Scenario 3: Managing public resources for health services

Principles to underpin management by public entities of funding to non-government organisations.

The following scenario is typical of funding arrangements with NGOs in the health sector.

The fictitious Midnorth District Health Board has made an agreement with one of its primary health organisations (PHOs) to run an initiative under the public health strategy Healthy Eating, Healthy Action.

The fictitious initiative – called Kaihauora – will target and involve Māori whose health is at risk.

Our scenario focuses particularly on:

  • the complex accountability situation;
  • trade-offs between effectiveness and efficiency in the somewhat limited “market” of suitable NGOs;
  • the effects of needing to focus on what the public entity is trying to achieve (in this instance, the changing of population behaviour rather than on specific outputs); and
  • the importance of relationship understandings and agreements with NGOs in the health sector generally, and with local NGO and iwi groups.

Complex accountability in public health initiatives

There are accountability mechanisms in place to manage the funding delivery links in the health sector between the Ministry of Health (the Ministry), district health boards, and NGOs. The more recently created PHOs sometimes have a place in the delivery of certain initiatives (as in this scenario).

All public funding for health is appropriated by Parliament under Vote Health. The Ministry is the administering department.

Public health initiatives often involve a direct funding arrangement between the Ministry and various NGOs. However, in this scenario – as is often the case with the delivery of health services – the delivery of the public health strategy Healthy Eating, Healthy Action includes:

  • district health boards (which are public entities, and receive public funding from the Ministry under a Crown Funding Agreement, using a formula based on the size and characteristics of their populations, and including expectations for specific initiatives);
  • PHOs (which are not public entities, but must be not-for-profit, and are funded by district health boards to work with enrolled populations and their communities to achieve the objectives of the Ministry’s Primary Health Care Strategy. PHOs are not audited by the Auditor-General. District health boards have primary health care service agreements with PHOs, and deliver funding on a capitation basis under that agreement);
  • NGOs (which receive funding under contracts or agreements with the Ministry, the district health boards, or in some instances through the PHOs).

Relationship agreements with NGOs

Funding arrangements with NGOs in the health sector need to be considerate of relationship agreements between the public entities and NGOs.

The relationship between the Ministry and NGOs is formalised through the Framework for Relations Between the Ministry of Health and Health/Disability Non-Government Organisations.1

Individual district health boards (such as our fictitious Midnorth District Health Board) may have similar agreements or at least consultative relationships with NGOs involved in the district health board’s district. PHOs may have their own agreements or consultative relationships with NGOs. The Government has acknowledged the interdependence of primary health organisations and NGOs.2

Planning the Kaihauora initiative

District health boards receive funding from the Ministry to implement various health sector strategies, including the public health strategy Healthy Eating, Healthy Action.

In our scenario, the Midnorth District Health Board has carried out a thorough update of its health needs assessment when it reviewed its district strategic plan. It found that obesity, diabetes, and cardiovascular disease (which are linked in international medical literature) are unacceptably higher for Māori than for other groups in the district health board’s population.

Trend analysis from several preceding years indicates that the health status for Māori in diabetes and cardiovascular disease is not improving relative to other groups in the population.

Being clear about what the public entity is trying to achieve

The Midnorth District Health Board concludes that it needs to put in place a new initiative – Kaihauora – to tackle underlying public health issues and to get the results hoped for in the Primary Health Care Strategy, and related public health initiatives. Kaihauora aims to reduce obesity and increase levels of physical activity, and hence reduce the risk of related chronic health conditions such as diabetes and cardiovascular disease.

The Midnorth District Health Board prepares a business plan for the Kaihauora initiative. To fully consider the public benefits and the risks, the plan sets out:

  • the Primary Health Care Strategy priorities and the related Healthy Eating, Healthy Action strategy underpinning the need for the Kaihauora initiative;
  • health status results for chronic conditions linked to eating and activity patterns for the Māori population within the District Health Board’s district;
  • the logic for intervention, including the potential health risks and costs without intervention;
  • other considerations, in particular the relationship agreement that happens to exist between the Midnorth District Health Board and NGOs;
  • options for intervention, with their relative costs and benefits, and recommends the preferred intervention (the Kaihauora initiative);
  • the resource requirements for implementing and maintaining the Kaihauora initiative; and
  • how the Midnorth District Health Board intends to assess the success of the intervention, if it is adopted.

Using that information, the Midnorth District Health Board decides to launch the Kaihauora initiative, to contribute to the long-term target of eliminating, within the next 10 years, the difference between diabetes and cardiovascular disease hospitalisation rates for Māori and the population average.

Managing trade-offs in selecting a provider and negotiating terms

The Kaihauora initiative aims to raise community awareness and is designed to encourage at-risk Māori in the district to adopt healthy eating habits and be physically active. Rather than the purchase of particular outputs, it requires changes to the health-contributing behaviours of its Māori population.

