This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its February 2013 Inquiry into the Government’s decision to negotiate with SkyCity Entertainment Group Limited for an international convention centre, the New Zealand Auditor General reviewed the government’s decision to negotiate a contract for the development of an international convention centre in Auckland, New Zealand that would be funded with casino-generated revenue. While the Auditor General concluded that it found “no evidence to suggest that the final decision to negotiate with SkyCity was influenced by any inappropriate considerations”, it found deficiencies in the advice that the Ministry of Economic Development provided to decision-makers and flaws in the decision-making process conducted by government officials and Ministers.
In fact, the report found an absence of an internal governance framework for the major project:
Given this complexity, we were surprised to find that there was no documented analysis or advice on the process that needed to be followed from a procurement perspective, or any systematic consideration of the relevant principles and obligations that should guide the steps taken. In our view, those involved had a strong focus on the need to manage the difficult relationship between the commercial issues and the policy and political decisions that were needed, but too little focus on the disciplines that should govern commercial decision-making in the public sector.
The Auditor General also found that the project lacked the overall planning processes necessary to better ensure compliance with the government’s open tendering obligations:
The overall planning
The first example concerns the lack of overall planning. A specific weakness was that there is no evidence that any consideration was given to whether the Mandatory Rules on Procurement were relevant.
These Rules set out how government departments must carry out major procurements. They are the main way in which New Zealand gives effect to obligations contained in a number of international free trade treaties and have been in place since 2006. The main requirement is that major procurements should be carried out by open tender, unless the situation falls within one of the specified exceptions.
Given that early discussions were considering options like public sector ownership, public private partnerships, and other arrangements that were effectively procurements, we would have expected to see some careful consideration of how the international treaty obligations summarised in the Mandatory Rules might need to shape the overall process.
Similarly, the Auditor General raised concerns over how the project team approached the development of a project plan to assess competing proposals, evaluate pricing, and negotiate the contract award:
The evaluation process
The second example relates to the way in which the responses to the Expressions of Interest (EOI) request were evaluated. Although decisions were made on the merits of the different proposals, we do not consider that the evaluation process was transparent or even-handed. The evaluation process lasted for more than a year. The meetings and discussion between the Government representatives and SkyCity were materially different in quantity and kind from those between the Government and the other parties that responded.
Ministers and officials told us that the SkyCity proposal was quite different from the others and needed to be understood in much more detail to establish whether it was commercially and politically viable. The other proposals were more straightforward to assess. Officials therefore engaged in extensive and detailed discussion with SkyCity. The practical effect was that officials worked closely with SkyCity as it put together a detailed proposal from the broad outline that was initially submitted in response to the EOI request. They did so under the auspices of the evaluation process for the EOI, while telling the other parties that decisions had been delayed.
The Government took this approach so that it could fully understand the policy and political consequences of the SkyCity proposal before deciding to proceed to full commercial negotiations, while still maintaining some competitive tension during those discussions by keeping the other responses “live”. However, the result was that SkyCity was treated very differently from the other parties that responded and the evaluation process effectively moved into a different phase with one party. In our view, the steps that were taken were not consistent with good practice principles of transparency and fairness.
If a purchaser wants to maintain competitive tension while it explores one or more responses in more detail, the usual approach is to proceed to a full Request for Proposals (RFP) process. This imposes costs on all those participating in the RFP, but is warranted because of the advantages that flow from the competitive process. If that additional cost and process is not justified, a purchaser can proceed to direct discussions with one party and adopt other mechanisms to manage the value-for-money aspect in the absence of a competitive process. There is a growing amount of guidance available on alternative negotiation techniques to manage price in this type of situation.
The Auditor General ultimately found that the “quality of support that was provided fell short of what we would have expected from the lead government agency on commercial and procurement matters.” More specifically, the report found that the government’s decision to “explore the market through a formal and competitive process with a request for expressions of interest” was “poorly planned and executed”, and that “insufficient attention was given to planning and management of the process as a whole, so that risks were not adequately addressed and managed.”
While the Auditor General acknowledged that “financially constrained governments are looking for new and creative ways to collaborate with the private sector to achieve their goals”, and that this scarcity will result in “more initiatives that test the boundaries of established ways of working – including established procurement procedures”, the Auditor General stressed that “the underlying principles that established processes aimed to protect” needed to be followed, since new approaches to procurement projects “still need to be able to show that public resources are being appropriately managed and spent.” In other words, public institutions cannot use resource scarcity as an excuse for parting company with due process. In summary, the audit found that the government needed to bolster its due diligence practices where major procurement projects are concerned.
