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Video transcript: Procurement and how it contributes to trust and confidence

Transcript for a video of a presentation about ethical procurement given at the 2019 Audit New Zealand information updates.

Title: Procurement and how it contributes to trust and confidence

Martin Richardson

Ethical dilemmas are at the heart of our toughest choices. Imagine for a moment that you’re not a chartered accountant – highly trusted though that profession may be – but that you are, in fact, a procurement manager in charge of a capital programme in one of our main centres – could be here, could be elsewhere around the country. Would you rather, on the one hand, favour your local contractors, use your spend to support their viability, confident that that prosperity is going to remain within your local community? Or, on the other hand, is it right to get the absolute best value for your ratepayers, for your local stakeholders, confident that you’ve negotiated the lowest possible price and attracted the best contractors from around the world?

That’s a genuine dilemma, because each side is rooted in some of our core values. There’s no right answer to that dilemma. In our experience, those really difficult ethical choices are rarely moral temptations, those right-versus-wrong choices that we sometimes have to make. Although those can happen; some tempting things can come along. But often the really difficult choices are the right-versus-right dilemmas. But, before we get into that, why is an auditor up here talking about procurement? Well, don’t worry, if you are a procurement manager in charge of a major capital programme, we’re here to help.

Love it that it’s my own colleagues that laugh. In fact, I was a little bit nervous coming to do this presentation today; intimidating audience out there. Turned to one of my colleagues for a bit of moral support and he said, “Don’t worry, you’ll be fine. In fact, you’re the best presenter that I’ve ever heard. Talking about procurement. On behalf of the Auditor-General.” So, with no better endorsement than that, over the next 40 minutes or so I shall talk through the Auditor-General’s interest in procurement and how that’s manifested in a Work programme that we’ll be pursuing, talk a little bit about ethics in some of the dilemmas that can arise, and finish off by telling some stories about some of the ethical issues that we’ve seen. And perhaps, through that, we’ll be able to reflect on how procurement does indeed contribute to trust and confidence in the public sector.

So he’s not here today, in case you don’t know who the Auditor-General is. There’s a lovely portrait of John Ryan. You may well recognise him. What you might not know is why he’s interested in procurement. So Parliament authorises government spending and provides public entities with their powers. In return, it needs assurance that we can account for our performance and our spending. Government spending – sounds a lot like procurement to me. The Auditor-General, to inform work planning, selects a theme each year, and procurement is the theme for 2018/19; and, indeed, it will flow on for the following two years as well.

What do we mean by procurement? Well, we’ve chosen to adopt the eight stages that MBIE have defined as the procurement cycle. So we’re talking about an end-to-end process: from planning – that something is needed – through to the process of putting that contract in place, managing that contract, and transition out of the contract either to take over an asset or to transition to a new service provider. So it’s an end-to-end process. We’re also talking about a whole diverse array of funding arrangements. So, yes, we’re talking about commercial contracts, but we’re also perhaps talking about grants programmes, so a whole different array of funding arrangements whereby public money goes out to third-party providers to deliver services or goods on our behalf.

In case you can’t recall MBIE’s eight-stage procurement cycle, there it is. And, through the pieces of work that the Work programme will compromise, we hope to touch on each of those eight stages, but not every piece of work will look at each of those eight stages. So we might focus on one of those stages in a particular piece of work. We’ve started the programme by releasing a foundation report which has introduced the programme and explained our interest. That report, I think, was available as a hard copy, is still available on the Office’s website, so I would encourage you, if you haven’t already, to go and download a copy. Really sets the tone for what we’re going to cover in the programme.

If you have downloaded that report, one of the diagrams that you will have seen in there is this one. Maybe a little bit hard to read on the screen, but it’s really our best estimate of a breakdown of public expenditure. It was actually pretty hard to get some accurate numbers to put into this diagram, so they are a best estimate. But I had to present at the Chartered Institute of Procurement and Supply Conference really quite recently – a couple of weeks ago. And, at that conference, John Ivil, who is Mr New Zealand Procurement, quoted the numbers that we’ve got on this diagram. So I take confidence from that, that, even if they’re not correct, they’ve at least been accepted in the sector.

