This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its October 2018 report entitled Procurement Processes and Management of Probity by the Moorebank Intermodal Company, Australia’s Auditor-General found that a new public institution failed to establish proper procurement governance practices. As noted in the report, the “Moorebank Intermodal Company (MIC) was established in December 2012 under the Corporations Act 2001” and was mandated with “the delivery of the Moorebank Intermodal Terminal (MIT) project in south western Sydney.” The Auditor-General raised concerns over the failure to obtain value-for-money in the procurement of consultants, and the failure to establish and enforce proper policies and procedures in the use of corporate credit cards and expenses, and the failure to address conflict of interest and properly manage gifts and hospitality:
It is not evident that MIC has obtained value for money in its procurement of advisers and consultants. The company’s management of probity risks associated with conflicts of interest and gifts and hospitality has not been effective.
MIC has engaged a range of advisers and consultants to assist it to deliver on its purpose. Open and effective competition has not been a feature of MIC’s procurement practices. This has contributed to the company being unable to demonstrate that value for money has been achieved through its procurement activities. Probity risks (including conflicts of interest) have not been well managed.
MIC has not had in place an appropriate and effective framework to manage and control the use of corporate credit cards and reimbursement of staff expenses.
MIC has not effectively managed the risks associated with accepting and providing hospitality, gifts or benefits. Initially this was due to the absence of relevant policies and guidance. Subsequent to the development of policies and guidance, poor compliance and ineffective governance arrangements resulted in the acceptance of offers that should have been declined under MIC’s policy framework.
More specifically, the Auditor-General found that the organization as slow to develop its procurement policies and procedures or ensure that consultant contracts were awarded pursuant to open tenders:
Procurement
MIC has no overarching procurement strategy and was slow to develop its procurement policies and procedures. The procurement policy was documented and approved by MIC’s CEO in June 2014 in response to an internal audit recommendation that it be documented. This was some 18 months after MIC was established and after the company had conducted 19 procurements with future payments totalling $27.8 million. It was also subsequent to the development and board approval of various other corporate policies. An additional ‘Selection and Management of Consultants’ procedure was developed in June 2016 for procurements specifically related to the MIC Funded Works package (under the contractual arrangements with the SIMTA).
MIC’s procurement framework does not appropriately emphasise the important role that effective competition can play in obtaining value for money. MIC’s procurement framework is also internally inconsistent. Specifically, one policy requires open tender processes for procurements over $100,000 whereas a more recent procedure prescribes a process of select tendering and is silent on the need to achieve value for money.
MIC has not conducted any open tender processes when procuring advisers and consultants. Rather:
-
68 per cent of procurement processes were sole source engagements worth $11 million; and
-
32 per cent involved limited competition (seeking a proposal or quote from two to 10 respondents) worth $21 million.
Turning to conflict of interest, the Auditor-General found that the organization’s management of conflicts was ineffective since prior relationships between staff and service providers had a significant influence on contract award decisions and had an adverse impact on achieving value-for-money:
MIC’s identification and management of conflicts of interest in its procurement activities has been ineffective. Relationships (long-term business and/or personal associations) with MIC staff were often (51 per cent of the time) the preferred basis for the sole sourcing of service providers or inviting them to participate in tender processes. While relationships with service providers were disclosed between MIC employees, there was no evidence of any formal consideration of conflicts of interest. Additionally, MIC’s corporate policies contain limited guidance on conflicts of interest. No definition is provided, nor are any contextual examples of conflicts of interest articulated. This situation makes it difficult for staff to identify inappropriate practices. Situations were also identified where employees had used their position to promote their external associates to Qube and to assist associates in securing employment by MIC.
MIC’s identification of potential candidates by way of personal or business referrals combined with its extensive use of non-competitive procurement processes significantly diminished the value for money that might have otherwise been obtained. Many of MIC’s procurements have been urgent, unplanned or reactive. This inherently increases the risk of paying more. It was also difficult to be assured that there was a genuine business need for a number of MIC’s procurements — particularly where the original proposal was initiated by the service provider. MIC typically has not revisited or negotiated on price, even when the opportunity has presented itself.
The Auditor-General also found that the organization was slow to implement policies and practices for gifts and benefits from suppliers, and that it failed to properly monitor those gifts:
Gifts and benefits
MIC did not have a policy or supporting gifts and benefits register until September 2014. This was approved some 21 months after MIC was established. The policy would be significantly enhanced if it explicitly identified procurement and contracting activities as a high-risk area for the acceptance of gifts and benefits. Amendments to the policy in February 2018 have weakened controls by allowing MIC’s CEO to both accept and approve his or her own receipt of gifts and benefits.
MIC’s recording of gifts and benefits has been inaccurate and incomplete. Key factors in this situation have been:
-
the lag in the development of MIC’s policy material, which meant that staff were not required to record such offers until late 2014;
-
poor understanding of the requirements of the policy, resulting in only three items (rather than at least 63) being recorded on the register until November 2015;
-
MIC’s recording only of gifts and benefits that were accepted and not those refused (evidence is that few offers have been refused) prior to February 2018; and
-
poor consideration of the application of the policy towards MIC board members.
In response to these findings, the Auditor-General made a series of recommendations relevant to the operations of all public institutions, which highlighted the importance of establishing and enforcing proper procurement governance frameworks, including rules regarding conflicts of interest and the receipt of supplier gifts, as well as open procedures for ensuring that contracts are awarded pursuant to open and transparent tendering processes.
