Part 3: Performance audits and other work we expect to complete in 2018/19

Annual plan 2018/19.

1. Theme-based work – Procurement

Procurement is our theme for 2018/19, with work on this theme continuing in the following two years. By procurement we mean all the processes involved in acquiring goods and services, from the initiation of the procurement through to reviewing whether all commitments have been met and all benefits have been realised.

Our work starts with a Procurement foundation report, which will introduce our procurement work programme and explain our interest in procurement and the impact we hope to have through this work.

We are interested in procurement because:

  • procurement of goods and services is significant across the public sector;
  • it is important that central and local government are getting value for money from their procurement activity;
  • it is important that public entities' procurement practice complies with the law and that entities are accountable to Parliament, taxpayers, and ratepayers for the management of public resources;
  • procurement should be carried out in a fair, honest, and impartial way that helps ensure that New Zealand maintains its excellent international reputation for a low level of corruption in this area; and
  • effective management of government expenditure is an important factor in New Zealand's wider economic performance.

We estimate that the public sector spends about $42 billion each year procuring goods and services. There have been some recent high-profile instances of poor procurement in the public sector. We are often asked to look into the fairness and probity of procurement activities. Although we think there have been improvements in how the public sector procures its goods and services, we consider that there is still room for improvement.

Through our work, we aim to:

  • improve procurement practice in the public sector;
  • strengthen public sector accountability for procurement; and
  • improve trust and confidence in public sector procurement.

Strategic alignment

In The Auditor-General's strategic intentions to 2025, we describe the ultimate outcome that we seek from all of our work – that Parliament and New Zealanders can have trust and confidence in the public sector. Our work on procurement is strongly aligned with this outcome. Poor or corrupt procurement practice can easily erode trust and confidence in the public sector. We want our work to raise awareness about the implications of poor procurement and how it can adversely and significantly affect trust and confidence.

By highlighting good procurement practice we intend to improve the standard of procurement practice across the public sector. We also want to see stronger public accountability for the use of public funds. We think we can contribute to this through our work by making sure that all public entities understand that they are accountable for their use of public funds through the procurement process.

At the end of our procurement work, we intend to bring together our observations from our work to offer our reflections on procurement practice and to highlight challenges and opportunities for the public sector. We also intend to update our good practice guidance on procurement.

What we plan to do

Starting in 2018/19, we plan to examine the Ministry of Business, Innovation and Employment's (MBIE's) role in procurement, and focus on how it develops procurement workforce expertise and capability in central government. We will look at the governance, management, and effectiveness of procurement in procurement-intensive public entities and high-risk aspects of procurement. We also plan to look at various approaches such as the use of all-of-government contracts, public organisations' panels of suppliers, and public private partnerships.

It is important that public entities select the appropriate procurement approach to fit the circumstances. Different approaches involve different types of relationships with suppliers, different types of opportunity and risk, and require different ways of managing risk.

We have planned a three-year programme of work on procurement, which we describe below. As we carry out our work, we will monitor our programme to ensure that it reflects emerging procurement findings and risks.

We expect that the work for 2018/19 will largely be completed as planned. However, there may be some changes to the work proposed for 2019/20 and 2020/21 if new information or risks come to light that mean we need to change our priorities for the procurement-related work we carry out.

Procurement work – 2018/19
Procurement foundation report Our foundation report will set the scene for our three-year programme of work on procurement. The report will set out why procurement is critical to the delivery of public services, and will explain the rationale for our work on improving public entity procurement practice. It will explain what we mean by procurement, and what we want to achieve through our work.

The report will provide information about the scale and nature of procurement in the public sector, and highlight key themes, challenges, and questions that we are interested in.
MBIE's procurement functional leadership: Driving efficiencies and improving services and service delivery In 2015/16, the total value of local and central government procurement was about $42 billion, which represented about 17% of gross domestic product.1

MBIE is a functional leader for government procurement and has a critical role in enabling effective and efficient procurement across the State sector through collaboration. Functional leadership is aimed at maximising the benefits and reducing the overall costs to the Government of common business activities that may not be achieved through an agency-by-agency approach.

