Procurement

Procurement refers to all activities involved in acquiring goods or services, either outright or by lease. This includes acquiring consumables, capital equipment, real property, infrastructure, and services under consultancies, professional services, facilities management and construction, as well as the outsourcing of functions and subsequent contracting.

The NSW Procurement Policy Framework (2015) provides the procurement framework for the NSW public sector. The Public Works and Procurement Act 1912 and the Public Finance and Audit Act 1983 also contain additional legislative obligations in relation to procurement for agencies. Local councils are subject to provisions of the Local Government Act 1993, including s 55, and Local Government (General) Regulation 2005, concerning procurement.

Neglect of inventory performance facilitates corruption

Neglect of inventory performance facilitates corruption
The ICAC investigated corruption involving gifts and benefits given to staff with procurement responsibilities in local councils. It found that staff working in the store or depot of many local councils accepted gifts in return for over-ordering, underdelivery and favouring of some suppliers. Even though policies at these councils limited gifts, and contained procurement guidelines, financial delegations and segregation rules, stores and depot staff were still able to favour suppliers. In one case, some 400 kilometres of construction fencing was ordered – 20 times the order of stock required. Why did this happen? What sort of inventory system could permit such gross over-ordering and allow for it to go unnoticed? Councils had what appeared to be well-considered policies and procedures but, once mapped, the basic weaknesses in these processes became obvious: storepeople had end-to-end control over the procurement and inventory processes. In some cases, employees involved in risk assessment did not realise that storepeople were in control of most of the council’s non-capital procurement expenditure. Some councils also lacked a strong inventory management system. The solution was not to apply patches to corruption risks, but to reform fundamental elements of the procurement process to optimise efficiency and effectiveness while also controlling for corruption. `Source: Report on investigation into allegations that staff from a number of local councils and other public authorities accepted secret benefits from suppliers, October 2012.`

The ICAC investigated corruption involving gifts and benefits given to staff with procurement responsibilities in local councils. It found that staff working in the store or depot of many local councils accepted gifts in return for over-ordering, underdelivery and favouring of some suppliers. Even though policies at these councils limited gifts, and contained procurement guidelines, financial delegations and segregation rules, stores and depot staff were still able to favour suppliers.

In one case, some 400 kilometres of construction fencing was ordered – 20 times the order of stock required. Why did this happen? What sort of inventory system could permit such gross over-ordering and allow for it to go unnoticed?

Councils had what appeared to be well-considered policies and procedures but, once mapped, the basic weaknesses in these processes became obvious: storepeople had end-to-end control over the procurement and inventory processes. In some cases, employees involved in risk assessment did not realise that storepeople were in control of most of the council’s non-capital procurement expenditure. Some councils also lacked a strong inventory management system. The solution was not to apply patches to corruption risks, but to reform fundamental elements of the procurement process to optimise efficiency and effectiveness while also controlling for corruption.

Source: Report on investigation into allegations that staff from a number of local councils and other public authorities accepted secret benefits from suppliers, October 2012.

Some agencies do not buy high-value items and are concerned that corruption controls simply become red tape over what are essentially lower-value procurement transactions. The ICAC, however, routinely receives information about corruption in low-value procurement that falls under thresholds for tender requirements. The problem is that while the total value may not be significant for the agency, or in statewide terms, the corrupt funds to be obtained remain significant for perpetrators. In fact, because low-value items are often frequent purchases, their value can add up over time even while going “underneath the radar” of senior managers, finance departments or audit.

Common corruption risks in procurement include:

an employee providing confidential information to a supplier, giving the supplier an unfair advantage in a tender process
a procurement officer having a private company that produces goods/services relevant to their agency's operations and submitting tenders to the agency without declaring this interest
a tender assessment panel member or procurement officer not declaring a conflict of interest (for example, a private relationship or secondary employment) involving a tenderer
collusion between two tenderers; one submitting a “dummy” bid, and the other, a genuine bid
a public official colluding with a contractor to falsify or inflate invoices.

View the ICAC's video on How to recognise the signs of corruption for further information.

