Part 7: Establishing educational courses
7.1
In this Part, we discuss several of the educational courses that TWOA offers:
7.2
We looked at how TWOA acquired and set up the courses, and conflicts of interest.
7.3
We also discuss a claim over the ownership of the intellectual property in some courses.
7.4
The quality of the educational courses offered by TWOA is outside our terms of reference. We note that the courses we discuss have been granted all necessary internal and external academic approvals, and passed numerous external audits and reviews. We understand the courses are widely regarded as innovative, because they provide educational opportunities for people who otherwise have had little success in the education system, and because no student fees are charged. The courses have become extremely popular. The people we met who are involved in these courses display a strong commitment to, and passion for, TWOA’s educational goals and activities.
7.5
We have focused on work undertaken by TWOA. We have not examined the course development work undertaken by the private companies.
7.6
As in other areas discussed in this report, TWOA did not document the business cases for course proposals well. Again, there was much informal and oral assessment and decision-making. In the several courses we discuss in this Part, members of Rongo Wetere’s whānau were heavily involved.
7.7
For most of the relevant times discussed in this Part, TWOA did not have policies in place for identifying and managing conflicts of interest. Rongo Wetere’s paternal relationship with Susan Cullen was recorded in the conflicts of interest register once the register was established in late 2003.
Mahi Ora
7.8
Mahi Ora is a free, home-based 12-month distance learning course. It aims to bring learning and education to Māori who have not previously benefited from mainstream education. It involves personal development, education and training, technology, and encouragement towards employment. Mahi Ora was created by Ms Cullen and her companies Life Works International Limited and Mahi Ora Limited, which were registered private training establishments. Her companies had researched and prepared the course over several years, at their own cost and at considerable financial risk to the companies and individuals involved.
Joint venture with TWOA
7.9
The Mahi Ora course was the subject of a joint venture agreement with TWOA in 2000, and was launched in July 2000. Under the agreement, Ms Cullen’s company was responsible for running the course. It employed staff and incurred most of the operating costs. TWOA was responsible for obtaining the necessary academic approvals in its name and overseeing quality. This course, like the others discussed in this Part, qualified for Crown funding based on the number of equivalent full-time students who enrolled. Of the funding received, 78% was provided to Ms Cullen’s company and 22% retained by TWOA. We understand this income split ratio is not unusual for joint venture arrangements of this type.
7.10
We were told that the idea for a joint venture came from Ms Cullen. The joint venture agreement was prepared by Ms Cullen after all the necessary academic approvals were obtained. The agreement was signed by Ms Cullen and Rongo Wetere. It does not appear there was any negotiation over the terms of the agreement.
7.11
The only internal assessment or approval process conducted by TWOA in relation to Mahi Ora was the course approval by TWOA’s Academic Board. This was largely an assessment of the educational merits of the course. Rongo Wetere is not on the Academic Board, and was not involved in creating the course or obtaining the academic approvals.
7.12
We looked for a business analysis of the joint venture proposal. We could not find one. We were told this was hardly necessary, as the proposal presented no financial risk to TWOA. But there was no analysis of, for instance, the capability and financial viability of the proposed joint venture partner. Nor could we identify any record of a decision by TWOA (even a decision “in principle”) to start the necessary approval processes or to enter into a joint venture. The decision to proceed seems to have been a “meeting of minds” after informal conversations. We acknowledge that the relevant events took place some time ago, so it may be difficult to recall such matters accurately. Rongo Wetere was one of those involved, and during our interview he accepted that he must have approved the joint venture.
7.13
We were told that Rongo Wetere was initially sceptical about the course, and took some convincing over its merits. We were told that no one had any idea how successful the course would ultimately be. We were also told that, rather than favouring his children, he is especially tough on them in business matters.
7.14
Nevertheless, his participation in the approval of the Mahi Ora joint venture raised a conflict of interest for him. Ultimately, he was the person who agreed to the course going ahead. In our view, it was inappropriate for him to be involved at all. The lack of documentation around TWOA’s decision-making exacerbated the conflict of interest, because it makes it difficult for observers to see whether there were sound reasons for the decisions that were made, and precisely who was involved (and to what extent).
