Part 6: Acquiring goods and services

Inquiry into certain aspects of Te Wānanga o Aotearoa.

6.1
In this Part, we describe:

General practices

6.2
Some purchasing and contracting decisions were made at TWOA’s head office, and some at individual campuses. As in Part 5, we found that TWOA’s business cases for proposals were frequently not documented. There was, again, much informal and oral assessment and decision-making.

6.3
Insufficient thought was given to identifying and managing conflicts of interest in relation to acquiring goods and services. We were told that, if anything, the family connections led to TWOA and MO1 Limited getting far better deals from the private organisations than they might otherwise have done. The people we spoke to did not seem to realise that, if this possibility existed, then the possibility that benefits could flow in the reverse direction also existed. That latter possibility, or the potential that others might reasonably perceive that possibility, is precisely why conflicts of interest must be managed carefully.

6.4
We have no reason to doubt whether the services were delivered. We also have no reason to doubt the quality of service provided. The dollar amounts we discuss are the total value of the business transactions between TWOA and the other entities involved, not any profit that might have been made by those other entities.

6.5
We could not assess specific purchases or contracts for compliance with policies, because at the relevant times TWOA did not have procurement policies.

6.6
Our appointed auditor, and other advisers, have urged TWOA for several years to:

  • improve its documenting of business cases;
  • consider tendering;
  • have written contracts;
  • ensure that contracts are properly authorised; and
  • identify and manage conflicts of interest.

6.7
It is taking too long to embed these disciplines into the culture and everyday practices of TWOA. A lot of work was done in 2004, with the help of external consultants, to prepare detailed procurement policies. At the time of our fieldwork, TWOA had a draft procurement policy and a draft contract management policy. It is too soon for us to say whether these new policies are having a positive effect on business practices.

Major construction projects

6.8
All major building construction and renovation work for TWOA is managed by one preferred supplier – Livingstone Bros Limited. The business relationship has been in place for many years, after Livingstone Bros Limited worked on the Te Awamutu campus in the early 1990s. During 2003 and 2004, TWOA paid a total of $23.5 million to Livingstone Bros Limited. We were told that Livingstone Bros Limited’s preferred supplier status had been confirmed in writing, but no one could find the letter of confirmation.

6.9
We do not doubt that a business relationship of this nature might be useful, but we would expect such a significant and exclusive arrangement to be put in place only after careful and thorough assessment, and to be reviewed from time to time. We saw no evidence that TWOA has ever formally assessed how and why it should have such an arrangement; nor that it has reviewed the relationship. Without this, TWOA cannot be sure that it receives value for money from the exclusive arrangement; nor can it be confident it does not need to consider alternative options (either generally or for particular projects).

6.10
These comments are not a criticism of Livingstone Bros Limited. It is an established construction and project management firm with offices in Hamilton and Te Awamutu. In the files we reviewed, it managed its projects professionally, with documented project plans prepared at the outset (including the peer review of budgets in selected cases), and with detailed and regular reporting to TWOA. Livingstone Bros Limited’s role covered most aspects of project design and management (except landscaping or grounds works, data cabling, site security, and loose furnishings). It carried out carpentry and concreting work, and selected and controlled subcontractors for other aspects of projects. Subcontractors accounted for around 70% of the costs of a project, and Livingstone Bros Limited usually used a competitive approach to select subcontractors. TWOA told us that it was satisfied with the standard of the services provided by Livingstone Bros Limited.

Power Chill NZ Limited

6.11
Power Chill NZ Limited does a significant amount of air-conditioning work for TWOA and MO1 Limited, both directly and as a subcontractor (through Livingstone Bros Limited). Power Chill NZ Limited undertakes major construction projects, small installations, and ongoing maintenance and servicing.

6.12
We examined this contracting arrangement because of the potential for conflicts of interest. Kingi Wetere and William Wetere are involved in Power Chill NZ Limited, but we were told they are not closely involved in its day-to-day operations.

6.13
The work Power Chill NZ Limited has done for TWOA and MO1 Limited over the last 5 years (including as a subcontractor to Livingstone Bros Limited) amounted to $3.8 million. This included $2.7 million as a subcontractor to Livingstone Bros Limited, $1.1 million directly for TWOA, and about $70,000 for MO1 Limited.

