Part 3: Our findings

Inquiry into Alpine Energy Limited's decision to install solar equipment at a senior executive's house.

3.1
In this Part, we discuss our findings about the four allegations that:

Alpine Energy had no procurement policy

3.2
The first allegation was that Alpine Energy did not have a procurement policy from 2013 to 2018, or, if a policy did exist, it was not consistent with good practice principles.

3.3
Alpine Energy 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 a procurement policy, effective from 31 March 2019.

3.4
We decided that we did not need to do further work on that issue as part of our inquiry because, through the Office’s work programme theme Procurement, there was already an increased focus by the auditor on procurement policies and practices.

Some significant contracts not negotiated on a contestable basis

3.5
The second allegation was that some significant contracts were not negotiated on a contestable basis.

3.6
In response to this allegation, Alpine Energy provided us with information about its procurement of various services that we asked about. Our review of that information showed that some of these services had been obtained on a contestable basis (for example, banking services, the asset management system, and insurance services) and some had not (for example, air travel services and earth-moving services).

3.7
For those services that were not obtained on a contestable basis, Alpine Energy provided an explanation for its procurement approach, which we considered to be satisfactory. For example, there might have been only one supplier or the supplier had continued to offer services at rates agreed under all-of-government contracts, despite no longer being on the all-of-government panel(s).

3.8
Alpine Energy was also not required to comply with the Government Rules of Sourcing in force at the time.4

Using company resources and staff time to procure goods or services for employees’ personal benefit

3.9
The third allegation was that Alpine Energy’s resources, including staff time, might have been used to procure goods or services for employees’ personal benefit.

3.10
We established that:

  • Alpine Energy has a policy that enables employees to obtain goods through the company, with the costs of those goods then being deducted from the employee’s pay;
  • on at least one occasion, a member of staff used a company purchasing card to obtain goods for their personal use. They reimbursed Alpine Energy for the cost of the goods before it was billed for those goods. We were told that this happened because of a misunderstanding between employees; and
  • in the past, at least one member of staff spent time researching the prices of goods at the prices available to Alpine Energy, with the possibility of those goods then being obtained for another employee’s personal use. We saw evidence of an employee being asked to research prices by another employee. We were also told that an employee offered to do this for another employee.

3.11
We saw no evidence that these practices were common or widespread. In particular, we saw no evidence of employees actually procuring any goods through Alpine Energy using the terms and conditions of purchase available to Alpine Energy based on the research used by another employee.

3.12
Researching prices by a public organisation’s staff, and any processing of purchases by the organisation for staff personal use, is using public resources to benefit staff. In the instances we saw, the value of staff time used for those purposes was likely to be small.

3.13
Our guidance has some principles about the private use of a public organisation’s suppliers, including setting value and quantity limits, and monitoring use to avoid any risk the use might influence future procurements with that provider. These principles are intended to help public organisations reduce the risk that individual employees might be able to personally benefit from specially negotiated rates, which in some instances, might be commercially sensitive. The principles are also intended to help public organisations protect themselves from allegations that procurement decisions are influenced by the potential benefits that employees might receive as a result.

3.14
However, there is no specific guidance about the staff time spent on researching or processing that personal use. We intend to consider this point as part of updating our guidance on sensitive expenditure.

3.15
In the meantime, this is, in our view, an area that organisations should consider carefully, particularly the perception of inappropriate personal benefits and the risk that staff time is being used to serve their personal interests rather than those of the organisation.

The solar energy trial

3.16
As noted in Part 1, the main reason we carried out our inquiry was to address concerns about the solar installation at an employee’s house and questions this raised for us about sensitive expenditure.

3.17
The type of sensitive expenditure in this instance was unusual because it does not fit any of the categories of expenditure specifically addressed in our guidance. However, it was clearly expenditure with the potential to result in benefits (many of which are not readily quantifiable) for both Alpine Energy and the employee and was therefore sensitive expenditure.

3.18
The benefits to Alpine Energy were the opportunity to run a trial of solar equipment and collect data that might be of use to the company at a relatively low cost and with relatively low risk, in particular if the trial was unsuccessful.

