State Purchase Contracts

Tabled: 20 September 2018

Audit overview

The Victorian public sector (VPS) buys a lot of goods and services—$18.6 billion worth in 2016–17. One way that this purchasing power is harnessed is through State Purchase Contracts (SPC). SPCs aggregate demand for commonly used goods and services such as utilities, office consumables, information and communication technology (ICT), staffing and travel services.

The primary benefit of an SPC is financial—that is, government achieves direct savings through lower unit costs and prices than would be possible through fragmented VPS procurement. Other benefits include reduced transaction costs for suppliers and buyers, as well as the ability to influence and improve the quality of service offerings.

In 2016–17 the Victorian Government's 34 SPCs had a combined annual spend of approximately $1.47 billion, growing from $1.06 billion in 2014–15.

The Victorian Government Purchasing Board (VGPB) is responsible for monitoring the compliance of departments and specified entities with VGPB supply policies. The Market analysis and review policy includes the requirement for these agencies to use mandated SPCs and outlines the process that lead agencies must follow to establish an SPC. Four lead agencies manage SPCs—primarily the Department of Premier and Cabinet (DPC) and the Department of Treasury and Finance (DTF ), but also the Department of Justice and Regulation (DJR) and Cenitex. Each SPC can involve either a sole supplier or a panel arrangement. The typical term for an SPC is three years with provision for two one-year extensions. During the term, the panel may be open, admitting new suppliers, or closed.

Of the 34 SPCs, 23 are mandatory for use by all 34 agencies subject to VGPB policies, with the remaining being optional. Statutory authorities, local councils, organisations that government partly funds, and charitable or not‑for‑profit organisations can use SPCs voluntarily, subject to approval from lead agencies.

VGPB reports to the Minister for Finance, with DTF providing it with secretariat and other support. VGPB was established in 1995 under the Financial Management Act 1994 (FMA) to:

  • develop, implement and review supply policies and practices
  • monitor compliance with supply policies
  • develop procurement capability
  • establish and maintain a comprehensive database of departments' and supply markets' purchasing data, for access by departments
  • provide strategic oversight of major procurements
  • engage with stakeholders to drive greater procurement efficiencies.

Our overall objective for this audit was to assess whether government agencies realise financial and other benefits by using SPCs.

We examined whether VGPB and lead agencies oversee SPCs effectively. We also examined whether the reported benefits are reliable and whether scope exists to increase the financial benefits of these arrangements.

Conclusion

SPCs provide financial savings and other benefits. However, more savings are possible if contract management activities are strengthened to better manage suppliers, reduce the risk of leakage—expenditure made outside of mandatory SPCs—and aggregate spending in new categories. The VPS cannot fully realise these savings without comprehensive and detailed spend data, and it is the absence of such centralised data that VGPB must address .

Financial management reform in the public sector over the past three decades has included decentralised budgeting, accounting and reporting. This has led to the siloed information systems that feature today in Victorian Government departments. Departments need to harness today's technology to redress this, not just to secure better data for procurement but to make public sector financial management broadly more efficient.

Findings

Informing procurement

Neither VGPB nor lead agencies have a complete picture of the goods and services VPS agencies purchase. This is mainly due to the absence of standardised systems and consistent business rules that govern how purchasers collect and classify information.

As a result, VGPB and lead agencies do not know, who is buying what, from which suppliers and at what cost. Instead, they rely on suppliers to self-report . This means they have limited insight into potential contract leakage, and they do not fully understand all the categories of expenditure that could possibly be aggregated.

Aggregation

Lead agencies undertake market analysis and consult with key stakeholders including representatives from SPC users to support category strategy development. However, VGPB and lead agencies lack consolidated, detailed transaction data, so they are not well equipped to conduct meaningful and insightful spend analysis to develop category strategies. Because they use supplier-reported data on existing SPCs, their category strategies relate only to these existing SPCs rather than entire expenditure categories. This results in potential missed opportunities to realise further benefits.

Lead agencies undertake ad hoc checks of the supplier-reported data and require SPC users to confirm spend for some SPCs, but their verification activities are limited because they do not have all the information needed to sufficiently assess and validate the supplier reports.