This audit will examine how well MBIE's functional leadership drives efficiencies and improves services and service delivery. Our audit will specifically examine the part that all-of-government contracting plays in this. The audit will not examine MBIE's property functional leadership responsibilities for assisting agencies to manage the Crown estate.
MBIE's functional leadership: Developing procurement workforce expertise and capability in central government As well as helping to improve operational procurement practice, MBIE's focus is on building strategic procurement capability. To help raise procurement skill levels across the public sector, MBIE offers:
  • strategic procurement help and advice;
  • guidance on end-to-end procurement from high-level strategic thinking and business planning through to the operational aspects of sourcing a supplier and managing the contract;
  • training and education for people working in procurement in the public sector; and
  • frameworks and tools.
Our audit will look at how well MBIE's functional leadership develops procurement workforce expertise and capability in central government.
Panels of suppliers There are indications that public entities are increasingly using panels of suppliers to buy goods and services. MBIE's guidelines state that panels should be used only when the estimated benefits outweigh the costs of establishing them.

We will survey how many of the 300 largest public entities use panels of suppliers for their procurement, how these are used, and the amount of spending involved. We intend to publish the survey results. The results will be used to determine whether we carry out further work to examine the effectiveness of panels of suppliers.
Management of MBIE's grant programmes There is significant expenditure on the various grant programmes that MBIE administers. This is expected to grow further in the next three years with the establishment of the $1 billion each year Provincial Growth Fund. We will continue earlier work to review grant processes, systems, and controls to ensure that these programmes operate effectively and efficiently, in line with good practice.
Procurement work – 2019/20
Procurement workforce capacity and capability (local government) Local authorities have a vital role in providing infrastructure, facilities, and services for their communities. This often means contracting with third parties for a wide variety of goods and services (for example, construction, technology, waste collection, and public transport). To do this well, local authorities need people with the right skills to advise, manage, and make decisions about what to buy, how to buy it, and how to make sure they are getting what they paid for.

In central government, MBIE has a role through its functional leadership to lift procurement capability and develop commercial talent. In local government, there is no similar function.

Using a case-study approach, we intend to examine a small selection of local government procurements. We will focus on how the capacity and capability of the people involved affected how well each procurement achieved its intended outcomes. We hope to highlight the importance of procurement capacity and capability, and identify areas that local authorities should focus on to reduce the risk of procurement failures.
Government Chief Digital Officer: Information and Communication Technology procurement functional leadership Information and Communication technology (ICT) procurement is one of the more important and complex procurement areas. There have been a number of notable ICT procurement failures in the past. Alongside MBIE, the Government Chief Digital Officer (GCDO) has been another key functional leader. The ICT functional leadership role includes responsibility for:
  • implementing effective assurance processes to manage project risks;
  • utilising emerging technologies that will enable greater workforce mobility, collaboration, and resilience;
  • providing advice to central government agencies and wider government on agencies' proposed ICT investments;
  • providing guidance to help agencies improve their online services; and
  • engaging communities and industry bodies on skills and capability building.
Our audit will examine aspects of how well the GCDO is fulfilling their ICT leadership role in the area of procurement.
Procurement of assets to support effective healthcare District health boards (DHBs) currently own more than $6 billion worth of assets, which the Ministry of Health estimates have a replacement value of approximately $16 billion. A significant proportion of these assets are hospital buildings. Existing DHB facilities are insufficient to meet future service demand in some areas, and much of the existing building portfolio is ageing and will need replacing over the next 20 years.

New Zealand's healthcare system can only be effective with the right infrastructure. The very large investment that is required increases risk, which must be managed through effective strategy, planning, governance, procurement, contract management, project management, and relationship management. The current arrangements for hospital building projects, with the Ministry of Health taking the lead role, are relatively new and still developing, presenting an opportunity for early and useful external review.

This performance audit will examine significant investments in the health sector. We are interested in how the health system determines what infrastructure investments are needed, where, and when. In subsequent years, we will also consider whether there is merit in looking at other aspects of significant procurement in the health sector either as part of our annual audits or as part of other projects.
Partnerships with the private sector to deliver public sector outcomes – how effective are they? A range of collaborative procurement methods are being used in New Zealand to deliver key infrastructure and other large-scale projects. One such method has been public private partnerships (PPPs), which have been used across a number of sectors in recent years.

We propose to examine how such collaborative arrangements have been established and managed for best effect given the New Zealand context, and provide assurance that the expected benefits are well defined, monitored, and assessed. Because there have been a number of PPPs set up already in the transport, education, and justice sectors, we propose in the first instance to explore how effectively these PPPs are delivering on their intended outcomes. We aim to identify lessons from these examples that may be applicable to various forms of high-value, collaborative contracting.
How well does the NZTA's procurement model manage long-term procurement risks to ensure future value and sustainable procurement? Procurement to maintain the State Highway network is important to all New Zealanders. The network is over 11,000km long and extends the length and breadth of the country. It plays a strategic role in linking our towns and communities, with over 70% of freight and 80% of people travelling to work using the network every weekday. A significant proportion of investment in transport infrastructure is spent on State Highway maintenance contracts.

