Part 3: Good procurement practices were not followed

Inquiry into management fees paid by South Auckland Middle School and Middle School West Auckland in 2018.

3.1
In this Part, we discuss how well the Establishment Board managed the procurement process when it decided to engage Villa Education Trust to deliver the establishment services and how much to pay for those services.

3.2
In particular, we consider whether the Establishment Board:

had valid reasons for engaging Villa Education Trust to deliver the establishment services; and
met the principles of good procurement practice that we expect to see from a public organisation.

3.3
We consider conflicts of interest in Part 4.

There were valid reasons to engage Villa Education Trust to provide the establishment services

3.4
The Establishment Board told us that it engaged Villa Education Trust to deliver the establishment services because no other party had the background knowledge and understanding needed to set up the new schools effectively. The Establishment Board also told us that a significant amount of work was needed before the schools could open for Term 1 in 2019. We agree that it was reasonable for the Establishment Board to determine that Villa Education Trust was the appropriate provider of the establishment services.

Previous experience

3.5
The Establishment Board told us that no-one else could have provided comparable services to assist it in setting up the new designated character state schools. This was because Villa Education Trust had been the sponsor of the previous charter schools and so had an in-depth knowledge and understanding of the schools, as well as the staff, students, families, and communities.

3.6
In addition, the integrated and project-based curriculum that Villa Education Trust had developed and owned was a significant factor in South Auckland Middle School and Middle School West Auckland's applications for establishment as designated character state schools.

Amount of work involved

3.7
The Establishment Board also told us that a lot of work was needed in a short time for the schools to be ready to open for Term 1 of 2019. For South Auckland Middle School and Middle School West Auckland, there was a condensed time frame and all the Establishment Board members we spoke to commented on the amount of work involved.

3.8
When operating as charter schools, South Auckland Middle School and Middle School West Auckland were not part of the state school system and as a result enjoyed more autonomy than state schools. They could set their own curriculum, and they had more freedom over the employment and remuneration of teachers. The operating framework for state schools is more fixed, which meant that before they could open as designated character state schools, South Auckland Middle School and Middle School West Auckland needed to make significant changes to their administrative arrangements and curriculum.

3.9
In addition, many charter schools, including South Auckland Middle School and Middle School West Auckland, employed chief executives who were responsible for the day-to-day running of the schools. This meant that the principals could focus on the educational aspects of the school. The new designated character schools would not have a chief executive to carry out the tasks that needed to be done before the schools opened.

3.10
Section 125 of the Education and Training Act 2020 confirms that a Board is the governing body of its school/kura. The Ministry of Education also produces a Financial Information for Schools Handbook, which provides guidance for school principals and Boards of Trustees across a range of financial management matters, including strategic planning, budget setting, conflicts of interest, and internal controls.⁸

3.11
The Financial Information for Schools Handbook sets out the roles and responsibilities of school boards, which include:

being responsible for setting the strategic direction of the school;
allocating resources to achieve goals;
making and documenting significant financial decisions about the school; and
declaring and managing potential conflicts of interest in decision-making.

3.12
However, being a member of a school board is not typically a full-time position of employment, and it is reasonable for school boards to procure additional capacity and expertise, where appropriate.

3.13
We spoke to the governance facilitator engaged to support the Establishment Board during this time. He confirmed that a lot of work was needed and considered that no-one else other than Villa Education Trust could have done the necessary work. He recalled frequent meetings with Ministry staff at the time, and his view was that it was a new and challenging environment for all involved.

The Establishment Board's procurement practices

Context to the procurement

3.14
When South Auckland Middle School and Middle School West Auckland were approved as designated character schools on 28 August 2018, they became part of the state school system. This also meant that the Establishment Board was a public organisation because school boards are Crown Entities as defined in the Crown Entities Act 2004.

3.15
As set out in the Financial Information for Schools Handbook, money received by school boards, whatever the source, automatically becomes public funds and boards are accountable for all expenditure. All public organisations are expected to make spending decisions transparently. This means that they should be open about the spending, and willing and able to explain spending decisions. The Financial Information for Schools Handbook advises school trustees that they make "significant financial decisions" and should "carefully document those decisions and their decision-making processes".

3.16
The Establishment Board also needed to apply good procurement practices. For example, this should include (but is not limited to):

a clear determination of the agreed scope of work and expected cost before work begins and payment is made;
establishing appropriate delegations and approval processes; and
a clear understanding of how delivery of services will be monitored and who by.

Determining the scope of work and fees that would be paid

3.17
There are a range of factors that organisations might consider when making spending decisions. These include whether they can get the same level of service from a different provider for less cost and the potential risks of engaging particular providers.