6.14
Power Chill NZ Limited was not formally a preferred supplier to TWOA, and had no exclusive arrangement. It did not undertake all of TWOA’s air-conditioning work, and we were told it sometimes quoted unsuccessfully for TWOA work. Nevertheless, it had worked on many large TWOA projects in recent years. Kingi Wetere told us that Power Chill NZ Limited set discounted prices for TWOA jobs, which helped ensure frequent success.

6.15
The selection of Power Chill NZ Limited was often non-competitive. This was not the fault of Power Chill NZ Limited, but raises concerns about the robustness of TWOA’s decision-making.

6.16
TWOA’s Council told us that it was not aware of specific contracts with Power Chill NZ Limited. Equally, there is no evidence that Rongo Wetere was involved in deciding to contract with Power Chill NZ Limited.

Work subcontracted to Power Chill NZ Limited by Livingstone Bros Limited

6.17
We were least concerned about the projects managed by Livingstone Bros Limited. Livingstone Bros Limited selected its subcontractors independently of TWOA, and provided professional and external oversight. There were no conflicts of interest here.

6.18
Livingstone Bros Limited’s usual practice was to seek 3 quotes for all subcontracting. Unfortunately, this was often not possible for air-conditioning work. We were told that alternative suppliers in the region were often too busy, or did not like the work on offer from TWOA (because many of TWOA’s projects were renovations of old buildings, rather than the construction of new buildings). To make up for this lack of competition, Livingstone Bros Limited had some of Power Chill NZ Limited’s quotes peer reviewed by external consultants, to provide further assurance about value for money.

Work undertaken directly for TWOA

6.19
Work commissioned directly by TWOA was usually smaller installation projects or maintenance and servicing work. Individual campus managers, not head office, commissioned the work. There were no conflicts of interest here, but we considered TWOA’s decision-making practices. Practices varied across campuses.

6.20
We examined 9 of the projects that Power Chill NZ Limited had quoted for. In 4 projects, Power Chill NZ Limited was the only company that quoted for the work. These projects were each worth between $25,000 and $50,000. For the other 5 projects, we were told that TWOA sought quotes from other companies, but documentary evidence of the other quotes had not always been retained so we could not verify this. The inconsistency of TWOA’s practices was disappointing, as was the frequent lack of a competitive approach to ensure that the successful contractor (whether or not it was Power Chill NZ Limited) represented good value for money.

6.21
Power Chill NZ Limited was entitled to quote or tender for TWOA work. There is no reason in principle why Power Chill NZ Limited should not have been chosen to undertake such work, if robust selection methods and assessments showed that it was the best available supplier.

6.22
There was no suggestion that Rongo Wetere was personally involved in deciding whether Power Chill NZ Limited would provide services to TWOA, so we did not identify any conflicts of interest for him. Nevertheless, it was a company with close personal connections to TWOA at a senior level. This increased the need for sound and transparent decision-making. That was not always evident here, because of the lack of competitive selection in some cases.

Work undertaken for MO1 Limited

6.23
There were conflicts of interest in the work Power Chill NZ Limited undertook for MO1 Limited. For much of the period that we reviewed, Kingi Wetere was General Manager (and a director) of MO1 Limited, and the sole director of Power Chill NZ Limited. In his MO1 Limited capacity, he commissioned and monitored some air-conditioning work undertaken by Power Chill NZ Limited. The work was not competitively quoted or tendered.

6.24
Kingi Wetere’s connection with Power Chill NZ Limited was declared on TWOA’s conflicts of interest register in late 2003. The register did not record any mitigating strategies for dealing with his conflicts of interest.

6.25
Kingi Wetere acknowledged to us that this situation was difficult. He told us that, if anything, he took an especially hard line on Power Chill NZ Limited, and sometimes challenged its invoices if he thought it had spent too long on a job. He told us he never exceeded his delegation as MO1 Limited’s General Manager. However, in our view he put himself in an impossible position. An outside observer would be unlikely to regard him as independent and impartial in managing those business dealings. Also, MO1 Limited and Power Chill NZ Limited shared premises for more than a year. That arrangement added to the lack of transparency between these 2 companies.

