The Government spends billions every year on everything from toilet rolls to computer systems. But new research shows the way officials award contracts is opaque, complicated and skewed towards international companies. Open tenders are the exception not the rule. Even the Government admits the system must change.
Ian McCrae is ropeable. When we met, the chief executive of Auckland-based health IT company Orion Health was almost leaping off his seat with anger. And the subject of his ire: a Ministry of Health decision to spend $38 million (“thirty eight million dollars”) of taxpayer money on an online Covid-19 vaccinations system supplied by multi-billion dollar international companies including Salesforce, Amazon and Deloittes.
The new system will bypass and eventually replace New Zealand’s existing national immunisation register, built and run for almost two decades by Orion Health.
The loss of the contract isn’t what angers McCrae the most – the company he founded in 1993 employs 560 people in 20 offices across 13 countries and has more than 55 large-scale (country or region-wide) health management IT systems deployed around the world. Orion didn’t need this contract, he says.
Nor is his biggest beef the fact he believes Prime Minister Jacinda Ardern openly maligned his product when she said in Parliament on April 7 that “we have not had a national, well-functioning immunisation register for years”.
Actually, we have had, McCrae says. When Ardern’s daughter Neve got her childhood vaccinations, he bets the system worked just fine.
He also categorically denies a Ministry of Health assertion that Orion said it would not support the National Immunisation Register after March 2022. Rubbish.
“It’s such a gross, ridiculous waste of money. I have never seen anything like it,” – Ian McCrae, Orion Health
No, the reason McCrae is ropeable is what he sees as the lack of any proper, open procurement process before the Ministry of Health awarded the Covid vaccination contract to Salesforce and Deloitte. Just a 12-slide Powerpoint overview in a September 2020 email to Orion from the Ministry of Health, including the words, “we are not looking for a formal response at this stage”. Then six months later, the announcement of the foreign consortium.
And that $38m, taxpayer-funded price tag.
“It’s such a gross, ridiculous waste of money. I have never seen anything like it,” McCrae says. Orion could have upgraded the existing register to meet the Government’s initial requirements for $50,000, plus a some money for "a number of enhancements and improvements that we have been proposing for several years to the National Immunisation Register system".
Orion could have carried out a "total technology refresh" for $1m to $3m, if the Government wanted, "though we see little need for this".
"I strongly believe that Covid was simply used to circumvent proper procurement and this has cost New Zealand hugely." – Ian McCrae
Whatever the figure it would have been a fraction of what the Government ended up paying. “We are supplying health systems for entire countries. How can an immunisation system cost that much?”
McCrae has this week written to the Auditor-General calling for a review of the "scandalous" $38 million price tag. "I strongly believe that Covid was simply used to circumvent proper procurement and this has cost New Zealand hugely."
His opinion is uncompromising: “At the very least it’s incompetent, at worst it’s misappropriation.”
McCrae is talking about the Government using Covid exemption provisions to circumvent procurement rules.
And McCrae isn't the only one criticising government procurement. New research commissioned by an IT sector industry body finds this untendered $38 million contract is just the tip of the iceberg in terms of non-transparent Government procurement over the last 12 months.
The Covid vaccination contract is in the public eye because it’s to do with Covid and because McCrae isn’t afraid to call the Government to account. But awarding contracts without what most people would think would be normal, open procurement practices seems to be just how it’s being done.
The harsh reality
The report that brings this to light is called The harsh reality of NZ government digitech procurement. It’s the work of Victoria MacLennan, co-chair of NZ Rise, a not-for-profit consortium of locally-owned IT firms.
MacLennan worked with Laurence Miller of anti-corruption agency Transparency International to crunch numbers from the Government Electronic Tender Service, or GETS.
According to GETS’ own spiel, it is “a free service designed to promote open, fair competition for New Zealand Government contract opportunities”. According to the website, “most large government contracts" are advertised on GETS.
That’s not what MacLennan and Miller found. Nowhere close.
When they examined how much Government spent on IT contracts in 2020 and what of that spend was transparently awarded and notified, their conclusion was horrifying.
Just 2 percent. Two.
“For the digital technology sector, 144 contract award notices were published in 2020, and the total published value of contracts awarded in 2020 was $64.5 million. Annual government IT expenditure is estimated at around $3 billion, so the published data is only 2 percent of total government expenditure.”