In 2013, the NZTA introduced the Network Outcomes Contract model. The design principles of the new contract model were for fewer, bigger, and longer maintenance contracts. In 2014, we followed up our 2011 performance audit on maintenance of the State Highway network and noted that there was a risk that the new Network Outcomes Contract model could reduce competition in the maintenance and renewals market, and that this could have adverse long-term effects on the procurement environment.

We plan to carry out a performance audit examining how well the NZTA is working to ensure a robust contracting market that is capable of delivering a competitive tendering environment when these contracts are completed.
Procurement work – 2020/21
Effectiveness of panels of suppliers Based on our analysis of the results from our survey in 2018/19, we intend to identify aspects of the effectiveness of panels of suppliers for further examination. Potential aspects for examination include:
  • Is public entities' use of panels of suppliers appropriate?
  • Are public entities following good procurement practice in establishing and operating panels of suppliers?
  • Do public entities have the capabilities needed to use panels of suppliers effectively?
  • Is the use of panels of suppliers by public entities realising the expected benefits?
How services are procured in a local community to meet that community's needs We plan to carry out a performance audit on whether the procurement of services is effective in responding to the needs of communities.

We plan to consider how well the procurement of services meets community needs. We will consider how well procurement is managed, monitored, and adjusted to support the achievement of desired outcomes for communities. We will also examine how effectively agencies work together to ensure that procurement of services is well co-ordinated and aligned with community needs.

This work is still being scoped.
Managing smaller contracts (less than $0.5 million) Many larger public entities have entered into smaller contracts (less than $0.5 million) across a broad range of suppliers. Collectively, the total contract value and risk exposure can add up to tens or hundreds of millions of dollars. Ensuring consistency of contract management and service delivery, and providing assurance across a large portfolio of small contracts, can be challenging. This is particularly true of large public entities, where responsibility and oversight of contract management is devolved across multiple teams.

To provide some assurance, we will carry out a performance audit to review the management of low-value, high-volume contracts across central government agencies.

This work is still being scoped.
Reflections report on Procurement We plan to prepare a reflections report that will bring together the results of and observations from our three-year programme of work on Procurement.

Concluding work from previous years' theme-based work

In 2018/19, we plan to:

  • complete our reflections report on the results of our work under our Information theme; and
  • complete our work on our Water management theme.

Future theme-based work

Alongside our proposed focus on Procurement as a theme for the next three years, we are considering what other theme-based work we will start. We are proposing to examine sustainable development in the wider context of our theme-based work on the Well-being of New Zealanders starting in 2019/20.

The ultimate objective of public expenditure is achieving positive change in the well-being of New Zealanders. Achieving positive change means better outcomes for New Zealanders, through improvements to our society, economy, and environment. We propose to focus on outcomes that are important for New Zealanders' quality of life, their communities, environment, living standards, and society at large.

We propose to select areas where public sector agencies are explicitly seeking to improve outcomes through their interventions and where multiple agencies are working together to achieve improved outcomes. We are mindful of the importance of the Treaty of Waitangi and will take this into account when examining outcomes for Māori.

At this stage, we have selected some indicative topics for consideration as part of our theme-based work on the Well-being of New Zealanders. We will confirm the final topics following further planning over the next year. The indicative topics are:

  • for 2019/20:
    • preparedness for reporting by the Government on progress against the 17 United Nations sustainable development goals; and
    • reduction in family violence;
  • for 2020/21:
    • reduced inequalities in social outcomes between demographic groups (focus to be determined);
    • reduction in poverty and the diseases of poverty;
    • improved resilience of infrastructure to natural hazards;
    • effectiveness of Whānau Ora in achieving better outcomes for Maori;
    • increased sustainability of natural resources; and
    • a report based on outcomes at a community level (focus to be determined).

2. Multi-year programmes of work on significant matters

Multi-year programmes of work on significant matters – 2018/19
Auckland Council – review of service performance: Effectiveness of post-implementation reviews of projects Section 104 of the Local Government (Auckland Council) Act 2009 requires that "The Auditor-General, must, from time to time, review the service performance of the Council and each of its council-controlled organisations." We carry out a review each year and work with Auckland Council's governing body and senior management, and the Council's Audit and Risk Committee, to determine the focus of our work and ensure that it will provide value.