Aranui (2003) Limited

6.26
Aranui (2003) Limited is a company owned and operated by Rongo Wetere’s brother, Ara Wetere.

6.27
In TWOA’s early years, Ara Wetere undertook some voluntary work for TWOA, and donated quantities of building materials for some projects.

6.28
In 2003 and 2004, Aranui (2003) Limited carried out much landscaping, grounds maintenance, drainage, tar-sealing, and fencing work at several TWOA sites. From 2003 to early 2005, TWOA paid Aranui (2003) Limited $1.8 million. Ara Wetere told us he did much of the work himself. His company had a small permanent staff, and contracted casual workers as and when required. His company also often used subcontractors.

6.29
The recent relationship with TWOA began when Ara Wetere called in to see his brother when he returned to Waikato after many years away. Rongo Wetere told him “there’s work available if you so want it”. He was referring to fencing and concreting in and around the Hamilton area. Ara Wetere was experienced in this work.

6.30
We examined this procurement because of the large amount of contracting Aranui (2003) Limited has undertaken for TWOA, and the close family ties of the people involved.

Selection and oversight

6.31
The work carried out by Aranui (2003) Limited did not come within the scope of work managed by Livingstone Bros Limited, and so did not have the external oversight and control by an independent project manager that existed with much of Power Chill NZ Limited’s work. On a few occasions, TWOA sought advice or a peer review from Livingstone Bros Limited on a quote or invoice from Aranui (2003) Limited. One of those occasions was long after the work had been completed and, based on the minimal information provided by TWOA, Livingstone Bros Limited was unable to assist.

6.32
Almost all of the work carried out by Aranui (2003) Limited was contracted directly with TWOA, and overseen by 2 senior managers from TWOA’s head office. They approved most invoices, but referred some to Rongo Wetere for approval.

6.33
We expected TWOA to have prepared a proper business case or project plan for the work to be carried out by Aranui (2003) Limited. TWOA has not been able to provide us with any proposal or similar document assessing what was required for any of the work.

6.34
Given the high value of the work undertaken by Aranui (2003) Limited, we expected evidence of a competitive tender, or evidence that TWOA sought a series of quotes before selecting the provider. We found no evidence that TWOA used competitive processes.

6.35
The arrangements for contracting Aranui (2003) Limited were unacceptably poorly documented. There were no written contracts, and sometimes there were no quotes from Aranui (2003) Limited. On one occasion, this was noted and commented upon by Rongo Wetere, but no action was taken to ensure that the situation was rectified. Instructions on the work required were issued orally and without any follow-up documentation, usually by senior managers of TWOA and sometimes by Rongo Wetere.

6.36
We were told that TWOA used Aranui (2003) Limited because of its availability, speed, and quality of work.

6.37
TWOA senior managers told us that the work was often urgent. They were desperate to meet deadlines and enable other contractors to start on other jobs. They were having difficulty getting quotes within the timeframes required because there was a shortage of suppliers.

6.38
In our view, the perceived urgency was a consequence of TWOA’s inadequate business cases and planning for the work to be carried out by Aranui (2003) Limited (or the projects that this work formed part of). We do not accept that it was impossible to find other willing contractors for this work.

6.39
At times Aranui (2003) Limited completed, without approval, work over and above the intended work. Senior managers accepted this work and authorised payment without proper documentation. This would not have been necessary if TWOA had properly prepared business cases or project plans, and closely monitored them.

Conflict of interest

6.40
Rongo Wetere had advised Ara Wetere that work was available for him. In several cases, Rongo Wetere personally directed Ara Wetere to do work (including, for example, at the Glenview hotel site).

6.41
This was inappropriate because they were brothers. The possibility that a person could be influenced by improper motivations raises a conflict of interest. To give work of this value to a company owned and run by Rongo Wetere’s brother, in the manner in which it was done, was an unacceptable practice for a public entity.

6.42
Rongo Wetere has never declared his connection with Aranui (2003) Limited in TWOA’s conflicts of interest register. TWOA’s Council told us that it was unaware of these contractual arrangements.