Let’s have a look in more detail at one of the numbers that we’re quoting: $42 billion. That’s our best estimate of the annual expenditure of the New Zealand public sector on goods and services. So whether that number is precisely accurate or not, I think the one thing we can conclude is that it’s a pretty big number. And, indeed, if it is accurate, it represents 35% of total public expenditure and 15% of the entire economy. So, with that amount of spending, I think it’s vital that we get value for that public money. I think it’s important to be accountable and comply with the law. It’s a requirement to be fair, honest, impartial, and maintain our excellent international reputation. And there’s an opportunity to use that expenditure to support New Zealand’s economic performance. So our aim is to develop procurement practice, strengthen accountability, and improve trust and confidence. Because, in our view – and I’m sure you’ll agree – trust is good for procurement. People like dealing with people that they trust.

So, over the next three years, various pieces of work. As I said earlier, four pieces of work in year one; the foundation report that I already referred to; a piece of work looking at MBIE’s functional leadership for procurement; a survey of how the public sector is increasingly using panels of preferred suppliers, or pre-approved suppliers; and a piece of work looking at grants programmes which, increasingly, is focusing down on the Provincial Growth Fund. So if you turn to our annual plan, you would have seen a number of pieces of work described through the scoping and further development of the work programme, focused it down. So two pieces of work on MBIE has become one – but don’t worry, we won’t be letting them off lightly; it’ll be more in-depth. And, as I said, the grants work is now focusing down, really, on the management of the Provincial Growth Fund. The work on the Panel of Suppliers will be published in due course with some interesting facts and figures that you might be able to learn from.

What’s coming next? Well, over the coming two years we’ll do some further work at different aspects of procurement. So in 2019/20 you’ll see some work looking at the local government workforce. We’ll turn our attention to functional leadership in the digital space, some work on the procurement of healthcare assets, the effectiveness of public-private partnerships, and, finally, a piece of work looking at NZTA’s contracting models and what impact they have on the market. And then we’ll wrap the programme up in 2020/21. We may revisit this theme of Panels of Suppliers, depending on what’s come out of the survey.

We’ll certainly be looking at how the public sector comes together to use its spend in a local community to address that community’s needs. Clearly many disparate public sector entities will be involved in trying to tackle the issues of any particular local community. We’ll do a piece of work looking at the management of smaller contracts, the thinking there being that large contracts attract a lot of attention; very small contracts pretty much manage themselves, but it’s those mid-range contracts that are often the poor cousins in the procurement cycle. And, finally, we’ll wrap the programme up with a reflections report. So the programme will be book-ended by that foundation report that we’ve already put out and a reflections report that’ll close the programme.

So, as Chantelle said, I’ve been an auditor for quite a number of years, and, in particular, a probity auditor here in New Zealand over a number of largescale projects, many in this very city – ensuring, in real time, that those most significant procurements are carried out fairly, and that we maintain the confidence of the market. In that role, we spend a lot of time thinking about probity, but that’s not a word that most people use in their everyday lives, so what does it actually mean? Well, essentially it’s about taking a fair and ethical approach to procurement. It’s often assured by following the good practice, but also by following the procurement principles. We’ve defined those procurement principles in our Guide to Funding Arrangements, and we’ve defined them as accountability, openness, value for money, legality, fairness and integrity.

MBIE’s expressed them a little differently. MBIE talks about planning and managing for great results, being fair to all suppliers, getting the right supplier, getting the best deal for everyone, and playing by the rules. We don’t see any conflict between the different ways in which those principles are expressed. Fundamentally, they’re all about fairness and getting the best deal. Standards rooted in those principles protect us. So ethics: why care? Well, because we need to maintain the confidence of the market. Procurement professionals need to comply with policies, guidelines, standards, and competencies such as the CIPS Code of Conduct, the Corporate Code of Ethics, the Global Standard for Procurement and Supply. They help professionals check that their own moral compass is aligned to that of their organisation and the profession that they represent.

Procurement is a unique profession because it relates to the market. It’s at the intersection between the public and private sectors. The market has different motivations. The market has limited visibility of what we’re doing as a public sector, and different views as to what’s appropriate. For all those reasons and more, interactions with the market can lead to ethical dilemmas – in fact, they have a high likelihood of occurring. After all, ethical dilemmas really occur when there’s a difference of opinion about what’s right, and conflict can soon follow. So ethics can require moral courage. Acting, or failing to act, commission or remission. Sometimes we do wrong when we act, when we do the wrong thing; but other times, we fail when we fail to act. Many moral codes emphasise wrong actions, but inaction can be equally damaging. So it’s not just about what we believe to be correct; it’s also about having the strength and the courage to do what we know is right.

