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Review of Public Procurement in Scotland - Report and Recommendations

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5 Accountability and Governance

Background Summary

As illustrated by the Public Procurement Profile, the level of Public Sector purchased goods and services is estimated to be £8bn. Given that this represents average "funds disbursed" in excess of £30m per working day to external parties it should be expected that all possible attention is attracted to the issue of accountability and governance in the area of procurement. There are various fiscal and other legal requirements put upon those holding public office and governance positions. A short list of some of the documents which describe these requirements is shown below at 5.1 (Principles).

In summary, the category of procurement expenditure ought to be the highest priority focus for all those holding responsibility for conformance with accountability and governance responsibilities.

Findings Summary

While my review did not constitute a detailed audit, its examination of organisation and structure, business practices and processes, resource levels and skills associated with public procurement leads to the conclusion that there are shortfalls in accountability and governance compared to the appropriately strict requirements associated with public office and in particular public expenditure with external parties.

This shortfall expresses itself in the following areas:

  • Conformance to Governance Principles
  • Priority given to Procurement
  • Organisation Structure and Reporting Lines
  • Authority to procure Goods and Services
  • Business Conduct Guidelines
  • Audit of Procurement

It must be emphasised that these areas are representative of practices required to meet basic requirements. They are certainly not characteristics associated with achieving more advanced and progressive levels of procurement capability and better performance. They are quite simply fundamental yet minimum business practice. However, without these mandatory minimum requirements being met there is little prospect of building upon that foundation to achieve better or ultimately Best Value in procurement.

5.1 Accountability and Governance - Governance Principles

Background

Various fiscal and legal documents detailing the requirements put upon those holding public office and governance positions are shortlisted as follows:

  • EU legislation for Public Procurement
  • "Scottish Public Finance Manual"
  • Public Finance and Accountability (Scotland) Act 2000
  • The Independent Commission for Good Governance in Public Services 2004
  • Local Government in Scotland Act 2003
  • Guidance from Ministers on Local Government in Scotland Act 2003
  • Code of Conduct for Councillors May 2003
  • "Building a Better Scotland" Document 2004
  • Public Procurement Rules

Findings

Despite the abundance of documented requirements and the public sector's strong intention in the area of accountability, there is in some areas insufficient recognition, understanding and implementation of the principles of good governance as they apply to procurement in the public sector. Whilst there is growing awareness at senior and leadership levels of the importance of procurement this awareness has not been consistently translated into action to address these basic requirements. Indeed, what is in fact a need to conform to basic governance, is sometimes interpreted as a discretionary longer-term goal rather than an immediate requirement which demands correction. Rather than provide a complete transcript of the documentation listed above, I would refer to the following example of the governance prescribed by just one piece of legislation and its associated guidance.

  • Local Government in Scotland Act 2003 - Guidelines from Ministers:

"The authority should have a strategy for procurement and the management of contracts and contractors to ensure that it treats procurement as a key component in achieving all its objectives."

"The Authority should have appropriate procurement expertise, guidance and training to support its procurement activity."

5.1.1 Recommendation

Each and every organisation within the public sector should be obliged to meet the minimum governance and accountability requirements and be required to provide personal certification by a senior executive of that conformance by 30 June 2006.

5.2 Accountability and Governance - Priority

Background

As previously indicated in this Review the relevance of and opportunity offered by excellence in procurement cannot be overstated. The starting point is where as part of good governance, the appropriate priority is recognised and applied within the organisation. The benefits that organisations and its officials will reap from applying this priority will be extensive and will include economies in resources, good management information, sound disciplines and, of course, cost savings in externally-procured expenditure.

Findings

There is a growing awareness of procurement issues and a number of positive initiatives but still insufficient practical priority is attached to procurement within some parts of the Public Sector. This is apparent in aspects of structure, staffing, reporting of information and senior executive and non-executive management involvement.

5.2.1 Recommendation

A programme of communication of information associated with the essential priority of procurement in the public sector should be undertaken. It should provide education and reconfirmation to those in leadership roles of the value attached to good procurement and the risks associated with insufficient prioritisation. It should also reinforce the principles referred to in this review at 5.1 and require and encourage those at the leadership level to pursue not only conformance to basics but pursuit of best practice and associated Best Value.

5.3 Accountability and Governance - Structure and Organisation

Background

As already indicated in this Review conformance to basic principles and recognition of priorities are key aspects of what is required for procurement. The acceptance of this, or otherwise, is no more apparent than in the area of organisational structure and function reporting lines. The Head of Procurement, and equally important the procurement function's influence and the priority attached to it, can be judged by their positioning in the organisational structure. And, of course, there should be as a starting point a central procurement organisation.

