Part 3: Integrity of procurement and contract approval procedures

Auckland City Council: Management of footpaths contracts.

Various allegations were made publicly that the Council had mismanaged the tendering and awarding of its footpaths contracts. One allegation of a probity nature was that an individual staff member had compromised the integrity of the Council's procurement process by accepting a gift of a Christmas ham from a tenderer during the process of awarding the current footpaths contracts (starting from 1 July 2009).

Given the nature of the allegations, we decided to look in depth at the Council's procurement and contract approval procedures. We reviewed the procurement process leading up to the Council's decision to award three separate sets of footpaths contracts – for both of the current contracts and the two preceding sets of contracts. We wanted to establish whether there was any indications of wrongdoing during procurement and, if so, to what extent.

We also wanted to see whether the Council had procurement procedures that would limit the potential impact of any wrongdoing, and that the Council properly followed these procedures for its footpaths contracts.

Allegations were also made publicly that the Council had paid too much for footpaths work in 2005/06. Given these allegations, which we also address in Part 4, we wanted to see that spending on footpaths work properly followed the Council's approval procedures.

What we looked at

In this Part, we discuss how the Council applied its procurement procedures leading up to the awarding of three sets of footpaths contracts, and, where applicable, the Council's decisions to extend existing contracts or significantly increase their contract values. The three contract periods we assessed in detail were:

  • 1 July 2001 to 30 June 2004;
  • 1 July 2004 to 30 June 2009; and
  • 1 July 2009 and beyond.

We also discuss whether the Council properly applied its procedures for probity auditing to provide assurance over the procurement process for its footpaths contracts.

Our overall conclusions

The Council's procurement and approval procedures require that, for contracts as large as the footpaths contracts, the work must be subject to tender or request for proposal, and tenders must be accepted by resolution of the Council before contracts are awarded.

Generally, the Council followed its procedures and applied them in a sufficiently robust way leading up to the award of footpaths contracts from 2001 to 2009. It also generally followed its approval procedures for extending and changing the value of contracts during this time.

Overall, we did not find a fundamental flaw or gap in the Council's procurement and contract approval procedures.

However, we did find areas where the Council's administration of contracts and monitoring of budgets needs to be tightened to ensure that councillors are fully informed when approving contract values.

We consider that Council staff should ensure that they provide councillors with more accurate information about cumulative expenditure and values during the process of approving contract values.

Procedures for contracts from 1 July 2001 to 30 June 2004

From 1 July 2001 to 30 June 2004, the Council's city footpaths work was covered by two geographic contracts for a fixed three-year term. These contracts resulted from reorganising the Council's footpaths work from three previous geographic areas14 into two new ones, and were for citywide footpaths and car-park maintenance works, including asset renewals.

A report by Council staff dated 5 June 2001 made a recommendation for awarding the two contracts. The report noted that the Council's use of longer-term contracts (for the previous three years) had resulted in cost savings, and that the rationalisation of contracts from three to two years would result in improved planning and co-ordination of the footpaths work.

On 13 June 2001, the Transport and Roading Committee adopted the Council staff's recommendation.

At its full meeting on 14 June 2001, the Council awarded the two footpaths contracts starting on 1 July 2001 (TARS/00/255 and TARS/00/256)15 to John Fillmore Contracting Limited.16

In our view, the Council followed its procedures and applied them as it should have to the footpaths contracts starting from 1 July 2001.

Procedures for contracts from 1 July 2004 to 30 June 2009

From 1 July 2004, the Council's city footpaths work was covered by two contracts for three years, with an option to extend for up to two years.

On 5 May 2004, the Transport Committee adopted the Council staff's recommendation to award the footpaths contracts and the decision was subsequently agreed to by the full Council at its meeting of 27 May 2004.

Both footpaths contracts – TARS/03/348 (Contract 348) and TARS/03/349 (Contract 349)17 – were awarded to John Fillmore Contracting Limited.18 The awarding of the contracts reflected an offer by the tenderer to deduct $100,000 a year from the combined value of the contracts, should both contracts be awarded together.

The Council subsequently decided to take the option to extend both of the contracts for the two additional years.

Significant increase in original contract values

During the 2006/07 financial year, the Council began spending significantly more on its footpaths work than was provided for in the original contract values (see paragraphs 2.7 and 2.20-2.21). This meant that the Council needed to approve significant increases in contract values for that period in keeping with its Delegations Register.