3.19
The benefits to the employee were:

  • Their house being one of the first in New Zealand to have the latest technology integrated solar tiles installed.
  • Solar tiles on their house to generate power during the day.
  • An electric vehicle charging station.
  • Potentially having the means of storing unused power generated during the day for later use.
  • The right to purchase the solar equipment at the end of the trial.

3.20
Concerns about the sensitive nature of the expenditure were heightened because:

  • The employee involved was a senior employee. This increased the risk that
    they would be seen to be benefitting personally because of their position in Alpine Energy.
  • The trial was not successful. This meant Alpine Energy could not show that it got any real benefit from the expenditure.
  • The price the employee paid for the solar equipment at the end of the trial was less than 10% of its cost. Together with the lack of clear benefit to Alpine Energy, this creates a perception that the employee has benefitted disproportionately from the expenditure at Alpine Energy’s expense.

Our view

3.21
Based on the information we have been given, we are satisfied that the expenditure in this case had a legitimate business purpose and that it was not expenditure incurred for the primary purpose of benefitting the employee. In particular, we saw no evidence that the installation was part of the employee’s recruitment package or an attempt to avoid scrutiny of the expenditure as sensitive expenditure.

3.22
There are other ways Alpine Energy could have carried out a solar energy trial – such as finding and entering into an arrangement on an arm’s length basis with a private individual – that might not have given rise to the same concerns about sensitive expenditure. However, we accept that other approaches might have been more complicated and carried more risk for Alpine Energy, particularly if the trial was not a success, as was the case here.

3.23
We are also satisfied that those involved in the transaction were, to some extent, alert to the sensitive nature of the expenditure. This is evident in the Chief Executive’s decision to tell the Board about the proposal, even though this was not required (because the Chief Executive had the delegation to approve the trial). The employee’s declaration of a conflict of interest at the Board meeting when the expenditure was discussed, and the fact that related invoices were approved by the Chief Executive, also show that those involved were alert to the sensitive nature of the expenditure.

3.24
Nonetheless, we are not satisfied that Alpine Energy:

  • gave enough thought to how the expenditure would look from the perspective of public accountability; or
  • took all the steps it could have taken to ensure that it was in a position to allay any concerns that might be raised about it.

Steps Alpine Energy could have taken

3.25
There are some steps we consider Alpine Energy could or should have taken to ensure that it could justify the expenditure and manage the perception risks associated with it. The possible steps include the following:

  • Alpine Energy should have explicitly identified the expenditure as sensitive expenditure at the outset and therefore recognised that there were good practice guidelines it would need to have regard to, and a public perception risk that would need to be managed.
  • Alpine Energy could have explicitly weighed up the costs and benefits of alternative ways of running the trial, so that it had a documented record of why installing the solar equipment on the employee’s house was the most cost-effective and/or least risky option for the company.
  • Alpine Energy could have explicitly considered how it would deal with any conflicts of interest that might arise when decisions were being made about the design of the installation and costs associated with installing it. Clearly the employee had a right to be involved in decisions that would affect their house. But we found no evidence that Alpine Energy had thought ahead to how it would manage any potential or perceived conflicts between what the company was hoping to achieve with the trial and what the benefits received by the employee were.
  • Alpine Energy could have considered whether there were any other potential liabilities arising from the benefit being provided to the employee. For example, we were told that no advice about possible income tax or fringe benefit tax liabilities was sought.

3.26
Alpine Energy could have explicitly weighed up the costs and benefits of ending the trial sooner, once it became evident that it might not be able to collect any data. It is possible that the cost of removing the solar equipment and making good the employee’s property outweighed the cost of leaving it there, even though Alpine Energy was not getting any benefit. However, we found no evidence that the company explicitly thought about that. We note also that, had Alpine Energy sold the solar equipment to the employee when they first enquired about buying it, the company might have been able to get a higher price for it.

Disposal of the assets

3.27
Our good practice guide identifies circumstances where organisations are selling surplus assets to staff as being further examples of sensitive expenditure. That guidance sets out three specific expectations when public organisations consider selling surplus assets to staff. These are that the organisation should:

  • ensure that all assets identified for disposal to staff are valued and subject to a tender or other process that is appropriate to the value of the asset;
  • recognise the value of the asset and any potential for actual or perceived undue benefit by staff; and
  • maximise the return to the organisation if disposing of assets to staff.