We have started work on reviewing the planning, design, execution, and reporting of the Council's post-implementation reviews for the following projects:
  • Customer Services Review – Contact Centre consolidation (phase 1);
  • Libraries Fit for the Future – organisational structure change;
  • Community Facilities (Contract Management) – new contract structure for maintenance of community facilities; and
  • Regulatory Future Shape – organisational structure change for regulatory services to deliver consistent and improved customer experience.
Our work will involve assessing the approach and processes followed. We will report to Parliament on our observations. We expect to provide timely advice to the Council that will add to the quality of the reviews and support it in developing its expertise in carrying out objective assessments of its projects in the future.
Review of the Defence Major Projects Reports Since 2010, the Ministry of Defence and the New Zealand Defence Force have produced a major projects report annually, setting out the status of the management of major defence acquisitions. We have reviewed these reports to provide independent assurance about the information that they are based on.

In 2018/19, we plan to complete the review of the Defence Major Projects Report 2017 and also the Defence Major Projects Report 2018. We then intend to reassess how often we will review these major project reports in the future.

Future multi-year programmes of work

Topics for our future multi-year programmes of work are still being considered. We will confirm the final topics following our planning over the next year. At this stage, our proposed topics are:

  • for 2019/20:
    • Auckland Council review of service performance (topic to be determined);
    • Auckland City Rail Link;
    • Effectiveness of procurement of a major defence capability (topic to be determined);
    • Commentary on the Treasury's 2019 statement on the long-term fiscal position; and
    • Monitoring the response to the Havelock North inquiry recommendations (pending invitation); and
  • for 2020/21:
    • Auckland Council review of service performance (topic to be determined);
    • Tāmaki Redevelopment Agency;
    • Defence (topic to be determined);
    • Inland Revenue Department: Benefits from the Business Transformation programme; and
    • Monitoring the response to the Havelock North inquiry recommendations (pending invitation).

3. Sharing good practice

Work on sharing good practice – 2018/19
Severance payments: A guide for the public sector We will develop a programme of work to more actively share insights about what "good" looks like, including updating our existing good practice guides and, where relevant, developing new good practice guidance. We will start with an update of our guide Severance payments: A guide for the public sector.
Insuring public assets We will carry out work to consider how well public entities assess their asset risk, particularly risk from natural disasters, for the purposes of deciding how or whether to insure or otherwise mitigate that risk.

Our work is likely to include whether MBIE's and the Treasury's work has been effective in achieving better assessment of risk to assets from major events (and in general). Depending on whether the Local Government Risk Agency has been established, we may also consider its effectiveness in improving local authorities' assessment of asset risk.
Reporting on the progress of public entities in implementing the Auditor-General's recommendations from previous reports In 2018/19, we expect to report on the progress public entities have made in implementing the recommendations from some of our earlier reports. We will select the reports for follow up according to criteria such as the significance of the recommendations that we made and whether a reasonable time has passed to expect that the recommendations will have been acted on.

Future sharing good practice work

Topics for our future sharing good practice work are still being considered. At this stage, our proposed topics are:

  • for 2019/20:
  • for 2020/21:
    • updating Procurement guidance for public entities; and
    • reporting on the progress of public entities in implementing the Auditor-General's recommendations from previous reports (programme of follow-up work to be determined).

4. Sector-based reporting

Work on sector-based reporting – 2018/19
Sector reports We will prepare the following sector reports:
  • Central government: Results of the 2017/18 audits;
  • Summary of results of the 2017/18 central government audits for Chief Executives;
  • Local government: Results of the 2017/18 audits;
  • Consulting the community about local authorities' 10-year plans;
  • Matters arising from the 2018-28 local authority long-term plans;
  • Results of the 2017 school audits;
  • Results of the 2017 audits of tertiary education institutions; and
  • Results of the 2017/18 audits of district health boards.

Future sector-based reporting

In addition to those sectors we are required to report on each year, we will decide which sectors to report on based on matters arising in particular sectors.

5. Thought leadership

Work on thought leadership – 2018/19
The state of the public sector accountability system This is the first in a series of planned think-pieces that will examine the state of the public sector accountability system.

This think-piece will inform the programme of work on the public sector accountability system that we will carry out in the next three years. It will examine how New Zealand's system of public accountability has evolved and what stakeholders expect from a public accountability system. It will also contrast New Zealand's system with other jurisdictions, highlighting the perceived strengths and weaknesses of New Zealand's system, including performance reporting.

The work will include a combination of literature research and interviews with a broad range of stakeholders.

Future thought leadership work

We will determine our future thought leadership work programme based on our work in 2018/19.

1: Data sources include the Financial Statements of the Government, local authority annual reports, and Statistics New Zealand.