Part 1: Introduction

Inquiry into Callaghan Innovation’s procurement process.

1.1
Callaghan Innovation is a Crown agent that supports businesses in the innovation sector – from start-up companies to experienced research and development companies.2 Callaghan Innovation is monitored by the Ministry for Business, Innovation and Employment (MBIE).

1.2
Callaghan Innovation's work includes providing hands-on support for start-up companies, capability-building programmes and workshops, networking opportunities, and research and development grants.

1.3
Callaghan Innovation has a Founder and Start-up Support Programme (the Start-up programme), which offers entrepreneurial capability-building, start-up development, and investment-readiness support. Other organisations provide this support.

1.4
The Start-up programme (which replaced the Founder Incubator and Accelerator programme) aims to build capability, accelerate growth in start-up companies through mentoring and training, and increase the number of tech start-up companies in New Zealand. The Start-up programme also aims to "lift diversity in start-ups and entrepreneurship, especially Māori and female representation".

1.5
Providers of the Start-up programme need to work closely and extensively with founders who are in the early stages of developing their business.3 Callaghan Innovation told us that these founders often work alone and are potentially vulnerable to poor behaviour from service providers, investors, and/or mentors because there is often a significant power imbalance.

1.6
Because of this, Callaghan Innovation wanted to select providers for its Start-up programme who would provide a safe and supportive environment for founders.

1.7
The Start-up programme is for a three-year contract term (with an optional two-year renewal), with $2.86 million of funding available each year. Each supplier receives an allocation of this funding and must co-fund the services they provide at a rate of 2:1. That means $2 of funding from private sector or other sources for every $1 of Callaghan Innovation funding.

The procurement process for the Start-up programme

1.8
Callaghan Innovation released a registration of interest on 11 November 2021 to identify potential providers for its Start-up programme. A request for proposal (RFP) process for the shortlisted candidates followed, which closed on 31 March 2022. Manaaki, a subsidiary of We Are Indigo, was one of the shortlisted candidates invited to take part in the RFP.4

1.9
Callaghan Innovation told Manaaki that it was unsuccessful in the procurement because of the due diligence findings. This was carried out after the initial evaluation phase.

1.10
Some unusual aspects of the procurement included using a licensed private investigator to carry out the due diligence, sharing the due diligence findings about Manaaki with other public organisations, and that information about the procurement was made public. Manaaki later raised concerns about the procurement process with Callaghan Innovation.

1.11
Figure 1 shows a timeline of the main events in the procurement for the Start-up programme and after Callaghan Innovation had made the procurement decision.

Why we were interested in this matter

1.12
We were aware of issues about the procurement for the Start-up programme from news articles published in October and November 2022. Manaaki also raised concerns about the procurement and the due diligence process with us. These concerns included that:

  • Callaghan Innovation did not properly manage a conflict of interest;
  • the due diligence process lacked balance and natural justice; and
  • Callaghan Innovation breached confidentiality by sharing information from the procurement with others.

1.13
Because of these concerns and the potential non-compliance with the Government Procurement Rules (the Procurement Rules) and expectations, we decided to inquire into this matter under section 18 of the Public Audit Act 2001.

Figure 1
Timeline of events for the Start-up programme, from March 2022 to November 2022

Timeline of events for the Start-up programme, from March 2022 to November 2022

The Government Procurement Rules

1.14
Callaghan Innovation is a "mandated agency" for government procurement, which means that it must follow the Procurement Rules.5

1.15
The Procurement Rules include principles that provide overarching values for procurement and apply to all public organisations. Principle 5: Play by the rules requires all government agencies to:

  • Be accountable, transparent and reasonable.
  • Make sure everyone involved in the process acts responsibly, lawfully and with integrity.
  • Stay impartial – identify and manage conflicts of interest.
  • Protect suppliers' commercially sensitive information and intellectual property.