3.18
An organisation that can show what factors it considered when making spending decisions is better placed to demonstrate how it assessed the value of services provided by a particular provider.

3.19
Organisations will usually have written records (such as minutes of meetings, workshops, or tender evaluation sessions where the decisions were made) that show the decision-making process they followed when selecting a supplier and agreeing the final price. The conclusion of the decision-making process and the final selection of a particular supplier is usually evidenced by a signed contract or other agreement that is finalised before the work begins.

3.20
We were especially interested in the decision-making process here because the fees appeared high compared to those paid by other schools in the state school system in similar circumstances. We did not see any evidence that showed how the Establishment Board determined the nature of the services to be performed or assessed the appropriateness of the fees that were charged.

3.21
There was no formal agreement between the Establishment Board and Villa Education Trust before the $450,000 was invoiced and approved for payment.⁹ There was no scope of work, nor did we see any evidence that the expected costs of the establishment services were discussed or agreed. This is despite a resolution requiring those things being passed and recorded in the minutes of the 6 September 2018 meeting.

3.22
It is also not clear how the management fees were determined. Before our interviews with members of the Establishment Board, we were provided with some high-level workings (which were undated) that included details of:

who worked on the establishment activities;
high-level descriptions of the establishment activities;
approximate number of hours worked (4090 hours); and
an hourly rate of pay ($110 per hour).

3.23
We had some questions about the document and how the details in it had been established. For example, we wanted to know why a single hourly rate had been used, rather than different rates to reflect the different levels of experience and expertise of the individuals who contributed to the establishment services. We also wanted to understand how the hourly totals had been calculated.

3.24
Shortly before our interviews with Establishment Board members, we were provided another document (which was also undated). This was broadly similar to the first one, but it included some additional detail about the nature of the tasks that had been performed. Some of the information in the more detailed document conflicted with the original document we had been provided. In the second document:

the total number of hours was 4130 hours¹⁰ (compared to 4090 hours in the original); and
the hourly rate was $108 per hour (compared to $110 per hour in the original).

3.25
During our interviews with members of the Establishment Board, we were told that the total fees had been determined on a global basis, and the hourly rate and hours had been calculated afterwards. When we asked why the hourly rate had changed between the two documents, the answer was that "there were more hours allocated here". Put another way, the hourly rate changed because the way it was calculated was based on the total fees ($250,000 and $200,000) divided by the estimated hours worked, so that the hourly rate was "for want of a better word ‘a balancing figure'".

3.26
Use of a global figure would not be concerning in itself, but the Establishment Board was unable to provide us with any documentary evidence from the time that recorded how the fees had been calculated. We were told that the governance facilitator appointed by the Ministry advised the Establishment Board that the fees were acceptable provided they were at a market rate. However, it appears the Establishment Board did not receive this advice until after it had paid the $450,000 management fees to Villa Education Trust. The governance facilitator told us that although he was officially appointed from 10 September 2018, his first discussion with the Establishment Board as governance facilitator did not occur until 18 September 2018 (after the Establishment Board paid Villa Education Trust the management fees on 11 September 2018). The Establishment Board was unable to provide any evidence showing that it had considered market comparisons before it paid the management fees.

3.27
During interviews it was confirmed that the breakdown of hours worked was not prepared when the invoices were created and paid in September 2018. Instead, the breakdown was prepared during the audit of the financial statements for the period ended 31 December 2018, in response to questions from our auditor.

3.28
The lack of a pre-agreed (and recorded) scope of works and payment terms is particularly concerning because the management fees were paid in advance and covered services to be delivered over an extended period. All the Establishment Board members that we interviewed told us that some of the establishment services had been delivered after the new schools opened. Indeed, most told us that some establishment activities were still ongoing when we conducted our interviews in April 2021, more than two years after the new schools opened.

3.29
Without a scope of works or any other documents from the time, it is not clear that the Establishment Board understood exactly what it was paying for when it paid the management fees.

3.30
Clearly documenting the contractual terms was particularly important in these circumstances because the individuals entering into the arrangement were essentially agreeing to pay themselves, given the trustees of the Establishment Board were also trustees of Villa Education Trust. We discuss the implications of the conflicts of interest in Part 4.

Establishing appropriate delegations and approval processes

3.31
We expect all public organisations to have clear processes for approving spending and authorising payment. We also expect these processes to be well understood throughout the organisation, especially when spending is approved under a delegated authority.¹¹

3.32
This expectation is also set out in legislation. Section 152 of the Education and Training Act 2020 (previously clause 25 of Schedule 6 of the Education Act 1989) requires school boards to perform their functions and exercise their powers in a way that is financially responsible.

