August 2009

01 Aug 2009

Proposed Reforms to Public Sector Procurement

In June, the Government announced a reform agenda for government procurement policy and practice. The Cabinet Paper setting out the reform agenda, entitled "Government Procurement Reform".

The need for reform in this area is considered critical in light of the current economic climate, which has placed pressure on the public sector to achieve value for money, and in order to address concerns expressed at the Government's Job Summit earlier this year that current polices are creating significant barriers to New Zealand businesses supplying government.

The reform agenda is likely to be of particular interest to prospective ICT suppliers because the public sector is a major customer in the ICT market and there are likely to be a number of large scale ICT projects that will survive the Government's current budget spending reviews and perhaps even fall within "emergency pressures" costs for which the Government will seek to apply savings gained through cuts achieved in other areas. The supply of computers has also been identified as one of the first three areas of government spending to be analysed and subject to the proposed reforms.

In this article, we briefly outline the Government's procurement reform agenda and provide an overview of the current rules and guidelines that apply to public sector procurement. 

Proposed Government Procurement Reform

The reform agenda is based around four key themes: 

• cost savings;
• building procurement capability and capacity;
• enhanced business participation; and
• improved governance, oversight and accountability.

The Cabinet paper outlining the proposal for reform indicates a four year timeline and a required budget of up to $20 million to implement the reform (approximately $3 million of which will be required for the first year). There will also be ongoing support costs into the future.

The initial focus of the reform agenda will be on three areas of immediate importance with three government agencies hosting Centres of Expertise. The Centres of Expertise will lead an all-of-government approach in these key spend areas, being computers, vehicles and office consumables. Procurement capability building will be targeted at these Centres of Expertise and the top ten agencies spending the most or letting the highest risk contracts. A review of tangible results will be made after one year before long term commitments to the rollout of a full procurement reform agenda is undertaken.

A Centre of Expertise is a group established within a lead agency that will be responsible for providing an all-of-government or sector-specific approach to a specific area of spend allocated to that Centre of Expertise to manage. The Centres of Expertise will be responsible for implementation of key activities within the reform agenda. Specific roles will include:

• Manage key areas of spend across government.
• Develop a strategy to gain maximum efficiency for given all-of-government/sector-specific spend areas.
• Establish and manage linkages with suppliers and their suppliers in the supply chain.
• Implement agreed actions on behalf of government to improve efficiency.
• Measure and report savings and efficiencies delivered through any all-of-government or sector-specific approaches.
• Manage all-of-government or sector-specific contracts awarded to deliver improved outcomes.
• Work effectively with key businesses in relevant sectors.

It is proposed that the hosting of a Centre of Expertise by an agency will be a voluntary activity but there will be incentives in place to encourage agencies to participate. These will include funding support for additional procurement resources and increased access to training and education. It is likely that the agencies with the largest external expenditure will host a Centre of Expertise on behalf of government.

Priority Actions

A number of actions have been developed for the first year of the proposed reform agenda to address specific issues arising under each of the reform agenda's four key themes. These actions are to be further developed and refined. 

Cost Savings

At this stage priority actions relating to cost savings include agencies providing a detailed report on their procurement expenditure for both the immediate past financial year and the current financial year. A core team for consolidation and national analysis (comprising the Ministry of Economic Development (MED), the State Services Commission (SSC) and Treasury) will then analyse these reports to identify trends and potential spend areas for consolidation and an assessment of current procurement capability within various agencies, with a view to recommendations for improvements. These activities will be repeated and expanded in future years. The cost saving actions will also include the:

• establishment of Centres of Expertise;
• development and launch of standardised procurement processes, standards and tools; and
• development and launch of standard government conditions of contract.

Procurement Capability and Capacity

Initiatives to improve procurement capability and capacity will include:

• an initial assessment of current procurement capability in order to identify opportunities for improvement;
• the development of core competency standards for those in procurement roles; and
• a focus on ensuring appropriate training and development of procurement expertise.