Findings

Although there is a general recognition of importance of the reporting line of procurement within public-sector organisations, there are still some situations where the most senior procurement manager is not placed at a sufficiently high level within the overall organisation. Indeed, there are some organisations without a fully operational central procurement department and where the responsibilities are widely dispersed throughout the undertaking. Often where there is a central procurement organisation, it is grouped with another function such as Finance or Information Systems.

5.3.1 Recommendation

The optimum reporting line for the Head of Procurement is directly to the Chief Executive but at a minimum he or she should report to an Officer or Executive who reports to the Chief Executive. The Procurement Function should not have a less senior reporting line than this minimum.

5.3.2 Recommendation

The Head of Procurement should have the procurement department under his responsibility.

5.3.3 Recommendation

Organisations without a central procurement department should create one.

5.3.4 Recommendation

Undertakings should recognise in their organisational and governance structures that Procurement, Finance, Information Systems and Facilities are separate disciplines with separate, though sometimes overlapping interests. In large mature organisations the separation of Procurement and other professional functions such as Finance should be considered within the optimum recommended at 5.3.1 above. In small organisations where this would pose difficulties or be administratively cumbersome given the size of the organisation, the minimum reporting line is adequate so long as the functional independence of procurement is recognised.

5.4 Accountability and Governance - Procurement Officer

Background

The transaction and associated documentation developed and executed to procure goods and services is, in effect, a legal contract between the entity and a supplier.

Over and above this legal status associated contracts are often commercially and operationally complex. The earlier description of procurement as a profession underlines the relevance of ensuring that goods and services procured externally are obtained under the management of a professional. Of course the business decisions linked to procurement will have internal approval cycles and other controls ( e.g. capital expenditure) but it should be normal to have the supplier interface managed by a procurement professional who is formally recognised as "an officer" formally authorised to contract for the procurement of goods and services.

Findings

The Procurement Officer concept is established in some parts of the public sector but not others. The "authorised officer" principle is not fully embraced as part of the management structure and management system. In addition, the uniqueness of the officer's authority is not always recognised (see 5.5 Authority to Procure).

5.4.1 Recommendation

Contractual commitments on behalf of all organisations should be executed by a "Procurement Officer". The Procurement Officer should have the sole authority to make these legal commitments on behalf of the organisation. Each body in the Public Sector should have a Procurement Officer network.

Any other departments within these bodies that have a specially delegated authority to procure goods and services ( e.g. for technical reasons) should also have a formally designated "Procurement Officer" (Ref. 5.5.2. Authority to Procure). In smaller units this fiscal responsibility can be a part of an individual's overall duties but scale of spend or other constraints are not reasons to be without this officially designated and accountable role within the unit. Even in specialised technical areas those authorised to act as "Procurement Officers" should comply with the formality of the responsibilities delegated to them.

5.4.2 Recommendation

Units not having the authority to procure are of course exempt from this requirement. Units currently having the authority to procure goods and services but not having a Procurement Officer should have this authority suspended until that is rectified.

5.4.3 Recommendation

Every public-sector organisation should have a Chief Procurement Officer. This person should be designated as the person with not only overall responsibility for day-to-day procurement transactions but also as the individual accountable for all other procurement functions including leadership of the procurement team throughout the undertaking.

5.4.4 Recommendation

The fiduciary responsibilities and accountability requirements for those officially designated as procurement officers should be documented. This role definition should be finalised with the help of the Society of Procurement Officers and other appropriate professional groups and become a formal aspect of appointment to the post.

It will then apply to all those formally authorised to procure goods and services whether members of the procurement department or not.

5.5 Accountability and Governance - Authority to Procure

Background

Chapter 5.4 above describes the procurement officer's authority and role and also equates it to one of having a delegated legal power to execute the internally approved procurement decisions on behalf of the organisation. It therefore follows that unauthorised individuals should not be involved in making legal commitments or executing contracts on behalf of organisations. Leaving aside the legal aspect, it is highly unlikely that enthusiastic amateurs, although well intentioned, will consistently achieve good value and appropriate terms and conditions from suppliers to the public sector. Nor will they be able to manage the business process in a manner consistent with the public sector's corporate and social responsibilities. Finally, in some cases this unofficial buying can be inadvertently facilitated by weak or unresponsive business processes.

Findings

The level of buying by those who would not normally be authorised to do so appears to be high in the public sector. The term "maverick buying" is widely used and the practice is recognised as a concern. In some areas this practice has become institutionalised.

Apart from circumventing formal procurement business processes it also means that expenditure incurred through "maverick buying" may also circumvent the pre-approval aspect of the undertaking's financial controls and result in retrospective approval of expenditure so that invoices can be paid.

5.5.1 Recommendation

Procurement activities and transactions should be conducted by the appropriate staffed and skilled procurement function and its procurement officers. It should not be undertaken by non-procurement staff located either in central structures or employed in other ( e.g. operational) sub-sections of the organisation.