3.33
The Ministry's Financial Information for Schools Handbook also sets out the importance of a school having strong internal controls. It lists the key internal controls that all schools should implement. These include:

having segregation of duties – which means that no one person should have control of ordering goods, approving expenditure, and authorising payments; and
ensuring that all expenditure is verified, approved, and authorised before it is paid, and that authorisation is in line with delegation policies.

3.34
Clearly recording who has approved spending and authorised payment can help public organisations demonstrate that they have appropriate controls. In turn, this helps to build public trust and confidence in the financial information that those organisations produce.

3.35
Because there was no pre-agreed scope of work or documentation from the time to show how the fees had been calculated, and the full amount was paid before the work was done, we wanted to understand how the Establishment Board got assurance that the fees represented good value for public money. We were particularly concerned because the same people were on both sides of the transaction.

3.36
We wanted to understand the process for approving spending and authorising invoices for payment if they needed to be paid before the next meeting of the Establishment Board, as happened in this instance. We asked the members of the Establishment Board about processes for approving spending and how these invoices were authorised for payment.

3.37
There is no documentary record of who authorised the invoices for payment and, when interviewed, Establishment Board members could not recall specifically who had authorised the invoices for payment:

One Establishment Board member suggested that the chair of the Establishment Board might have authorised the payment.
The chair of the Establishment Board said that the Board member who was also the chief executive of Villa Education Trust would have authorised the payment.
Another Establishment Board member said that a sub-committee of the Establishment Board responsible for approving spending (which included the chair and the Board member who was also the chief executive of Villa Education Trust) would have authorised the payment.

3.38
In our view, $200,000 and $250,000 represent significant spending for a public organisation such as this and it is unacceptable that there is no record showing unequivocally:

who approved the spending as being valid;
who authorised the invoices for payment; and
whether they had the appropriate authority to do so.

Determining how the delivery of services will be monitored

3.39
Good procurement practice does not stop when a contract or agreement is signed. It continues while the work is carried out.

3.40
We expect public organisations to be able to clearly demonstrate value for public spending. Organisations can do this by having:

appropriate systems to monitor what the supplier has delivered under the agreement; and
agreed actions that will be taken if delivery does not meet expectations.

3.41
We were particularly interested in how the Establishment Board monitored the work that was being carried out, because the full amount of the management fees were invoiced and paid before the establishment services were delivered. That is, they were not paid in instalments based on progress or the proportion of work that had been carried out or paid in full after all work had been completed.

3.42
We were told that the Establishment Board received regular updates at meetings about how the various tasks were progressing, but that a lot of these updates were verbal. We have not seen any minutes recording the updates to the Establishment Board, and the Establishment Board members acknowledged during interviews that they "could have been better with the documentation".

3.43
It also appears most of the updates were provided by a member of the Establishment Board who was also the chief executive of Villa Education Trust and had been involved in many aspects of the establishment services that were delivered.

3.44
It does not seem to us that this Board member could provide independent oversight over Villa Education Trust's delivery of services to the Establishment Board. We further discuss how conflicts of interests were handled in Part 4.

Overall comment

3.45
Public organisations should be able to clearly explain their spending decisions and support those explanations with appropriate evidence. Not only is this good procurement and cost management practice but it also supports the public's trust and confidence that public money is being spent well.

3.46
In this case, as we have outlined, there are several aspects where the Establishment Board has not met the expectations of good practice. In general, there is no reliable evidence from the time about how the Establishment Board calculated the fees, developed a scope of work to outline what would be provided for the fees, approved the payments, or actively managed the services that were delivered.

3.47
It is especially concerning to us that members of the Establishment Board, who were collectively responsible for the governance of the new state schools, were unable to identify a standard practice for approving spending.

3.48
Being able to show how and when you have spent public money means that the public and other stakeholders (such as the Ministry in this case) can have confidence that the services that have been paid for have been delivered and priced appropriately. That confidence is missing in this case.

8: All references to the Financial Information for Schools Handbook in this report are to the March 2018 version, which is the version that applied to the circumstances here. However, similar guidance appears in the 2021 version of the Financial Information for Schools Handbook, which is available on the Ministry's website: education.govt.nz.

9: A services agreement between the Board and Villa Education Trust has been in force since 1 January 2020, but it did not exist during the relevant period.

10: The total number of hours recorded also did not align with the workings in the document, and the hourly rate and total hours did not agree with the amount charged.

11: By this, we mean that one or more members has been delegated authority to approve the spending (up to relevant financial limit(s)), rather than the whole governing body being required to approve the spending.