Some important changes are coming that will impact upon what agencies need to consider when planning their upcoming procurements and when preparing their procurement documentation and contracts.
Last month Cabinet endorsed the new edition of the Government Procurement Rules which will apply from 1 October 2019. While the 3rd edition of the Rules will continue to apply to procurement processes until then, both agencies and suppliers should be mindful of how the changes may affect their future procurement activity. In particular, the 4th edition of the Rules introduces new requirements for agencies and suppliers and a number of new concepts which it would be worthwhile getting familiar with before they come into force.
Moving forward, it will be important for those preparing procurement documentation to be across the changes, as obligations under the new Rules will need to be reflected in requests for proposals/tenders, evaluation criteria and new contracts. For example, agencies involved in procurement of significant construction works will need to factor workforce development considerations into their evaluation criteria and include new contractual provisions enabling them to monitor delivery on commitments.
Procurement with a wider focus: Broader Outcomes and a new understanding of public value
New concepts in the Rules
One of the biggest changes to the Rules is the introduction of “Broader Outcomes", which are the secondary benefits generated due to the way goods or services are produced or delivered. Requiring agencies to consider (and incorporate, where appropriate) these Broader Outcomes in their purchasing decisions is a clear reflection of the Government's policy of using the Rules to more explicitly leverage government contracts to support economic, environmental, social, and cultural objectives, in addition to achieving the primary benefit of getting the best whole-of-life public value from the procurement.
Cabinet has identified that certain types of designated contracts will be required to achieve one or more of these Broader Outcomes, which means that the outcome will instead become a “priority outcome" for that procurement. If a procurement is subject to a priority outcome, the agency will be required to include requirements relating to that priority outcome in its procurement.
Designated contract areas include, construction, ICT services and computer software, office supplies, cleaning services, light vehicles, and stationary heating systems. The New Zealand Government Procurement website sets out minimum requirements for the designated contracts. Agencies have obligations to monitor designated contracts to ensure that commitments made in contracts are delivered and reported on (Rule 17(3)), in addition to conducting reasonable due diligence (Rule 16(5)).
The Broader Outcomes are to:
NZ businesses: increase New Zealand businesses' access to government procurement (note also a new definition in the Rules of “New Zealand business");
Construction workforce: increase the size and skill of the domestic construction sector workforce;
NZ worker conditions: improve conditions for workers and future-proof the ability of New Zealand business to trade; and
Net zero emissions economy: support the transition to a net-zero emissions economy and design waste out of the system.
Under new Rule 15, agencies must check whether a procurement is subject to one or more of the priority outcomes and consider what other Broader Outcomes could be leveraged through the procurement. Broader Outcomes also apply to all opt-out procurements.
When drafting procurement documents, particularly requirements and evaluation criteria, and evaluating tenders, agencies will need to consider how to incorporate relevant Broader Outcomes. Suppliers will need to ensure their tenders demonstrate how the supplier will help the agency achieve the applicable Broader Outcomes.
Another important shift to a broader focus in procurement is the replacement of the concept of “value for money" with “public value". Under the new Rules, “public value" means the best available result for New Zealand for the money spent and includes using resources effectively, economically, and responsibly, and taking into account any Broader Outcomes an agency is trying to achieve. Procurement decisions must be based on the best public value, over the whole-of-life of the goods, services or works (Rule 3(2) and Rule 46).
Supplier Code of Conduct and Government Procurement Charter
Two further additions to the New Zealand procurement framework under the new Rules are the introduction of a Supplier Code of Conduct and the Government Procurement Charter.
Supplier Code of Conduct
The Supplier Code of Conduct provides a minimum set of expectations for suppliers. The Rules note that agencies should consider incorporating a commitment for suppliers to adhere to the Supplier Code of Conduct in their contracts. Suppliers should familiarise themselves with this because an act or omission that offends against the Supplier Code of Conduct is a new reason why an agency may exclude a supplier (under Rule 44(1)(f)).
The Charter sets out how the Government expects agencies should conduct their procurement activity to achieve public value. Under the Charter, the Government directs agencies to:
Seek opportunities to include New Zealand businesses.
Undertake initiatives to contribute to a low emissions economy and promote greater environmental responsibility.
Look for new and innovative solutions.
Engage with businesses with good employment practices.
Promote inclusive economic development within New Zealand.
Manage risk appropriately.
Encourage collaboration for collective impact.
Agencies are expected to ensure that their procurement practices reflect the Charter and should seek to meet as many of these expectations as practical.