Purchase of Mahi Ora
7.15
The Mahi Ora course immediately attracted many enrolments. By the end of 2004 more than 50,000 people had enrolled in Mahi Ora, and in early 2005 it was attracting around 300-500 new enrolments each month. We were told that the financial return on Mahi Ora has been several times greater than the initial investment.
7.16
In 2001, the success of the Mahi Ora course was already evident. It represented a large and ever-increasing proportion of TWOA’s students and income. Both parties felt that TWOA should purchase the Mahi Ora course outright, by buying the business. The vendor was Ms Cullen’s company Mahi Ora Limited. TWOA established a subsidiary, MO1 Limited, to purchase and then run the Mahi Ora course.
7.17
Because of a family bereavement, Ms Cullen had little direct involvement in the sale and purchase. We were told she was represented largely by Kingi Wetere (who had become involved in her company along with William Wetere).
7.18
The purchase was discussed and approved by TWOA’s Council. Two valuations of the course were obtained, which helped inform the price. A TWOA Council member (who became an inaugural director of MO1 Limited) undertook one of those valuations. The purchase price of $7.022 million was within the range suggested by both valuations.
7.19
Other than the 2 valuations, TWOA could not provide us with any documented assessment, from a business perspective, of the purchase proposal. We were told it was a simple decision because the course was already highly successful and because of the pre-existing relationship between the parties. But there may have been several commercial and strategic issues to consider; for example:
- a due diligence investigation of the business being purchased;
- evaluating and planning for the expected life cycle of the course;
- how the course fitted into TWOA’s operational priorities and objectives;
- assessing whether the purchase was affordable given other budget constraints; and
- the best timing for any purchase.
7.20
Similarly, TWOA could not provide any evidence of negotiations over the price, or other terms, of the purchase. We expected to see evidence of some negotiation, to indicate that TWOA had sought to achieve sound value for money. We do not know precisely how the terms were arrived at, and who was involved on behalf of TWOA. We were told that all parties saw themselves as working for the common good of TWOA.
7.21
It was conceded that Rongo Wetere would have been involved in some discussions, but we were told that he had very little direct involvement in discussions about the purchase of the Mahi Ora course, and that this was deliberate. For instance, he did not sign the sale and purchase agreement. Former members of the TWOA Council told us that Rongo Wetere noted his conflict of interest and distanced himself from the purchase. However, the minutes of the relevant meeting of the Council indicate that he participated in its consideration and approval of the proposal, including moving one of the relevant resolutions.
7.22
Rongo Wetere’s participation in the Council’s consideration of the purchase came to the attention of our appointed auditor during his audit of TWOA’s 2001 financial stataments. He referred the matter to our Office. We wrote to TWOA in 2002. We expressed concern about Rongo Wetere’s apparent involvement in the Council’s consideration of the matter, given his conflict of interest, and sought an explanation. TWOA told us at the time that “although not accurately reported in the Wananga minutes” Rongo Wetere had actually excluded himself from “many of the discussions relating to this acquisition”. TWOA said –
In future, should circumstances arise we will more accurately record in our minutes, disclosures on conflicts, and exclusions from discussions.
7.23
We wrote again to TWOA. We reiterated that we thought Rongo Wetere ought to have abstained from all matters relating to the purchase of Mahi Ora. We suggested that TWOA consider taking legal advice on potential conflicts of interest should they arise in the future.
7.24
This was the first time we became aware of a conflict of interest at TWOA. We accepted TWOA’s assurances about that matter, and expected it to manage such situations better in future. After expressly raising the issue with TWOA in 2002, we did not expect this sort of poor practice to recur.
7.25
As soon as the purchase took place, Kingi Wetere and William Wetere took on senior management positions in MO1 Limited, and they and Rongo Wetere became directors of MO1 Limited. Ms Cullen continued to provide some voluntary advice and assistance in respect of the Mahi Ora course. At the same time, the AI Trust bought a property from Ms Cullen that had served as the offices for managing the course, and leased that property to MO1 Limited.