Multiple underlying systemic issues
An ICAC investigation found corrupt conduct in relation to construction and maintenance procurement undertaken by the NSW Department of Justice (DoJ). A DoJ asset manager ("the manager"), who was later appointed a senior manager in the Department of Corrective Services (CSNSW), engaged in corrupt conduct by receiving payments and other benefits from a contractor and the contractor's wife. The projects were managed by the DoJ’s Asset Management Services (AMS) unit. Some of the systemic issues uncovered as a result of the investigation are outlined below. Inappropriate management of external relationships: As an asset manager, the manager worked closely with a small number of contractors, including the contractor referred to above. This allowed a personal relationship to develop, which facilitated the corruption. Unfettered discretion or authority: The manager was considered by many within CSNSW and AMS as a resident expert and “go-to man” due to his asset management experience and record of delivering. This lead AMS and CSNSW staff to rely on the manager, who used that reliance to informally influence procurement decisions. Poor risk awareness or mitigation: AMS did not appreciate or manage the risks associated with the very high rate of turnover in its asset managers and consequent reliance on short-term contractors. Lack of staff capacity or capability: Due to the high rate of turnover in asset managers, staff often lacked the necessary skills and experience for the role and so, in some cases, relied on the manager for advice on which contractors to engage. Poor change management: AMS had only relatively recently become responsible for asset works for CSNSW properties. The transition was fraught with confused roles, responsibilities, accountabilities and reporting lines, incompatible computer systems, and significant ongoing tension between CSNSW and AMS. In the confusion, resident experts, such as the manager, became more influential and more poorly overseen. Poor consultation or engagement: Project scoping was poorly executed and often duplicated between CSNSW and AMS. Contracts were typically awarded to the lowest-price contractor, regardless of other considerations, meaning the manager could reasonably predict which contractors would be awarded work. Poor performance management and poor budgetary management: Minor capital works budgets had to be spent by June 30 each year, creating pressure (or a perverse incentive) on asset managers to quickly engage contractors and have them paid, rather than follow due process. This again lead to asset managers' reliance on the manager to help them more quickly perform their work. There were delays in commencing minor capital works due to inefficient processes in the program, leading to frequent budget underspends and therefore an increasing backlog of minor capital works. Minor capital and maintenance works were funded from multiple funding sources. This made overall program oversight and governance more complicated and created perverse incentives to misclassify work to access funding sources that had fewer controls on expenditure. AMS directly paid subcontractors who were engaged by head contractors at CSNSW correctional centres, creating little incentive for head contractors to seek value for money when engaging subcontractors. Governance failings: AMS did not have a system for managing the performance of its minor works contractors, which meant poor performance was not detected. Lack of due diligence or planning: The project scoping process was inefficient, with frequent duplication and variations, leading to project delays. There was a limited pool of suppliers prepared and available to perform the works, leading to further reliance by AMS asset managers on the manager to identify available contractors. Structural weakness: AMS asset managers were primarily responsible for verifying satisfactory completion of works but there was often no formal involvement of staff in the correctional centres that owned the assets. Poor formal frameworks: There were no clear policies or a service level agreement governing whether AMS or CSNSW had carriage of specific works, leading to confusion over who was responsible for what work. Senior CSNSW staff were found to have engaged CSNSW and AMS contractors to perform work at their homes, which was not explicitly against CSNSW policy. Poor information management: Due to incompatible computer systems, CSNSW had no access to AMS project information, and vice versa. Poor recordkeeping: Both CSNSW and AMS asset records did not contain a level of detail that facilitated efficient and effective management of assets and some financial controls. Information on projects and associated expenditure was held across multiple organisational systems that did not reconcil. `Source: Investigation into the conduct of a former NSW Department of Justice officer and others, August 2017.`

Multiple underlying systemic issues

An ICAC investigation found corrupt conduct in relation to construction and maintenance procurement undertaken by the NSW Department of Justice (DoJ). A DoJ asset manager ("the manager"), who was later appointed a senior manager in the Department of Corrective Services (CSNSW), engaged in corrupt conduct by receiving payments and other benefits from a contractor and the contractor's wife. The projects were managed by the DoJ’s Asset Management Services (AMS) unit. Some of the systemic issues uncovered as a result of the investigation are outlined below.

Inappropriate management of external relationships: As an asset manager, the manager worked closely with a small number of contractors, including the contractor referred to above. This allowed a personal relationship to develop, which facilitated the corruption.