And that’s despite the Government’s own 2019 updated rules for procurement stating government agencies must look beyond price to “broader outcomes”. To wit, officials must:
- Seek opportunities to include New Zealand businesses and promote inclusive economic development within New Zealand;
- Openly advertise any procurement over $100,000 on the Government Electronic Tenders Service;
- Publicise details of all contracts awarded on GETS, including the expected spend;
- Publish award notifications for emergency procurement on GETS.
It’s not just IT spend. Widen the scope to all government procurement last year and the results are hardly better.
“The total published value of contracts awarded in 2020 was $1.016b, or 2.5 percent of government expenditure,” the report found. “Across all government services, only 26 award notices relating to Covid-19 emergency procurement were published in 2020, and only five contained information on the value of the contract.”
While the pandemic required quick procurement decisions, the rules still require that they are publicly notified, MacLennan says.
“It is completely unacceptable that there is no transparency of government COVID-19 expenditure. Government agencies have been making unprecedented levels of emergency expenditure without complying with the procurement rules approved by Cabinet.”
Could that be right?
A government response is non-committal.
“New Zealand Government Procurement is committed to enabling government contract awards to be openly notified and published on the Government Electronic Tender Service to promote inclusivity, sustainability and transparency in government procurement processes,” said a spokesperson for the Ministry of Business and Innovation.
“Government Procurement is working on ways to improve overall quality of input and process automation to replace existing manual processes, which will lead to improved transparency and the use of verifiable percentages.”
Exactly what is happening, and whether there are targets or deadlines isn’t clear.
The strange system of government panels
Meanwhile, there is a traditional system of government procurement that appears to directly go against any moves towards transparency or equity.
It’s called "government panels".
If you are a company selling to government, you will be well aware of these closed shop panels. If you are not, you may not have heard of them, but they are crucial to this issue.
Government panels are small groups of pre-approved suppliers that government agencies can use if they want to buy stuff without going through a full tender. There are open panels, where new suppliers can join.
But many panels are closed, meaning the existing suppliers, which almost always include big corporate players such as Deloitte, Accenture, KPMG, Beca and Aecom, according to this article from Stuff reporter Steve Kilgallon, are the only ones government buyers can use.
Some of these closed panels stay closed for three or four years, meaning if you are a small, a growing or a new player in the market, you have no hope of even being considered for work.
For government officials, it’s great. Finding a supplier is easy – you don’t have to vet lots of candidates or make hard decisions.
It’s potentially less risky. You are using the same supplier other officials use. And perhaps most importantly, as an explainer from supplier Qual IT puts it here, it “saves time and money by not having to undergo a primary procurement process through GETS”, that previously-mentioned and allegedly encouraged Government Electronic Tender Service.
“They should have rolling entry to the panels, or simply just get rid of them,” Emily Mason of Wellington consulting firm Frank Advice told Kilgallon. “It stops innovation, it stops efficiency, it stops diversity and it stops competition for those who are already on it.”
"Panels create a closed market with no innovation. And in the end the economics are extraordinarily unsound." – Don Christie, Catalyst
Too right, says Catalyst's Don Christie.
“It makes it easy for government – and cheaper. The idea was companies would sharpen their pencils to get on the panel and save the government money," he explains.
“But it creates a closed market with no innovation. And in the end the economics are extraordinarily unsound.”
That’s because choosing one of the firms on the panel may look cheaper on paper, but when you consider the wider benefits, that’s not necessarily the case.
In June last year Catalyst IT published a report on the benefits of local procurement, using data commissioned from Economics New Zealand.
“The domestic multiplier and tax revenue effects of local procurement substantially reduce the net cost to the government of local contracts,” the report says. “As an example, the net cost of a $1,150,000 contract (a million dollars plus GST) reduces by some 30 percent after the secondary tax revenue effects of the local employment and spending it induces."
What Economics NZ is saying is that awarding an IT contract to a domestic supplier sets in train a chain of money flowing through the economy, including into government coffers, which doesn’t happen (or happens on a much smaller scale) when the contract is awarded to an overseas supplier.
Then there are those broader outcomes. Those complicated, hard-to-put-a-figure-on broader outcomes.
