Auditor-General's overview

Spending on supplies and services by district health boards: Learning from examples.

Together, the 20 district health boards (DHBs) spend about $6 billion of public money purchasing supplies and services from external organisations each year. Total DHB spending each year is about $10 billion. Spending on supplies and services is clearly an integral part of any DHB's ability to provide health and disability services to the public.

How well DHBs spend money is important, and of interest to Parliament, the public, and the DHBs. We all expect DHBs to manage their spending on supplies and services well, for two main reasons. First, even small improvements in how DHBs manage their spending on supplies and services could increase the money available to provide for additional health and disability services – contributing to an improvement in the overall health of New Zealanders without increasing the overall amount of money spent. For example, an average 1% saving by all DHBs would mean about $60 million each year that could be used for additional health and disability services.

Secondly, all forms of purchasing are a prime risk for any organisation in terms of waste, theft, fraud, and other illegal or unethical uses of money. Carefully managing the processes used for purchasing and contract management can greatly reduce that risk.

In the health sector, my staff have carried out systematic work in all DHBs as part of the annual audit and reporting cycle, and more in-depth work with five DHBs. Together, this work has given us a reasonably clear picture of how well DHBs are managing their purchasing and contract management (collectively called "procurement").

This report brings together what my Office has learned during the last three years about how DHBs are managing the processes of spending money on supplies and services and determining value for money. It identifies four critical questions that DHBs need to ask to determine whether they are managing the processes of spending money on supplies and services well and ensuring value for money:

  • Are we spending the money on the right supplies and services (the things we need to achieve our objectives/outcomes)?
  • Are we purchasing supplies and services in the right way (appropriately managing risk and demonstrating value for money)?
  • Do we know whether we are getting the supplies and services we thought we were buying (the right quantity and quality at the right time)?
  • Are we paying enough attention to procurement?

To share what we have learned and improve sector knowledge, this report gives examples from practices my staff observed in DHBs. These examples are intended to let DHBs compare their own practices and to help them determine how they can further improve the processes they use to spend money.

Part 3 of this report describes the good practices and improvements we have noted during the last three years. However, we have also noted some practices that need to improve further (see Part 4). I encourage DHBs – and all other public entities – to reflect on all these examples, and consider whether and how they could improve their own practices.

We consider that senior managers, Board members, and others who have responsibility for improving procurement in their DHB, might find a brief, high-level guide to procurement useful. In the Appendix and in a separate summary sheet (PDF, 133kB, 2 pages), we have summarised how the processes for spending money on supplies and services can be most effectively improved by:

  • recognising the significance of procurement;
  • supporting procurement activity;
  • making procurement easier;
  • managing risk; and
  • monitoring performance.

Spending money on supplies and services is integral to every DHB's ability to deliver health and disability services, and it needs a strategic approach. That approach has to be based on comprehensive knowledge about which supplies and services are needed (now and for the future) and why they are needed (how they will contribute to delivering better health or greater independence for New Zealanders).

The attention to, and resourcing of, procurement needs to reflect this strategic importance. Senior managers and appointed Boards need to take a "helicopter" view of the DHB's procurement activity, ensuring that purchases align with the DHB's strategic direction and that the purchasing approach is appropriate for the supplies and services that are purchased.

Allocating resources to procurement is a challenging task, given the limited number of people with specialist procurement training, the demand for such people, and the constraints of the current economic environment. Training and developing their staff and sharing knowledge and experience within and between DHBs are two ways in which DHBs are coping with these challenges.

Procurement is not an exact science; it requires a good mixture of controls, risk management, and well-informed judgement in both purchasing and contract management. It also requires a level of investment in these controls, risk management processes, and information systems in proportion to the scale and complexity of procurement activity.

Procurement also requires a focus on the end result at all times to make sure that the procurement meets the needs of the DHB. Important decisions should drive the purchasing process, rather than the process driving the decisions.

Because procurement is fundamental to the effective and efficient delivery of supplies and services, DHBs need to give it an appropriate level of internal scrutiny.

I am publishing this report at a time when changes in the health sector will affect how some purchasing is managed. This report should help the organisations created to improve purchasing in the sector (such as Health Benefits Limited) to understand the current challenges that DHBs face in procurement, and to further develop good practice. Many of the issues identified in this report will remain relevant for DHBs and the organisations assisting them with procurement.

Signature - LP

Lyn Provost
Controller and Auditor-General

14 September 2010

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