Unfettered discretion or authority: The manager was considered by many within CSNSW and AMS as a resident expert and “go-to man” due to his asset management experience and record of delivering. This lead AMS and CSNSW staff to rely on the manager, who used that reliance to informally influence procurement decisions.

Poor risk awareness or mitigation: AMS did not appreciate or manage the risks associated with the very high rate of turnover in its asset managers and consequent reliance on short-term contractors.

Lack of staff capacity or capability: Due to the high rate of turnover in asset managers, staff often lacked the necessary skills and experience for the role and so, in some cases, relied on the manager for advice on which contractors to engage.

Poor change management: AMS had only relatively recently become responsible for asset works for CSNSW properties. The transition was fraught with confused roles, responsibilities, accountabilities and reporting lines, incompatible computer systems, and significant ongoing tension between CSNSW and AMS. In the confusion, resident experts, such as the manager, became more influential and more poorly overseen.

Poor consultation or engagement: Project scoping was poorly executed and often duplicated between CSNSW and AMS. Contracts were typically awarded to the lowest-price contractor, regardless of other considerations, meaning the manager could reasonably predict which contractors would be awarded work.

Poor performance management and poor budgetary management: Minor capital works budgets had to be spent by June 30 each year, creating pressure (or a perverse incentive) on asset managers to quickly engage contractors and have them paid, rather than follow due process. This again lead to asset managers' reliance on the manager to help them more quickly perform their work. There were delays in commencing minor capital works due to inefficient processes in the program, leading to frequent budget underspends and therefore an increasing backlog of minor capital works. Minor capital and maintenance works were funded from multiple funding sources. This made overall program oversight and governance more complicated and created perverse incentives to misclassify work to access funding sources that had fewer controls on expenditure. AMS directly paid subcontractors who were engaged by head contractors at CSNSW correctional centres, creating little incentive for head contractors to seek value for money when engaging subcontractors.

Governance failings: AMS did not have a system for managing the performance of its minor works contractors, which meant poor performance was not detected.

Lack of due diligence or planning: The project scoping process was inefficient, with frequent duplication and variations, leading to project delays. There was a limited pool of suppliers prepared and available to perform the works, leading to further reliance by AMS asset managers on the manager to identify available contractors.

Structural weakness: AMS asset managers were primarily responsible for verifying satisfactory completion of works but there was often no formal involvement of staff in the correctional centres that owned the assets.

Poor formal frameworks: There were no clear policies or a service level agreement governing whether AMS or CSNSW had carriage of specific works, leading to confusion over who was responsible for what work. Senior CSNSW staff were found to have engaged CSNSW and AMS contractors to perform work at their homes, which was not explicitly against CSNSW policy.

Poor information management: Due to incompatible computer systems, CSNSW had no access to AMS project information, and vice versa.

Poor recordkeeping: Both CSNSW and AMS asset records did not contain a level of detail that facilitated efficient and effective management of assets and some financial controls. Information on projects and associated expenditure was held across multiple organisational systems that did not reconcil.

Source: Investigation into the conduct of a former NSW Department of Justice officer and others, August 2017.

Developing a strategy

Procurement functions carry high risks for corruption given they involve discretionary decision-making combined with the transfer of large amounts of public funds into private hands. A written policy can help achieve consistency and compliance in procurement, but only if staff understand the policy, are able to comply and are motivated to comply. Training staff involved in procurement is essential to ensure they understand policies and procedures and know how to implement them. However, training staff – who understand policies but choose not to follow them – will not in itself eliminate corruption. Including procurement in internal audit and corruption risk management programs can help identify suspicious transactions, close systemic weaknesses that create opportunities for corruption, and work as a deterrent.

Improving compliance in procurement is more successful when managers:

actively manage and monitor procurement transactions and analyse procurement spending at different levels of aggregation

develop a good understanding of their agency’s procurement needs and market prices
request compliance audits and respond to negative findings
conduct checks to detect non-compliance
use purchasing, customer and supplier data to identify anomalies in procurement patterns
put in place a complaints management process to deal with allegations about wrongdoing concerning procurement activities.

Recordkeeping around procurement is particularly important for accountability, for transparency and – when it is known that records are audited and checked – as a deterrent to corrupt conduct.

