Part 6: Procurement practices

Inquiry into the Saudi Arabia Food Security Partnership.

Our terms of reference for this inquiry included considering the procurement practices that the Ministry and NZTE used to purchase goods and services for the Partnership. We reviewed five relevant engagements. In this Part, we discuss them in chronological order. The costs incurred under the third and fifth engagements (the contract for services and the funding agreement) formed part of the agreed maximum of $11.5 million allocated to the Partnership.

Procurement practice guidance

From April 2006, the Mandatory Rules for Procurement by Departments (the Mandatory Rules) applied to "public service departments", which included the Ministry. They were introduced not only to help government departments make good purchasing decisions but also so that New Zealand's obligations under its trade treaties were complied with. The Mandatory Rules were replaced (from 1 October 2013) by the Government Rules of Sourcing, which are now into their third edition. However, the Mandatory Rules applied at all times relevant to this inquiry.

In 2001, we published Procurement: A Statement of Good Practice. We updated it in 2008, publishing Procurement guidance for public entities (our 2008 guidance). Our 2008 guidance described what good procurement looks like, including:

  • Good process requires good planning so that value for money is achieved, along with overall goals and business strategy.
  • The procurement approach will vary depending on the goods or services being procured.
  • Open tendering will most likely be the preferred method, although direct procurement and closed tenders can be appropriate in certain circumstances.

The Mandatory Rules

The Mandatory Rules "set out mandatory standards and procedural requirements for the conduct of procurement by government departments". In brief, they required:

  • that departments conduct their procurement in accordance with certain policy principles, that procurement was normally by way of open tendering procedures, and that notices of intended procurement be published on the Government Electronic Tenders Service (GETS);
  • compliance with the Mandatory Rules for the procurement of goods and services above $100,000 (based on the maximum total estimated value of the procurement over its entire duration);
  • that departments put in place policies and procedures to eliminate any potential conflict of interest;
  • that departments accord all potential suppliers equal opportunity; and
  • that certain procedures, relating, for example, to information and time limits, be complied with.

There were certain exclusions and exceptions to the Mandatory Rules, including:

  • that the Mandatory Rules did not apply to the procurement of goods and services "outside the territory of New Zealand, for consumption outside the territory of New Zealand" or to the hiring of government employees; and
  • that open tendering was not required "where … for reasons connected with the protection of exclusive rights, such as patents or copyrights, or where there is an absence of competition for technical reasons, the goods or services can be supplied only by a particular supplier and no reasonable alternative or substitute exists" (exception 1b) or "… for reasons of extreme urgency" where open tendering "… would result in serious injury to the department, the department's programme responsibilities or the New Zealand Government".

If it was necessary for a department to depart from the open tendering procedures because of one of the exceptions, the department was required to maintain a record, or prepare a written report, providing specific justification for the contract.

Engagements carried out

First engagement

The first engagement for the Partnership was engaging an official to lead the development of a public-private partnership between New Zealand and the Gulf Cooperation Council and act as Special Envoy for Government-Commercial Partnerships (the Special Envoy). We discuss New Zealand's relationship with the Gulf Cooperation Council in paragraph . Employment arrangements are generally exempt from the requirements of the Mandatory Rules.

The Special Envoy's contract was described as a fixed-term employment agreement, and we have no evidence that suggests it was not an employment relationship. It is clear from the documents we have seen that, in a paper to the Ministers of Foreign Affairs and Primary Industries, officials suggested several other possible candidates. Ministry officials told us that they held no record of what was agreed at the meeting with the Ministers.

Mr McCully told us that he had previously worked with the appointed official (who was not one of the possible candidates on the list suggested by officials) and recommended him for the role to the Ministry. The then Secretary of Foreign Affairs and Trade said that, because the letter of engagement was from him, he would have made the decision to employ the Special Envoy. The letter of engagement outlined how the official's previous experience met the requirements of the role. We have seen no evidence of any open process for engaging the official. However, the Mandatory Rules did not apply to employment arrangements, and this engagement is not contrary to the Rules.

Second engagement

The second engagement was of Deloitte in late 2012. This occurred after a Ministry official had discussions with the Al Khalaf Group about a way forward. The engagement was to draft a "blueprint", which would outline the potential components of the Partnership, including the breeding venture.

The Secretary of Foreign Affairs and Trade approved a budget that allowed a Ministry official to progress various Government-Commercial Partnerships Initiative matters, including engaging Deloitte. A file note in the Ministry's documentation details the decision to carry out a "selected" (which we have taken to mean "closed") procurement to engage Deloitte and outlines why an approach was to be made to that firm. The documentation we have seen indicates that Deloitte was chosen because of the experience the firm had in the red meat trade and the Middle East.

