Proposed Changes to the Government Procurement Rules

At the end of January 2019 the Ministry of Business, Innovation and Employment (MBIE) released for consultation a draft 4th edition of the Government Procurement Rules (fourth edition).  This fourth edition will update and rename the current 3rd edition Government Rules of Sourcing.

This article outlines some key changes proposed by the fourth edition.  You can access the draft fourth edition here.

While the fourth edition is a consultation draft only, we expect many (if not all) of the proposed changes will become a part of the rules.  On that assumption, we have also noted a few things that suppliers should start to consider in preparation for the changes taking effect.  However, if there is a proposed change that you do not consider appropriate, then we strongly suggest that you make a submission to MBIE on that point.  Submissions must be made by 5th March 2019.

Purpose of the Procurement Rules

MBIE describes the rules as helping “to support good market engagement”, recognising the importance of open competition and innovation in order to achieve “better solutions”.  In practice, the rules are mandatory for Government departments and a number of other public sector agencies and generally apply to contracts worth $100,000 or more.  They operate as good practice for agencies in the public sector for who they are not mandatory.

Key changes

The key changes proposed by the fourth edition are to introduce requirements around meeting broader outcomes in procurements, require procurements to be of best public value, and introduce a Government Procurement Charter and a Supplier Code of Conduct.

There is also a new rule proposed on planning a procurement, which emphasises the importance of market analysis and engaging early with the market.  This is noted as particularly relevant for incorporating the broader outcomes in the procurement process.

Broader outcomes

The most significant proposed change is the addition of requirements for agencies to consider and incorporate broader outcomes when procuring goods and services. These outcomes are the secondary environmental, social, economic and cultural benefits which may be generated from the way a good or service is produced or delivered.  Agencies will need to include these in the notice of procurement, along with applicable policy statements, and also report on them to Government.

In late October 2018, the Government set out four “specific priority outcomes” to be leveraged by the Government’s procurement contracts, specifically to:

  • increase New Zealand businesses’ access to Government procurement;
  • increase the size and skill of the domestic construction sector workforce and provide employment opportunities to targeted groups;
  • increase conditions for workers and future-proof the ability of New Zealand business to trade; and
  • support the transition to a net zero emissions economy and assist the Government to meet its goal of a significant reduction in waste by 2020.

The changes in the fourth edition incorporate these specific priority outcomes within the proposed new broader outcome rule.  Each of the specific priority outcomes also has its own rule with particular requirements.  The relevant specific priority outcome rule will apply where a contract type is designated by Cabinet/Ministers against a specific priority outcome.

These proposed rules each have an action for agencies in order to meet the specific priority outcome, eg consider how they can create opportunities for New Zealand businesses or ensure suppliers comply with relevant employment standards and health and safety practices.  The new rules also require agencies to:

  • have regard to any specific guidance from MBIE (which is still to be developed); and
  • monitor designated contracts in order to ensure that commitments made in contracts are delivered and reported on.

Importantly, the fourth edition requires broader outcomes to be incorporated into procurement processes so as not to discriminate against certain suppliers or result in offsets (additional conditions to develop the local economy or to improve balance-of-payments accounts) being included.  Broader outcomes will need to be considered even when running a secondary procurement under a panel or choosing an All of Government contract too.

Public value

It is proposed that the test for awarding a procurement contract change from “best value for money” to “best public value, including broader outcomes”, although it will remain measured over the whole life of the goods, services or works.  While the existing rules mentioned the term “public value”, it was not discussed.  In the draft fourth edition, a new section has been introduced to define public value.

This requires a focus on getting the best possible result from the procurement, efficient use of resources and taking into account total cost of ownership from the procurement and the contribution it makes to the results the agency is seeking to achieve.  This might include benefits of the procurement to the local community or the environment and how it achieves the broader outcomes.

If you are a supplier to the public sector, to help your offering be attractive to agencies, you should begin to consider how your solutions will deliver public value.  Assuming this rule change is made, it will likely become necessary for the public value of your solution to be outlined in tender responses so as to help agencies assess that value in accordance with the rules.

Government Procurement Charter

The fourth edition proposes a new Government Procurement Charter, which agencies must incorporate into procurement processes.  It contains eight focus statements.

The good news for New Zealand businesses is that the Charter, consistent with the first priority area of the broader outcomes, directs agencies to seek opportunities to include New Zealand suppliers in procurement processes.  Suppliers to the public sector also need to be mindful of a few other directions in the Charter.  There include directions to engage with businesses with good employment practices and to undertake initiatives that contribute to a low emissions economy and promote greater environmental responsibility.

There is also a direction to manage risk appropriately and not transfer all risk to the supplier.

Supplier Code of Conduct

The fourth edition introduces a requirement for suppliers to comply with a new Supplier Code of Conduct (Code).  Under the fourth edition it is suggested that a commitment to comply with the Code be included in supplier contracts.

The Code is in draft, and had a short consultation period of three weeks, which ended on 19 February 2019.  The draft Code can be read here.

The Code is high level (one page) and covers the Government’s expectations in relation to six areas:

  • labour and human rights;
  • health, safety and security;
  • prompt payment to subcontractors;
  • environmental sustainability;
  • ethical behaviour; and
  • corporate social responsibility.

While the Code is still a draft, we recommend that businesses wanting to work with Government agencies should check how they measure up to these expectations now.

Related to this, is a proposed change to the rules on excluding suppliers from a tender, to add two new reasons.  The new reasons are where the agency has evidence of:

  • human rights violations by the supplier or in the supplier’s supply chain; and
  • any matter that materially diminishes on an agencies’ trust and confidence in the supplier.

Additional Supplier obligations

There are a few other proposed requirements that will impact suppliers.  These are that agencies:

  • must ensure suppliers (including subcontractors) meet minimum employment standards;
  • should ensure suppliers comply with Protective Security Requirements (ie Government security standards);
  • should be considering how to flow down expectations around broader outcomes to the subcontractors of a supplier.

Other changes for agencies

For construction works, the fourth edition proposes reducing the threshold for the rules applying from $10m to $9m, and adding a requirement to apply the good practices set out in the Government’s Construction Procurement guides.

There will also be new requirements for agencies to engage in an annual self evaluation of their procurement processes and to report to MBIE.  Agencies will also be required to produce a biannual report on those service contracts which are critically important to the delivery of the agency’s business objectives or which pose a significant risk and/or impact in the event of a provider failure.

Having your say

MBIE is seeking your feedback on the draft fourth edition until 5th March 2019. Whether you are interacting with Government procurement directly as a contractor, indirectly as a sub-contractor or through the outcomes of procurement as a member of the public; now is the chance to provide your perspective. While MBIE is asking for feedback on the proposed changes, there is an ability to provide general comments so we think that is an opportunity to suggest a change to an existing rule that you think should be made too.

Please get in touch with the team at Lane Neave if you would like assistance to make a submission to MBIE.

Business Law Team

If you need any assistance do not hesitate to get in touch with the business law team at Lane Neave.

Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Nicola Hardy, Peter Orpin, Nicola Hardy, Ellen Sewell, Matt Tolan, Kristina Sutherland, Caroline Cross, Jacob Nutt, Danita Ferreira, Angela Sargent, Whitney Moore, Alex Stone, Giuliana Petronelli, Joshua Wall, Ben Cooper

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Graeme Crombie is a Lane Neave partner in the corporate team

Graeme Crombie
Partner, Lane Neave

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