3.28
In May 2013, the Chief Executive presented a memo to the Board that described the proposal and the terms of agreement for the trial. The agreement stated that the solar equipment would be sold to the employee at the end of a three-year trial for “half the depreciated book value or the price for modern equivalent – whichever is the lesser.”

3.29
We were told by Alpine Energy that, at the time of the agreement, the intention was that the final price would be half of the book value or half of the price of a modern equivalent system, whichever was less.

3.30
Alpine Energy invoiced the employee $3,000 (excluding GST) on 20 December 2018, five years and seven months after the Board meeting. We were told that this price (the sale calculation) represented the mid-point between the estimated depreciated value and a modern equivalent system.

3.31
There are a number of aspects of the supporting calculations that were inexplicable or we do not agree with. There is a general lack of contemporary written documentation, either to support and explain why Alpine Energy deviated from the original agreement or to substantiate the judgements it made.

The process for disposal was appropriate

3.32
In this case, we accept that because the equipment had already been installed on a specific employee’s house, it was neither reasonable nor practical for a tender or other wider disposal process to have been conducted. Accordingly, our findings below relate to how well we consider Alpine Energy has given effect to the other two expectations.

Determining the value at which the assets were recognised and sold

3.33
The guidelines expect an organisation disposing of assets to staff to recognise the value of the asset and any potential for actual or perceived undue benefit by staff. The Chief Executive said that the determination of the value of the assets for the sale was “not an exact science”. However, it is not clear how Alpine Energy has determined the value.

3.34
There had been an agreement that any sale of the assets would be at the lower of two values, as described at paragraphs 3.28 and 3.29. The calculation of the price for the sale of the solar equipment was different to this. That price was the mid-point between the estimated depreciated value of the panels and the cost of a modern equivalent system.

The calculation of the depreciated value used estimated values for known actual values

3.35
The first point to note is that Alpine Energy did not use the depreciated value of the assets from its financial accounts. At the point of sale to the employee, the  net book value of the equipment was about $16,000 (based on the evidence we have seen).

3.36
Alpine Energy calculated the depreciated value using a mixture of estimated and actual components. The estimated components used were the start date  (1 July 2013 with an expected useful life of five years) and the cost of equipment ($37,000). The actual component used was the date at which the trial ended (December 2018).

3.37
In the event, what actually happened was that the costs increased to about $52,000, the start of the trial was delayed until May 2015, and the solar equipment was recorded as installed and available for use on 30 June 2015. The increased costs and the delays in getting the solar equipment operational meant that the original estimates of costs and the start and end dates were no longer applicable for calculating the subsequent sale price. Only the end date (December 2018) reflects what actually happened. It is not clear what an “estimated depreciated value” is. It is also not clear why this estimated value was substituted for the known depreciated value ($16,000).

3.38
In our view, the starting point for determining the recognised value of the assets can only be what actually happened. That is the actual cost, as depreciated from the date that the equipment was capitalised until the date of disposal. Any departures from this starting point, and the reason(s) for departing from the original agreement, should have been clearly documented at the time.

3.39
The result of using the mixture of estimated and actual values is a depreciated value of $0. We have been told that the employee could not have been charged the “depreciated value of the estimated cost, as that would have been zero”. However, as discussed above, the original agreement did not refer to estimated cost and so we question why that was applied to the sale calculation.

Price of a modern equivalent system

3.40
The other element in the calculation was the cost or price for a modern equivalent system.

3.41
In the original agreement this had to be determined in order to assess whether it was lower than the depreciated book value and therefore the price the employee would be charged. In the sale price calculation, a value for a modern equivalent system was also required because Alpine Energy decided to charge the employee the mid-point between the estimated depreciated value and the price of a modern equivalent system.

3.42
As part of working out the price of a modern equivalent system, Alpine Energy referred to an estimate for a small residential system, obtained in May 2018. The price quoted was between $3,500 and $5,000. We are not satisfied that this would have been an appropriate comparison because there is no evidence that the estimate provided was for a similar system. There were no technical specifications in the information so it is not possible to confirm whether it was a comparable system or whether it included the cost of installation.

3.43
In any event, the value assigned to a modern equivalent system in the sale calculation was $6,900, which is higher than the maximum $5,000 quoted above. We were told that this was based on “referring to nationally advertised pricing” but we have not been provided with any evidence of this, nor have we been able to calculate a similar result.

