Local Government Magazine

Lessons in procurement risk

Back in May the Office of the Auditor-General wrote to Queenstown Lakes District Council over concerns raised about its procurement of services from a consultancy firm to conduct reviews of three Council bylaws. This is part of that letter as an example of best practice for all councils.

The specific issues were: the council engaged consultants using a direct procurement approach, inconsistent with its procurement policy and/or guidelines; the work was split into smaller jobs to avoid the requirement for approval at a higher level; and that the contractors were engaged without sufficient work being carried out to identify and/or manage potential conflicts of interest, as the contractors were former council employees.

“Based on the information that we have seen, the hourly rates charged appear reasonable and the consultants were appropriately experienced to carry out the work that they were engaged to complete. Additionally, we did not see any evidence that there was a conflict of interest and we note that we were told the consultants had left the council more than three years prior to the first engagement. The issue here is whether the council followed robust processes and can demonstrate how it made decisions.

“In line with best practice, the council’s guidelines require officers to consider the whole-of-life value of the goods or services being procured and preclude contract splitting ‘so as to avoid the necessity for entering into a particular procurement process’. Although the council review found that there was no deliberate intent to split the contract for this purpose, the separation and staging of the different parts of the reviews without a clearly documented procurement plan exposed the council to risk.

“Although the council has provided a rationale (after the events) for splitting the contracts, the practice was neither documented nor tested, a point which is acknowledged in its review. “Accordingly, the council’s records do not answer the question effectively raised in the council’s guidelines – ‘how much is this all going to cost, and what procurement option will get the best outcome for the community?’.

“Establishing how much a project or contract will cost can be achieved in various ways. In this instance, it appears no attempt was made to establish a budget for the review of each bylaw or for the reviews overall. The actual costs regularly exceeded the estimates, which we understand were made by council officers.

“After the first stage of the review was completed, we can understand why the council chose to continue using the same consultants for subsequent stages. However, in the absence of any analysis of the potential costs for each stage, the estimate for each stage has little meaning. This creates a risk that the council will pay more than it should, if it does not have an idea of what a good or service will cost.

“The Council has exposed itself to questions being asked about the fairness of the selection of ZQN.7 [the consultancy firm in question] and the transparency that the council displayed in its procurement approach. We recommend that the council ensure that there is sufficient documentation to support its decision-making processes.

“We also recommend that the council ensure that there is sufficient, appropriate evidence to show how the expected price of the services being procured has been calculated.

“We further recommend that the Council ensure that it has processes for establishing appropriate budgets for procurement activities. Where appropriate, this might include talking to staff in other local authorities who might have engaged in similar activities.”

Application of government procurement rules

To achieve good procurement results, public organisations need robust policies and processes, advises the Office of the Auditor-General.

“The Ministry of Business, Innovation and Employment (MBIE) has published the Government Procurement Rules (the Rules). These are intended to support good market engagement, which leads to better outcomes for agencies, suppliers, and taxpayers. The Rules promote good practice for procurement planning, approaching the supplier community, and contracting.

“Where application of the Rules is mandatory or expected, they must be followed for all procurements worth more than $100,000, or $9 million for new construction works. As a local authority, the Council is not required to apply the Rules to its procurement activities but is encouraged to do so.

“The Rules are based on five principles of Government Procurement, which are: Plan and manage for great results; be fair to all suppliers; get the right supplier; get the best deal for everyone; and ‘play by the rules’.

“Although we acknowledge that there is no obligation for the council to follow the Rules, they provide a good foundation for making robust procurement decisions. We recommend that the council considers incorporating the Rules into its internal policies and guidelines, especially in relation to significant procurements (for example, those over the thresholds identified by the Rules).

“The [Queentown’s] council’s procurement policy and guidelines were first issued in 2016 and were expected to be reviewed after 12 months. It is important that public organisations regularly update policies and other guidance to ensure that guidance remains relevant and up to date and to maintain consistency with aspects of good practice that might be identified elsewhere.

“For example, the New Zealand Government Procurement webpages published by MBIE contain a wealth of material that can be used by all public organisations.

“Regular review also ensures that practices that are inconsistent with the policy or guidelines are identified and either the practice or documentation is changed.

“The council has not reviewed its policy or guidelines since their adoption in 2016 and it is likely this has contributed to the lack of alignment between them and Council procurement practices.

“This misalignment has been identified in relation to the engagement of ZQN.7, and is known to exist in relation to other contractors and consultants engaged by the council.

We encourage the council to continue to progress the review and update of its procurement policies and guidelines and to complete these as soon as possible. As noted above, as part of the review and update process, we recommend that the Council compare its policies and guidelines to the Rules published by MBIE and incorporate any requirements that are relevant to the council’s activities, and consider any of the other cases where it is aware of misalignment.” LG

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