Part 4: Conflicts of interest and the risk of bias

Inquiry into Callaghan Innovation’s procurement process.

4.1
In this Part, we describe:

4.2
Conflicts of interest can arise in various ways. Public organisations need to make a judgement about whether situations represent a conflict of interest or not. However, the underlying concern is the need for organisations to make decisions impartially and manage the risk, or perception, of bias.

4.3
In considering the alleged conflict of interest in the due diligence process, we have considered formal conflicts of interest and risks of actual or perceived bias.

4.4
We note that Manaaki complained to the Private Security Personnel Licensing Authority alleging that the contractor was guilty of misconduct in relation to the due diligence investigation on the basis that he had failed to disclose a material conflict of interest. The Authority found there was no misconduct on the facts considered there. We note that the purpose and scope of our inquiry is different from that proceeding.

Allegations of a conflict of interest in the due diligence process

4.5
After the procurement was complete, Manaaki raised a concern that a conflict of interest affected Callaghan Innovation's decision-making for the procurement. This allegation arises from work the contractor did for one of the people he interviewed.

4.6
Manaaki had also seen correspondence (released under the Official Information Act) that led it to believe that Callaghan Innovation's Chief Executive knew that the contractor had done some work for, or had some information about, We Are Indigo when the Chief Executive suggested that Callaghan Innovation commission the contractor.

4.7
This correspondence comprised text messages to the Chief Executive from Mr B (the business contact who had passed on the contractor's contact details to her) referring to the contractor and We Are Indigo.

4.8
The Chief Executive told us that she did not know that the contractor had done work that related to Manaaki at the time he was commissioned to do the work.

4.9
Figure 4 sets out the stages of the due diligence process that we describe in this Part.

Figure 4
Stages of the due diligence process, from November 2021 to August 2022

Stages of the due diligence process, from November 2021 to August 2022

The contractor's previous work involving Manaaki

4.10
In 2020, We Are Indigo, the parent company of Manaaki, was contracted by the head contractor for MBIE's Digital Boost campaign. We Are Indigo subcontracted aspects of that work to Company A. At the end of the subcontract, there was a dispute between We Are Indigo and Company A about the payment of invoices.

4.11
The contractor who did the due diligence work for the Start-up programme told us that Company A hired him to assist with an Official Information Act request to MBIE. After Company A hired a lawyer, the contractor's services were no longer needed.

4.12
During this engagement, in late November 2021, the contractor contacted an investigator at MBIE, claiming that he had evidence that We are Indigo might have committed fraud. The allegation concerned differences between amounts paid under the subcontract between We Are Indigo and Company A for the Digital Boost campaign and the amounts paid by MBIE to the head contractor. The contractor told us that he had contacted MBIE because he wanted to know whether MBIE wanted to investigate the matter.

4.13
MBIE took no action because it did not consider that it had a role in intervening in a commercial dispute between two subcontracting companies that MBIE had no formal contractual relationship with and because nothing suggested that this was anything more than a normal commercial dispute.

4.14
The contractor later interviewed Company A as part of the Start-up programme due diligence process.

Our view of the potential conflict of interest and risk of bias

4.15
In our view, the contractor's correspondence with the MBIE investigator suggests that, even before Callaghan Innovation engaged him, the contractor had formed a view that there was evidence of potential fraud in We Are Indigo's dealings with Company A and MBIE.

4.16
This raises concerns about whether the contractor had a predetermined view of Manaaki's behaviour and conduct. In turn, this raises questions about whether the contractor came to the engagement with Callaghan Innovation with an open mind. At the very least, it created a perception risk that needed to be carefully managed.

4.17
Predetermination is technically not a form of conflict of interest but comes from the common law on bias. The underlying risk with predetermination is that an individual will "taint" a decision or process that they are involved in because they are biased or appear to be biased.

4.18
The question to ask is whether a person has previously done or said something that might make people think that they will not fairly consider all the relevant information before forming a view on a matter. The individual needs to ask themselves whether someone looking in from the outside could have reasonable grounds to think they might be biased.

How Callaghan Innovation managed conflicts of interest and risks of actual or perceived bias

4.19
We were interested in whether the contractor had disclosed his previous work for Company A and, if so, how Callaghan Innovation managed and documented this.

