Auditor-General's overview

E ngā mana, e ngā reo, e ngā karangarangatanga maha o te motu, tēnā koutou.

Trust and confidence in a public organisation is driven by competence, reliability, and integrity. Where there is any question about those things, real or perceived, trust and confidence can be quickly eroded.

Sensitive expenditure is one area in which integrity risks need to be carefully managed. Sensitive expenditure can involve an individual receiving a private benefit paid for out of public funds that is additional to the business benefit to the public organisation. There is a heightened sensitivity for this type of expenditure, and concerns can arise that the benefit is not appropriate or lacks a legitimate business reason. Public organisations need to be deliberate and diligent in their management of this kind of expenditure and, as with all spending, be able to justify it.

These issues arise regardless of the amount of money being spent. Even a small amount of public money being spent on sensitive expenditure can raise concerns if it appears to be improper. A sensitive expenditure decision has the potential to harm the reputation of the organisation as well as the public sector more generally.

The issues raised with us in this case

This inquiry was prompted by concerns that were raised with us about procurement practices carried out by Alpine Energy Limited (Alpine Energy), a “public energy company” under the Energy Companies Act 1992.

The information we received included allegations about Alpine Energy and its procurement practices during the period 2013-2018, which raised questions for us about proper procurement practice, financial prudence, and probity.

One of those allegations was about Alpine Energy’s decision to install solar energy equipment on an employee’s house as part of a trial of solar energy. When the employee left the company, Alpine Energy sold the solar equipment to the employee for much less than it cost to install. Regardless of the amounts of money involved, this raised questions for us about whether Alpine Energy had properly managed the risks around sensitive expenditure. In this case, installing the solar equipment on the employee’s house appeared to have conferred a personal benefit on the employee, while the benefit to Alpine Energy was unclear. Our initial view was that this arrangement appeared unusual and, as a result, we decided to carry out an inquiry under section 18 of the Public Audit Act 2001.

The installation of the solar equipment

Our inquiry showed that some of the questions we had about the expenditure could be answered quite easily. For example, we saw no evidence that the solar equipment was installed on the employee’s house as part of a recruitment or employment package. Our inquiry found that the installation had a legitimate business purpose, in that it was conducted as part of a trial of solar energy being carried out by the company as part of a general interest in renewable energy, that the arrangement was fully disclosed to the Board, and that it was agreed from the outset that the employee would purchase the solar equipment at the end of a three-year trial period, with the price to be calculated on the basis of a pre-agreed formula.

Although some of our concerns were resolved, others remain. We found that Alpine Energy did not manage this expenditure as well as it could have done and did not always follow principles of good practice, as expected of public organisations.

Alpine Energy did not explicitly recognise the expenditure as sensitive expenditure. Therefore, it is not able to demonstrate what steps it took at all stages of its decision-making to mitigate the risks associated with the fact that it was incurring sensitive expenditure. Alpine Energy could have taken steps to better support the sensitive expenditure, including:

• weighing the costs and benefits of other ways of running the trial (so it had a documented record of why it installed the solar equipment on the employee’s house);
• explicitly considering how it would deal with any conflicts of interest that might arise; and
• weighing up the costs and benefits of ending the trial sooner once it became evident that it might not be able to collect any data from the trial. Ultimately the trial was largely unsuccessful and the trial was put on hold until the equipment was sold to the employee.

When calculating the final sale price, Alpine Energy deviated from the original agreement that was made. There are a number of aspects of the supporting calculations that were inexplicable or that we do not agree with. For example, Alpine Energy replaced known cost of the equipment with an estimated cost. Using these amounts produced a lower sale price than if known amounts had been used. In our view, the starting point for determining the recognised value of the assets can only be the actual cost, as depreciated from the date that the solar equipment was installed, until the date of disposal.

There is also a general lack of written documentation, either to support and explain why Alpine Energy deviated from the original agreement or to substantiate the judgements that Alpine Energy made. Any decision to deviate from the original agreement should have been clearly documented at the time.

It is also not clear that Alpine Energy sought to maximise its return on the sale of the solar equipment to the employee and recognised the potential for actual or perceived advantage to that employee, both of which are expected for sensitive expenditure such as this. Alpine Energy did seem to be aware that it could not be seen to provide the solar equipment to the employee for nothing.

However, it appears to us that the price Alpine Energy was looking to find for the sale was a low and acceptable amount to the employee, rather than one that also sought to maximise the return to the company and would be seen to be fair and reasonable. This approach might have contributed to concerns that the employee appeared to be enjoying a personal benefit.

Other issues

One other allegation was that Alpine Energy had no procurement policy during the period or, if a policy did exist, it was not consistent with principles of good practice as applied to public entities. In relation to this allegation, the company confirmed that it did not have a procurement policy in place from 2013 to 2018. However, it said it did have some elements of procurement covered in other policies, and that it was in the process of developing a procurement policy during that period. Alpine Energy has subsequently adopted one, effective from 31 March 2019. In our view, a procurement policy is a foundation policy for all public organisations and we expect all public organisations to have one.

Another allegation was that some significant contracts were not negotiated on a contestable basis. For those we examined, the company was able to provide a satisfactory explanation for the procurement approach taken.

It was also said that Alpine Energy’s resources, including staff time, may have been used to procure goods or services for employees’ personal benefit. From the work we did, we found no evidence of these practices being common or widespread.

Sensitive expenditure needs to be carefully considered

The types of sensitive expenditure we come across in the public sector generally relate to travel, accommodation, hospitality, or use of company equipment. This case involved a relatively unusual type of sensitive expenditure that we are not likely to come across often. We are currently carrying out work to update our guidance on sensitive expenditure, which will include our updated views and reiterate principles such as those we discuss in this report.

However, this case serves as a useful reminder to all public organisations, regardless of their activities, size, or location. Even for commercial entities in the public sector, the appropriate treatment of sensitive expenditure is an important area and one in which vigilance is required, to manage perceived and substantive benefits.

When spending public money, public organisations should think carefully – not just about whether that expenditure can be justified to internal stakeholders, but about how the expenditure will look to a reasonable outsider. We say this not to stifle innovation or hinder legitimate commercial decisions, but in the interests of ensuring that public organisations do not inadvertently undermine public trust in them, or in the integrity of the public sector more generally.

We accept that giving careful attention to how sensitive expenditure will look to a reasonable outsider might require more time, effort, and documentation than other types of expenditure. Although that might use resources, those resources will be less than a public organisation would have to use if it lost the public’s trust and confidence through poorly managing sensitive expenditure.

I thank Alpine Energy and those who contributed to our work for their co-operation in the course of our inquiry.

Nāku noa, nā

John Ryan
Controller and Auditor-General

19 December 2019

Photo acknowledgement: Chris Tse