Auditor-General's overview

Inquiry into Callaghan Innovation’s procurement process.

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

Callaghan Innovation is a public organisation that supports businesses in the innovation sector. To build capability and accelerate growth in start-ups, Callaghan Innovation has a Founder and Start-up Support programme (the Start-up programme). Through this programme, a panel of providers provide mentoring and training to founders.

Between November 2021 and June 2022, Callaghan Innovation carried out a procurement process to find providers to deliver the Start-up programme.

Integrity of processes is critical in procurement. It is important that public organisations use procurement processes that support public trust and confidence in how public money is spent. The Government Procurement Rules, which Callaghan Innovation must comply with, require agencies to safeguard the integrity of their procurement activities and processes.

My Office was aware of media commentary about Callaghan Innovation's procurement process for the Start-up programme, and Manaaki, one of the tenderers, raised concerns about the due diligence process for the procurement with us.

The concerns were that Callaghan Innovation had not properly managed a conflict of interest, that there was a lack of natural justice,1 and that Callaghan Innovation had inappropriately shared confidential information with other public organisations.

For these reasons, I decided to inquire into whether Callaghan Innovation's actions and procurement processes for the Start-up programme complied with the principles of good procurement that the public and I expect from public organisations. This inquiry does not comment or form a view on the procurement's outcome.

Callaghan Innovation's Start-up programme procurement

We understand that founders in the innovation sector can sometimes find themselves in vulnerable situations because of the power imbalance between them and more established investors and directors. Some of these founders had previously told Callaghan Innovation about unethical behaviour, including bullying, harassment, and sexism, that they had experienced.

Callaghan Innovation wanted to select providers who would provide a safe environment for founders. Therefore, Callaghan Innovation decided to carry out more intensive due diligence on the shortlisted tenderers for the Start-up programme and hired an external contractor, a private investigator, to do this.

The contractor reported no significant issues with five of the six shortlisted tenderers. However, Callaghan Innovation was concerned about the due diligence findings for one of the tenderers, Manaaki (and its parent company We Are Indigo), and commissioned a second due diligence round. Callaghan Innovation's former Chief Executive said that this was "giving Manaaki the benefit of the doubt". Callaghan Innovation later told Manaaki that it was not successful in the Start-up programme procurement because of the due diligence findings.

Callaghan Innovation shared the due diligence reports about Manaaki with two other public organisations during and after the procurement. The media reported about the procurement and due diligence process while the procurement was ongoing, and redacted copies of the two due diligence reports about Manaaki were provided anonymously to the media and others after Callaghan Innovation had made the procurement decision.

Callaghan Innovation's due diligence process was neither transparent nor fair

Because of the nature of the concerns Callaghan Innovation wanted to address, it was reasonable for Callaghan Innovation to implement a more intensive due diligence process. In doing so, it was important for Callaghan Innovation to set up a process that treated all those involved in the procurement fairly and transparently, as the Procurement Rules require.

Callaghan Innovation did not give enough thought to how it proposed to manage the more detailed information it might get from the due diligence process or what it would do to respond to any significant concerns that the process identified. It did not sufficiently consider precautions to keep information secure or how it could give effect to the principles of natural justice.

The due diligence process was not transparent. We were told that there were concerns about the "optics" of using a private investigator and that a decision was made not to inform tenderers who would carry out the due diligence.

Not disclosing who would carry out the due diligence meant that tenderers could not raise any potential conflicts of interest or risks of bias. This resulted in Callaghan Innovation missing an early opportunity to identify and manage an alleged conflict of interest that Manaaki raised with it later.

In my opinion, there was a lack of natural justice in the due diligence process. Manaaki had a limited opportunity to give its version of events in response to the first due diligence report and no opportunity to respond to the findings in the second due diligence report.

Callaghan Innovation told us that it decided to exclude Manaaki from the procurement based on allegations of poor behaviour that some of the people interviewed for the due diligence made. Guidance on due diligence for public sector procurement is limited, but I question whether a reasonable observer would find it acceptable to make decisions based on allegations without considering whether those allegations can and should be verified first, regardless of what guidance is available.

I acknowledge that instances of poor behaviour might occur in settings where the behaviour is not witnessed and that it is not uncommon that an individual's testimony of their experience might be the sole source of evidence. However, the due diligence reports included other serious allegations that I consider were capable of being independently verified.

Manaaki does not dispute that the terms of the request for proposal enabled Callaghan Innovation to exclude it from the procurement, but Manaaki does not agree with the basis that the decision was made on. After the procurement, Manaaki raised concerns with Callaghan Innovation about a potential conflict of interest in the due diligence process, information sharing with other agencies, and the leaking of the due diligence reports.

In my view, Callaghan Innovation could have dealt with the concerns Manaaki raised more transparently. An organisation's obligations to act fairly, transparently, and reasonably do not disappear once it has made a procurement decision.

Callaghan Innovation did not properly manage the risk of bias

The contractor who Callaghan Innovation hired to carry out the due diligence had previously worked for a company (Company A) that had a dispute with We Are Indigo (Manaaki's parent company). As a result of that work, the contractor made allegations of fraud against We Are Indigo to the Ministry of Business, Innovation and Employment. The contractor later interviewed Company A as part of the due diligence process, while still subject to a retainer agreement with Company A.