Think of it like this. Imagine the government needs a road. Company X will build it for $1m, using its existing staff. But company Y employs former prisoners, who are finding it hard to get work after being released. Company Y trains them up, provides counselling and budgeting advice, pays them the living wage, helps them with housing. Their road will cost more. Maybe quite a lot more.
But if 70 percent of those former prisoners stayed out of jail for the rest of their lives, and instead worked and pay taxes, the savings for whole of government could be enormous.
But how do you know? And if you are a Ministry of Transport procurement officer, how can you calculate a hypothetical future benefit for the Ministry of Justice?
Why would you even try to calculate it? Much easier just to pick the cheaper one.
Procurement is broken
And there’s another problem: government procurement systems aren’t geared to making difficult choices and providing the information and help to allow innovative procurement; to allow Company Y to bid for and get that roading job.
Rather the opposite. Researching this story, we came across another report. A worrying report. It’s called the New Zealand Government Procurement Business Survey. Normally it’s produced every year, although the 2020 one was postponed because of the pandemic, so 2019 is the latest iteration.
The survey is open to anyone who sells stuff – or tries or wants to sell stuff – to the government, and respondents get asked a whole heap of questions about their experience with the process. For example, there are questions on transparency, opportunity to bid for government contracts, and the professionalism and communication skills of the people managing procurement for.
And the answers (in 2019 and previous reports at least) do not shower glory on government procurement. They really really do not.
Here are some of the questions and the answers, complete with some great graphs.
Q: How do you rate the government’s initial engagement in the procurement process?
A: Good or very good – 39 percent | Average or poor – 61 percent.
That's almost two thirds of people aren't impressed with the government. And compared to previous years: the situation is getting worse.
Q: How openly officials discussed contract opportunities?
A: Positive – 37 percent | Neutral or negative – 63 percent.
Q: What is the overall quality of Government’s tender activity?
A: Good or very good – under 40 percent | Average or poor – Over 60 percent.
And so it goes on.
Clarity of tender documents? Positive: 47 percent; neutral or negative 52 percent.
Do you feel you can effectively bid for Government contracts? Here the survey breaks the numbers down by size of business and what the company is selling. Remember the survey isn’t an open one – most of the responses come from businesses who have subscribed to a tender on the Government Electronic Tenders Service.
Big businesses (over 50 staff) said they had no problem bidding for government work (86 percent), but small ones (five employees or less) found it much harder. More than 40 percent said they felt shut out of Government contracts.
A third of the 176 ICT (tech) companies that filled in the survey, said they could not effectively bid for Government work.
There’s more.
Q: What are the main factors that make it difficult to effectively bid for government contracts?
A: Complex or unclear information (20 percent), lack of support from or engagement with government agencies (27 percent), complicated procurement processes (24 percent).
Q: What is the quality of the government’s contract management?
A: Negative or neutral – 57 percent | Positive – 44 percent.
And then, towards the end, the pièce de résistance; companies are asked to rate the people they deal with against a series of competencies.
Basically the question is asking whether the officials, the bureaucrats spending $42b of taxpayers money every year on stuff the government needs – building products for roads and schools, IT services, cars, fuel, toilet rolls, cleaners – are they good at what they do?
And the answer: not very.
Only four out of 10 are seen as innovative; only half communicate well, less than half are good at decision-making or at “timing”, whatever that is.
Only 53 percent are even seen as professional – surely the most basic attribute someone should have to do their job.
Not only that, but the numbers are getting worse, not better.
And all this matters. Selling to Government matters to the fortunes of our companies. In fact, 75 percent of respondents to the 2019 survey saw government business as “extremely important” or “very important” to them.
New Zealand businesses based from other markets rely on Government work to thrive. Yet government agencies are seen by 85 percent of its customers as no better or considerably worse to deal with than other companies.
It could be so different, says Catalyst's Don Christie, board member of Internet NZ and past chair of NZRise.
The government could and should be using its $42b-worth of procurement clout to support the New Zealand economy and help local businesses get the sort of scale they need to take on the international market, he says.
It’s what many other countries do, Christie says – the US, China, Canada, Australia, Europe, Asia. They set outcomes for what they want to achieve with their procurement (it might be, say, local employment, supporting indigenous business, or environmental goals) and then they work out how to achieve those goals.