The Midnorth District Health Board is buying “results” – awareness of the message, and changes in the eating patterns and activity levels of the target population. The District Health Board recognises that a traditional contract for specified outputs is not suitable. Nor does it have the capability or capacity among its own staff to carry out the initiative.

The Midnorth District Health Board consults with its PHOs, the NGO “umbrella” group in the district, and local iwi (since the initiative closely involves the Māori population) on the proposed initiative, and the intended results. They all agree that involvement of an NGO provider or providers, who have credibility with the at-risk Māori group, will get better results than using the DHB or PHO health professionals. Furthermore, in this instance, the DHB does not want to directly undertake either the initiative or its direct management. And, although it would like to, the local iwi does not have the capacity or capability to do so either.

In the view of the Midnorth District Health Board, the PHOs, iwi, and the NGO “umbrella” group, such a project will require the provider(s) to “know its communities” – its leaders, population profile, and the programmes and initiatives already running in the community. It must also be able to communicate the issues to community groups and look for ways to raise community awareness as a whole (for example, running catering programmes at the local marae to promote healthy eating information, and change the types of food that might be served to large groups at the marae).

They agree that the initiative fits well with the interests of one of the PHOs. The PHO undertakes to locate a provider or providers able to deliver the desired results. The PHO signs a variation to its primary health funding agreement with the Midnorth District Health Board, to give it additional funding to achieve the results intended in the Kaihauora initiative. It then seeks a provider or providers to accomplish this.

Seeking a provider

The Midnorth District Health Board policies require fairness, transparency, and value for money in the tendering process, which it usually achieves through open tendering. Under certain circumstances, this might not be a cost-effective or a possible approach, so the exceptions are clearly spelled out in its procurement policy. Further, to ensure that public money is managed fairly and transparently, a condition of its funding arrangements with its PHOs is that each PHO will act in the same way (that is, fairly and transparently) when in receipt of public funds.

In this circumstance, the PHO is to receive public funds from the Midnorth District Health Board. The PHO believes that there is a very limited pool of possible providers, but it wants to ensure that it acts fairly. It therefore seeks an expression of interest in consultation with the NGO “umbrella” group and local iwi as to how to do this most effectively.


The expression of interest document sets out clearly what the PHO expects to be achieved by the successful provider(s).

The PHO considers the responses, and concludes that a limited request for proposal (RFP), involving only 2 potential providers, is warranted.

Both of the potential providers respond to the RFP. One is an NGO with evidence of good credibility with local iwi and the target group, but light on track record in managing an initiative to raise community awareness. The other is an experienced social marketing company, with no particular experience with the target group.

For the reasons outlined earlier, the PHO decides that credibility with the target group is more likely to be effective in changing eating/activity patterns within the target group. It documents the reasons for its choice, accepting the risk that comes with the relative inexperience of the NGO.

The NGO also has concerns. It does not want to take on the job if it risks building up its capacity, delivering the social marketing messages effectively, and then losing the funding because the Kaihauora initiative as a policy proves to be wrong.

The PHO decides to design accountability and monitoring arrangements that will track the resource use without requiring unrealistic administration and reporting. In close consultation with the Midnorth District Health Board, it will also make clear to the NGO what the chances are of the policy being continued or terminated.


To address these concerns requires some trade-offs between the principles that we expect public entities to follow:

  • fairness (to other potential providers – for example, by open tendering) is traded off against value for money (using an expression-of-interest approach followed by a limited RFP, because the initiative is likely to draw on a limited pool of potential providers);
  • accountability (which in this instance could warrant detailed reporting by the NGO and intensive monitoring by the PHO) must be considered in the context of fairness to this small and administratively inexperienced NGO; and
  • efficiency is also considered in the context of fairness – funding must be appropriate, given that the provider must build up its own capacity, yet carries the risk that the Kaihauora initiative as a policy might not work and therefore could be discontinued by the Midnorth District Health Board.

Managing the risks

The approach adopted needs to be transparent, so that:

  • the NGO is clear on what the risks are; and
  • the PHO can hold the NGO accountable for the public funds, and, in turn, be held accountable by the Midnorth District Health Board for spending Kaihauora funds and for taking justifiable risks with them.

These risks are documented, and the Midnorth District Health Board and the PHO adopt a procurement approach that:

  • agrees the timetable and criteria for judging the effect of Kaihauora (on the health status of Māori). The timetable and criteria are made clear to the potential provider in early discussions (and later spelled out in the formal agreements between the Midnorth District Health Board and the PHO, and between the PHO and the NGO);
  • seeks an expression of interest/limited RFP. The approach is documented, to make it clear how potential providers will be selected;
  • agrees conditions for future renewal of the contract, so that the extent of contestability will be reconsidered;
  • has accountability mechanisms such as monitoring and reporting that take the level of risk into account (the NGO was unproven in this field), while acknowledging the NGO’s limited experience of and resources for formal reporting (for example, the PHO makes allowance for funding accounting and auditing services for the NGO for the Kaihauora initiative); and
  • takes into account the costs of building the capacity of the selected NGO.