Lifeworks
7.26
Ms Cullen’s company Awarua Limited then created another course, similar to Mahi Ora but targeted at Pākehā. It was called Lifeworks. In 2003, after the course had been prepared, MO1 Limited and Awarua Limited signed an agreement. MO1 Limited agreed to pay $1.7 million to Awarua Limited as a once-only fee for the creation of this course, and then took ownership of full rights to the Lifeworks course in New Zealand. We understand that Rongo Wetere was not involved in this transaction. However, Kingi Wetere and William Wetere held senior positions in MO1 Limited at the time, and would have been involved in the transaction.
7.27
MO1 Limited has licensed the Lifeworks course to The Open Polytechnic of New Zealand. Delivery of the course began in early 2003.
Kiwi Ora
7.28
Kiwi Ora is a similar course, but aimed at immigrants and intended to help them adapt to life in New Zealand. It was created entirely by Ms Cullen’s company Ora Limited.
7.29
A joint venture agreement between TWOA and Ora Limited was first signed in late 2002. Delivery of the course began in early 2003. The nature of the joint venture agreement is similar to the one used for Mahi Ora in 2000. That is, Ora Limited is to deliver the course, and is responsible for all costs (including, for example, employing administrative and tutorial staff to deal with students, and preparing the course materials). TWOA is the identified education provider, monitors the quality of the course, and ensures that the necessary Ministry of Education and New Zealand Qualifications Authority approvals are obtained and maintained. Again, the revenue from the course, which is wholly dependent on student numbers, is split between the parties. The share transferred to Ora Limited under the joint venture agreement was initially 85%, while TWOA retained 15%. Ms Cullen told us that the agreement favoured TWOA.
7.30
Like the courses discussed above, Kiwi Ora has attracted many enrolments. In its first 6 months, it had attracted about 5000 students, and by 2005 it was accounting for about a quarter of all TWOA’s enrolments.
7.31
As with Mahi Ora, the course was considered and approved by TWOA’s Academic Board. There was no documentation of any business case or commercial assessment of the joint venture by anyone in TWOA.25 There was no record of any TWOA discussions or decision in principle to proceed with the business arrangement. There was no documentation of any negotiation that might have occurred over the terms of the joint venture agreement.
7.32
We were told that the idea for this joint venture came from Ms Cullen and Ora Limited. Rongo Wetere orally agreed to Ms Cullen starting work, but had little knowledge of the details. The only formal approval of the course within TWOA was by the Academic Board. No one else made any decision on behalf of TWOA to proceed with the business arrangement. Ms Cullen drafted the joint venture agreement. She and Rongo Wetere were the signatories to the 2002 joint venture agreement. The joint venture agreement was not referred to TWOA’s Council before it was signed.
7.33
Rongo Wetere’s involvement in this matter – as the only person who apparently gave any form of approval for the business arrangement, and as the signatory to the joint venture agreement – raised a conflict of interest.
7.34
In 2003, an adviser to TWOA’s Council expressed concern about the nature and scope of TWOA’s relationship with private training establishments. Concerns were expressed at a later Council meeting about how the Kiwi Ora joint venture was agreed. TWOA’s acting Council chairperson, Craig Coxhead, conducted an internal review of Rongo Wetere’s involvement in that agreement. In his report back to the Council, Mr Coxhead found that there was a “clear conflict of interest”. He described this as a serious issue, for which there was “no excuse”. He made several recommendations, including about the need to adopt a conflicts of interest policy and register. These were implemented in late 2003.
7.35
Mr Coxhead’s review also noted that there was no formal consideration of Ora Limited’s financial viability, and recommended that this should be done in future situations like this. His review noted too that the joint venture agreement had not been put to the Council for consideration, and in some respects had exceeded Rongo Wetere’s delegated authority.