I read an interesting book recently, a book called How Good People Make Tough Choices by Rushworth Kidder. And in that book he says that decision-making falls into one of two categories: moral temptations and ethical decisions; right versus wrong, and right versus right. He suggests that there’s four paradigms for understanding these ethical dilemmas, and I thought this morning I might focus down on two of them. So, firstly, truth versus loyalty. So he says that truth is about conforming to the facts, whereas loyalty is about allegiance to a person, a group, a government, an organisation, a set of ideas. It’s right to stand on the truth, but it’s also right to be loyal.

The other one that I thought was relevant for us is justice versus mercy. So justice urges us to stick by the principles, hold to the rules despite the pressures of the moment, pursue fairness without attention to personalities or situations. But mercy urges us to care for individuals on a case-by-case basis. It’s right to be merciful, but it’s also right to enforce justice. Ethical dilemmas are often these right-versus-right choices. Having a clear understanding of ethical dilemmas can really help. It helps separate right from wrong, cutting through the mystery, the complexity, the confusion, and getting to the heart of the matter. Because most people, in our experience, are trying to do the right thing – some not, but mostly people are. And yet, many still struggle; these ethical dilemmas still occur.

So Kidder suggests that ways of thinking can help. Moral philosophy offers us different ways of thinking about ethics. Here’s three of them. “Ends-based thinking: do whatever produces the greatest good for the greatest number of people. Rules-based thinking: rules exist for a purpose, they promote order and justice, and they should be followed. Care-based thinking: the Golden Rule: do unto others as you would have them do unto you.” These different ways of thinking can lead us alternate ends of the right-versus-right dilemma. So let’s think of a simple procurement example: a late tender. You’re running a tender process, you set a deadline. That’s when you want all proposals in, but, nevertheless, one tender is going to be or has been delivered late.

So ends-based thinking might lead you to accept that late tender. It might be the best proposal for the job. It might be the best contractor – and, even if it isn’t, it keeps some competitive tension in the process. It will help deliver the best outcome if we accept that tender. But rules-based thinking might lead us to reject that tender. Rules and tender conditions set a deadline; it’s been broken; everyone else complied; it would be unfair to allow that exception. Care-based thinking might flip our decision back the other way: we can empathise with the reasons; we understand perhaps the person delivering the tender had a problem. Perhaps they’ve been ill. We can exercise mercy, some compassion.

Kidder suggests that we don’t always have to make these binary choices, that often there’s a third way that addresses both sides of the right-versus-right dilemma. So, rather than getting locked in to slavishly following rules, or only thinking about what’s best – as Greg put it, the ends justifying the means – Kidder suggests that the best option is a win-win. So I thought it would be interesting to reflect on some of the examples that we’ve seen in the New Zealand public sector, and how well they meet the Chartered Institute of Procurement and Supply’s definition of what comprises ethical procurement.

If any of you out there are members of the Chartered Institute of Procurement and Supply, you’ll be delighted, like me, that every year they make available to you, and require you to pass, an exam on ethical procurement. It’s great timing and a great joy to me that my membership is due for renewal around the end of December, so a good time to be taking an ethical procurement exam, I find. So, as I was studying this over Christmas break this year, I got to reflecting on whether some of the issues that CIPS was requiring me to know about actually manifested themselves in my day-to-day experience. And I came to the conclusion that some did and some didn’t. By the way, Greg, I did actually pass that exam, in case you were wondering.

CIPS says that ethical procurement doesn’t have to cost more. In fact, they suggest that a drive for efficiency may actually create more opportunities for being ethical. Let’s see if we agree with that proposition, shall we? So when CIPS says ‘ethical procurement,’ it’s really talking about three things: firstly, the impact of personal conscience; secondly, efforts to eradicate fraud, bribery and corruption; and, finally, sustainable procurement. So, between now and morning tea, I thought we could go through my personal and completely unscientific scorecard on the New Zealand public sector. You can see whether you agree.

