Procurement is a topic in itself, but it has also become a major issue of governance in the public sector. There are a number of reasons for saying this. The first is the extent to which public sector entities interact with and depend on the private sector – whether in the purchase of goods, assets, systems, and services, the outsourcing of service delivery, or the extensive (and growing) involvement in public investment and infrastructure development. The second is the amount of procurement-generated risk (whether financial, commercial, political, or reputational) faced by public sector entities, especially those which are not organised or geared to manage particular forms of risk. The third is the need to manage that risk, whether through established or new systems and practices of corporate governance, and ensure that the right incentives are in place for the entity to achieve its objectives through the procurement process. The fourth is the need to ensure that procurement activities meet the standards of transparency and accountability that are demanded in, and increasingly characterise, modern public management.
At the same time, procurement is an activity with an inherently commercial element. All procurement needs to be understood in the context of a legal relationship, with the law of contract sitting at its heart. This is obviously so in conventional purchasing situations, IT procurement, and the area of infrastructure development (for example, transport, housing, or the development of national and local amenities). But it is less so when the relationship is understood and documented in non-commercial terms – most significantly, in the area of social service delivery by not-for-profit community organisations funded by entities such as the Ministry of Education and district health boards.
The legal transaction which constitutes a “procurement” must also not be seen in isolation. In any context, but more so the public sector context, the transaction needs to sit within the framework of a procurement strategy, by which the context of the transaction, its drivers, and its risks, are fully understood. The strategy, in turn, should drive the selection of the procurement method (whether it be by conventional tendering, by a more limited selection process, or through what the Auditor-General has termed a “relational” purchase5); the specification of services, delivery standards and performance requirements; the choice of project governance and risk management mechanisms such as steering committees and probity advisers or probity auditors; and the structuring of the parties’ relationship through the contract itself.
Then, the ongoing management of the relationship, both internally (for example, through project governance arrangements established through the contract) and by each party (for example, through contract monitoring and performance reporting systems) is also a critical activity in delivering value for money. That can involve significant risk and require difficult decisions on resource allocation – especially when large numbers of contracts or providers are involved. Finally, issues arise over project completion, delivery (in the case of the construction of an asset), and renewal (in the case of service delivery) – thus completing what is often referred to as the “procurement life cycle”.
These dynamics are what give rise to the term “governing by contract” in the title to this paper. Lawyers on both sides of a procurement relationship need to understand the dynamics, and be able to advise their respective clients about them on an ongoing basis – as well as on the core elements of the transaction itself.
The two authors of this paper come at these issues from the perspective of their own experience: one with a background of several years working in the Office of the Auditor- General and, more recently, in private practice as an adviser on and a participant in public sector governance processes; the other with a background in commercial law working in private practice for significant private sector entities, as well as public sector entities, on a range of major commercial relationships. The shared aim, as indicated in the brochure outline for the seminar, is to discuss the points of tension and common ground between their perspectives, and show how a shared view of “best practice” has evolved in the procurement process and through the life of a contractual relationship.
(The paragraphs above comprise the introduction to a paper Garth Sinclair and I presented at the NZLS CLE Public Sector Governance Intensive in 2009. As its content remains relevant to readers of the material on this site, I thought I’d post the full article for those interested in it. Here is the full PDF. Given the paper’s dual authorship, the Creative Commons licence that applies to much textual content on this site does not apply to the full article. If you’d like re-use rights, please get in touch.)