What to include in your supplier contracts – subcontracting and other expectations
The Rule on subcontracting also includes references to both the Supplier Code of Conduct and the Charter, as well as the priority outcomes (Rule 25(1)). As is currently the case, agencies are expected to require prime contractors to meet certain standards in their subcontracting activities. This currently means applying the Principles of Government Procurement, but under the new Rules will extend to applying the Charter, the Supplier Code of Conduct and the priority outcomes. Agencies should take care to ensure that subcontracting provisions in their contracts with a prime contractor include these expectations.
New Rule 19(1) also provides that agencies should ensure their contracts set out the expectation that suppliers and sub-contractors comply with employment standards and health and safety requirements.
New rules for construction and infrastructure
New Rules in relation to construction contracts require both agencies and suppliers interested in tendering for government construction contracts to take new steps.
Agencies procuring construction works over $9 million will be required to include in procurement documentation questions about the skills development and training practices of suppliers and their sub‑contractors. If a weighted attribute model is used for evaluation, then these questions must be weighted criteria. Agencies must also monitor contracts to ensure suppliers deliver and report on the skills and training commitments made in tenders.
The purpose of this new Rule is to grow the capability and capacity of the construction workforce, including encouraging suppliers to create employment or upskilling opportunities for targeted groups such as Māori, Pasifika and women.
New guidance on construction contracts
Rule 18 refers to new MBIE guidance on implementing the Rule, to which agencies must note. This guidance has not yet been released, however, presumably this will include amendments to the Government Model RFx templates, as well as guidance on evaluating the new criteria. Agencies will need to amend their template RFx documents and their template construction contracts to include relevant provisions.
Construction suppliers will need to consider how they will address the new requirements when tendering for government construction contracts, and will need to ensure their sub-contractors do so as well.
Rule 69 is also significant because it requires agencies to apply the good practices set out in the Construction Procurement guides, or produce documented evidence of the rationale when they have not been followed. These guides already existed, but it was not mandatory to apply them.
The previous rule relating to Public Private Partnerships (rule 62 of the 3rd edition) has been replaced with a new rule on Infrastructure (Rule 64), which reflects the establishment of the Treasury's Interim Infrastructure Transactions Unit. The obligations on agencies to engage with Treasury under Rule 64 remain largely the same, but now have greater application, as they apply to all infrastructure projects with a total cost of ownership value of more than $50 million, regardless of how they are funded.
Procurement for a net-zero emissions economy
The new Rules also include obligations relating to the transition to a net-zero emissions economy and designing waste out of the system. Under new Rule 20, agencies should support the procurement of low-emissions and low-waste goods, services and works, and should encourage innovation to significantly reduce emissions and waste impacts from goods and services. Agencies must also have regard to guidance to be published by MBIE on the procurement of low-waste and low-emissions goods and services (which is yet to be released).
There are also a number of designated contracts for the outcome of emissions and waste reduction where agencies must incorporate this priority outcome into the relevant procurement processes. For these designated contracts, agencies must support the procurement of low-waste and low-emissions goods and services and encourage innovation to significantly reduce emissions and waste impacts from goods and services. Agencies are also required to conduct sufficient monitoring of designated contracts to ensure that commitments made in contracts are delivered and reported on.
The incorporation of emissions reductions into procurement forms part of wider Government policy towards supporting the transition to a low-emissions economy. This year so far we have already seen proposed updates to the New Zealand Emissions Trading Scheme and, most significantly, the introduction of the Zero Carbon Bill, which is now before Select Committee. The Zero Carbon Bill was introduced into Parliament in May 2019 and is expected to be passed by the end of the year, passing into law a target to reduce New Zealand's greenhouse gases (other than biogenic methane) to zero by 2050. As discussed in our recent article, while the new legislation will have potentially far-reaching impacts, it will have particular effect on the public sector, for example with introduction of public sector reporting on climate change adaptation and the creation of a new independent Crown entity, the Climate Change Commission. The private sector can also expect to experience similar shifts in the transition to a low-carbon world, with increasing attention focused on the appropriate disclosure by companies of their climate change-related risks.
These new Rules relating to construction and the low-emissions economy have been introduced alongside other new obligations, which relate to increasing access for New Zealand businesses (Rule 17, noting also the inclusion of the new definition of “New Zealand business" in the Rules) and improving the conditions for New Zealand workers (Rule 19).
The fourth edition of the Government Procurement Rules has changed elements of the framework for procurement through introducing a number of new considerations and concepts into the procurement process. Suppliers and procuring agencies alike will need to understand their obligations under the Government Procurement Charter, Supplier Code of Conduct, and rules relating to Broader Outcomes, as well as how these new considerations apply in practice (for example, through updating their relevant documentation).
Getting familiar with the changes to the Rules now will help agencies comply with best practice and get the most out of their procurements once the suite of changes introduced in this edition of the Rules becomes the new normal.
If you or your business would like further information or advice in relation to the new Government Procurement Rules, please do not hesitate to contact the contacts listed or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.