Findings From Inquiry Into Callaghan Innovation’s Procurement Process Published

A newly released inquiry from the Auditor-General has examined Callaghan Innovation’s procurement process for its Founder and Start-up Support programme. Through this programme, a panel of providers provide mentoring and training to founders (people who are in the early stages of establishing or developing their business).

Callaghan Innovation carried out more intensive due diligence on the shortlisted tenderers for this programme because it wanted to select providers that would provide a safe environment for the founders. It hired an external contractor, a private investigator, to do this. Callaghan Innovation later excluded one of the tenderers, Manaaki, from the procurement because of allegations made in the due diligence reports prepared by the contractor.

Manaaki raised concerns that there was a lack of natural justice in the due diligence process, that Callaghan Innovation had not properly managed a conflict of interest, and that Callaghan Innovation had shared confidential information with other public organisations. For these reasons, the Auditor-General decided to inquire into this procurement process.

The inquiry focused on whether Callaghan Innovation’s actions and processes were consistent with the Procurement Rules and, where appropriate, the Public Service Commission’s Code of Conduct. The Auditor-General did not seek to re-perform the due diligence or form a view on the procurement’s outcome. Accordingly, his staff did not speak to those people who were interviewed as part of the due diligence process.

The contractor had previously worked for a company (“Company A”) that had a dispute with We Are Indigo, Manaaki’s parent company. At that time, the contractor had made allegations of fraud against We Are Indigo. The contractor later interviewed Company A as part of his due diligence on Manaaki.

Despite being made aware of the contractor’s earlier work on several occasions, and being told about the related fraud allegation, Callaghan Innovation later commissioned the contractor to do a second round of due diligence on Manaaki. Callaghan Innovation did not document any of its considerations about the contractor’s earlier work, the risk of bias arising from that work, or any mitigation strategies.

The second due diligence report included an allegation of attempted misappropriation of government funds similar to the contractor’s previous fraud allegation. The Auditor-General’s staff could not find evidence that an interviewee made this specific allegation.

“Callaghan Innovation’s objective to protect founders was well intentioned. It was reasonable for Callaghan Innovation to implement a more intensive due diligence process. However, it was important that the process treated all those involved in the procurement fairly and transparently. Callaghan Innovation’s process was neither transparent nor fair,” says Auditor-General John Ryan.

“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.

“Callaghan Innovation did not adequately consider how a perception of bias created by the contractor’s previous work could taint the due diligence. It needed to do more to manage that risk.

“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 second report.

“In my view, Callaghan Innovation should have considered its actions more carefully throughout the due diligence process,” says Mr Ryan.

Callaghan Innovation shared copies of the due diligence reports on Manaaki with other public organisations for purposes outside the scope of the procurement.

“Public organisations need to consider whether and what information is appropriate to share with other organisations.

“In my view, it was not fair, or reasonable, for Callaghan Innovation to share the due diligence reports without appropriate reason or process, or without giving Manaaki an adequate opportunity to have its response noted.

“In sharing the due diligence information, Callaghan Innovation did not demonstrate the transparency or fairness that I – or, in my opinion, the public – expects from a public organisation,” says Mr Ryan.

After the procurement decision, the reports were sent anonymously to many external individuals and organisations.

“Although the source of the leak remains unknown, it is deeply concerning that those reports subsequently made their way into the public domain,” says Mr Ryan.

“It’s important that public organisations use procurement processes that support public trust and confidence in how public money is spent.

“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 public services requires 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. Not doing this can negatively impact market confidence, and risks eroding trust and confidence in the integrity of the public sector.

“Callaghan Innovation has told me that it has reflected on this procurement process and what changes it might make for the future. I will be interested in how this work progresses.”

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