So firstly the impact of personal conscience. Well, I think, generally, a strong performance here. We have high standards of integrity, and they’re typically supported by good-quality policies, procedures and codes of conduct. But the Chartered Institute poses some questions on its website. It says, “Ask yourself this.” So you can do that. Not hard questions; I think you’re going to know the answer. “Ask yourself this. Do you own a smartphone? Have you ever eaten an organic salad? Have you got any cotton items in your wardrobe?” If you say yes to those questions, CIPS suggests that you already have between 30 and 40 slaves working for you to support your lifestyle. Quite a confronting proposition; not one that I feel particular comfortable with.

So yes, while I do think that we have a reasonably strong performance in this dimension, I have never seen a public sector entity completely map their supply chain back to the source, as CIPS says is the good practice. I have seen some examples of due diligence going beyond the tier 1 contractor, but I’ve never seen that complete map. And until I got to speak directly before John Ivil at that CIPS conference, I’d never heard a public sector procurement manager talk to me about modern slavery (he made sure he got it into his speech after I’d thrown out that challenge, so I’ve now heard one). And even at a more fundamental level, it’s still true that conflicts of interest give rise to more inquiries and issues than virtually any other issue that we encounter in procurement.

All too often we see this. So, whilst conflicts of interest are generally well managed and exceptions are rare, sometimes even minor issues can turn out to be major. So here’s a story. You can relax; it relates to a ministry based in Wellington, so time to sit back and feel smug. In late 2017, there was a significant IT programme that needed additional funding to fulfil its scope. The Ministry wasn’t confident that it had adequate information to recommend that additional funding to Ministers. In fact, the Minister had recently changed; there’d been a change of government, and the Ministry was a little bit nervous. So it decided that it would supplement its own knowledge with the views of an expert: engage a consultant. The scope was to review the programme’s status, its achievability, its approach to delivering on benefits, and reach a conclusion on the robustness of the funding increase. Who better to engage than a professional services firm.

Sometime later, questions started to be asked about the independence of that firm. The same firm had previously been involved consulting to the programme. Concerns were raised: could the report be relied on? Was it truly independent? Politics started coming into play. Because of the level of public and political interest, we were asked to review the appointment process for that particular consultant, and it’s fair to say that that procurement did not demonstrate good practice. Records were almost non-existent; certainly there were none of the meetings where the agreement was negotiated. The consultant had actually been quite open about the potential for conflicts of interest, but those disclosures hadn’t been fully or properly considered by the Ministry. And the lack of documentation failed to recognise the profile, the sensitivity of the review, and the need to maintain its integrity. So, without a plan, how to manage/mitigate those actual, potential or perceived conflicts that had been declared, confidence started to be chipped away.

So let’s be clear: if you think you know what the example was, there was nothing to suggest that the work by that professional services firm wasn’t excellent. The problem was, even the declared conflicts were enough to undermine its credibility, because they hadn’t been properly considered and managed. This was a right-versus-right dilemma, but one where the wrong choice was made. It was right to want to engage the best consultants, the best professionals for the job. But it was also right for the review to maintain its integrity, free from conflict of interests. It was wrong to ignore or fail to manage those conflicts. Was there a win-win there? I suspect there could have been, a way that the review could still have used the best professionals for the job, and yet avoided some of the inherent conflicts – but, sadly, that wasn’t what happened. So sometimes these issues are subtle.

So, secondly, Chartered Institute says, “We must avoid fraud, bribery and corruption.” Again, I think a reasonably strong performance here. We’ve got little tolerance for fraud and corruption. But I do think that we risk complacency. And if we look at all of those indicators that the Institute calls out, in my work, I still see a high level of sole sourcing. Which is not necessarily the wrong procurement approach, but often is accompanied by weak or poorly explained rationale for why it’s the right approach. We also see specifications that do favour certain suppliers, oftentimes the incumbent supplier. And it’s certainly true that contract management remains the poor cousin in the procurement cycle. I’ve seen isolated examples of public entities building the capacity of their supplies, but I’ve seen very few examples where that capacity building is related to integrity.

MBIE has been consulting on a new set of government rules of sourcing, which include a draft government procurement charter setting out expectations for sustainable and inclusive procurement. I think they’re likely to help on this dimension. One of the things that the new rules will encourage is engaging with businesses that have good employment practices, for example. It says, “Ensure that the businesses you contract with operate with integrity, transparency and accountability, respecting the protection of international, human and labour rights and meeting all New Zealand’s employment obligations.” I think it’s going to be challenging to ensure that all of your contractors can meet that standard. Let’s look at a couple of examples.