No interests were declared

4.20
When Callaghan Innovation engaged the contractor at the beginning of May 2022, the contractor did not complete a formal conflict of interest declaration even though his contract required disclosure of actual, potential, or perceived conflicts.

4.21
The contract described a perceived conflict of interest as one "where other people may reasonably think that a person is compromised". The definition referred to business interests or obligations where "independence, objectivity, or impartiality can be called into question".

4.22
A member of the procurement team emailed the contractor on 9 May 2022 to say that "you have stated that you have no conflicts of interest related to this activity. Please let me know if that changes at any point throughout the engagement." At that point, Callaghan Innovation had sent the contractor a list of the shortlisted tenderers, which included Manaaki.

4.23
The contractor told us that, once he had decided to interview Company A as part of the due diligence process, he let Callaghan Innovation know that he had previously done work for Company A. The contractor said that he continued with the due diligence because his work for Company A had been completed in December 2021, so he did not consider that there was a conflict of interest.

4.24
The procurement team sent the contractor a conflict of interest declaration form to complete on 13 May 2022. The contractor returned the signed form on 23 May 2022, declaring no interests.

What Callaghan Innovation knew about the contractor's previous work for Company A and when

4.25
There were several instances throughout the procurement when the contractor's previous work relating to Manaaki was brought to Callaghan Innovation's attention.

4.26
We asked Callaghan Innovation's procurement team when it became aware of the contractor's previous work for Company A.

4.27
The contractor first met with Callaghan Innovation on 5 May 2022 to discuss the proposed due diligence work. Callaghan Innovation asked the contractor whether he had come across any of the shortlisted tenderers before. We were told that the contractor mentioned working for Company A in a dispute involving a shortlisted tenderer (Manaaki – through its parent company We Are Indigo).

4.28
The contractor told Callaghan Innovation that his work with Company A had finished and that there was no longer a conflict of interest. Callaghan Innovation accepted this explanation.

4.29
Callaghan Innovation told us that the procurement team found out that Company A had been interviewed for the due diligence only when it received the first due diligence report about Manaaki. Callaghan Innovation asked the contractor why he interviewed Company A. The contractor said that another person he interviewed suggested talking to Company A.

4.30
The procurement team did not consider it unusual for an investigator's previous clients to feature in subsequent inquiries and concluded that there was no conflict.

4.31
Shortly after Callaghan Innovation received the first due diligence report about Manaaki, Callaghan Innovation's Chief Executive shared the report with MBIE for a separate procurement (see Part 5). After this, MBIE met with Callaghan Innovation on 23 May 2022.

4.32
At the meeting, MBIE explained that it was aware of a dispute between We are Indigo (the parent company of Manaaki) and Company A relating to the Digital Boost campaign. MBIE told Callaghan Innovation that the contractor had made allegations of fraud against We are Indigo.

4.33
MBIE told us that it expressed concern that the contractor's previous work for Company A presented a potential conflict of interest and that it had asked Callaghan Innovation what Callaghan Innovation's obligations were in terms of due process for the due diligence findings. MBIE suggested telling Manaaki about the allegations so it could have an opportunity to respond.

4.34
Callaghan Innovation's procurement team said that MBIE did not tell it anything that it did not already know. Callaghan Innovation said that the contractor had declared that he had no conflict and that there was no evidence to suggest that the contractor's previous work would influence how he collected and provided information.

4.35
Shortly after, Callaghan Innovation asked the contractor to do a second round of due diligence on Manaaki.

4.36
Callaghan Innovation did not document any of its conversations with the contractor about these matters. Nor did it document its considerations of whether there could be a conflict of interest or risk of bias arising from the contractor's previous work.

Manaaki raised concerns about a conflict of interest with Callaghan Innovation

4.37
After the procurement, Manaaki found out who had carried out the due diligence through an Official Information Act request. Manaaki wrote to Callaghan Innovation's current Chief Executive on 12 August 2022 about its concerns with the due diligence process. These concerns included that the contractor had interviewed former clients as part of the due diligence process, that this could be a conflict of interest, and that it raised the issue of bias.

4.38
Manaaki's concerns were based on correspondence between one of its employees and Mr B about the contractor's previous work relating to We Are Indigo and a subsequent phone conversation the employee had with the contractor.

