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Brief Counsel

Rules of commercial engagement with government

25 February 2013

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The Auditor-General’s inquiry into the process behind the selection of SkyCity to build the international convention centre provides a useful contextual guide to the rules of engagement when dealing commercially with government.

This applies not just to procurement processes but also to contestable funding applications.  We discuss some of the key take-outs.

Context

The main question before the (deputy) Auditor-General was whether the Government’s decision to negotiate with SkyCity was influenced by “inappropriate considerations, such as connections between political and business leaders”. 
The inquiry found no evidence of impropriety on these grounds but did find a range of procedural problems and deficiencies the effect of which was to compromise the fairness and credibility of the engagement. 
In particular, it found that the call for Expressions of Interest (EOI) was poorly planned and executed with the result that one submitter was treated differently from the rest during the evaluation process.
The Auditor-General’s analysis and conclusions provide a useful refresher guide both to government agencies and to parties engaging with them on how procurement processes should be run. 

Take-outs

Participants in a procurement process – whether an EOI or a Request for Proposal (RFP) – should be able to expect:
  • the same, full information on the Government's requirements and how the process will run, and
  • equal treatment (this does not mean that everyone needs to be treated identically but it does mean that they should have the same broad opportunities to receive and provide information).
No RFP was issued in this case but the EOI request and associated process failed both of these expectations.

Tender documents must be as clear and unambiguous as possible

The EOI document was muddled and merged different objectives.  It tried to do three things at once: to elicit general ideas about how New Zealand might attract more business events, to test interest in building a new international-standard centre and to explore whether there were any plans to expand existing facilities around the country. 
It also failed to set out how the proposals would be evaluated and what criteria would be applied.  And, although it contained a clause reserving the Government’s right to negotiate with a single submitter, it provided no explanation of why and how such a decision would be taken.

The playing field should be level

More importantly, the EOI was not clear that the Government’s preference was to put no money into the project.  Instead submitters were asked to provide creative suggestions on how it could be funded, including “central government, local government and private sector funding options”.  And the main background information provided was a feasibility study which included a conclusion that central government would meet some or all of the capital costs.
“This context, combined with the fact that the Government was using a procurement process to approach the market, all supported an impression that government funding was likely to be part of the eventual solution.
“Yet SkyCity knew...that the Government did not want to fund the construction of a convention centre at all and would look at alternative ways of making a centre viable, including regulatory reform to provide a potential provider with an enhanced revenue stream.”
The result was that “one potential submitter had a clearer understanding of the actual position on a critical issue” than any other potential submitters.
The Auditor-General doubted that the failure to disclose the Government’s reluctance to put up any cash made a material difference as it was widely known that the Government’s finances were constrained and it was unlikely that any other submitter would have been able to adapt their proposal so that they carried the full construction costs.
But the omission was “symptomatic of the lack of attention to procedural risks”.

Direct engagement with Ministers....

...is fine in the preliminary stages. 
“We have no concern that the Government took steps to find out whether SkyCity’s development plans might be relevant to the discussions about an international convention centre.  Nor is it unusual for a company like SkyCity to approach government officials and Ministers to explore whether there might be government interest in, and support for, its development ideas....
“Our investigation confirmed that the discussions between August 2009 and March 2010 remained high level and preliminary in nature.”
However, once a formal approach has been made to the market (through an EOI or RFP) all communications with submitters needed to be carefully managed. 

Forward planning is essential

The Government had made no commitment to proceed to a formal RFP when the EOI request was issued.  It was fully entitled to proceed one step at a time, but it is essential to always be thinking ahead.
“The decision to proceed to an EOI process should have been accompanied by systematic planning on next steps and what was needed to manage any risks.”
This was particularly so after SkyCity had made it clear that it would need regulatory reform to make the centre viable as it was apparent at this stage that any further discussion would effectively be a commercial negotiation about an exchange of value to achieve the desired outcome.
Against this backdrop, Ministers and negotiating officials needed to be well-briefed on the procedures which should be followed – the general principles which needed to underpin the process, the relevance of the Mandatory Rules for Procurement by Departments (which, as the name indicates, are binding), the limited exceptions in those rules, and the procedural steps the Government would need to follow if it was considering proceeding to direct negotiations with SkyCity.

Maintaining competitive tension

The usual way to maintain competitive tension while exploring one or more of the EOI responses in detail is to proceed to a full RFP.  Where the costs this will impose on participants is not justified (perhaps because there really is only one contender) and the purchaser enters direct discussions with one party, other mechanisms can be used to manage the value-for-money aspect in the absence of a competing bid. 
There is a growing amount of guidance available on alternative negotiation techniques to manage this type of situation.

What to be aware of when dealing with the Crown for funding or as a supplier

For those wanting to provide goods or services to the Crown or receive funding, the basic principles that govern all public spending are: accountability, openness and transparency, value for money, lawfulness, fairness and integrity.  These apply regardless of the value or complexity of the arrangement.
Although the principles do not bind the private sector, suppliers or funding applicants can be affected by association with a deficient process through reputational damage, wasted expenditure on pitching and planning, and delay – all of which can come with a cost.
For public sector procurement of goods and services over $100,000, further considerations apply.
  • The reach of the Mandatory Rules on Procurement extends beyond their statutory jurisdiction as many public sector agencies which are not bound by the Rules choose to apply them anyway as part of their own procurement policies.
  • The Rules require central Government to use a tender process to test the market, unless one of the limited exceptions applies.  Usually the Government will have to go through an RFP stage, even if it has issued an EOI.
  • Where there is no “off the shelf” process for making complex decisions (such as a testing of market, commercial negotiation and policy and political decisions), the Government will still need to follow the basic procurement principles – and document that it has done so.
  • Different principles may govern different stages of a procurement process, so potential participants should understand which apply. 
  • If responding to an EOI, look for the evaluation process and evaluation criteria.  If they’re not there, ask for them, especially if the Government reserves the right to negotiate directly with one submitter as a result of the EOI.
  • All potential submitters for an EOI are entitled to have the same time and information to prepare and submit responses.  No submitter should have more opportunity than another to improve its proposal based on post-submission feedback to its response.

For further information, please contact the lawyers featured. 

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