Response to query about Housing New Zealand processes

29 April 2016

File Ref: EN/CEO/3-0028
Inq. Ref: 13446

Phil Twyford
Member of Parliament for Te Atatu
Parliament Buildings
Wellington

Email: phil.twyford@parliament.govt.nz

Dear Mr Twyford

Thank you for your letter and attachments of 4 June 2015, in which you raise concerns about the processes that Housing New Zealand Corporation (Housing New Zealand) used in its decisions to contract with Andrew Body Limited (ABL) in 2011/12 and 2012/13.

You were concerned about what appeared to be:

  • the lack of an open competitive process, although the Government Rules of Sourcing required it except in certain circumstances;
  • a poor use of public money, as the arrangement appeared to have involved payment of a large amount of money for the apparent extent of the services received; and
  • the poor management of two potential conflicts of interest.

You were also concerned about the quality of Housing New Zealand’s responses to your initial requests for information under the Official Information Act 1982. The quality of responses to such requests is a matter for the Office of the Ombudsman. We suggest that you contact that Office about those concerns, if you have not already done so.

Our work

Before you contacted us, Housing New Zealand had already recognised systemic issues with its procurement policies and processes. It is addressing these issues.

We have examined Housing New Zealand’s procurement policies and practices and assessed the matters raised in your letter, with a view to suggesting potential improvements. Specifically, we have:

  • reviewed the findings and recommendations of our annual audits of Housing New Zealand since 2011/12;
  • reviewed changes to Housing New Zealand’s procurement policies in response to those recommendations;
  • compared Housing New Zealand’s current procurement policies and processes with good practice guidance; and
  • reviewed the available documentation on Housing New Zealand’s contracts with ABL1 and assessed the management of the contracts against the requirements that applied to Housing New Zealand at the time and against good practice guidance on procurement.

We focused on the procurement processes that Housing New Zealand used and particularly its approach for the ABL contracts. We have not looked at the quality of ABL’s work or whether it delivered value for money.

Our findings on each of the issues you have raised are set out in detail below.

Use of a competitive process

Housing New Zealand procurement policies and practices

The Government Rules of Sourcing did not apply to Housing New Zealand before the third edition of the Rules (dated 1 February 2015). Since then, Housing New Zealand has been required under Rule 59 to use the Government Model Contracts, which it has incorporated into its policies.

We reviewed the 2009 Housing New Zealand procurement policy that applied at the time of the ABL contracts. Housing New Zealand’s policies were generally consistent with our Office’s good practice guidance on procurement and specifically on the use of selective procurement.

Housing New Zealand’s 2009 policy was to go to the market for contracts for services in excess of $100,000 in value (the point at which, according to its 2009 policy, the Government encouraged Housing New Zealand to advertise an open request for tender or proposal).2 An open request for tender or proposal (as opposed to a closed request for tender) was Housing New Zealand’s preferred method for higher-value procurement.

The 2009 policy required careful evaluation of any deviations from the standard procurement process to ensure compliance with policy and legislation. Deviations were required to be both:

  • no greater than the particular situation required; and
  • justified in writing and approved by authorised persons and the procurement manager.

In our annual audit work during 2011/12, the contracts in our sample included a larger than expected proportion of closed tenders.3

We advised Housing New Zealand that, although closed tender or proposal processes can be appropriate in some circumstances, good practice guidance is that public entities make limited use of these procurement methods. This is because a closed tender or proposal method may not allow equal access to all suppliers in the market, so an opportunity to secure a better source of supply may be missed. We recommended to Housing New Zealand that it apply more scrutiny when considering a closed tender process, to confirm it is the only appropriate approach in the circumstances.

After our 2011/12 audit and its own internal audit of procurement processes (in 2013, followed up in 2014 and updated in 2015), Housing New Zealand initiated an improvement programme. The improvement programme has several elements, including:

  • implementing the recommendations of the internal audits;
  • introducing a central repository for registering and monitoring contracts, involving a new central Procurement team (although we note that it is possible to initiate procurement through the business units, so the repository cannot be guaranteed to be complete);
  • restructuring the procurement capability in Housing New Zealand;
  • the Procurement Refresh Project, which will update Housing New Zealand’s policy to accommodate requirements under the third edition of the Rules; and
  • procurement updates and training for staff.

We reviewed the documentation about the improvement programme. We concluded that the scope of the Procurement Refresh Project and the framework for the procurement function seemed appropriate. We recommended to Housing New Zealand that it finalise its revised procurement policies and processes as soon as possible.

We acknowledge Housing New Zealand’s changes in procurement arrangements to address its procurement shortcomings. However, given the risks, we are extending our audit work in 2015/16 on Housing New Zealand’s procurement.

Housing New Zealand’s management of the procurement of ABL’s services

We reviewed Housing New Zealand’s procurement process in its initial and subsequent engagement of ABL. It involved procurement negotiations with ABL without going to open tender. Of the 10 contracts within the six projects that ABL worked on, six were ultimately valued at over $100,000 and none went to open tender.

We understand that Housing New Zealand did not use an open tender process because the work required particular experience and expertise which it believed ABL had, it was required in a short time, it could not be specified highly, and it required a provider capable of working with some level of uncertainty. These circumstances are not uncommon in the procuring of professional services.

The first contract with ABL (in 2009) included initial work under Housing New Zealand’s Tamaki project, and cost $20,200. Housing New Zealand could not provide us with documentation on the selection of provider for this early work.

Subsequent work was contracted without an open tender. In one instance, Housing New Zealand made a case to its executive team for the use of ABL as a preferred supplier. However, Housing New Zealand could not provide us with documentary evidence of its process for selecting a provider, where the work was valued at more than $100,000 and it did not go to open tender.