The following recordkeeping practices should be observed by staff involved in procurement:

determine and record weightings of evaluation criteria prior to advertising/opening a tender

record in writing meetings and all other contact with tenderers prior to tender selection
use a tender box that is opened in the presence of at least two officers, with a list of tenders deposited being made upon opening
require members of tender assessment panels to declare in writing any associations with tenderers (these disclosure documents should be signed and dated by each panel member, counter-signed by the convenor and kept with the tender records)
if alternative or non-complying tenders/offers are considered, specify the reasons in writing
record in writing tender panel decisions and the reasons for these decisions
communicate with all tenderers in writing.

As a general rule, direct negotiations should be avoided unless permitted under government policy. However, there are situations when it may be impossible to use a competitive process to identify a supplier or to test the market. Each matter should be considered individually.

The following ICAC publications offer specific advice on aspects of procurement:

Direct negotiations: Guidelines for managing risks in direct negotiations (May 2006) – advice about direct negotiations
Corruption risks in NSW Government procurement: The management challenge (December 2011) – advice for managers on corruption prevention in procurement
Managing IT contractors, improving IT outcomes (August 2013) – advice about the procurement of IT contractors
Controlling corruption opportunities in the provision of maintenance services (February 2017) – advice relevant to the procurement of maintenance services and the corruption risks associated with different contracting models.

A list of ICAC investigations follows that have concerned corruption risks arising from procurement activities.

Investigation into bribery and fraud at RailCorp – Eighth report – corruption prevention (December 2008) dealt with the decision to outsource the provision of goods and services in an environment of dysfunctional markets, the inability of management to effectively oversee procurement processes and a lack of internal segregation of duties.
Investigation into the conduct of a University of New England (UNE) procurement officer and UNE contractors (August 2012) dealt with the outsourcing of facilities management work in a regional location with small markets where there was a lack of central authority by the agency over procurement.
Investigation into allegations that staff from a number of local councils and other public authorities accepted secret benefits from suppliers and that staff from two local councils facilitated payment of false invoices from suppliers (October 2012) dealt with supplier interactions and the need to manage supplier engagement. One focus of the investigation was public officials accepting gifts from suppliers as an inducement to place orders with their companies or to continue placing orders with their companies. The investigation also dealt with false invoicing and a lack of effective controls over procurement and inventory.
Investigation into allegations of corrupt conduct in the provision of security products and services by suppliers, installers and consultants (September 2013) dealt with the design and installation of high-end security systems in an environment where public sector agencies had limited internal capabilities in this area. Specific problems identified during the inquiry included a failure to undertake adequate due diligence enquiries during tender processes, limited staff training in procurement and a failure to follow tender requirements.
Investigation into allegations that an Ausgrid engineer corruptly solicited and accepted benefits from Ausgrid contractors and subcontractors (June 2015) dealt with procurement in a situation where there were limited cost benchmarks, and loose contractor selection and monitoring processes.
Investigation into the conduct of officers of the NSW Rural Fire Service and others (December 2015) dealt with the supply of catering and other products in an environment of underdelivery and over-ordering of goods, and the uncompetitive allocation of work.
Investigation into the conduct of a TAFE NSW ICT manager (March 2016) dealt with the splitting of purchase orders and lack of control over the use of out-of-contract suppliers in relation to the procurement of IT goods and services.
Investigation into the conduct of a Mine Subsidence Board district manager (March 2016) dealt with procurement problems, such as a failure to undertake a proper needs analysis prior to engaging contractors and a failure to effectively evaluate contractor performance. The investigation also identified inadequate segregations in tendering processes and a lack of organisational capability to process claims.
Investigation into the conduct of a senior officer of the NSW Department of Justice and others (August 2016) dealt with supplier fraud and conflicts of interest involving work performed under a court house upgrade program. The investigation found that the mechanism for linking business needs to the program was inadequate, there was uncertainty over project scope and costs, and limited recording and transmission of project information provided unwarranted control over the program to a public official.
Investigation into the conduct of a former NSW Department of Justice officer and others (August 2017) dealt with inefficient and disordered procurement systems.

Visit these pages to learn more about the risks around procurement, which can involve conflicts of interest (including public officials procuring from their own, or a friend’s or family member’s company), outside employment, the offering of gifts and benefits to public officials, joint-venture arrangements and outsourcing.

Reviewed November 2018