whether productivity, innovation, greater choice and lower prices outweigh the benefits of maintaining stability, trust and effective working relationships with existing providers."
"A public entity should be aware of, and comply with, all applicable legislation when it procures goods and services."
Examples of applicable legislation are the:
- Organisation's own enabling legislation;
- Official Information Act 1982;
- Commerce Act 1986;
- Fair Trading Act 1986; and
- Dumping and Countervailing Duties Act.
This section does not include any requirement to ensure that the funded service provider complies with relevant legislation (including the Employment Relations Act or the Human Rights Act).
"A public entity should observe ethical standards, principles and behaviour throughout the procurement process."
Value for money: "Value for money does not necessarily mean selecting the lowest price...Care should be taken to ensure that unreasonable delivery risk is not assumed in pursuit of the lowest 'whole of life' cost..."
Market effects: "A public entity should take into account the possible effects of its procurement decision on the supplier base - especially when deciding to join with other public entities to purchase for competitive advantage (syndicated procurement)."
The guidelines provide detailed suggestions for the development of agencies' own procurement policies and plans. This includes suggested evaluation criteria to assess provider tenders or expressions of interest. There are several listed under "the supplier's capability". Examples listed are its:
- Experience in providing similar services;
- Skills, experience, and competence of its key personnel;
- Design and development capability;
- Financial status;
- Level of management competence; and
- Ability to meet the specified timetable.
In a later section of the guidelines on "Due Diligence" there are suggestions as to how these criteria would be demonstrated including, "...obtaining curriculum vitae and meeting with individuals to discuss their relevant experience and understanding of the requirements."
Part 2 of the guidelines includes a section on "Dealing with low priced tenders". It suggests that a public entity should scrutinise any tender that is priced very low in relation to others. It provides a list of criteria for doing this, for example, "...whether the tenderer has included all costs associated with the provision of the goods or service". It does not include the requirement to check whether wages comply with statutory minimums or are a fair rate for the job. In services where costs are predominantly associated with labour costs such as cleaning or home based support work[13] competing on prices may be at the expense of employee wage rates or hours allocated for the job.
3. The Treasury: Guidelines for Contracting with Non-Government Organisations
This paper is specifically aimed at contracting for the provision of services with NGOs, or otherwise providing funding for NGOs, not for the purchase of inputs. Because of other government policy and objectives in terms of the relationship between government and the not-for-profit sector, this document places particular emphasis on contracting with not-for-profit organisations.
Key extracts from the policy:
Principles underpinning the guidelines:
- Services purchased should contribute to the achievement of Government outcomes and objectives;
- Contracting should reflect the needs of the ultimate users or recipients of the service;
- Provide appropriate accountability for the public money;
- Represent value for money;
- Quality of service of central importance;
- Crown and its organisations should act in good faith; and
- Crown should understand the nature of the organisations they and the Crown contract with.
Selecting a provider
Government agencies can identify potential providers in a number of ways:
- Ask other government agencies;
- Ask other NGOs, particularly umbrella organisations;
- Published information;
- Advertising for expressions of interest;
- Tendering for services;
- From an existing provider they have a relationship with
- Contract managers knowing of suitable NGO in their area; and
- Information from needs assessments of service planning data.
The contract needs "...to strike a careful balance between;
- Including enough detail to ensure that there is certainty (for both NGO and the Government purchaser) as to the nature and scope of the service; and
- Allowing the NGO flexibility.
...Care must be taken to avoid compromising the effectiveness of the service provision by over prescription of its form and content."
Quality specifications include the need to (avoid) "unreasonable compliance costs."
The guidelines do suggest that inputs such as suitably qualified or trained staff could be considered.
Capability of the NGO
"Government agencies need to be confident an NGO can actually do what it undertakes, and in a manner consistent with the values and standards the government expects."
Included in the information to provide this assurance is:
- "evidence of appropriate governance and management systems and internal controls. This may include, for example...having good employer practices."
"Good employer practices" is footnoted and defined as:
"Compliance with relevant employment relations and human rights legislation as well as fair and ethical practices such as:
- positive relationships with unions in the contractor's trade or industry;
- participatory mechanisms for employees, in addition to participation in matters such as health and safety;
- observance of EEO principles and opportunities;
- work/life balance policies;
- provision of training and development opportunities; and
- ethics and integrity."
Negotiating the terms of the contract
"The Crown should actively seek value for money. At the same time government agencies need to understand the interests of the NGO they are contracting with. Government agencies want NGOs to deliver services under the current contract, but also have an interest in their viability into the future, and maintaining a good relationship. NGOs - for profit and not-for-profit - must at least cover their costs of service provision, including the cost of capital. Purchasers want cost effective service. They need to be aware of the risk of under-pricing the service they are purchasing. "Driving down' the price could undermine the quality of the service and damage the capability of the NGO to deliver."