We obtained and consolidated the past three years' worth of expenditure data from the seven Victorian Government departments. Our analysis of the 2016–17 year highlights the following areas of common goods and services expenditure for which SPCs do not currently exist:

  • accounting services—of the $37.1 million total departmental spend in 2016–17, the top two suppliers account for 94 per cent
  • market analysis and statistical services—of the $13.4 million total departmental spend in 2016–17, the top five suppliers account for 52 per cent.
Leakage

User departments and agencies are responsible for ensuring that expenditure made outside of mandatory SPCs, or 'leakage' does not occur. However, they do not understand or manage contract leakage in their organisations.

Lead agencies also do not effectively oversee user departments' compliance with mandatory SPCs.

We examined expenditure data at the seven departments to identify potential leakage in four mandatory SPCs. In a significant number of transactions, we were unable to determine the nature of the spend due to the limited descriptions on the invoices. Given these limitations, our analysis is conservative and indicative—it uses the best available data in departments' finance systems .

Our analysis for 2016–17 shows potential leakage of:

  • $0.25 million, or 2.1 per cent of the total spend of $12.23 million, in the stationery category
  • $0.06 million, or 0.1 per cent of the total spend of $48.64 million, in the travel category
  • $2.07 million, or 0.7 per cent of the total spend of $289.37 million, in the staffing category
  • we found no potential leakage in the legal services category.

This leakage, if confirmed, would contradict the statements of compliance made by departments in their Annual Supply Reports (ASR) to VGPB.

Managing contracts

VGPB oversight of SPCs

VGPB does not have the resources to directly oversee the management of all SPCs or ensure compliance with its supply policies. With its limited resources it sensibly monitors only the compliance of the seven departments, Public Transport Victoria, VicRoads, Victoria Police and Cenitex, as opposed to all 34 VPS agencies in its scope.

Annual Supply Reports

The seven departments, Public Transport Victoria, VicRoads, Victoria Police and Cenitex each submit an ASR to VGPB each year. The ASRs summarise procurement activity and report instances of non‑compliance with VGPB policies, including the use of mandatory SPCs.

VGPB acknowledges the limitations of its monitoring activities in assessing compliance with its policies. For example, in their 2016–17 ASRs to VGPB, the seven departments raised no compliance issues with their SPC obligations. This is despite being unable to tell us whether contract leakage was occurring. However, VGPB accepted these assertions without detailed scrutiny or auditing of the information. VGPB stated that this was due to the lack of data and the tight time frame specified in the FMA between entities submitting their ASRs and VGPB including them as part of its annual report.

While VGPB's audit program requires entities to verify compliance with mandatory policy requirements and submit a report to VGPB every three years, this verification takes place well after assertions are made.

VGPB oversees the establishment of SPCs, however, its oversight of lead agencies' contract management activities is minimal once the contract is executed. While VGPB requests an update from lead agencies at certain milestones, these milestones are at the one- or two‑year points of contracts that run for three years.

Lead agencies' management of SPCs

Lead agencies use contract management frameworks to manage SPCs. However, there are inconsistent management practices across the four lead agencies.

There is an opportunity to improve SPC performance by better monitoring suppliers' performance and sharing information with users, including:

  • assessing client satisfaction
  • managing key suppliers
  • sharing savings opportunities with departments and entities
  • tracking SPC prices.
Assessing client satisfaction

DTF surveys SPC users annually to assess their satisfaction with SPCs. The 2016−17 results indicate that almost three-quarters of users were satisfied with their overall experiences. Although this survey is useful, it does not show users' assessments of suppliers on individual engagements. This is particularly important for panel supplier arrangements such as the Professional Advisory Services (PAS) SPC, where DTF could use this information to address performance issues and notify users of issues with specific suppliers.

While the PAS SPC requires users to complete a satisfaction survey and forward it to DTF at the completion of each engagement, only a limited number of users do so. Consequently, as it acknowledges in the PAS category strategy, DTF has little visibility of the SPC's performance and buyer satisfaction.

In 2016–17, DJR undertook an extensive consultation process on the Legal Services Panel SPC to develop a new client satisfaction survey. The survey results feed into annual performance review meetings with suppliers. The survey results indicate that users are generally satisfied with the services provided by the panel.