7.36
Further joint venture agreements were signed for 2004 and 2005. On these occasions, Mr Coxhead ensured that Rongo Wetere was excluded from all decision-making. Mr Coxhead personally negotiated and signed the contracts with Ora Limited, and the Council ratified them. The income split was adjusted slightly in TWOA’s favour.26
7.37
We acknowledge that Rongo Wetere’s conflict of interest in the first Kiwi Ora joint venture agreement has already been the subject of a detailed internal review by TWOA. However, we are concerned that our advice in relation to the Mahi Ora course earlier in 2002 was not heeded. By the time of the Kiwi Ora course, TWOA had clearly been put on notice that it needed to take conflict of interest issues seriously. It did not.
7.38
Regardless of the merits or subsequent success of a transaction, it is a basic expectation of good practice in the public sector that important business decisions can be shown to have been carefully considered, justified, and properly authorised. This should apply as a matter of course.
7.39
When a conflict of interest exists, the need for transparency is heightened considerably. In those cases, the entity must take extra care to ensure that its actions and decisions are clearly justifiable. Questions are bound to be asked when a major transaction with a public entity involves a close relative of a person as senior as the chief executive.
7.40
This was not a remote or insignificant conflict of interest, and TWOA must have known, after Mahi Ora, that Kiwi Ora was likely to be very successful. When this joint venture proposal was considered by TWOA, Rongo Wetere should have had nothing to do with it. He should have taken steps to ensure that he was formally excluded from any formal or informal assessment or decision-making, and he should have had those steps clearly documented. He did not.
7.41
The recurring and similar conflicts of interest over these courses are likely to cause members of the public to question the motives behind the various arrangements between TWOA and Ms Cullen’s companies. This is regrettable, because TWOA’s poor practices could detract from what may well otherwise be high quality educational products.
Greenlight
7.42
Greenlight is an adult literacy programme created by TWOA in collaboration with Cuba’s Ministry of Education. Contrary to some public allegations, we understand that this programme has not been purchased by TWOA (whether from Marcia Krawll or anyone else).
7.43
Rongo Wetere had been concerned for some time about literacy problems impeding the success of students. Before the Greenlight programme, TWOA had been spending sizeable amounts of money on literacy support tutors at some campuses. Ms Krawll recommended that Rongo Wetere speak to officials in Cuba about setting up a literacy programme, because Cuba had a good reputation for literacy education.
7.44
Greenlight is a video- and audio-based programme. Students are taught basic literacy and numeracy skills in their home environment and at their own pace. The programme is divided into 4 modules. It is modelled on a Cuban methodology. TWOA personnel have travelled to Cuba 5 times since 2002 in connection with this programme, and several Cuban advisers seconded from the Cuban Ministry of Education have spent a lot of time in New Zealand helping TWOA to create the programme. Work on the programme started in late 2002, and delivery of the first module began in mid-2003, at the same time as work began on the later modules. Each of the modules has been trialled on a small pilot group of students before being finalised. The pilot for the fourth module was almost ready to be rolled out as we were conducting our fieldwork. TWOA personnel we spoke to are pleased with the programme’s success so far, and confident about its future.
7.45
Ms Krawll is the co-ordinator of the Greenlight programme.
7.46
The creation costs of the programme have been high, and the programme has taken longer to create than was originally envisaged. We were told TWOA thought the programme would cost between $1.5 million and $2.5 million. At the time of our fieldwork, costs exceeded $5 million. TWOA now expects the programme to cost between $6 million and $7 million.
7.47
Most of the costs are for producing videos and other programme materials. TWOA contracts a professional firm for video production. TWOA bears the costs of the Cuban advisers seconded to New Zealand, and since 2004 TWOA has paid a fee to the Cuban Ministry of Education for their services. We were told that Ms Krawll and Rongo Wetere helped to minimise costs by personally housing some of the secondees free of charge for part of their time in New Zealand. TWOA also has a team of its own staff working on the programme.
7.48
We are concerned about the informal nature of the planning for, and control of, such a significant programme. There was no formal written proposal or written business case for the Greenlight programme. TWOA’s Council has been kept informed of the programme, but did not formally approve it (or the contractual arrangements with the Cuban Ministry of Education). The Council told us it was not aware of specific details and escalating costs, although Rongo Wetere disputed this. We are surprised that more questions were not asked, given the significance of the programme. The decision to create the programme evolved solely out of discussions between Rongo Wetere, Ms Krawll, and Cuban officials.