6.43
Our comments are not a criticism of Ara Wetere, who was entitled to offer his services to anyone who wanted to contract his company.

6.44
The overall situation shows poor judgement by Rongo Wetere and the senior managers involved for TWOA.

Enercon International Inc and Pace Energy Solutions

6.45
We looked at TWOA’s use of 2 consultants from the United States of America (the United States) because of concerns others had raised about the nature of the work, the selection methods, the cost of the work undertaken, and the relationships between the parties involved.

6.46
Dr Jack Scherschell and Paul Saxton were energy conservation consultants based in the United States. They were involved in Enercon International Inc, a company that sold technology that improved light output while using less electricity. Dr Scherschell also had his own organisation called Pace Energy Solutions.

6.47
Rongo Wetere told us that he had been concerned about the cost of power used by TWOA, particularly at the Porirua and Palmerston North campuses. In 2002, Rongo Wetere was introduced to Dr Scherschell, who was a friend of Ms Krawll. Ms Krawll had worked with Dr Scherschell on and off for 20 years. Rongo Wetere discussed energy conservation measures with him.

6.48
Rongo Wetere decided to bring Dr Scherschell and Mr Saxton to New Zealand to investigate energy conservation measures at the Porirua and Palmerston North campuses in 2003. Once here, Dr Scherschell and Mr Saxton visited the Porirua campus, before returning to the United States to prepare a report for TWOA.

6.49
There was a long delay in receiving their report. After receiving it, Rongo Wetere decided to go ahead with a full energy conservation system for the Porirua campus, using Enercon International Inc. Dr Scherschell and Mr Saxton returned in June 2004 to install the system. Their work was carried out with the help of local electrical subcontractors.

6.50
Dr Scherschell came to New Zealand again in August 2004, after which he, through his company Pace Energy Solutions, prepared a report for TWOA offering a “University Wide Energy Conservation Project”. This project did not go ahead.

Processes and business case

6.51
We expected to see a properly prepared business case for the work carried out by these consultants. TWOA could not provide us with:

  • any assessment by TWOA of the need for the work, or assessment of the consultants’ proposal;
  • any post-project report; or
  • any analysis of other options (including, for instance, any contact with organisations such as the Energy Efficiency and Conservation Authority in this country).

6.52
We were told that there was a written contract, but TWOA could not provide us with a copy. Rongo Wetere could not tell us whether a set fee had been agreed before the work was carried out. There was little apparent concern about the costs of the project. No one monitored the work as it was carried out, and TWOA had little idea about the resulting benefits or effectiveness of the project.

6.53
This situation is grossly unsatisfactory. There was:

  • no clear evidence that the work was necessary;
  • no justification for using these particular consultants;
  • no justification for using consultants from as far away as the United States; and
  • a clear disregard for record-keeping and document retention.

What did it cost?

6.54
This project cost TWOA at least $173,599 ($93,907 paid to Enercon International Inc, $45,209 paid to Pace Energy Solutions, and $34,483 in other costs).

6.55
Of the $173,599, air travel for the consultants’ 3 trips from the United States cost $42,136. On 2 of those occasions, the consultants appear to have travelled business class.

6.56
There are likely to have been additional costs associated with this work. TWOA has not been able to provide any information about accommodation costs and related expenses while Dr Scherschell and Mr Saxton were in New Zealand.

6.57
The travel costs incurred by the consultants appear to be disproportionately high, given the nature and value of the project. With no documented business case or project proposal, we cannot see why TWOA paid to bring these consultants to New Zealand.

6.58
In our view, the invitation to undertake this work was based wholly or largely on the personal relationship that existed between one of the consultants and Ms Krawll. The combination of the personal relationship with the lack of business case and proper procurement process amounts to an unacceptable use of public funds.

6.59
These comments are not a criticism of Enercon International Inc or Pace Energy Solutions. Our concern is with how TWOA handled its side of the arrangements.

Gazza’s Groomers

6.60
“Gazza’s Groomers” was the trading name of a business run by WoodCo Services Limited, a company owned and operated by Gary Wood. WoodCo Services Limited was contracted to provide fleet grooming services for TWOA’s and MO1 Limited’s motor vehicles. We looked at this procurement because of the potential for conflicts of interest.