Despite the broader outcomes remit in the New Zealand procurement rulebook since 2019, Christie says it still feels like New Zealand officials are almost obsessively fixed on ensuring a level playing field between local and international players – which has often seen the global corporates, with their huge sales forces and marketing budgets, chosen for contracts.
“Over the years, every conversation with government has always started with 'how will it affect our Fair Trade Agreements'.”
In addition, Christie believes many officials are frightened of taking a risk on a local supplier, he says. He wonders how much that old ‘safe choice’ IT mantra: “No one ever got fired for buying IBM” is still applicable among New Zealand bureaucrats.
If true, it would be ironic: one of New Zealand’s biggest IT network roll-out failures was an IBM project – the 1990s $107m (way more in today’s numbers) INCIS police computer system. The project was finally abandoned in 1999.
As then Minister of State Services Trevor Mallard said at the time: “It is clear from reading papers that [INCIS] has been a monumental balls-up."
If the All Blacks can do it...
“There’s a lack of belief that New Zealand companies can compete with the likes of Amazon Web Services, Microsoft or Google,” Christie says. “But we can, and we do it all the time. Like the All Blacks smashing England. We can do it in the IT space. Rod Drury proved that.
“Why shouldn’t our government have an approach that stimulates local innovation and productivity? Which develops local capability.”
In 2004, Christie’s company Catalyst IT was awarded the contract to take the government-owned Open Polytechnic online, and that experience helped the company become a major provider of this sort of open source software worldwide, Christie says.
“The original government investment getting the polytechnic online in 2004 created a capability in New Zealand companies that we could use to export very successfully. It created an important outcome for New Zealand, but also a capability we are still using successfully overseas.
Fast forward two decades, however, and like Orion Healthcare and the Covid vaccination register, Catalyst is struggling to even get a chance to tender to be part of the Tertiary Education Commission’s vocational education reform, Christie says.
“No one wants to talk to us. We have the most globally-used platform; the system with by far the greatest number of students. But the Government thinks they have to go overseas.
“They think no one in New Zealand could service them, rather than thinking of this as a great opportunity to take New Zealand forward in the educational technology space.”
Risk aversion
It’s easy to blame the people making those too-safe decisions.
In 2018, author and CEO of PeopleNotTech wrote a column in Forbes.com titled “Nobody gets fired for buying IBM. But they should.”
In it she examines the psychology behind risk aversion. “The ‘IBM-buyers’ don’t feel entitled or mandated to take what appears to be a risky decision on behalf of the company,” she says.
“A lot of it comes from a lack of self-confidence that long-term employees of large organizations often develop in time as a result of a myriad of institutional factors such as: lack of exposure to the wider market; lack of incentive to keep learning and developing; lack of valuable personalised KPIs; existent or perceived lack of inside and outside opportunities and above all, an overall belief that taking any chances has a higher likelihood of failure than success and that failure, irrespective of causes will be attributed to the employee and it will be terminal.”
Systemic problems
Ross Copland is CEO of Te Waihanga, the NZ Infrastructure Commission. One of the many things the commission is looking at as it prepares a 30-year strategy for Government is procurement.
With his infrastructure reform hat on, Copland knows the procurement rules aren’t uniformly followed by officials buying stuff. And when they don’t follow the rules, mostly there is no comeback.
But it’s not as simple as that, he says. The rules themselves are creating problems.
As the head of a Crown entity, Copland is not only looking at the effectiveness of government procurement from outside. He’s also buying stuff.
So he has first hand experience of the rules, in particular the ‘broader outcomes’ principles.
Copland says the idea is great, but actually following the rules can be frustrating and time consuming because they are so unspecific and, well, ‘broad’.
He says a small piece of procurement for Te Waihanga recently took up dozens of person-hours, as they tried to work out how to apply the principles.
“We are finding there is a genuine time and cost burden associated with meeting them. A lot of them are hard to follow because they are ambiguous and there’s no measurement criteria.”
So tough is procurement that the 18-month-old, 40-person organisation has decided to take on a specialist procurement officer.
“It would be much easier if they were much more definitive.”
Copland gives the example of the mandate that 5 percent of what organisations buy needs to be allocated to a Māori business.
Which is great – a big, bold statement of an important principle. But in practice it’s hard to follow because there is so little detail behind the rule.