The second due diligence report included an allegation that Manaaki had attempted to misappropriate government funds. This allegation was related to the earlier dispute between Company A and We are Indigo. The contractor told my staff that the allegations set out in the due diligence reports were based on the interviewees' statements. However, my staff could not find evidence that an interviewee made this specific allegation.

We acknowledge that the contractor was not the decision-maker and it was for Callaghan Innovation to decide whether it had sufficient grounds to exclude Manaaki from the procurement. However, the allegation of "attempted misappropriation of government funds" was included in Callaghan Innovation's final decision document for the Start-up programme procurement. It was also subsequently shared with other government agencies.

Callaghan Innovation was told about the contractor's previous work with Company A on several occasions. The Ministry of Business, Innovation and Employment told Callaghan Innovation about the contractor's earlier allegations of fraud and misappropriation against We Are Indigo. Shortly after, Callaghan Innovation commissioned the contractor to do a second round of due diligence on Manaaki.

Callaghan Innovation appears to have relied initially on the contractor's view that no conflict of interest arose from his previous work because there was no ongoing financial relationship with Company A. Callaghan Innovation said that, because the contractor would be reporting only what people said to him in interviews, his prior experience could not influence the objectivity of his reporting.

However, Callaghan Innovation did not document any of the discussions or considerations about the nature of the contractor's prior work, its potential risk to the procurement, or mitigation strategies. This is not consistent with good practice, as set out in the Government Procurement Rules and our guidance on conflicts of interest, nor is it consistent with Callaghan Innovation's policies.

In my view, there was a risk that the contractor came to the engagement with a pre-determined view about Manaaki and its suitability for the Start-up programme. At the very least, the contractor could be perceived to have done so. Callaghan Innovation needed to do more to manage that risk. It did not adequately consider how a perception of bias created by the contractor's previous work could "taint" the due diligence.

When Manaaki raised concerns that the contractor had a conflict of interest, Callaghan Innovation commissioned consulting firm EY to review the due diligence process. EY identified no significant deficiencies in the due diligence process that would have changed the outcome of the process.

However, because the scope of EY's review did not address the conflict of interest, the review did not resolve the concerns that Manaaki raised. This has led to ongoing questions about the procurement.

The due diligence reports were shared and entered the public domain

Callaghan Innovation did not meet its obligations of confidentiality, which are a necessary part of the procurement process.

Callaghan Innovation decided to share copies of the due diligence reports with two different business units in the Ministry of Business, Innovation and Employment and with New Zealand Trade and Enterprise. It did this for purposes outside the scope of the Start-up programme procurement. The terms of the procurement did not allow Callaghan Innovation to share information with other public organisations.

The other agencies were not informed that the due diligence was mostly based on testimony, that it included matters that had not been corroborated, and that not all findings had been put to Manaaki. Nor were Manaaki's earlier responses to the first report included. Callaghan Innovation never told Manaaki that it had shared the reports.

Public organisations need to consider whether and what information is appropriate to share with other organisations, especially when privacy, confidentiality, and commercial interests need to be considered. We did not see evidence that Callaghan Innovation adequately considered whether it could or should share the information.

In my view, it was neither fair nor reasonable to share the due diligence reports without appropriate reason or process, or without an adequate opportunity for the subject of those allegations to have their response noted. In sharing the due diligence information, Callaghan Innovation did not demonstrate the transparency or fairness that I expect – or, in my opinion, that the public expects – from a public organisation.

These concerns have been amplified by the two due diligence reports being sent from an anonymous email address to many external individuals and organisations after the procurement.

Maintaining the confidentiality of the information provided to public organisations goes to the heart of trust and confidence in procurement processes and the public sector more generally. Callaghan Innovation commissioned the due diligence reports and was responsible for their safekeeping. Although the source of the leak remains unknown, it is deeply concerning that those reports subsequently made their way into the public domain.

Concluding remarks

Callaghan Innovation's objective to protect founders was well intentioned. Unfortunately, in my view, Callaghan Innovation should have considered its actions more carefully throughout the due diligence process.

In particular, Callaghan Innovation should have considered how it would need to manage the potentially sensitive information the process might uncover and the risk of bias that the contractor's earlier work posed. This has weakened the procurement process and exposed Callaghan Innovation to the risk of challenge.

For most suppliers, the worst outcome is being unsuccessful in a procurement. Here, two actions have significantly amplified the impact of a single procurement decision on Manaaki. These are Callaghan Innovation sharing the due diligence reports with other public organisations without a solid basis for doing so and without informing the tenderers, and the due diligence reports being leaked.

Delivering effective services to the public depends on maintaining trust between the public sector and the businesses that seek to deliver those services. Suppliers taking part in a public organisation's procurement process expect to be treated fairly and transparently. When they aren't, it can negatively impact market confidence and risks eroding trust and confidence in the integrity of the public sector.

Callaghan Innovation advised me that it has reflected on this procurement process, the recommendations from the EY review, and what changes it might make for the future. We detail the proposed areas for improvement in Part 6 of this report. I will be interested in how this work progresses.

I thank Callaghan Innovation, the Ministry of Business, Innovation and Employment, New Zealand Trade and Enterprise, EY, and the individuals involved in the procurement that we met for their assistance with this inquiry.

Nāku noa, nā

John Ryan
Controller and Auditor-General | Tumuaki o te Mana Arotake

23 November 2023

1: By natural justice, we mean being procedurally fair, which includes allowing someone the opportunity to comment on the fairness, accuracy, and balance of what has been said about them and/or to identify any errors.