6.61
The arrangement involved staff of WoodCo Services Limited travelling to campuses in the North Island to clean TWOA’s vehicles. The arrangement was agreed near the end of 2002, and ran until early 2005. TWOA paid WoodCo Services Limited about $329,000 between 2003 and early 2005.

6.62
When the contractual arrangement began, Gary Wood was:

  • an employee of TWOA, working in an unrelated area (the IT division); and
  • in a personal relationship with Min Marshall, TWOA’s Corporate Services Director and a member of its senior management.

6.63
Gary Wood is also the brother of Robin Wood, who was TWOA’s vehicle fleet manager and who reported to Ms Marshall.

Selecting Gazza’s Groomers

6.64
We were told that TWOA needed to arrange for the proper grooming of its motor vehicles. It had been making informal enquiries with a local automotive repair firm about car grooming services, and also had an approach from another person (a relative of TWOA’s then purchasing officer), without finding any suitable provider. TWOA was particularly keen to find a provider who could service its national fleet, not just the vehicles in one location. Gary Wood, who had somehow become aware of TWOA’s needs, then apparently offered to provide such a service.

6.65
TWOA did not call for tenders before awarding the contract to WoodCo Services Limited. The staff we spoke to all told us that the absence of a formal tendering process was simply normal practice at that time.

6.66
We do not understand why TWOA thought that Gary Wood was suitable for the job. He had no previous experience in this area, but was apparently willing to employ staff to carry out the work. While there is nothing particularly difficult about cleaning cars, Gary Wood did not have experience in running any sort of business.

6.67
We have been provided with a letter and brief proposal from WoodCo Services Limited, from around the time the arrangement was agreed. We have not seen any documentary evidence of an assessment of the proposal by TWOA before it decided to agree to the arrangement. However, we were told that further informal enquiries of other vehicle groomers were made to determine whether WoodCo Services Limited’s prices were reasonable.

6.68
We were told that written contracts were signed for both the 2003 and 2004 years, but TWOA has been able to provide us with only the 2004 contract. The contract is short and contains little detail about the precise nature or cost of the services to be provided. TWOA told us that a schedule referred to in the contract does not exist.

Conflicts of interest

6.69
Ms Marshall and Robin Wood were the main people involved in discussing Gary Wood’s proposal. It appears that Robin Wood did not make the decision to accept the proposal, but it is not clear who did. Rongo Wetere signed the contracts, but was not otherwise involved.

6.70
Ms Marshall had a conflict of interest. She was in a personal relationship with Gary Wood before and after the contract was first agreed, but told us she had separated from him for the several months around the awarding of the contract. (We understand that the relationship finally ended in late 2004.)

6.71
Ms Marshall was also one of the 2 founding shareholders of WoodCo Services Limited. We heard inconsistent explanations for this. Gary Wood told us this was a mistake, because the company was supposed to be his business alone. Ms Marshall told us this was a mistake, because the company was originally intended to be used for another purpose. Ms Marshall was removed as a shareholder in late 2004. We have been assured she never shared in the profits of the company. These explanations do not significantly alleviate the conflict of interest.

6.72
Robin Wood was, at the time of agreeing the 2003 contract, directly responsible for managing TWOA’s vehicles. He, too, had a conflict of interest, because he is Gary Wood’s brother.

6.73
These relationships were known to the managers of Ms Marshall and Robin Wood. The conflicts of interest were not hidden, but nor were they managed appropriately by TWOA. In our view, TWOA should not have allowed Ms Marshall and Robin Wood to have had any role in awarding these contracts.

6.74
Once TWOA’s conflicts of interest register was established in late 2003, Ms Marshall declared her interests, which included her connection with Gary Wood.

Subsequent events

6.75
Robin Wood was the person at TWOA originally responsible for overseeing the contract with WoodCo Services Limited. Later, a new employee in Robin Wood’s team was given this responsibility so that Robin Wood did not have to deal directly with WoodCo Services Limited. We understand that this was a deliberate move because Robin Wood was uncomfortable managing a contractual relationship with his brother’s company.

