District Health Boards are being forced to recognise millions of dollars of unbudgeted costs as they impair their investment in new shared financial management systems.
After the government requested an indefinite "pause" in further development of the National Oracle Solution (NOS), Nelson Marlborough DHB reported a full $2.26 million impairment of its contribution to the project.
"The impairment of the National Oracle System asset was not expected when the budgets were developed and shows as a variance in the statement of comprehensive revenue and expenses," the DHB's annual report said.
Other DHBs have recognised partial impairments in line with the accounting treatment used by project owner New Zealand Health Partnerships Ltd (NZHPL).
Counties Manukau DHB, which required bailout funding to invest in building maintenance and infrastructure this year, recognised a lesser impairment of $488,000 relating to pre-2015 spending on capabilities that may not now be delivered.
"There has been a change to the target operating model which has meant that the costs incurred on change management should be fully impaired and supply chain should be partially impaired for those costs which related to these developments," the DHB's report stated.
Counties Manukau DHB also recognised a contingent liability in relation to the NOS.
"There is also a level of risk and ambiguity regarding continuation of the National Technical Solution (NTS) of NOS," a note in its accounts explained.
"The eventual outcome will be influenced by the outcome of the revised business case and any subsequent contract negotiations to mitigate any penalties.
"For prudence, the worst case outcome has been estimated by New Zealand Health Partnerships Ltd (NZHPL) and CMDHB has noted its share of these costs as a contingent liability in the financial statements as at 30 June 2018."
Northland DHB booked a $190,000 NOS impairment, relating to its share of change management and supply chain components of the system and a "worst case" outcome of $165,000 impairment to its share of the NTS.
Taranaki DHB took a $224,000 impairment and Whanganui DHB $83,000 with many other DHBs yet to report.
The "worst case scenario", however, may yet not eventuate.
Meanwhile, NZHPL recognised a $5.8 million impairment of change management and supply chain components of the project, including a full $3.9 million of costs capitalised for change management and a $1.9 million partial impairment for the cost incurred on supply chain.
NZHPL said it remained confident that the NOS programme, which needs at least $22.8 million more funding, will be supported and completed.
According to the NZHPL, this is because it would resolve infrastructure and software needs across the sector and safeguard against system failures, has been live for the First Wave of four DHBs since 2 July and will also enable significant benefits to the sector, particularly procurement benefits, through increased economies of scale.
Benefits will also accrue to shared buying agency Pharmac, it said, which needs a national system with similar functionality to obtain expected benefits from national procurement of medical devices.
"A robust plan for the revised business case has been developed with widespread stakeholder involvement and support that effectively addresses all key matters raised by the Ministry," it said.
NZHPL is building and managing the $88 million NOS, which was intended to deliver a large number of business activities including receivables, debt collection, payables, general ledger, project and assets accounting, requisitions and purchasing, inventory management, replenishment, supply chain, national catalogue, contract management and financial and management reporting.
The National Technology Solution (NTS) is the technical infrastructure to support the NOS system.
Specifically, this includes high availability, rapid recovery from technical failure, as well as security hardening to meet current requirements, including compliance with the New Zealand Information Security Manual (NZISM).
"A number of the judgments considered above could be affected by the outcome of the revised NOS programme business case during the 2018/19 financial year," NZHPL said in its report.
"If this results in material changes in scope or cost/benefit assumptions, or in a decision to discontinue the programme, the NOS programme assets will be tested for impairment and a material impairment may need to be recognised in the 2018/19 financial year."
NZ Health Partnerships added it has contracts for the provision of infrastructure-as-a-service (IaaS) relating to the NTS programme, for which stop-cost contract penalties could result if the NTS was discontinued. These costs would be passed through to DHBs.
"In the unlikely event that there was a discontinuance of NTS and a requirement to stop the contract, for any resulting stop-cost penalties NZ Health Partnerships would have a contingent liability to the supplier, and an equal and corresponding contingent asset as a receivable from the DHBs," it said.
The Auditor-General reported on the NOS in June, agreeing with DHBs who decided not to impair their investments in the 2017 financial year.