The Council told us that, since 2004, the Transport division had been following a streamlined approval process for situations involving frequent revisions to contract values. This streamlined process was recommended by the Transport division and approved by the previous Assurance Services division. The recommended approach suggested a basis for removing the requirement for increases to contract values to be referred back to the Council, as long as the increases were within approved budget. The recommended approach was not formally proposed to or adopted by the Council, but became the practice of the Transport division during this period.

The Transport division's streamlined process was considered inappropriate by the current Risk and Assurance department and accordingly the practice has stopped.

The Council retrospectively approved significant increases in the values of footpaths contracts to account for 2006/07 expenditure on 28 June 2007, at the same time as it agreed to new contract values for the 2007/08 financial year.

The cumulative contract values approved on this basis to the end of 2006/07 totalled $52.5 million.19 The approved amount exceeded and therefore covered the cumulative total value of work done in the first three years of the footpaths contracts of $52.3 million, and cumulative payments of $51.1 million.20

We are satisfied that the Council had budgeted for the footpaths work. Although there were some uncertainties about the process, the expenditure was in keeping with the Council's intentions and ultimately the Council's approval.

Extending the contracts

In the period leading up to the end of the initial three-year term of the footpaths contracts (up to 30 June 2007), the Council had to decide whether to extend the footpaths contracts for the final two years, and also whether to approve further significant increases in the contract values during these final two years. Because of the financial significance of these decisions, the Council's procedures required both decisions to be made by the full Council.

The Council confirmed extension of the footpaths contracts for both the 2007/08 and 2008/09 financial years (at the same time as extending the Transport division's other main contracts) on 28 June 2007.

The report by Council staff to this meeting noted that:

By extending these contracts, Council will gain the benefit of the current contract rates, which are market competitive and direct cost savings from a reduced tendering frequency. In addition, the Transport division will achieve alignment of all physical works term contracts and provide a window of opportunity to consider more innovative methods of service delivery, such as an alliance agreement for a third of the isthmus to improve service delivery performance and reduce costs during a five-year term.21

The report by Council staff also noted that the market was very buoyant at the time and that, should the Council go to the market, rates could be 20% higher than those in the existing footpaths contracts.

Contract extension bypassed committee process

The full Council meeting on 28 June 2007 approved this contract extension without first reporting through the Transport and Urban Linkages Committee, as envisaged by the Council's procedures. The report by Council staff explains that this was because of the timing of the budget proposals for 2007/08, the timing of the market reviews, the sub-committee meeting schedule, and the need to finalise the contractual arrangements by the start of the new financial year.

We consider that, although the Council did not follow its usual procedure of reporting through the committee, this was a reasonable action under the circumstances. The full Council meeting had the authority to make the decision and the elected members were in an informed position to decide the matter.

Notifying the contractor about the contract extension

Council staff notified the contractor on 29 June 2007 about the contract extension, but only in relation to the 2007/08 financial year. The Council has been unable to locate any formal notification to the contractor in relation to the extension of the contract for the 2008/09 financial year.

In our view, it would have been good practice for the Council to have kept a record of any advice informing the contractor about the contract extension.

Further revised contract values based on understated amounts

The Council approved further revised contract values for the footpaths (and other Transport division) contracts for the 2008/09 financial year on 28 August 2008. These revised contract values were anticipated and reflected in the Council's budget for that financial year.

The contract values approved at the 28 August 2008 meeting accounted for cumulative work of $82.6 million to 30 June 2008.22 This is less than the Council's record of the cumulative total value of work done in the first three years of the footpaths contracts of $83.7 million (see paragraph 4.10 and Figure 4), and less than the recorded amount of cumulative payments of $84.9 million (see paragraph 4.23 and Figure 6, extracted from the Council's financial system).

In our view, therefore, the contract values approved by the Council at its meeting on 28 August 2008 must have been understated by an amount of up to $2.3 million (that is, Contract 348 payments exceeded the approved amount by $2 million, while Contract 349 payments exceeded the amount by $0.3 million). Council staff have told us that the numbers presented to the Council may have excluded certain work completed under the footpaths contracts. However, we have not been provided with a reconciliation that confirms that these exclusions adequately explain the differences. Furthermore, it was not made clear in the Council papers that there were any such exclusions from the numbers.

Our conclusions

Overall, expenditure on footpaths work for 2007/08 and 2008/09 was broadly in line with the Council's budget. The most significant variances from budget were in relation to the separate footpaths work in the CBD.