5.5.2 Recommendation

Where there are fully justified exceptions to the principle described at 5.5.1 then strict guidelines should be followed and these should include formally documented delegated authorities. The principle which must be established is, that those to whom authority is delegated, are in effect full- or part-time "procurement officers" subject to the same professional standards, responsibilities and accountability requirements as those operating in a professional procurement department.

5.5.3 Recommendation

All organisation structures within the Public Sector should comprehensively review their procurement activities and transactions to establish or confirm which organisational units, departments of groups within their structure are entitled to be authorised to procure goods and services including in particular the creation of, and commitment to, contracts, orders and other goods/service requests to outside parties. This authority should be justified, documented and regularly reviewed for ongoing validity and its terms should include minimum requirements for sound business processes, practices, contracts and staffing.

As a consequence of this, there should also be established and maintained a full list of those persons within these units authorised and responsible for procurement and its transactions. The specific individuals designated as "Procurement Officers" should be identified and should consider themselves as members of the internal network of procurement officers and subject to those disciplines and accountability.

All other units and persons should be prohibited from engaging with suppliers in any communication or other activity that could represent, or be construed to represent, procurement tender, contract or related purchase commitments. This policy should be documented and circulated to employees.

5.5.4 Recommendation

In some cases internal business practices inadvertently facilitate the ease of unofficial buying. All organisations should review controls and practices with this in mind. For example, the payment of invoices that do not have a pre-requisite contract or order for the goods and services provided tends to facilitate unofficial buying by allowing the procurement function to be bypassed. It also means that authority to procure is retrospectively given rather than pre-approved. Therefore, suppliers should be given notice that goods and services should only be provided on receipt of appropriate contract or order reference information and within that same written notice informed that invoices received without contract or authorised order references will require special approval if they are to be paid. At a later and appropriate point in time invoices received without a pre-approved contract or order number should be returned to suppliers for this information. The payment cycle should not commence until a valid invoice with all required data is received.

5.5.5 Recommendation

Where the procurement of low-value goods or services creates anomalies in administration cost versus value procured, then alternative methods such as payment on receipt should be developed and introduced within the principles of full procurement and financial controls. Also emergency requirements may require a similar flexible but controlled alternative. Therefore, neither the value of the order nor the requirement for speed and flexibility should be reasons for complete circumvention of procurement controls. There are methods and techniques that can be deployed to respond to these situations and procurement organisations should cater for these needs in the services they offer to internal users.

5.6 Accountability and Governance - Business Conduct Guidelines

Background

Within any private or public body it is relevant that there should be a clear and well-documented code of conduct associated with how the liaison, contact and business with outside parties should be conducted. This is not only good governance but it is also a safeguard against individuals within organisations finding themselves in situations where their judgements or decisions are subject to compromise or challenge.

Findings

Although there are guidelines for civil servants there is no single code of conduct for the wider public sector.

5.6.1 Recommendation

A business conduct guideline document should be developed and issued for all of the Public Sector in Scotland. The documents should clearly define all that is expected in the conduct of employees and or those involved in public funds, particularly in any contact or dealings with external parties. Compliance with the document should be a condition of employment or of funding and compliance with it should be regularly monitored. The development of the document and its distribution should be undertaken by the Scottish Executive's Procurement Directorate.

5.7 Accountability and Governance - Audit of Procurement

Background

Given the level of procurement expenditure in the public sector in Scotland, its complexity and the fact that every transaction results in disbursement of funds outside of the entity to external parties, it is clearly a vulnerable area from the standpoint of fiscal and business controls. In addition, the opportunity to capture Best Value such as that embraced in the Scottish Executive's approach to the theme of Efficient Government makes it a key area of focus for those involved in the audit of procurement.

Findings

There is not a specific and standard programme for the internal audit of procurement in the public sector in Scotland. The absence of this means that issues of governance and accountability and weaknesses in practices and processes may not be consistently reported and acted upon. The Audit Scotland Unit is aware of this issue and as part of its own audit programme has plans to ensure that internal audits address both basic conformance and more general procurement progress.

5.7.1 Recommendation

All organisations within the public sector should be required to confirm that their Internal Audit departments (or externally contracted internal auditors where appropriate) will certify annually that the following minimum audit activities have been covered and reported upon for procurement.

  • Minimum accountability and governance conformance.
  • Appropriate structure, organisation and staffing including authorised procurement officer structure.
  • Existence of adequate systems and performance reports.
  • Conduct of basic practices and processes including compliance with EU legislation.
  • Compliance with "Procurement Policy Handbook".

5.7.2 Recommendation

Whilst conformance to governance and accountability requirements and the adequacy of basic practices and processes should be reported in Internal Audits, progress towards improved procurement including strategies, other action plans and Best Value savings achievements is planned to be consistently reviewed by Audit Scotland. This should include a commentary on current status of that organisation's contribution to the procurement savings element of the Efficient Government programme.