Accountability for the public health initiative

There are several levels of accountability in such an arrangement, and this is common in the health sector.

The Ministry of Health

In this scenario, at the highest level, the Ministry is accountable under legislation for spending of the appropriation for the Healthy Eating, Healthy Action strategy, and the achievement of particular health gains through adopting such a policy. The Ministry needs to be able to collect and manage information, so it can be satisfied that a reduction in obesity and an increase in physical activity will, in fact, lead to reduced adverse health effects. The Ministry is responsible for keeping the health sector informed on that issue.

The District Health Board

The Midnorth District Health Board is accountable under an agreement with the Ministry for the success of the Kaihauora initiative. It must demonstrate to the Minister and the public that using public funds in this way is making a difference to the health status of Māori, and is doing so as efficiently as possible.

Therefore, the Midnorth District Health Board puts in place an information collection and management process that measures progress against the agreed indicators. The indicators are awareness of the “message”, and changes in the eating and activity levels of the target population, over the agreed time. This includes reporting against the relevant indicators that it used before the Kaihauora initiative to assess the health needs of the target population.

The Midnorth District Health Board reports to its governing body at the agreed milestone dates, and also before decisions are made by the Board about whether to continue with the project.

The Primary Health Organisation

The PHO is accountable under its agreement with the Midnorth District Health Board for ensuring that:

  • the public funding is applied by the NGO only to the agreed project (though making the agreed allowance for the infrastructure needed to sustain the project);
  • the funding of the project and its infrastructure is no more than is required to enable the NGO to get the appropriate results; and
  • the NGO provides sufficient information to enable the integrity and effect of its activities to be monitored.

The PHO requires the NGO to provide data to show that the public funds have been spent in keeping with the agreement. Because there is a substantial amount of money involved in the Kaihauora initiative, audited financial statements of the NGO are required. The PHO assists in setting up the systems needed to do this. It visits the NGO to enhance their relationship, and to support and develop the NGO’s capacity, and establishes an arrangement with local iwi to complement this support.

Success of the Kaihauora initiative

The essential aspect of the funding arrangement is that the NGO is accountable to the PHO under its funding agreement – not for specific outputs, but for ensuring that what it does makes a difference. It is accountable for providing data on target group awareness and eating behaviour, and data to show that the public funds have been spent in keeping with the agreement (audited financial statements are required). “Credibility” of the NGO with the target group may not necessarily achieve any change in the target group’s behaviour. Its success needs to be demonstrated. The PHO seeks confirmation that the desired changes have resulted.

However, to reduce the compliance costs on the NGO, and to ensure independent confirmation of the impacts of the Kaihauora initiative, the data on target group awareness and eating behaviour is provided by an independent researcher on contract to the PHO.

The Midnorth District Health Board negotiates with the PHO about whether Kaihauora should continue; the PHO keeps the NGO informed of the status of Kaihauora as a policy initiative and negotiates with the NGO about whether its funding agreement will be renewed or, if not, whether the PHO will go to the market.


The funding arrangement with an NGO may require it to produce certain changes in the population – for example, to raise community awareness – rather than delivering particular services, and the funding arrangement needs to reflect the risks and uncertainties in getting results in such a case.

“Sole provider” procurement or (as in this scenario) procurement that does not go to the market in an open way, must be justified. The public entity must document its reasons for the approach, and take particular care to make sure that any alternative providers have been considered fairly before opting for a procurement approach that may not give equal access to all potential providers.

Where an NGO provider is chosen for its ability to effectively deliver messages to the target population (in this case Māori), it may be small and lack a sound administrative and accountability structure. The higher risks must be managed but not – if it is to be done effectively – with more administrative compliance. Management and monitoring arrangements may need to be lighter on paperwork, but stronger on support and contact – and perhaps with accountability information being gathered by third parties who have expertise in that area.

To a certain extent, efficiency may need to be traded off for effectiveness – that is, the focus of the funding arrangement should be on results achieved, not just lowest cost. However, the public entity still must monitor to ensure that public funding is being used only for the public benefit, that costs are reasonable, and that continuing the initiative is justified.

In this scenario, the monitoring and evaluation and consideration of the ongoing relationship is complicated by several linked sets of accountability arrangements – from a government department to a Crown entity to one non-profit organisation (the PHO) to an NGO provider. The monitoring and reporting arrangements need to recognise each set of accountabilities, and acknowledge the risks for each party.

When a public entity is expecting outcomes in the form of changes in population awareness or behaviour, rather than specific outputs, it needs to prepare a sound analysis to underpin its intervention rationale, measure its success, and then justify – if need be – continuing its relationship with the NGO provider. All parties in the funding-delivery chain need to be aware of the policy-results-funding links.

1: See

2: See PHOs and NGOs Working Together to Improve Health Outcomes: Opportunities and Issues, speech by the Minister of Health, Hon. Annette King, to the NGO Working Group, NGO-MOH Forum, 19 March 2004 (Wellington).

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