This article is an excerpt from the 2020 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its September 2019 report entitled Inquiry into Waikato District Health Board’s procurement of services from HealthTap, New Zealand’s Auditor-General found weak planning and the improper sole-sourcing of an online virtual healthcare services contract. As the report summarized, the District Health Board (DHB) spent $16 million over two years in licensing fees without first engaging in any formal market testing or tendering process, and that its overall costs for the non-competed services totalled around $26 million:
Waikato DHB’s contract with HealthTap required Waikato DHB to pay about $16 million in licence fees over two years. The contract was pitched as a two-year trial of virtual care. Waikato DHB then intended to go back to the market using what it had learned during the trial phase to formulate a more detailed analysis of its needs, followed by a formal tender process. On the evidence available to us, Waikato DHB did not carry out any formal market testing or any form of competitive tender process when selecting HealthTap as a provider.
Towards the end of the two-year term of the contract, Waikato DHB commissioned a review of the project. That review concluded that virtual care represented an important strategic direction for health organisations in Waikato and New Zealand and that, where the services met a particular clinical need, HealthTap performed well. However, it also identified issues with the implementation of the service – including a lack of collaboration with internal and external stakeholders.
The review found that the overall cost to Waikato DHB was about $26 million. When the review was released by Waikato DHB, it said that it considered that the platform was introduced too quickly and without proper collaboration with staff. Waikato DHB also said that the community, its staff, and the organisation were not ready for this change. In March 2018, Waikato DHB decided that it would not renew its contract with HealthTap when it expired later that year.
The Auditor-General found that “fundamental aspects of good procurement that we would expect to see in a procurement of this type” were either “missing, defective, or carried out too late in the process to be effective”. Those deficiencies included no formal planning before the supplier was selected, which more specifically meant “no formal identification of business needs, no risk analysis, and no identification of internal or external stakeholders.” The report also found “no documented analysis of the market and what other options might be available.”
Furthermore, while the board’s former chief executive officer claimed to have “performed comprehensive market testing at the time of the procurement” to confirm that “there were no other credible platforms that met the criteria”, the board failed to provide the Auditor-General with any records of the market testing or of the selection criteria at the time. In fact, the report found that the chief executive officer initially contacted the supplier on the direction of the board chair and that there was “no evidence of governance or oversight at this point of the process”. Finally, no advice was sought from the board’s legal or procurement teams until after the draft contract was prepared.
The report concluded that the board’s business case and procurement plan were prepared retroactively after negotiations had already taken place and a draft contract was already prepared in the absence of any input from the board’s procurement or legal teams. In fact, the report concluded that the “information it contained on market analysis and the chosen procurement approach (that is, selective procurement) was, in our view, unconvincing” and that the procurement plan was actually never finalized. As the Auditor-General stated, “the sense we got is of a plan written after the fact, largely to justify a decision that had already been made”, which was found to be problematic:
There are some obvious problems with this approach. Lack of proper planning in the early stages of a procurement means that all subsequent decisions might end up being built on shaky ground. Expert legal and procurement advice came too late. Not getting expert advice at the outset means you risk failing to identify issues that might be fundamental to how you need to carry out the procurement. Writing your business case and procurement plan after you are already in contract negotiations with a potential provider means you risk writing to justify a decision you have effectively already made, rather than one that – viewed objectively – can be seen to be in the best interests of the organisation.
Our concern is not just about “not following the Rules”. It is about the apparent disregard shown for the principles underlying those Rules – namely, the importance of fair practice, sound decision-making, and being able to show value for money when making procurement decisions.
The Auditor-General also criticized the lack of consultation by the board with other district health boards in its introduction of a significant change to healthcare delivery in New Zealand:
The first problem is the lack of collaboration with other parts of the health sector. Each DHB is an independent entity, with its own responsibilities and interests that it needs to attend to. However, there is also an expectation and, in some situations, a legal requirement for DHBs to collaborate when planning, funding, and providing health services.
In this instance, given the nature and scope of what Waikato DHB was trying to do, its potential to fundamentally alter the way services would be provided, and the need to get buy-in from clinicians and others who would be expected to use the service, it is unclear why Waikato DHB did not seek to engage with other DHBs, providers of health and disability services, clinicians, and the National Health IT Board much sooner.
As the report concluded, while innovation in public sector service delivery is important, it should not come at the expense of good governance and due diligence:
Final comment
The events described in this report are now in many ways historical. However, there are important lessons about a good procurement process that can be learned and applied to other procurements in the public sector – in particular, when seeking to be innovative.
Innovation in the public sector is important. It can lead to new and better services for the public and more efficient ways to deliver current services. However, when public organisations seek to innovate, it is all the more important to respect the disciplines of good procurement. Innovative service delivery and good procurement practice are not mutually exclusive.
Respecting good procurement disciplines helps a public organisation have assurance that its procurement will deliver value for money, and that valuable public resources will not be wasted regardless of the innovative nature of what is being procured. Without enough assurance that its procurement will deliver value for money, there is a greater risk of the procurement wasting valuable public resources.
As this report illustrates, while public institutions should be able to innovate but that innovation must occur within the parameters of acceptable public procurement practices since non-compliant practices are not justifiable when matters of public interest are concerned.