A scope of work was agreed, with the costs estimated to be about $40,000 (the final invoice submitted was for that amount). Under the Mandatory Rules, open procurement was not required where the cost of the goods and services was under $100,000.

Accordingly, the direct procurement of Deloitte to prepare this blueprint was not in breach of the Mandatory Rules. The Ministry's procurement manual guideline is that "selected" purchases of $25,000 or more required an additional step in the procurement process. We did not see evidence that this step was taken. The manual also suggests that such purchasing must not be used to circumvent competition but could be used in a variety of circumstances, including where there was only one supplier.

Even though good practice suggests that the amount to be spent is not the only factor in deciding whether to openly tender an opportunity, where there is clearly a well-qualified and knowledgeable contractor available, not offering the opportunity can be the most efficient procurement method. We note that the good practice of preparing a file note was followed and that this indicated that the team at Deloitte fitted the requirements, given the specialist advice required, the need for the preferred supplier to be acceptable to the Al Khalaf Group, and confirmation from informal enquiries.

Third engagement

The third relevant engagement was the contract for services, dated February 2013, signed between the Ministry and HAATT Est. The Ministry would pay $4 million to recognise the investment HAATT Est had made in the Awassi breeding programme and its knowledge-based assets and networks in Saudi Arabia. The Ministry would also contribute up to $6 million as an investment in the Partnership. The disbursement of the $6 million was to be agreed between the parties (see paragraphs 6.23 to 6.30).

We understand that the Ministry's view, after receiving internal and external advice, was that the engagement was excluded from the Mandatory Rules because HAATT Est's services were to be performed overseas. Accordingly, there was no open procurement of these services.

A memorandum to the Secretary of Foreign Affairs and Trade, recommending that the contract be signed to enable immediate payment of the $4 million, referred to the Mandatory Rules and commented that departments were not required to apply them to procurement of goods and services for consumption outside New Zealand. There was also an exemption from open tendering because only one supplier was available (that is, the networks in Saudi Arabia, and the skills and expertise required, could be supplied only by HAATT Est).

Fourth engagement

The fourth relevant engagement was of Deloitte. This second piece of work was to help the Ministry to prepare the indicative business plan for investing in an agri-business hub in Saudi Arabia, required under the contract between the Ministry and HAATT Est. An undated procurement plan, which appears to have been written about March 2013, sought approval for the direct engagement of Deloitte to prepare this indicative business plan.

Deloitte was to be engaged under a syndicated contract for professional services.39 Selective purchasing under a syndicated contract to which the Ministry had access was permitted under the Ministry's procurement manual without a competitive tender process. However, since the amount involved was more than $25,000, an additional step in the procurement process was required in accordance with the Ministry's procurement guidelines. We saw no evidence that this additional step was taken.

The procurement plan noted that the selection of Deloitte for what we have referred to above as the "second engagement" had been under the Ministry's threshold of $50,000 for seeking competitive quotes. Based on Deloitte's performance under that procurement, the plan recommended that the Ministry engage Deloitte directly (which it was able to do under the syndicated contract).

The final contract price was $50,000 plus expenses. GST is excluded in valuing contracts under the Mandatory Rules, which further provide that all forms of remuneration must be taken into account in calculating the thresholds. Although some expenses were reimbursed under these two engagements, the combined total of the remuneration payable under them was not above the $100,000 threshold of the Mandatory Rules.

Deloitte provided the indicative business plan to Ministry officials, and officials produced a final draft in August 2013. We consider that this further engagement of Deloitte was appropriately conducted in all important respects.

Fifth engagement

In August 2013, the Ministry carried out a procurement process to find a supplier "with suitable experience, capability, capacity and commitment to build and lead a consortium of agricultural businesses in establishing an agribusiness hub in Saudi Arabia". This was the mechanism by which the Ministry and NZTE would procure $6 million of services to deliver on Phase 2 of the contract for services. A procurement plan was put in place. The process used was open and appears to have followed the recommendations of the Ministry's procurement manual.

The process began with a notice of procurement and an expression of interest document. Both of these were publicly notified on the GETS website on 20 August 2013. The notice stated that the Ministry, along with NZTE, was seeking "a lead provider and indicative consortium to develop an agribusiness hub around a demonstration sheep breeding farm and operation in Saudi Arabia".

This aligned with the procurement plan for the expression of interest. The plan called for a lead provider and consortium partners to develop a demonstration sheep breeding farm and operation in New Zealand and Saudi Arabia to showcase New Zealand agri-business expertise and technologies to Saudi Arabia and the wider Gulf Cooperation Council region. New Zealand farming techniques, technology, and equipment were to be showcased on an existing Saudi Arabian sheep breeding unit owned by the Al Khalaf Group.