In our view, the Council generally followed its procedures and applied them as it should have to the footpaths contracts starting from 1 July 2004.

However, some of the information provided by Council staff to councillors about contract values and expenditure for which approval was being sought was incorrect. Although this was not desirable for the purposes of making decisions to approve contract values, the differences were not significant and the overall expenditure was broadly in line with the Council's budget provisions and therefore the Council's intentions.

Recommendation 1
We recommend that Auckland City Council improve its process for approving contract values, including reconciliation of cumulative expenditure and contract values to better support the process.

Procedures for contracts from 1 July 2009

From 1 July 2009, the Council's city footpaths work is covered by two contracts for a period of two years, with the option to extend for up to a further three years. These contracts cover two geographic areas. These areas are currently smaller than those covered by the previous contracts, because footpaths work for a third of the isthmus is now dealt with under the Council's alliance agreement.

Transport Committee's recommendations

An extraordinary Transport Committee meeting on 25 March 2009 considered recommendations to the full Council about the approval of all of the Transport division's new term contracts. There were 10 contracts in all; two were for footpaths work.

The Council adopted the Transport Committee's report23 at the full Council meeting on 26 March 2009, and noted:

  1. That in order to allow the Transport Committee the opportunity to familiarise itself with material presented and to ensure probity, the awarding of … (8 of the 10 contracts) … be deferred to a meeting of the Transport Committee (if necessary a special meeting to be called).
  2. That the Council delegates authority to approve the awarding of … (the 8 contracts) … to the Transport Committee in order for the contracts to be implemented on 1 July 2009.
  3. That the council defer making a decision on … (the two footpaths contracts) … until the 23 April Council meeting.
  4. That the Chief Executive be requested to provide a report and recommendation to a meeting of the Transport Committee and Council that gives assurance as to the probity of all contracts regarding the approval and awarding of … (these) … contracts.

Consideration by the full Council

The Council deferred making a decision at the 26 March 2009 full Council meeting, to allow additional time to consider a number of allegations that were being raised about the Council's footpaths work.

At the full Council meeting on 23 April 2009, the Chief Executive's report requested by the 26 March meeting was tabled and provided the assurances that the meeting had sought.

A memo from the Chair of the Transport Committee was tabled. The memo's intended purpose was to give members a full update on the process for the proposed awarding of the footpaths contracts, and to support the recommendations of the Chief Executive. A number of documents were attached to the memo; they related to various allegations about the Council's footpaths work. The documents included "… a list of … answers to [a journalist's] questions … for your information and to ensure you are all aware and informed …"

The Council meeting also noted that it was now satisfied for the awarding of contracts to proceed in the circumstances. The minutes of the meeting note that:

(i) … in order to procure services that are essential for maintaining and improving a safe and effective footpaths network in Auckland City, a comprehensive, competitive tender process to obtain best value for Auckland City ratepayers has been undertaken.

(ii) The excellent financial results achieved for council's ratepayers as a result of this tender process, generating substantial multi year savings, together with the maintenance of high standards of customer service in the way footpaths work is undertaken.

(iii) That in view of various allegations made about the procurement process, and given the council's commitment to high standards of probity, council's Risk and Assurance manager obtained an independent audit of the procurement process … and that the outcome of the review … is that the process in arriving at the preferred tenderers has achieved suitable standards of probity.

(iv) That the Chief Executive will continue to investigate any current or future allegations relating to the council's procurement processes in accordance with normal practice with appropriate reporting to relevant council committees, and further notes the Chief Executive's assurance that none of the investigations of allegations made to date have any impact on the probity of the process leading to the recommendation regarding the footpaths contract.

(v) That the Chief Executive's undertaking that the suggestions made … for further improvement for council's procurement process will be incorporated into the council's business rules.

The full Council meeting on 23 April 2009 awarded the two footpaths contracts (PW/08/589 and PW/08/591)24 to John Fillmore Contracting Limited.25

Our conclusions

In our view, the Council followed its procurement procedures and applied them in a sufficiently robust way. We are also satisfied that the Council had an appropriate basis for deciding to proceed with awarding of the footpaths contracts.

Use of probity auditing as part of the procurement process

In assessing the probity of the Council's procurement procedures for footpaths work, we considered the Council's use of probity auditing, particularly for the contracts starting from 1 July 2009.