7.49
There is no detailed project plan guiding and controlling the work. We were told there was a budget, but Ms Krawll conceded that she did not know what it was, or who controlled it. Until very recently she did not report on progress or expenditure to any TWOA manager other than Rongo Wetere. That is unsatisfactory, given their personal relationship.27
7.50
We were told that revenue from the Greenlight programme has already covered its costs, and that the delivery of the programme is relatively inexpensive. This does not excuse the lack of proper control and monitoring. TWOA had little idea how much the programme would cost to set up, and little discipline has been exercised over costs as time has gone on. There were a number of reasons for the escalating cost. In our view, careful planning at the outset would have prevented or mitigated some of the difficulties that TWOA has encountered.
Claim by the AI Trust regarding intellectual property for educational courses
7.51
In its financial statements for 2003, TWOA noted that the AI Trust intends making a claim against TWOA for intellectual property and artworks that were transferred to TWOA when TWOA was formed in 1993. The intellectual property aspect relates to several of the educational courses that are offered by TWOA (and that presumably originated with the AI Trust).
7.52
The intended claim seems to stem from a concern that TWOA ought to acknowledge and pay the AI Trust for those educational courses and other assets that had been originally created and managed by the AI Trust, but were transferred to TWOA when it began to operate as a wānanga. The issue appears to have arisen in the context of recent moves to increase the separation between the 2 entities, and to add greater formality to the business relationships between them.
7.53
The matter was raised at a meeting of TWOA’s Council in April 2004. It is not clear from the minutes who raised it. The minutes record that it was suggested that the 2 entities agree on a robust process to determine the matter and that one person be appointed to prepare an independent report, which both entities could then consider.
7.54
Professional advice was sought from major accounting and law firms. The advice was sought by – and provided to – the 2 entities jointly. The advisers were asked to determine:
- whether certain assets and services were transferred from, or provided by, the AI Trust to TWOA when TWOA was established without full or any consideration being provided; and
- the fair value of the consideration to be provided by TWOA to the AI Trust for any such assets and services.
7.55
The advisers concluded that the AI Trust had a proper basis for a copyright claim in relation to TWOA’s Te Ara Reo Māori course materials, and that the AI Trust could seek payment from TWOA in return for giving continued permission to TWOA for it to use certain elements reproduced in those materials.
7.56
The advisers also concluded that an appropriate retrospective lump sum payment by TWOA to the AI Trust, for the use of the intellectual property in previous years, would be between $10.2 million and $14.2 million, with a mid-point of $12.3 million. The advisers recommended that the ongoing compensation to the AI Trust, for use of the course materials by TWOA, be an annual royalty of Te Ara Reo Māori revenue, calculated at a rate of 10.2%.
7.57
The cost of this legal and accounting advice was shared between TWOA and the AI Trust. The portion paid by TWOA was about $140,000.
7.58
TWOA communicated the nature and detail of the intended claim to Ministers in late 2004, but TWOA personnel told us that this issue is not being actively pursued.
7.59
We did not see evidence that the AI Trust has given formal notice of a claim. We were concerned to see that, if anything, TWOA and Rongo Wetere appeared to be leading the intended claim. In particular, Rongo Wetere’s position with the AI Trust appeared to conflict with his duty to act to protect the interests of TWOA. Letters from the advisers were addressed to him as both chief executive of TWOA and managing director of the AI Trust.
7.60
While we have not evaluated the professional advice, the amounts discussed seem high. We do not understand why this issue arose so long after TWOA took control of the property, and why TWOA appeared to take the lead in establishing the existence and amount of the intended claim.
25: In saying this, we are not suggesting that Ora Limited did not thoroughly research and plan the course.
26: In 2005, it changed to an 82% and 18% split.
27: The relationship between Ms Krawll and Rongo Wetere was recorded in the conflicts of interest register from late 2003.
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