Electricity Commission: Contracting with service providers.

The Electricity Commission (the Commission), a new Crown entity set up to oversee the electricity industry and markets, was formally established in September 2003. One of its first major tasks was to contract with service providers to perform specific functions relating to the operation of the electricity market.

To avoid delaying the introduction of the regulated electricity market, the Electricity Commission Establishment Unit (the ECEU) - a unit within the Ministry of Economic Development (the Ministry) - did a significant amount of preparatory work. This meant that contract negotiations were well advanced by the time the new Commission first met on 7 October 2003.

On 15 December 2003, we received a complaint about how the Commission and the Ministry had contracted with service providers. The complainant claimed that the Commission and the Ministry had not followed good practice in procuring public sector services. Essentially, the complaint was that the contracts should have been contestable, but were not.

As we have a role in ensuring that public entities are performing effectively and efficiently and complying with their statutory obligations, and because of the seriousness of the complaint, we decided to conduct an audit and inquiry.

It was not for us to form a view on whether the contracts should have been contestable or not. That decision was for the Commission to make. However, if a public entity decides upon sole source procurement, we would expect that decision to be made very carefully, based on sound analysis and due consideration of all the alternatives. Accordingly, we examined how the decision to use sole source procurement was reached – the adequacy of the procedures leading up to the appointment of the contracted service providers.

We found no evidence to suggest that the Ministry and the Commission had failed to comply with their statutory obligations in contracting with service providers, or that they had showed any lack of probity or financial prudence. However, we did find deficiencies. The documentation and procedures of the Ministry and the Commission were not of the standard we would expect of public entities engaged in sole source procurement.

The Commission lacked both a clear procurement policy and adequate procedures for documenting its contracting decisions, which exposes those decisions to the risk of challenge. We recommend that the Commission establish a clear and unambiguous procurement policy, which can be used to guide its decisions when the remaining service provider contracts come up for renewal.

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