DPC and Cenitex have limited visibility of users' assessments of supplier performance because they do not survey SPC users.

Managing key suppliers

The establishment of an SPC concentrates government expenditure with a select number of suppliers. Eight of the top 10 suppliers to the seven departments were SPC suppliers.

To manage an SPC well, lead agencies need to understand the level of supplier spend and to use this information to leverage further savings. However, this is not always occurring. For example, DPC's June 2018 review into labour hire and professional services found that despite the significant expenditure on PAS to a limited number of suppliers, 'there is no active account management of these suppliers at the whole of government level and the aggregation of demand is not actively used to drive better pricing outcomes'. DTF advised it is in the process of developing a strategy for the future PAS SPC, focusing on more active central category management.

Sharing savings opportunities with departments and entities

Lead agencies share high-level information on departmental spend and usage with VGPB and stakeholders on an ongoing basis. However, scope exists to better communicate and highlight saving opportunities and trends across users because, presently, users have no transparent way to assess if they are receiving competitive rates from suppliers compared to other users.

Such information can be useful for the users of SPCs, where suppliers may charge different users varying rates for equivalent goods or services. For example, our analysis of the hourly rate achieved by four departments for 58 engagements of temporary Victorian Public Service Grade 5 (VPS 5) senior policy officers through the Staffing Services SPC in 2016–17, revealed significant variation in rates within and between departments.

As the lead agency, DTF should review and distribute such information to SPC users to help them achieve the same level of savings as other users. Our analysis also highlights the need for user departments to do more work to understand where different parts of their businesses are paying varying rates for the same service. Understanding internal spending patterns will help SPC users negotiate lower prices during future engagements.

Tracking SPC prices

The SPC user is primarily responsible for ensuring that the prices it pays accord with the SPC contract. However, purchasing decisions are made in user departments by different business units and are not all centrally tracked through their Internal Procurement Units . This hinders the ability of SPC users to monitor compliance with SPC pricing. DPC's June 2018 review into labour hire and professional services raised concerns with how departments check the compliance of invoices with agreed rates on the Staffing Services SPC and ceiling rates on the PAS SPC.

Lead agencies, as contract managers, should also conduct spot-check analyses of supplier-reported invoices for high-risk SPCs to ensure pricing validity and accuracy, including ensuring ceiling rates are not exceeded. However, they have not done so for all SPCs.

Measuring SPC benefits

The reported benefits calculated by lead agencies show significant savings by using SPCs. Reported savings ranged from $192 million in 2014–15 to $272 million in 2016–17. However, we found:

  • six DPC-managed SPCs where the methodology for calculating savings resulted in the overstatement of benefits
  • errors in spreadsheets used by DTF and DPC to track spend and benefits for SPCs
  • seven SPCs, with a total spend in 2016–17 of more than $176 million, where lead agencies did not track financial benefits
  • no documentation that reported the achievement of the non-financial benefits identified in many SPC business cases developed by DTF and DPC.
Targets

DTF is required to meet a financial-benefit performance target specified in the State Budget papers—'Benefits delivered as a percentage of expenditure by mandated agencies under DTF managed SPCs'. Between 2013–14 and 2016–17 DTF reported that it exceeded the target each year.

DTF advised that the target of 5 per cent was derived in 2013 from past performance data. However, it is unclear whether this is a reasonable measure against which to judge performance, because DTF has not documented the basis for the target. There is also no documentation that outlines how each of DTF's 17 SPCs contributes to the overall target. Further, the target has not changed over the four years, despite changes to market conditions and SPCs across this period.

While DTF identifies the expected financial benefit following the sourcing process for each SPC, there is scope to enhance this process by 'locking in' these financial benefits as targets. The next step for DTF would then be to measure reported financial benefits against these targets for each SPC.

DJR has a documented financial benefit target for the Legal Services Panel, which, since the panel's establishment in March 2016, it has consistently exceeded.

DPC and Cenitex do not have overall or individual SPC performance targets, which means they cannot demonstrate that their SPCs deliver the expected financial benefits, and therefore cannot demonstrate that their SPCs are performing well.