3.44
The Chief Executive told us it was assumed that the cost of the modern equivalent system would not include batteries because, “if the company were to run a similar trial again, they would not include batteries”. In fact, the batteries represented most of the total costs of the trial (about 70%, see Figure 1). It is not clear how batteries could be excluded from the assessment of a modern equivalent system. In our view, it was inappropriate to exclude the battery components of the overall system for comparative purposes just because Alpine Energy’s view on what might be included in a future trial had changed.

Other considerations

3.45
We would have expected any write-down or reduction of the assets’ value, due to Alpine Energy’s assessment that the batteries did not work, to have been clearly recorded or documented at the time. We have seen limited records or documents relating to the fact that the batteries did not work but we note that, despite any perceived risk or concerns associated with Lithium-ion batteries, they remain installed and connected to the residential property. For example, we have not seen any evidence that Alpine Energy attempted to recover costs from either the manufacturer or supplier of the batteries, at the time when the faults were first noted, which we are told was shortly after installation.5

3.46
We also note that although Alpine Energy maintains that no data was obtained from the trial, the solar equipment remained on its asset register and the company has not been able to explain to us any other benefit it obtained from the equipment. From the evidence that we have been given, there was no reduction (or impairment) of the book value of the assets to reflect the operational problems.

3.47
Lastly, we were told that another relevant consideration at the time when the final price was determined was Alpine Energy’s obligation to “make good”. The agreement with the employee said that “ either party can seek to remove permanently the solar equipment on reasonable notice and that Alpine Energy would make right the property.”

3.48
No exact figure can be put on how much this would have cost, as it was not calculated at the time. However, Alpine Energy has told us that seeking to avoid possible financial exposure for any remedial work was one consideration when seeking to agree a final sale price with the employee.

It is also not clear whether the return to Alpine Energy was maximised

3.49
Our good practice guide also sets an expectation that the return on the sale of surplus assets will be maximised.

3.50
As described earlier, the value of the equipment in Alpine Energy’s books at the time it was sold to the employee was approximately $16,000. The equipment was transferred in December 2018 to the employee for $3,000 excluding GST. We describe the reasons we heard for calculating the sale price at paragraphs 3.30-3.34. It appears that the equipment was being sold to the employee for much less than it was worth to Alpine Energy.

3.51
Overall, Alpine Energy does not appear to have fully considered whether it was maximising the return when it determined the final sale price and disposed of the solar equipment. Alpine Energy appears to have been aware of the risks associated with offering the items for sale to the employee at a price that could be considered too low. We were told that the mid-point was chosen because Alpine Energy did not think it could charge the employee nothing.

3.52
On the other hand, the original agreement referred to two possible values (being half the depreciated book value and the price of a modern equivalent system) and stated that the assets would be sold for the lesser of the two values. We accept that it might be appropriate to ensure that there was sufficient incentive for the employee to agree to the trial in the first place, since it was going to be installed on their house. However, selling the solar equipment for the lesser of two values does not appear to demonstrate a conscious decision by Alpine Energy to maximise the return.

3.53
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 Alpine Energy and be seen to be fair and reasonable. This approach might have contributed to concerns that the employee was enjoying a benefit. This is the risk that the principles relating to sensitive expenditure try
to avoid.

3.54
As we have said earlier, Alpine Energy should have explicitly identified the expenditure as sensitive expenditure at the outset and recognised that there were good practice guidelines it would need to have regard to, and a public perception risk that would need to be managed. There is no evidence that Alpine Energy considered how its disposal of the asset aligned with those guidelines, in particular how the disposal maximised the return to the company and whether the price of disposal can be justified.

4: The Government Rules of Sourcing were the standards for the sourcing stage of procurement in force at the time. They were replaced by the Government Procurement Rules on 1 October 2019. Alpine Energy is still not required to comply with them. See procurement.govt.nz.

5: We have assumed that there would be some right of refund or manufacturer’s warranty for the batteries not working (that is, not storing energy) so soon after being installed. The Chief Executive has told us that he “did not seek any discounts from [the supplier] throughout the duration of the installation” because he was “much more interested in getting it operational.”