Information from interviews during the course of this research suggests that there is increasing attention paid by funders to the viability and sustainability of the home based support, residential and cleaning sectors in the contracting process. However, while there is general awareness of the issues, there is currently little direct or practical attention paid to the employment conditions for the employees in these sectors or to the impact that these very conditions have on issues of viability or sustainability.
Procurement philosophy
The "funder/provider"[14] split in health and contracting out by government agencies of tasks/services often previously undertaken directly by the agencies themselves (such as cleaning, catering, recruitment, project work) has been operating since the 1990s. It reflects a belief that these tasks/services are not fundamental to the core business of government agencies and are more appropriately carried out by non-government agencies that may provide them more cheaply or efficiently. This results in the contracting interface between government agencies and non-government organisations.
There is a strong perception, evident from the interviews and the policy documents, that it is not appropriate for government to be overly prescriptive about how the tasks/services are delivered as long as they are within set quality and legal parameters. The majority of funders and providers interviewed did not want contracts "over burdened" with "non-core" requirements and felt that the nature of the employment relationship with front line service providers (cleaners etc) was the sole business of the provider company. One funder said, "We can't be seen to intervene with providers and their workers."
There may also be a difference of opinion as to what margins are legitimate in the home based care industry. One informant questioned the soundness of the home care providers' business model in that they appear to expect to make a return on revenue. "Unlike residential services there is no capital investment. Their (home based support providers) costs are labour and administration. They should not get a return on other people's (taxpayer) money."
One official in a funder organisation noted that part of the reason there are poor employment outcomes for workers in the disability support sector is that "...exploitation of workers occurs because there is a volunteer mentality towards the sector - in a more business focussed environment this exploitation would not occur."
Where funders did express unease about the employment practices of provider companies it was in the context of the possibility of them supporting employment practices that may be illegal or where the employment conditions of the employees was impacting on the service durability or reliability because of issues such as high turnover.
There are, however, exceptions to the degree to which there is acceptance of the provider organisations as businesses entitled to make a profit. This was clear from interviews with some funders, especially in the health area, and most explicitly expressed by the provider organisations. Two explanations were offered for funder ambivalence:
- Government funders are only just beginning to understand private sector business and business processes; and
- There is covert distaste for organisations that make money (or are set up to make money) from taxpayer funding to provide services to infirm and vulnerable members of the community. One provider spokesperson said that funders seemed to think it was "reprehensible".
The research suggested that this perception may have consequences for the sector. One provider felt that there is a lack of "empathy" with the provider organisations and that this means that any discussion of the difficulty of being profitable under current funding arrangements does not appear to be seen as a legitimate complaint. Another provider spokesperson said that a lack of understanding of business goals or cost structures meant that service price was often the key driver for the funder and resulted in very low profit margin contracts and increased sector fragility.
Canadian research[15] draws an interesting parallel between the home care industry and the child care industry. It discusses the transition from child care as perceived as a private good and a family responsibility to being seen as a public good and therefore needing to be supported by skilled staff in professionally run centres. In many ways, homecare of the elderly is still seen as a private good/service and is being run by low paid women as if it was still a family responsibility. The paradigm shift to the sense of public good - socially and economically - would create the environment for the development of the sector through training and improved wages and conditions. It can also be argued that it would also advance issues of gender equity. This issue is also discussed in Australian research.[16]
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[11] One or two ‘lead’ departments contract with a provider and the contract is then available for other state sector organisations to ‘piggyback’ on the same contract terms. While the service specifications may differ by department (e.g. allocated time to clear carpets rather than lino or the size of the office to be cleaned), only one tender for services is posted and only one price schedule is negotiated. This process prevents wheels being reinvented several times for similar services.
[12] See Appendix 2 for chart of procurement process.
[13] Estimated by one provider as 80% of costs
[14] In this paper “funder” refers to those government agencies who contract “provider” agencies to deliver the services to individual clients or organisations. Cleaners and support workers (residential and home based) are paid by the provider agency to perform the work.
[15] The Changing Nature of Home Care and its impact on Women’s Vulnerability to Poverty. Morris, M. Robinson, J. Simpson, J. Canadian Research Institute for the Advancement of Women. 1999
[16] The Responsibility for Child and Aged Care: Shaping Policies for the Future. Michael Fine, SPRC Discussion Paper No.105. 1999 Australia