Improving New Zealand Business Participation

Of particular interest to potential suppliers to government agencies will be the proposed actions in relation to improving New Zealand business participation. Some of these particular actions include reducing bias against SMEs by prime contractors, reducing the complexities and compliance costs of tendering by SMEs and examining ways to help SMEs bid for business now while also growing their capability for the future. There will also be a focus on improving the flow of information to New Zealand businesses.

Governance, Oversight and Accountability

Some of the key activities to improve governance, oversight and accountability, are in the following broad areas:

• Leadership - for example, ensuring that the Prime Minister and other ministers champion procurement reform and that there is buy-in from key government agencies.
• Policy - for example, ensuring that appropriate structures are put in place and the development of clear and consistent policies.
• Results - for example, agreeing to and implementing within agencies simple KPIs on savings / value added contribution for the procurement reform agenda.
• Audit - for example, undertaking audits to ensure compliance with relevant policies and processes.

Next Steps

The Minister of Commerce intends to report to Cabinet at the end of August on the funding of the reform agenda and to seek confirmation of initial procurement reform actions. The Minister also intends to report to Cabinet at the end of November this year and at the end of February next year with updates on the progress of the reform agenda.

Current Mandatory Rules and Guidelines

Pending the implementation of reforms, it is perhaps timely to note current policies and guidelines applicable to ICT procurement by government and other public sector bodies. These rules and guidelines are in addition to the general legal requirements (e.g. the Fair Trading Act 1986) and public sector-specific legislation (e.g. the Local Government Act 2002) which may apply to public sector procurement.

Specific rules and guidelines include:

• Mandatory Rules for Procurement by Departments (Mandatory Rules) issued by government.
• Government Procurement in New Zealand: Policy Guide for Purchasers issued by MED (MED Guide).
• A Good Practice Guide (A-G Good Practice Guide) issued by the Office of the Controller and Auditor General (OAG).
• Guidelines for Managing and Monitoring Major IT projects, and other guidelines and codes issued by the SSC.

Mandatory Rules for Procurement by Departments

The Mandatory Rules set out mandatory standards and procedural requirements for the conduct of procurement by all "public service departments" as defined in the State Sector Act 1988, including the New Zealand Defence Force and New Zealand Police (Departments). Although the Mandatory Rules are not binding on the wider public sector (such as local authorities), the Mandatory Rules express an encouragement to the wider public sector to incorporate, where appropriate, the Mandatory Rules' standards and requirements into their procurement policies and practices.

The Mandatory Rules apply to the procurement of contracts for goods and services valued at or above NZ$100,000 (calculated over the entire duration of the contract). For contracts below the $100,000 threshold, Departments are still expected to meet the general principles and good practice guidelines set out in the other key documents that affect public sector procurement, such as the MED Guide and the A-G Good Practice Guide. The Mandatory Rules do not apply to certain specified categories of procurement, such as the hiring of employees.

The main features of the Mandatory Rules are:

• An open tendering procedure (i.e. where the tender is advertised openly and any interested supplier may respond to the advertisement) is to be the "default" procurement method. The Mandatory Rules set out some circumstances in which an open tender is not required, such as where a purchase is made under exceptionally advantageous conditions that only arise in the very short term (e.g. disposals resulting from a receivership).
• The Government Electronic Tenders Services website (GETS) is to be the primary publication medium for open tendering. Both invitations to submit a tender or participate in a procurement process and award decisions must be published on GETS. Interestingly, one of the priority actions identified in the Government's procurement reform agenda is to encourage the whole public sector (including local authorities) to advertise all contracts over $100,000 on GETS.
• Departments may establish for their use a list of registered or qualified suppliers to participate in a procurement process and must publish any such list on GETS. (Departments must still publish on GETS a notice inviting interested suppliers not on the list to apply.)
• Departments must publish on GETS a rolling Annual Procurement Plan (APP) which is to be updated at least every 6 months. The APP must contain a short strategic procurement outlook for the Department supported by details of any planned procurement, including the estimated publication date on GETS of a notice of an intended procurement.
• Departments must maintain relevant documentation which is readily accessible for the purposes of auditing compliance with the Mandatory Rules.