Housing New Zealand believes in hindsight that engaging with the open market would have been difficult in the ABL procurements, and that an “invitation-only” request for proposal to suitably pre-qualified entities should probably have been the appropriate approach under its policy at the time.

Housing New Zealand could not provide us with any record of it having considered the optimal procurement approach in this case. In our view, it should have been able to demonstrate how it was satisfied that the arrangements with ABL represented value for money. The one case made to Housing New Zealand’s executive team for ABL as the preferred supplier made only passing mention of an alternative provider, and none of other possible procurement approaches.

Management of costs

ABL appears to have been closely managed by Housing New Zealand staff and management throughout the period of the contracts. This would have provided Housing New Zealand with some assurance about ABL’s progress and fulfilment of its service delivery obligations under the contracts. However, for certain elements of Housing New Zealand’s procurement approach there was no documentary evidence that value for money, including overall costs, had been properly considered.

We reviewed how Housing New Zealand managed the costs of its six projects that involved ABL. We focused on the elements of the contracts that might have contributed to sound control of the risks of either paying too much on the original price or of cost creep in the projects.

Most of the ABL contracts were ultimately over $100,000 in value. The aggregate cost over five financial years (2011/12 to 2015/16) was just over $2.332 million. The highest aggregate cost in any one financial year was just under $1.4 million.

Open tendering may be used to ensure that provider rates are set competitively, which increases the assurance of value for money. It was not used in any of these contracts for the reasons already noted, or in a significant proportion of other contracts that we sampled at the time. However, going to the market is only one way of containing costs. Others include capping the cost and/or the length of the project, and regular reviews against estimates of costs. The ABL contracts all involved some form of specified daily fee. The total payment was seldom capped. There was a time limit, estimate of days expected to be worked, provision for termination on written notice, and/or review of work against a cap in just over half the contracts.

Setting benchmarks through a contractor panel process is one way of showing that value for money has been considered in procurement. It was suggested to us that the breadth of Housing New Zealand’s experience in contracting certain services enabled it to assess the skills available in the market and market rates for particular work without using a contractor panel. However, we did not see any documented consideration of these matters for the contracts that we looked at.

We would also expect to see an awareness of the aggregate cost of the contracts with a preferred provider. We saw no evidence that the aggregate costs of this group of contracts with ABL were considered. Contracts were not all processed through a central procurement system at that time. Doing so might have ensured better monitoring of the overall amount of work being contracted to each provider, and adherence to policy.

Management of conflicts of interest

There were some significant weaknesses in Housing New Zealand’s records of its management of the two potential conflicts of interest that you raised. Only one of the two was recorded in the contract documentation, and Housing New Zealand could not supply us with copies of advice that it had sought about it or mitigation strategies (if any).

The second concerned a potential conflict in ABL’s relationship with a firm that was a potential provider of social housing at a time that ABL was advising on social housing transfer policy. ABL has assured us that its connection with that firm did not continue beyond 2012.

However, you have since drawn our attention to the possibility that the second potential conflict of interest might be relevant to the recent (March 2016) confirmation of a similarly-named firm as a tenderer in the sales process that ABL advised on. We have reviewed the status of the firm with which ABL had a relationship, and it appears not to have been the same firm that is now a tenderer.

We have considered Housing New Zealand’s policy for managing conflicts of interest, particularly with reference to potential conflicts of interest for the contractors that it uses. The references to conflicts of interest in an appendix to Housing New Zealand’s 2009 procurement policy do not apply specifically to contractors; it states that “all staff [our emphasis] with the ability to impact the course of a procurement process must declare any personal interest that may affect, or could be perceived to affect, their impartiality”, and that “necessary steps to manage the conflict must then be taken by responsible staff”. Staff is not ordinarily understood to include contractors.

Housing New Zealand’s present procurement framework includes references to conflict of interest considerations. We have recommended to Housing New Zealand that managing potential conflicts of interest that might affect the impartiality of work carried out by, or on behalf of, Housing New Zealand, be explicit at all stages of the procurement and the ensuing work of both contractors and staff.

Conclusions

We have discussed the following expectations with Housing New Zealand and we are satisfied that these expectations are being acted on:

  • That Housing New Zealand finalise its revised procurement policies and processes as soon as possible.
  • That where the standard procurement process cannot reasonably be followed, approval and the reasons for not following it need to be recorded.
  • For contracts where open tendering and setting benchmarks through a contractor panel are not used, that particular attention be given to controls on overall expenditure and to demonstrating value for money.
  • At all stages of the procurement and the ensuing work of contractors or staff, that procurement policies and practices be explicit about managing potential conflicts of interest that might affect the impartiality of work carried out by, or on behalf of, the entity. We would also expect the social housing procurement process that is managed by the Transactions Unit of the Treasury to take any potential conflicts of interest into account. We have been assured by the Transactions Unit that it does so.

We note that in 2013 Housing New Zealand created a central procurement team, although contracts can still be operated by individual business units and not go through the team. We expect Housing New Zealand to ensure that this does not compromise the integrity of its procurement processes.

As a result of our findings, we are extending our audit work in 2015/16 on Housing New Zealand’s procurement. A copy of this letter will be sent to Housing New Zealand. Because of the level of interest in this matter, we have decided to also publish this letter on our Office’s website.

Thank you for bringing these matters to our attention.

Yours sincerely

Greg Schollum
Deputy Controller and Auditor-General

1: Covering six projects involving 10 contracts, variations to contracts, or roll-over contracts. We refer to contracts, variations to contracts, or roll-over contracts, collectively as contracts in this document.

2: Housing New Zealand’s Finance & Admin Instruction: Procurement Policy F-227/Issue 1, 15/12/2009, page 9.

3: Note that the random sample did not include any ABL contracts.