This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its June 2010 report entitled Ombudsman investigation into the probity of the Kew Residential Services and St Kilda Triangle developments, the Victoria Ombudsman found project governance deficiencies in two high-profile development projects conducted by the City of Port Phillip and by the Victoria Department of Human Services. As the report noted, weak conflict of interest and records management practices in both projects, along with a lack of necessary internal project management experience and role definitions, led to significant implementation problems:
Although probity processes were considered by the Department of Human Services in respect of Kew, and the City of Port Phillip in respect of the St Kilda Triangle, the attention paid to significant matters associated with probity, such as conflict of interest and record management, was insufficient, particularly given the scale and complexity of these projects.
At interview, a number of people involved in the Kew and St Kilda Triangle projects did not display a sufficient understanding of probity. These issues could have been addressed by the exercise of proper process and better management. The State Government has progressed its administrative processes in this regard since the tenders for these projects were commenced.
My investigation also identified a lack of clarity regarding the project management of development projects declared as having State significance. In both cases, the evidence supports the view that the City of Port Phillip and the Department of Human Services lacked project management experience in large and complex projects and required ongoing advice and assistance. In the case of the St Kilda Triangle, consultants from the private sector were engaged to manage the project. For Kew, Major Projects Victoria was engaged as an advisor when the Expression of Interest phase commenced. However, both projects did not run smoothly. In my opinion, it is important that project management expertise is engaged very early in the life of a project.
With respect to the definition of project roles, the Ombudsman raised concerns over the practice of blending the role of the probity advisor and procurement advisor together, noting that those two roles should be kept separate in major projects:
My investigation also identified that combining the probity auditor and advisor roles may result in confused accountabilities and weakened public confidence in the probity of a tender. In this regard, I consider that the Department of Treasury and Finance should review the Good Practice Guidelines – Conduct of Commercial Engagements and the Probity Risk Assessment Tool to specify that for major projects, probity auditor and advisor functions be provided by different individuals.
The report also identified weak levels of internal awareness regarding the need to properly manage conflict of interest risks in major procurement projects:
Conflict of interest
In the public sector context, a ‘conflict of interest’ is a situation where a conflict arises between public duty and private interest. The term refers to circumstances where a public official could be influenced, or could be reasonably perceived to be influenced, by a private interest when performing an official function.
My investigation identified that a significant number of witnesses did not recognise conflicts of interest during the tender processes. As a result, conflicts of interest were not declared or not managed adequately. In particular, hospitality from the private sector was accepted inappropriately. It was concerning that some senior public sector employees did not seem to understand the principles of conflict of interest. Some individuals clearly did not give adequate consideration to what the community’s perception would be of their financial interest in companies bidding for a project; or their relationships with individuals connected to such companies.
It was evident from my investigation that some public sector employees and elected representatives failed to understand that the ‘perception’ of a conflict of interest – even when the conduct of a public sector employee or councillor is exemplary – may be as damaging to public trust as any misconduct.
The Ombudsman raised concerns about the lack of internal expertise, poor procurement planning, and the lack of internal ability to properly manage the tendering process:
Limited expertise and poor planning
The processes employed by the St Kilda’s Edge Committee to achieve the proposed development of the St Kilda Triangle site were not developed at the commencement of the project. While there were over-arching policies in place, there was no clear guide to identify which officer or group of officers was ultimately accountable for each key decision in the tendering process or to assist in ensuring that all necessary approval and probity checks were undertaken. In my view, having such a guide was particularly important given the uniqueness of the project and the fact that the City of Port Phillip had not previously conducted such a large tender and development process.
I also question whether the City of Port Phillip had either the capacity or the expertise to manage the tender process. While the City of Port Phillip said in its business plan for the site that it had ‘significant expertise, capability and a history of successfully managing’ assets along the St Kilda Foreshore, it did not have such experience in large, complex tenders. The St Kilda Triangle development was a high-risk, complex and controversial project. In addition, the project was not subject to the same high level of checks and approvals associated with a state government development.
The Ombudsman found that both reviewed projects were plagued by significant delays, which were attributed to inappropriately protracted contract award negotiations:
Both projects suffered from significant delays. In the case of Kew it was the impact of heritage issues and in St Kilda Triangle, the uncertainty around achieving vacant possession of the site. These delays led to unfortunate ramifications, especially in relation to perceptions of the probity of both projects.
Delays both during the Request for Proposal phase and prior to the signing of the development agreement have the potential to lead to protracted negotiations with developers and to perceptions that the process was flawed and subject to inappropriate influences. Once the competitive element of the tender phase has been completed – when the preferred bidder is announced – it is important that any subsequent exclusive negotiation period is kept to a minimum, as this is when the developer’s negotiation position becomes stronger.
Kew saw protracted negotiations following the selection of the preferred bidder. In the case of St Kilda, there was a significant delay between the time the development agreement was signed (May 2007) and the time the development plan was approved (August 2008). Such delays may also strengthen a developer’s negotiation position.
The Ombudsman was also disappointed with the poor level of record-keeping in both projects, which undermined a proper audit review of the projects and raised concerns over compliance with statutory record-keeping duties:
Poor record-keeping
In both matters, physical and electronic records were obtained from the public and the private sector. In some cases, I used my power to summons such information, although, for the most part, information was provided to me on oral or written request. I am satisfied that my office has inspected all available and relevant documents in relation to both matters.
I was disappointed with the standard of record-keeping, especially of the Department of Human Services, the City of Port Phillip and Major Projects Victoria. To some degree, my investigation was hampered because:
-
there were obvious gaps in the documents held on file
-
some important documents could not be located. For example, in the St Kilda Triangle project, the City of Port Phillip could not locate video recordings of tender presentations when requested and could not provide all conflict of interest statements. In the case of Kew, the Department of Human Services could not locate probity documents, including conflict of interest statements and the approved probity plan
-
some documents were not formally filed
-
file titling was haphazard
-
documents were not correctly numbered – indeed no files reviewed during the investigation had documents with folio numbers
-
documents were not ordered chronologically.
Given these issues and that certain aspects of each project fell within the responsibility of different agencies, it was very difficult to put together a complete documentary history of each project. A full set of records simply did not exist.
Therefore, I consider that the City of Port Phillip, the Department of Human Services and Major Projects Victoria should review their file management practices in relation to procurement processes, to ensure that these meet the requirements of the Public Records Act 1973.
As this case study illustrates, the failure to establish proper project governance practices can lead to suboptimal project implementation and to adverse audit findings. Public institutions should ensure that they proactively establish appropriate project governance frameworks that provide proper practices and procedures for their project teams to operate within for successful project execution.