1.16
We do not refer to all the Procurement Rules and principles that Callaghan Innovation must comply with in this report. We have focused primarily on two of the Procurement Rules because we consider that they are relevant to the concerns raised with us, but we do refer to other relevant rules where appropriate. These two Rules are:

  • Rule 2: Integrity; and
  • Rule 4: Protection of supplier information.

1.17
Rule 2: Integrity explains how public organisations must safeguard the integrity of their procurement activities and processes. Public organisations must have policies that require that:

  • those involved in procurement decisions stay impartial;
  • procurement processes are fair, transparent and reasonable; and
  • all staff involved in procurement act responsibly, lawfully and with integrity.

1.18
Rule 4: Protection of supplier information explains that public organisations must protect suppliers' confidential or commercially sensitive information.

1.19
The Procurement Rules refer to the standards of integrity and conduct that the Public Service Commissioner sets. Te Kawa Mataaho Public Service Commission's Standards of integrity and conduct (the PSC Code of Conduct) requires public organisations to maintain policies and procedures that are consistent with the PSC Code of Conduct's expectations of fairness, impartiality, and trustworthiness.

1.20
To support public trust and confidence, it is important that public organisations' procurement processes are consistent with the Procurement Rules. Managing conflicts of interest well is also important in preserving the trust and confidence of suppliers in public sector procurement.

What we looked at

1.21
Our inquiry looked at Callaghan Innovation's procurement process for the Start-up programme, including:

  • the due diligence process;
  • how Callaghan Innovation identified and managed conflicts of interest in the due diligence process;
  • Callaghan Innovation sharing confidential information about Manaaki from the procurement; and
  • Callaghan Innovation's response to concerns about the procurement.

1.22
Our inquiry focused on whether Callaghan Innovation's actions and processes were consistent with the Procurement Rules and, where appropriate, the PSC Code of Conduct.

1.23
We did not seek to re-perform the due diligence or form a view on the procurement's outcome. Accordingly, we have not spoken to those people who were interviewed as part of the due diligence process.

What we did

1.24
As part of our inquiry, we:

  • examined documents about the procurement from Callaghan Innovation and Manaaki;
  • interviewed employees at Callaghan Innovation, including the current Chief Executive, the procurement team, the legal team, and Callaghan Innovation Board members;
  • met with the former Chief Executive of Callaghan Innovation;6
  • interviewed others involved in the procurement, including Manaaki, the contractor who carried out the due diligence, and people from the other public organisations that received the due diligence reports about Manaaki; and
  • met with EY to understand its review of the due diligence process.

1.25
When we refer to Callaghan Innovation's Chief Executive, we are referring to the former Chief Executive who was in the role during the procurement. We use "current Chief Executive" to refer to the Chief Executive at the time we wrote this report.

Structure of this report

1.26
In Part 2, we discuss the due diligence process for the Start-up programme procurement, including how the due diligence work was commissioned and carried out.

1.27
In Part 3, we discuss how Callaghan Innovation considered the findings of the due diligence process.

1.28
In Part 4, we discuss how Callaghan Innovation managed an alleged conflict of interest in the due diligence process.

1.29
In Part 5, we discuss how the findings of the due diligence about Manaaki were shared with other public organisations.

1.30
In Part 6, we discuss what happened after the procurement, including how Callaghan Innovation responded to the concerns raised about its procurement process and that information about the procurement entered the public domain.

2: A Crown agent is a Crown entity that must give effect to government policy when directed by a responsible Minister.

3: A founder is a person who founds or establishes a company or institution.

4: Manaaki.io (trading as Manaaki), a subsidiary of We Are Indigo Ltd, applied for the Founder and Start-up Programme RFP as part of a consortium with the Australian company Startmate. We refer only to Manaaki and We Are Indigo in this report because the matters relevant to this inquiry do not directly involve Startmate.

5: See "Government Procurement Rules", at procurement.govt.nz.

6: The previous Chief Executive handed over her duties as Chief Executive on 4 July 2022. The current Chief Executive was appointed on 21 September 2022. He was previously the interim Chief Executive from 4 July 2022.