So, to be clear, I’m not saying that either of these examples are examples of fraud, bribery or corruption. But they’re both examples of poor procurement practice, and, when we have poor procurement practice, we can open ourselves up to complacency and to risk. So Greg’s already trailed the first story. If you turn to the front page of the Office of the Auditor-General website, you’ll see a link to our report on Westland District Council and the work they did to protect the Franz Josef Wastewater Treatment Plant. Indeed, I think we’re going to tell that story in more detail later this afternoon. So I thought I might focus on the second story, and this is the example of the Waikato District Health Board and their programme to implement a virtual health system.

The aim of SmartHealth was to give improved access to doctors via smartphones, computers and tablets. However, as has been widely reported, that project was a failure. EY were commissioned to carry out an independent report, which outlined a catalogue of errors when rolling out the showpiece initiative. Stuff said, “Waikato Health bosses didn’t listen to its doctors, or seek to collaborate with other health boards, before launching its failed virtual health project, and a lack of financial oversight made it difficult for staff to track spending. Project costs blew out to 25.7 million, nearly 9 million more than had been anticipated. Of about 3,100 consultations made through SmartHealth, each consultation effectively cost taxpayers $8,300.”

I don’t know how much you pay to go and visit your GP, but I’m going to go out on a limb and suggest that $8,300 isn’t exactly best value for money. The DHB spent around $10 million on a trial, with no market testing and no evidence to demonstrate the competitiveness of the supplier. And I think that opens up the District Health Board to allegations of the kind of issues that I’m talking about here. So whilst I’m not saying it’s a definite example of fraud, bribery or corruption, it is true that a formal complaint has been sent to the Serious Fraud Office. So poor procurement practice can leave us vulnerable to some of these issues.

Finally, sustainable procurement. Well, I really tried hard to put some ticks and crosses on this part of the scorecard, but in the end I decided that I couldn’t. On the other two areas, my conclusion was it was a generally strong performance and I could think of exceptions, one or two things that had gone wrong. In this area, I can think of one or two things that have been done right, and it’s generally quite a dark picture to us. So I know that Wellington City Council has got a procurement policy that talks about local suppliers. I think Christchurch is doing something similar, recasting its procurement policy to think about sustainability, and I know that Auckland City Council has also done some work in this area. But I don’t know many other examples.

Again, I think the new government rules are potentially going to help. They might mark a turning point. If we think triple bottom line, perhaps we’ve been overly focused on pure economics in the past, and the new rules will rebalance us more towards social and environmental outcomes. So, again, looking at that Government Expectations for Sustainable and Inclusive Procurement, the new rules talk about, “Promoting economic development within the country, ensuring that opportunities are accessible for all, and undertaking initiatives that contribute to a low-emissions economy and promote greater environmental responsibility.”

But the thing is, none of this is new. We’ve had these guides for nearly 10 years – guides to sustainable procurement identifying priorities, identifying needs, how to evaluate and select suppliers – and yet we’ve struggled to come up with more than isolated examples. So I wonder, am I asking the wrong question? Are you not telling us all of those good examples that you’re doing, or are there actually some barriers getting in the way? So Probity, Ethics and the Auditor-General: Changing the World One Contract at a Time. The public sector spends a huge amount of money, but relationships with the market mean that ethical dilemmas can arise. There is temptation – right-versus-wrong choices – but also right-versus-right ethical dilemmas, and ways of thinking can help.

In New Zealand, we are strong; our moral compass is aligned. We have generally good policies and procedures – but issues still arise. And perhaps our ethical outlook is not as broad as the procurement profession thinks it could be. Helping organisations think through ethical dilemmas is what we do. As Stephen Walker puts it, “Ethics are our touchstone. Ethical leadership is a force for good.” But we’re approaching a watershed moment. New technologies are raising ethical issues unlike any we’ve had to consider before. The new generation wants to work for organisations that have real purpose and set a high bar. Ethical leadership means being professionally connected, grounded in shared professional skills, knowledge and experience, but also in our ethics – our ability to know the difference between what we have a right to do and what it is right to do.

For more information and to download presentations, visit auditnz.govt.nz.

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