How the Government plans to leverage its $41 Billion spend

April 4, 2019

Chris Dann Partner

The New Zealand Government spends approximately $41 billion each year buying goods and services from third-party suppliers and providers. Cabinet agreed last year to more explicitly leverage those contracts to achieve broader social, economic and environmental outcomes.

To give effect to that decision, the Ministry of Business, Innovation & Employment recently released updated Government Procurement Rules and a proposed new Supplier Code of Conduct. The changes are significant and relevant to the entire public sector, as well as all those that supply them.

How do the Rules apply?

Government departments, NZ Police, NZ Defence force and most Crown entities must follow the Rules if procurement is worth more than $100,000 (or (now) $9 million for new construction works). All other state sector and public sector agencies (including school boards of trustees and local authorities) are expected or encouraged to follow the Rules.

Broader Outcomes

Public agencies now have a responsibility to achieve “public value” (a new concept) when spending public money. Public value includes consideration and incorporation where appropriate, of the broader outcomes that can be achieved through procurement. Cabinet has directed four initial priority outcomes:

  1. Increase New Zealand business’ (including Māori and Pasifika businesses) access to government procurement. ICT services and software is noted as a particular focus area for this outcome.

  2. Increase the size and skill level of the domestic construction sector workforce. This priority follows criticism of, for example, the award of the Christchurch Convention Centre contract to an Australian based supplier that then engaged its own supply chain rather than hiring local firms to do the sub-contracting work.

  3. Improve employment and health and safety standards. The aim is to protect workers from unfair and unsafe behaviour and avoid well-performing NZ firms from being undercut by those who have cut costs through poor labour practices. Contracts for cleaning and security services and in the forestry sector are designated as targets for this priority outcome.

  4. Reduce emissions and waste. Procurement of vehicles, heating of government buildings and office supplies are the work areas to concentrate on.

Agencies are now required to include requirements relating to these designated priority outcomes in the evaluation and ongoing monitoring of their procurement of goods and services. Further guidance is under development on how to incorporate these requirements, as is a monitoring and reporting framework to track agency performance regarding these broader outcomes.

Changes to construction procurement

After the collapse of Ebert Construction, senior Government Ministers promised a “reset” and “a hard look at [Government’s] approach to procurement … to help the industry get back onto a stronger footing.”

The currently voluntary construction procurement guides will become mandatory unless agencies can produce documented evidence of the rationale for not following them.

Further, when procuring construction works agencies will be required to include questions around the skills development, training and health and safety practices of the supplier and their sub-contractors in evaluation.

Building and Construction Minister Jenny Salesa says the government intends taking a “whole of life” approach to costing projects, rather than a focus on cheapest up front price, and promises another discussion paper in the next few weeks dealing specifically with construction procurement and wider building and building product issues.

Also relevant in a construction context is that the new “Procurement Charter”, which is compulsory for the whole public sector even if the Rules are not, demands that risk is managed appropriately and by the party best placed to manage it: “Don’t transfer all the risk to the supplier”.

Supplier conduct requirements

The updated Rules and the proposed new companion “Supplier Code of Conduct” seek to impose the Government’s expectations on suppliers.

The Rules demand that Government agencies:

  • ask prime contractors to meet minimum procurement standards in their subcontracting, including relevant H&S, labour and/or protective security requirements and consideration of how to flow down the “Broader Outcomes” mentioned above; and
  • choose suppliers that comply with the Code of Conduct.

The Code of Conduct is a series of high-level “expectations” that Government has for all of its suppliers. Suppliers are themselves required by the Code to make their subcontractors aware of the Code. Those expectations include:

  • embracing international human rights standards and respecting the labour rights of their employees
  • complying with H&S legal requirements and maintaining work environments and systems to “ensure” the health and safety of workers and others (interestingly the “so far as reasonably practicable” qualification included in the Health and Safety at Work Act 2015 has been omitted!)
  • prompt payment of subcontractors
  • environmental sustainability
  • ethical behaviour, and
  • corporate social responsibility (eliminating discrimination by gender, ethnicity and occupation and promoting regional and Māori economic development are given as examples).

It is not clear how or when the Code will be implemented; nor how, or in what form or to what extent suppliers will be required to indicate or evidence their commitment to the Code.

What’s next?

Consultation on the Rules and Code of Conduct is now closed. The Ministry says it is currently reviewing the feedback and will present suggested changes to Cabinet for approval in May 2019. Government buying represents about 18% of New Zealand GDP – this is an important review which has largely flown under the radar but is likely to require changes in approach by both suppliers and the public sector. We will follow developments closely.

Get in touch

Partner, Chris Dann, has an established procurement practice and has advised both public and private sector clients on procurement issues, tender documentation and contracts – for domestic and international supply. If you have any questions, or need assistance in your business, please get in contact.

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