“There is no definition of what a ‘Maori business’ is, and no one can tell us,” Copland says. “Also we’ve found it hard to work out exactly how to apply that rule – for example, is it by value of contract, or of our total procurement?
Meanwhile, there is no list of Māori businesses, when a list would be really useful.
“We are looking for infrastructure advisory services, but we don’t know of many, if any, Māori businesses providing those services. So it’s hard to comply with that rule.”
Covid-prompted change
As in almost every sector, the Covid-19 pandemic may provide the push that’s needed to change government procurement practices. In September 2020 Economic Development Minister Phil Twyford put out a proposal titled “Government Procurement: Supporting New Zealand’s Covid-19 economic and social recovery”.
In the paper, Twyford sought a mandate to amend the Government Procurement Rules to give the overall head of procurement the discretion to undertake “targeted procurement interventions in response to an emergency, a crisis or a wider policy priority”. For example, to foster government procurement as “a critical enabler” of New Zealand’s post-Covid recovery.
It also asks permission to establish an “enhanced procurement monitoring and assurance function” to make sure government agencies follow procurement practices which are “fit-for-purpose, consistent and meet the required standards”.
Some sections of the report are blanked out to hide so-called “free and frank opinions”, but the paper references the supplier survey (above) as evidence that procurement processes leave much to be desired.
And it calls for some big changes, including:
- Developing key performance indicators (KPIs) for each agency’s procurement processes and reporting to ministers on progress simplifying processes and incorporating broader outcomes;
- Challenging organisational behaviours, procurement practices and appetite for risk;
- Ensuring procurement professionals are properly trained and capable;
- Using procurement strategically to deliver economic and social benefits;
- Ensuring procurement policies and processes are flexible, simple, accessible and encourage innovation;
- Making sure decisions are not driven by cost alone;
- Creating more opportunities for businesses of all sizes, including enabling easy access to and improved distribution of government contracts.
Sounds great.
And seven months on, where is the proposal now? That’s not clear.
An MBIE spokesperson sent details of several initiatives dating from before Minister Twyford’s September 2020 paper, including the $186mn Arlington Flats construction project in Wellington (which seeks to deliver numeracy, literacy and diversity, as well as apprentice training) and the Rapid Mobilisation playbook which tries to get construction projects up and running quicker.
“A number of other policies related to the Cabinet agreement are either in development or being consulted on and we anticipate further announcement during 2021,” the spokesperson says.
Social procurement
Louise Aitken is optimistic things are changing for the better within government procurement – though more slowly than she would like.
Aitken is chief executive of the Ākina Foundation, an organisation set up to promote social enterprises. These are for-profit companies that also have a social or environmental purpose.
This week, the foundation will present its most recent report A Roadmap for Impact to ministers in Parliament. The report contains recommendations to Government as to how social enterprises can be supported, including using government procurement.
Aitken hopes a Cabinet paper will be out in a few months giving the Government’s position on the report’s recommendations.
“If government, as a buyer, uses its procurement spend to stimulate demand for suppliers who deliver positive impact, and government interacts with the market effectively, then the market, including impact-led suppliers like social enterprises and Māori/Pasifika enterprises, will grow and evolve to respond to increased demand, resulting in more positive social, environmental, cultural and economic impact.”
Aitken knows the problems of government procurement first hand, including the lack of transparency and the difficulty for small, local organisations to get government business. Ākina struggled to get on a government panel, which was closed for several years to new participants.
And she sees many other social enterprises unable to get a foot in the $42b door.
Still, she sees a change over the last 12 months, with Covid introducing new priorities for Government.
Some agencies are more proactive than other – Kāinga Ora, the Ministry of Education, IRD, and the Ministry of Foreign Affairs and Trade, for example, are taking small steps to considering broader social or environmental outcomes when they tender a contract.
And she hopes more will come. “The big opportunity we see is Government actually arcticulating the impact they have and using it to support the economy and in particular social and environmental goals.
“How do they build capabilities in the government agencies, particularly in large spending organisations like Kāinga Ora? They need to think about it in a strategic way, with proper frameworks about what are the broader outcomes we care about.”
A big part of the solution is looking at training for procurement managers, Aitken says.
“You have to support people so they understand when you are telling a story of impact in a meaningful way – not just cutting and pasting from their sustainability report.
“It’s a huge opportunity – and Government recognises it’s needed.”