Recommendations

We recommend that the Victorian Government Purchasing Board:

1. in collaboration with portfolio departments and key State Purchase Contract users, develop and implement a strategy for the central collection of comprehensive procurement data across these agencies, that identifies:

  • the procurement data that agencies need to record, as well as common rules around data entry through a common chart of accounts, to consistently capture and code goods and services expenditure
  • how procurement data should be categorised, and includes a universally recognised categorisation approach such as the Australian and New Zealand Standard Industrial Classification or the United Nations Standard Products and Services Code
  • the cost benefit of options for developing a centralised system to collect and analyse procurement data from agencies
  • how the Victorian Government Purchasing Board will share this data across agencies to improve decision making and identify potential new State Purchase Contract opportunities
  • roles and responsibilities for the project and a time line for completion (see Section 2.2).

We recommend that the lead agencies Department of Treasury and Finance, Department of Premier and Cabinet and Department of Justice and Regulation in collaboration with portfolio departments and key State Purchase Contract users:

2. use the comprehensive procurement data collected as per recommendation one to enhance contract management activities, including:

  • feeding into forward category strategies (see Section 2.2)
  • outlining the scale of potential leakage (see Section 5.2)
  • assisting in monitoring compliance with contract rules (see Section 3.3)
  • confirming supplier-reported data (see Section 4.6)

3. set a benefits target (financial and or non-financial) at the establishment or renewal of each State Purchase Contract that includes a detailed methodology—approved by the relevant project governance committee—for the calculation of benefits (see Sections 4.2, 4.3 and 4.4)

4. use the approved benefits calculation methodology to track and report the State Purchase Contract's achievement of benefits against this target to the Victorian Government Purchasing Board (see Sections 4.2, 4.3 and 4.4)

5. use a risk-based approach to conduct checks of supplier reported data to confirm the accuracy and completeness (see Section 4.6)

6. develop and implement a risk-based approach to identify and monitor contract leakage (see Section 5.2).

We recommend that the lead agencies Department of Treasury and Finance and Department of Premier and Cabinet:

7. develop and implement a survey strategy to seek and analyse user feedback on specific State Purchase Contract suppliers and engagements—this strategy should use a risk-based approach to identify:

  • State Purchase Contracts that would benefit from analysis of user feedback
  • the frequency of these surveys (see Section 3.3)

8. develop a central record of State Purchase Contract exemptions sought by State Purchase Contracts users and report annually to the Victorian Government Purchasing Board—this record should be used for trend analysis to identify areas where users seek multiple exemptions, which potentially indicates a problem with the State Purchase Contracts scope and offerings (see Section 5.4).

We recommend that all departments as State Purchase Contract users:

9. undertake a risk-based assessment of potential contract leakage by analysing expenditure in accounts payable systems and report significant contract leakage to lead agencies (see Section 5.2)

10. include reviews of State Purchase Contract management in their forward internal audit programs, if warranted, based on the identified risk (see Section 5.2)

11. develop a central record of applications for State Purchase Contract exemptions, which may necessitate a change in process to require all exemption applications to be centrally managed within each department according to its procurement frameworks (see Section 5.4).

Responses to recommendations

We have consulted with Cenitex, the Department of Economic Development, Jobs, Transport and Resources (DEDJTR), the Department of Education and Training (DET), the Department of Environment, Land, Water and Planning (DELWP), the Department of Health and Human Services (DHHS), DJR, DPC, DTF and VGPB, and we considered their views when reaching our audit conclusions. As required by section 16(3) of the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions or comments.

The following is a summary of those responses. The full responses are included in Appendix A.

DPC and DJR accept all our recommendations as both lead agencies and users of SPCs and developed action plans to address them.

DTF supports all our recommendations as both lead agencies and users of SPCs and developed an implementation timetable.

DHHS, DET and DELWP accept all our recommendations as users of SPCs and developed action plans to address them.

DEDJTR accept our findings and will work with DTF and other lead agencies to implement the recommendations.

VGPB supports our recommendation to work with portfolio departments and key SPC users to develop and implement an e-procurement strategy for the central collection of comprehensive procurement data. This work has commenced as part of our procurement reform program and involves exploring solutions such as standard categorisation and consistent data capture.

Cenitex supports the report's findings.

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