4.39
Callaghan Innovation then met with the contractor about the concerns that Manaaki had raised. At this meeting, the contractor shared his contract with Company A, which was for 12 months from December 2021.

4.40
Even though Callaghan Innovation considered that the contractor's previous work for Company A could be a potential conflict of interest, the contractor maintained that there was no conflict because the work had finished in December 2021.19

4.41
Callaghan Innovation also told us that the contractor had told it that, in his view, he was providing verbatim witness testimony and that his prior experience could not influence the objectivity of this.

4.42
After the meeting, Callaghan Innovation discussed the matter internally. It decided that, to address the perceived conflict of interest, it should engage an independent organisation to review how the due diligence had been carried out (see Part 6).

Our observations about how Callaghan Innovation managed conflicts of interest and risks of bias

4.43
It is important to manage conflicts of interest carefully, both actual and perceived. This is so the public can have confidence that public organisations are making decisions impartially and for the right reasons and that they are not being influenced by personal interests or other motives. Poorly managing the perception of a conflict of interest or bias can be as damaging as poorly managing an actual conflict of interest.

4.44
In procurement, it is important that organisations identify and manage conflicts (including perceived conflicts or risks of bias) so the public can see that public sector procurement is fair and ethical, and that it provides value for money.

4.45
The expectation is that all public organisations have policies that help those involved in procurement to identify, notify, and manage conflicts of interest. A public organisation must also show how it uses sound judgement to manage conflicts.

Callaghan Innovation did not properly manage the risk of bias from the contractor's previous work

4.46
The contractor having made an allegation of potential fraud about We are Indigo (the parent company of Manaaki) raises questions about his impartiality, or at least perceived impartiality, for the reasons we set out in paragraphs 4.15 to 4.18.

4.47
The Executive Summary of the second due diligence report includes an allegation of attempted misappropriation of government funds relating to the dispute between We Are Indigo and Company A. The contractor told us that the allegations set out in the due diligence reports were based on the interviewees' statements. We reviewed all the interview notes and supporting material the contractor provided to us and could not find evidence that an interviewee made this specific allegation.

4.48
When findings are based mainly on testimony, there is a risk that the personal experiences of the interviewer or the interviewee affect (or are perceived to affect) the accuracy of judgements. The testimony from Company A described a dispute over a payment, and some documents were provided in support of that. It did not refer to attempted misappropriation of funds.

4.49
However, the contractor had previously referred to this dispute in similar terms when contacting an MBIE investigator. MBIE did not consider that any fraud or misappropriation of funds had occurred.

4.50
We acknowledge that the contractor was not a decision-maker and that he noted in his report that the allegations put Manaaki in a "show cause" position, which meant that it was for Callaghan Innovation to decide whether it had enough grounds to exclude Manaaki from the procurement.

4.51
Callaghan Innovation cited attempted misappropriation of government funds (in relation to Company A) as one of the findings underlying Callaghan Innovation's decision to exclude Manaaki from the procurement. This conclusion was also later shared and represented as a matter of fact with other government agencies and more widely (because the reports were leaked), without adequate opportunity for Manaaki to respond (see Parts 5 and 6). This was unfair to Manaaki.

4.52
Although individuals are responsible for declaring any interests that could present a conflict, the public organisation is responsible for deciding on the appropriate steps to take. It is neither safe nor appropriate to assume that disclosure alone will be enough.

4.53
A public organisation is responsible for carefully considering what it needs to do to avoid or mitigate the effects of a conflict of interest or a perception of bias. This includes assessing the risk that the person's capacity to make decisions lawfully and fairly might be compromised. In making this assessment, a public organisation needs to consider how the situation could appear to an outside observer.20

4.54
That the contractor had an ongoing contractual relationship with an organisation that he interviewed as part of the due diligence process was, at a minimum, an interest that the contractor should have disclosed to Callaghan Innovation and that Callaghan Innovation should have managed.

4.55
Although Callaghan Innovation told us that it did not know about the contract with Company A until after the procurement, we expected Callaghan Innovation to have sought more information about the contractor's previous work relating to Manaaki as soon as Callaghan Innovation found out about it.

4.56
Once the contractor had identified Company A as an interviewee for the due diligence, Callaghan Innovation should have more actively managed the perception of bias this created.