The notice of procurement made it clear that interested parties needed to participate in the expression of interest to be given the opportunity to be selected as a potential consortium lead. It was anticipated that the next stage would be a "competitive dialogue" phase. Information about what this entailed and what it was supposed to achieve was contained in a publication that accompanied the notice and expression of interest. About 180 parties viewed the notice, with about 80 downloading some or all of the documentation. Supplier questions were posted to the GETS website. A discrepancy in the closing date was addressed.

Three entities responded to the expression of interest: BAGL and two others. The competitive dialogue process for shortlisted candidates that was originally intended was not used because of the limited number of responses. An evaluation panel was convened, which included two officials (one as a non-voting chairperson) from the Ministry, an official from NZTE and, on the NZTE official's recommendation, independent representation from an industry expert. Various other officials, including the Ministry's probity adviser, were also involved. The panel shortlisted BAGL and one other, and these candidates gave presentations to the panel.

The evaluation panel concluded that, although BAGL and the other shortlisted provider were both viable choices, BAGL should be recommended as the preferred consortium lead. The funding agreement was eventually signed with BAGL. Proper minutes were kept, and proposals were appraised against pre-published criteria and weightings. The panel noted that "in order to develop a detailed schedule of deliverables and associated project budget […] [the consortium lead] will need to work with the Al Khalaf Group to ensure that the balance of effort and investment meets the expectations of both parties".

In a tendering filing and probity checklist, it was noted that panel members had made conflict of interest declarations. From evidence received from the Ministry of Business, Innovation and Employment, it appears that no "GETS post-award notice" identifying who the successful supplier was, and other matters, was posted to GETS. This is in breach of Mandatory Rule 48.

The Ministry completed a probity audit of the tender process. This made some minor criticisms but concluded overall that the Ministry acted, and was seen to act, in a fair, transparent, and unbiased manner. The findings of this audit were released publicly. We agree with these conclusions.

Conflicts of interest

Several perceived and actual conflicts of interests associated with the Partnership and associated procurements needed to be managed. Where appropriate, we expect conflicts of interest to be transparently managed rather than avoided to the detriment of excluding relevant people from a project or decision.

The Ministry's probity audit included a review of the conflict of interest declarations. It stated that conflict of interest declarations were obtained and that actual or potential conflicts were assessed and addressed. A declaration of interest was made by BAGL in its expression of interest response for the lead provider role and in a separate document on 24 January 2014 (after the funding agreement was signed). BAGL declared its interest in On Farm Research Limited and BL Land Co Limited.

Evaluation panel members also declared their conflicts of interest, and the probity auditor judged that the conflicts had been appropriately managed. The presentation material BAGL submitted to the panel explained that there was a "close business association" between BAGL and the Al Khalaf Group. The material provided a summary of the history of that association.

We were told that the panel knew about the previous relationship between BAGL and Sheikh Hmood and his companies, and between the second shortlisted entity and Sheikh Hmood and his companies. Nonetheless, we expected BAGL's expression of interest response to have referred specifically to this. The relevant Cabinet Minute "noted that the procurement and selection of New Zealand firms and services to participate in the food security partnership will be done with the agreement of the Saudi partners, [the Ministry], and NZTE".

We were told that the panel viewed BAGL's previous relationships with the Al Khalaf Group as a positive factor. BAGL was seen to have an increased understanding of the different conditions for farming in Saudi Arabia and of the Awassi sheep breed from its involvement in the Al Khalaf Group's farming operations in New Zealand. The second shortlisted entity also had a previous relationship with the Al Khalaf Group. We discuss Awassi NZ Land Holdings Limited's acquisition of 24.9% of the shares in BAGL in Part 7. Sheikh Hmood is a director of, and has a 90% shareholding in, Awassi NZ Land Holdings Limited.

Our comments on these matters

For the contract for services, the Government was clear that there could be only one supplier (Sheikh Hmood's companies) and entered into a contract for a specified amount. The Government entered into a commitment and then put together a range of services to meet that commitment. In other circumstances, and especially where a contract is high value or high risk, a competitive tender is to be preferred, in accordance with our 2008 guidance.

Overall, we consider that these procurements were carried out properly and that, in all significant aspects, they complied with the Mandatory Rules (which government departments were required at the time to follow).

39: A syndicated contract is one where, for example, a department has carried out an open tender for particular services, and other departments are then able to join that contract and purchase off the panel without having to carry out their own tendering process. The syndicated contract used by the Ministry was the "Defence Syndicated Contract".