A probity audit is a procedure designed to assure high standards of probity throughout a tendering process. The probity auditor generally carries out the role as the tender process proceeds (real-time).

Council procedures for probity auditing

The Council's current Procurement Manual requires that:

A probity auditor should be appointed at the start of the procurement and noted in the procurement plan … A probity auditor is required for all procurements exceeding $4m, or high/very high risk and unique or unusual procurements or if there is significant potential for the process to be challenged.

Under the Council's procedures, the conduct of a probity audit, properly documented in the relevant procurement plan and the probity audit scope, is a consideration in the classification of risk (the probity audit contributes to mitigating risk) for continuing contracts and the delegation levels that apply to them. However, major contracts of the size of the Council's footpaths contracts required the highest level of approval by the full Council, regardless of whether a probity audit was carried out.

Probity auditing for footpaths contracts starting from 1 July 2001 and 1 July 2004

The report by Council staff supporting the Council's decision to award the footpaths contracts starting in 2001 also confirms that probity reviews were used during this procurement.

Although not required under the Council's procedures at the time, probity reviews were carried out by the Council's Risk and Assurance department for the procurement that led to the award of the two contracts starting on 1 July 2004. These reviews are referred to in the reports by Council staff recommending that the Council award the contracts. The probity reviews also confirm that the procurement plan was complied with and that all probity requirements had been met.

Probity auditing for the contracts from 2009

The requirement to appoint a probity auditor did not apply to the footpaths contracts that started on 1 July 2009 because the procurement process for these contracts had already begun before the new procedures in the Procurement Manual applied.

The Council did not appoint a real-time probity auditor during the procurement process for the footpaths contracts starting on 1 July 2009. However, the Council did engage an external probity auditor to check that the correct process had been followed before it awarded the contracts. This action was in response to allegations about a lack of probity that were raised around this time.

The probity auditor reported on 24 March 2009, and the Council noted the probity auditor's conclusion when it finally awarded the 2009 footpaths contracts.

The Council also appointed the same probity auditor to carry out due diligence for a range of proposed Transport division procurements, including the procurement process leading to the award of the 2009 footpaths contracts. The Council believes this work neutralised any potential benefit that would have been achieved by a real-time probity audit.

The Council's procedures applicable to the contracts starting in 2009 do not require the Council to conduct probity reviews for major procurements. However, the Council procedures do make it mandatory for Council staff to consider using a probity audit.

For the 2009 procurement, the procurement plan confirms that such consideration took place and that the probity audit would be limited to the Risk and Assurance department attending the opening of tenders. This is also a core requirement of the Council's Delegations Register.

Our conclusions

In our view, the Council took a reasonable approach by not appointing a real-time probity auditor for the footpaths contracts starting in 2009, as it had done for its earlier footpaths procurement process. The requirement to do so was not in place at the time, and the Council took appropriate steps to ensure that the procurement process was carried out properly.

14: Two of these earlier contracts were completed by City Contractors Limited, and the third by John Fillmore Contracting Limited.

15: Covering respectively Avondale/Roskill, Balmoral and Penrose wards; and Western Bays, Hobson, and Eastern Bays wards.

16: These were respectively for the sums of $8,610,210 and $5,445,112 (a combined total of $14.1 million) plus GST.

17: Covering respectively Area 1 – Hobson, Eastern Bays, and Western Bays; and Area 2 – Avondale, Eden-Albert, and Tamaki-Maungakiekie.

18: These were respectively for the sums of $13,641,840 and $13,033,050 (a combined total of $26.7 million) plus GST, plus a CPI cost inflation adjustment as provided for in the contract.

19: $34.940 million in relation to Contract 348, and $17.609 million in relation to Contract 349.

20: Contract 348 expenditure slightly exceeds this amount by $0.2 million, while Contract 349 expenditure is significantly lower.

21: Extension of the Transport division's physical works and professional services term contracts, 19 June 2007.

22: Contract 348 – $58.848 million, and Contract 349 – $23.755 million.

23: Report No. 1/2009 relating to the Supplier Recommendations Report for 10 asset maintenance and renewal term contracts, street lighting design, and planning.

24: Covering respectively the southern and eastern area of the isthmus.

25: These were respectively for the sums of $8,018,500 and $11,753,400 plus GST on the basis that both contracts are awarded, and with a 10% allowance for cost fluctuations, unforeseen circumstances, and minor works (a combined value of $19.8 million).

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