The Mandatory Rules are more prescriptive than the MED Guide and the A-G Good Practice Guide, but are designed to be generally consistent with these documents. In the event of any inconsistency between the Mandatory Rules and these documents, the Mandatory Rules take priority.

Policy Guide for Purchasers - Ministry of Economic Development

Like the Mandatory Rules, the MED Guide is only binding on Departments, but it records the hope that State Owned Enterprises (SOEs) and local authorities will also base their procurement approach on the MED Guide. 

The MED Guide sets out the following principles Departments are expected to be guided by in procurement:

• best value for money over whole of life;
• open and effective competition;
• full and fair opportunity for domestic suppliers;
• improving business capabilities, including e-commerce capability; and
• recognition of New Zealand's international trade obligations and interests.

A large part of the MED Guide focuses on promoting opportunity through good practice and supplements the Mandatory Rules and the A-G Good Practice Guide.

Procurement Guidance for Public Entities: Good Practice Guide - Controller and Auditor-General

The A-G Good Practice Guide is a statement of good practice rather than a set of prescriptive rules. Nevertheless, it is a longer and more extensive document than either the Mandatory Rules or the MED Guide. It also has wider application, extending to all public entities that are covered by section 5 of the Public Audit Act 2001. This includes schools, SOEs, Departments, Crown entities and local authorities.

The OAG expects a public entity's procurement policies and procedures to "compare favourably" with the A-G Good Practice Guide.

The A-G Good Practice Guide includes, amongst other things: 

• a number of overriding considerations and basic principles that a public entity should take into account when procuring goods or services;
• an overview of the strategic planning stages leading up to the procuring of goods and services;
• guidance on the circumstances where a public entity will be justified in procuring directly from a selected supplier (and not through a competitive process); and
• an in-depth guide on how to conduct a tender or proposal process, including guidance on preparing the tender or proposal package, advertising, the evaluation process and awarding the contract.

Other guidelines issued by the OAG potentially relevant to ICT procurement include guides covering:

• public sector purchasers, grants and gifts;
• managing conflicts of interest; 
• the funding of non-government organisations; and
• achieving public sector outcomes with private sector partners.

Guidelines for Managing and Monitoring Major IT Projects - State Services Commission and The Treasury

The Guidelines for Managing and Monitoring Major IT Projects were issued by SSC and the Treasury in August 2001 (last updated in July 2002), and contain the expectations and standards for managing and monitoring IT projects within the public sector. The guidelines apply to all Departments, the Office of the House of Representatives, the Parliamentary Counsel Office and the Parliamentary Service. 

• The guidelines focus on a number of key areas of IT procurement including strategic alignment, government management, business case development, project management processes, and the technological environment. Some important areas of focus include: The appointment of three agencies (SSC, Treasury and the Department of Prime Minister and Cabinet) to monitor major IT projects, to assist and provide assurance to Ministers that the right projects are chosen in the first place, and to ensure projects are managed in the right way that mitigates risk to government.
• The need for Departments to link their major IT projects to their own strategy as well as to broader government strategies.
• Ensuring appropriate risk management strategies are put in place.

Other guidelines that have been issued by SSC relevant to public sector ICT procurement include the following:

• Guidelines for Treatment of Intellectual Property Rights in ICT Contracts;
• Guide to Legal Issues in using Open Source Software v2; and
• Departments are also subject to the Code of Conduct for the State Services issued by SSC requiring Departments to be fair, impartial, responsible and trustworthy.

Authors

Earl Gray

Partner - Intellectual Property

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Karen Ngan

Partner - Corporate & Commercial

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Richard Watts

Partner - Intellectual Property

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Sarah Chapman

Senior Associate - Intellectual Property

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Claire Foggo

Senior Associate - Intellectual Property

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