4.57
It is not enough for a public organisation to rely on an individual's declaration that they have no conflicts of interest when there is information to the contrary. The contractor's completed conflict of interest declaration form, which disclosed no interests, included a question asking whether the contractor was aware of anything that could give the appearance that he might be biased towards a particular supplier (for example, where he had expressed strong views about a supplier).

4.58
Callaghan Innovation's procurement team accepted the contractor's negative response to this question despite knowing that the contractor had done work for Company A and had made allegations that We Are Indigo had committed fraud to MBIE. Callaghan Innovation also considered it appropriate for the contractor to carry out further due diligence on Manaaki.

4.59
Callaghan Innovation appears to have relied on the contractor's view that no conflict of interest arose from his previous work for Company A because there was no ongoing financial relationship and because the contractor said that his methodology meant that any prior experience could not influence the objectivity of his reporting.

4.60
In our view, Callaghan Innovation did not adequately consider how the bias, or the perception of bias, that previous work created could impact on the due diligence process. Ultimately, not managing conflicts of interest or perceptions of bias can undermine how the integrity of a procurement is perceived and call into question the integrity of a procurement decision. It can also negatively impact market confidence and undermine trust and confidence in the integrity of the public sector.

Callaghan Innovation did not appropriately document its consideration of interests relevant to the procurement

4.61
It is good practice for an organisation to ask its staff and contractors to make a formal declaration that they are free from conflicts of interest or, if not, to get them to describe any circumstance that might create an actual, potential, or perceived conflict of interest or bias. An organisation should keep formal documents so it can show that it identified and managed a specific interest appropriately.

4.62
When Callaghan Innovation commissioned the contractor, it did not ask him to complete a formal conflict of interest declaration. This is not good practice nor is it consistent with Callaghan Innovation's conflict of interest policy. Callaghan Innovation should have asked the contractor to make a written declaration before he started work.

4.63
Callaghan Innovation told us that it discussed the contactor's previous work on several occasions, but it did not document any of those discussions. This is not good practice and is not consistent with the procurement principles of accountability and transparency.

4.64
We expected to see the following documented:

  • more careful consideration and documentation of the discussions about the contractor's work for Company A;
  • how Callaghan Innovation assessed the risks to the procurement (including the risk of the perception of bias); and
  • how Callaghan Innovation proposed to manage the risks to the procurement (or why it chose to discount them).

4.65
Because of the lack of appropriate documentation, Callaghan Innovation cannot show that its processes were consistent with the Procurement Rules and our conflict of interest guidance.

Callaghan Innovation did not disclose other relevant correspondence and relationships

4.66
In correspondence between Manaaki and Callaghan Innovation after the procurement, Manaaki raised concerns that Callaghan Innovation was biased against it. Manaaki's Rule 50 procurement complaint in November 2022 raised the correspondence between the Chief Executive and Mr B about the contractor as further evidence of a conflict of interest.

4.67
The text messages from Mr B to the Chief Executive referred to the contractor doing work that involved We Are Indigo or having information about it. They also referred to the contractor wanting to engage with Callaghan Innovation's procurement team about this.

4.68
Mr B had previously made several social media posts about "bad actors" in the innovation "ecosystem", which Manaaki believed were about it. After Manaaki raised concerns with Callaghan Innovation about Mr B's social media comments, Callaghan Innovation instructed the contractor to interview Mr B as part of the due diligence process. The basis for this was not clear to us, because Mr B had not worked for or with Manaaki.

4.69
Callaghan Innovation staff told us that they were not aware of the earlier correspondence about the contractor between the Chief Executive and Mr B. The Chief Executive said that she did not act on the messages at the time. However, the existence of this correspondence has contributed to the perception of bias in the process.

4.70
We appreciate that New Zealand is a small country and that organisations and individuals must use their judgement in considering which relationships are relevant and need to be disclosed.

4.71
However, in our view, the Chief Executive should have formally disclosed her connection with Mr B and her previous correspondence with him once Mr B became relevant to the procurement. This would have allowed the procurement team to consider whether this posed any risks to the procurement's integrity.

19: The contractor told us that, although the contract ran for 12 months from December 2021, the only work he did under it was completed in December 2021. However, he was still under retainer to Company A when he carried out the due diligence work for Callaghan Innovation.

20: See Controller and Auditor-General (2020), Managing conflicts of interest: A guide for the public sector, at oag.parliament.nz.