6.76
The relationship between TWOA and WoodCo Services Limited deteriorated during 2004, with a dispute over performance and contractual obligations. TWOA terminated the contract in early 2005, and we understand the contract with MO1 Limited has also ended.

Oma Investments Limited

6.77
Oma Investments Limited was set up in 2002 in an effort to source supplies for TWOA and MO1 Limited more cost-effectively, and to manage their resource needs on a more commercial footing (mainly course materials, especially for distance learning courses like Mahi Ora and Māori language courses). Oma Investments Limited sources, imports, packages, and distributes bulk resources and other supplies on behalf of TWOA and MO1 Limited.

6.78
Oma Investments Limited is a subsidiary of the AI Trust. We understand that some thought was initially given to whether Oma Investments Limited should be set up as a subsidiary (or division) of TWOA. It was decided it would have greater freedom to take commercial risks if it was completely separate from TWOA (for example, to trade internationally and in foreign currency, to borrow, and to move into areas of business unrelated to TWOA).

6.79
William Wetere was instrumental in proposing and establishing Oma Investments Limited, and was its first General Manager. Oma Investments Limited started business at the beginning of 2003, and operated out of properties owned by the AI Trust. TWOA sold its inventory to Oma Investments Limited, but this was later sold back to TWOA. Oma Investments Limited’s work for TWOA was then to source, manage, and distribute TWOA’s resources (without owning them). More recently, Oma Investments Limited has taken on other customers besides TWOA and MO1 Limited, and is expanding into other entrepreneurial activities, such as recreational clothing. Kingi Wetere is now its General Manager.

6.80
We were told that the involvement of Rongo Wetere, Kingi Wetere and William Wetere in Oma Investments Limited worked particularly well, because a detailed understanding of TWOA’s activities was crucial to managing its business needs properly (for example, to assess markets and estimate volumes and dates of supplies needed). We were told that Oma Investments Limited sourced supplies at cheaper rates than TWOA ever managed to get. At the end of 2004, Oma Investments Limited granted a trade rebate24 of $3.2 million to TWOA.

6.81
In principle, a business arrangement for the efficient management of TWOA’s and MO1 Limited’s resources is acceptable. But if such an arrangement is to exist, it needs to be professionally managed, with real separation between the parties and transparency in the business transactions.

6.82
The contractual arrangements were handled carelessly at first. The contract between TWOA and Oma Investments Limited was not documented and signed until nearly 18 months after operations had begun (and at the urging of our appointed auditor and other external advisers).

Conflicts of interest

6.83
Conflicts of interest pervaded the business relationships between TWOA (and MO1 Limited) and Oma Investments Limited:

  • For most of 2003 and 2004, William Wetere was General Manager of Oma Investments Limited and for some of that time was also General Manager of MO1 Limited.
  • Kingi Wetere was General Manager of MO1 Limited until early 2004, and then moved into a senior position at TWOA.
  • Rongo Wetere was Tumuaki of TWOA.
  • Rongo Wetere, William Wetere, and Kingi Wetere were all, for a time, directors of both Oma Investments Limited and MO1 Limited.
  • Two other TWOA personnel were for a time directors of Oma Investments Limited and MO1 Limited, while also holding management or governance positions at TWOA.

6.84
Some, but not all, of these conflicts of interest were declared in TWOA’s conflicts of interest register. In particular, Rongo Wetere did not record that his son was the General Manager of Oma Investments Limited. The register did not include any proposed mitigating strategies.

6.85
Kingi Wetere signed the main supply contract between MO1 Limited and Oma Investments Limited for one party, and William Wetere for the other. With the comparable contract signed between TWOA and Oma Investments Limited, the TWOA signatory had been (up until a few weeks beforehand) a director of Oma Investments Limited.

6.86
We were told that this has never presented a problem because everyone had the same kaupapa – they were all moving in the same direction, and the intention of Oma Investments Limited was always to support TWOA. Nevertheless, these were separate entities – 2 in the public sector and one in the private sector – contracting with each other over business matters. We cannot see how the business relationships between TWOA and MO1 Limited, on one hand, and Oma Investments Limited, on the other hand, could have been managed in a transparent manner.

24: A trade rebate is a refund or discount offered to a particularly valued customer.

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