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Probity: Easy to Say but Difficult to Do

Probity: Easy to Say but Difficult to Do

Once upon a time, a major NSW public authority regularly engaged the same IT consultant without calling for tenders. Let’s call her Ms Marvel. During her stellar reign at this government agency, Ms Marvel enjoyed access to selection panels and to information that other contractors could only dream about.

She was involved in nine projects over a three-year period. Of these, only one was tendered. Ms Marvel was selected for six of the projects because each cost less than $20,000. The NSW government’s Guidelines for the Engagement and Use of Consultants states that competitive bids are not required where the consultancy is less than this amount.

However, two other projects awarded to Ms Marvel each cost more than $20,000. One was worth $92,970. Ms Marvel was appointed for both because she had been engaged on a related project and had unique experience in the area. In total, the eight projects not put to tender generated payments to Ms Marvel of more than $500,000.

The remaining project involved retaining Ms Marvel three days per week for three months at an agreed fee of $1200 per day. But this project was still running when someone finally blew the whistle on Ms Marvel — three years and more than $434,000 later.

The NSW Audit Office (AO) investigation that revealed the remarkable saga of Ms Marvel found that “unique” expertise became the sole criterion for awarding her work. The agency concerned undertook almost no market testing and, as a result, Ms Marvel charged what she pleased. Over time, the agency simply lost sight of the idea of getting value for money.

If ever the textbook on how not to conduct probity is written, the case of Ms Marvel will form one of its chapters. As will RMIT’s $47 million PeopleSoft debacle, the federal government’s $351 million Health Group IT Outsourcing tender and . . . well, it will be a long book. That’s probity for you — easy to say, difficult to do.

Australian governments are required to observe the highest standards of probity in all their commercial dealings. The business they conduct must be fair and open. They must demonstrate levels of integrity consistent with the public interest. The proponents of sound probity argue that it is only common sense writ large, but it can be demanding and tedious. So what is probity exactly?

In a nutshell: “complete and confirmed integrity”. The dictionary definition refers to honesty, ethical conduct and propriety. Within government, the word probity is also used to mean “good process”. Clear procedures, consistent with government policy, legislation and the legitimate interests of bidders must be established, understood and observed from the outset. Probity demands that all bidders are treated equally and that all decisions are made in a way that allows them to be understood and justified.

Probity is the responsibility of all stakeholders involved in doing business with governments, from the most junior staff to the Prime Minister. It provides accountability, preserves public confidence in government, protects the interests of tenderers and improves decisions so that they are defendable against potential legal challenge. Sound probity also generates fewer conflicts, stifles corruption and promotes organisational and attitudinal change.

Confidentiality and Disclosure

Although all Australian governments are committed to transparency, some confidentiality may be required during a tender to protect the competitive position of bidders and the commercial interests of the government concerned. All public servants are under a general obligation of confidentiality and other people involved in a tender process — for example advisers and consultants — must also respect confidentiality.

The Victorian government recently announced a new policy on the public disclosure of tender and contract-related information called “Ensuring Openness and Probity in Victorian Government Contracts”. Once a contract has been awarded, the government must disclose details of that contract on the Victorian government Purchasing Board Web site. Contracts worth more than $10 million are published in full. The policy also demands that only trade secrets or genuinely confidential business information can be withheld. The Freedom of Information Act defines “confidential business information” as material that, if disclosed, is “likely to expose a private sector contractor unreasonably to disadvantage”.

Scepticism by contractors about information security can deter them from bidding or reduce the detail they provide in support of their bids — neither of which is in the government’s interest. The incorrect release of information can even cause a tender process to be aborted. This is why government agencies establish strong security procedures for handling tender-related documents. Those that contain sensitive information are stored securely at all times, with access restricted to authorised staff with a direct “need to know”. They also produce limited numbers of copies of tender-related documents, with each copy numbered.

Another confidentiality issue is proprietary business information. In major tendering, governments sometimes give private sector bidders the opportunity to compete against each other on the basis of quality and innovation as well as price. But bidders want to be sure that their intellectual property is safe.

Tender Process and Conflicts of Interest

The rules governing the tender process are usually documented in the Request For Tender (RFT) that is given to all bidders at the start of the process. These rules cover any restrictions on the eligibility of parties to bid; the scope, content and format required of bids; any skills or experience which bidders must possess; a statement of the government’s objectives; the criteria against which bids will be evaluated; the deadline and location for submissions; procedures for contact between the project team and bidders; details of any parties which bidders are prohibited to contact; and a statement of the government’s rights.

The RFT has legal status and governments are bound by their terms. This was illustrated in the Hughes Aircraft case, a landmark legal judgment in 1997 in which the Federal Court of Australia found that the Civil Aviation Authority (CAA) had acted illegally by failing to adhere to the bid evaluation criteria described in the RFT for a new air traffic control system. The Court found that the CAA changed the selection criteria after bids had been submitted, giving more weight to a particular criterion than the RFT had stipulated. The CAA did this without telling bidders and without asking them to re-bid on the basis of the revised criteria. By departing from the terms of its own RFT, the CAA had breached a process contract it had implicitly entered into with the bidders.

A conflict of interest arises when a member of the project team — or an adviser to it — has an affiliation that might be seen to prejudice his or her impartiality. Conflicts of interest are commonplace and, provided they are identified and settled early, they need not be indicative of any wrongdoing. Responses to a conflict or potential conflict can vary. At one extreme, it may result in an individual or adviser being redeployed. At the other, it may be resolved simply by documenting the conflict.

Getting Help from Outside

In any major government transaction, probity processes may need to be checked by someone independent of the project team. In some cases this means engaging a probity auditor.

An external probity auditor may be needed where the transaction is of high value; the matter is complex, unusual or contentious; or the nature of the marketplace makes bidder grievances more likely (for example, where commercial secrets are commonplace or where competition is particularly fierce). Probity auditors are highly experienced — and expensive.

They have three main roles: to provide probity advice to government during a tendering process; to provide scrutiny of the tendering; and to provide a report at the end of the process that records an independent view of the way it was managed. A probity auditor cannot act as insurance against errors in decision making, nor can they be called in part way through to remedy an already tainted process.

Probity auditors are no guarantee that problems will not occur. In some instances, their inappropriate use has actually created problems. They are generally paid by the agency that employs them. This relationship can create the appearance of divided loyalties, but accessing probity auditors from a whole-of-government panel can help keep the engaging agency at arm’s length.

The vendor community appreciates the transparency that probity brings, even though it can extend the process. Some tenders run for up to two years, creating challenges for both sides: technology advances, thinking evolves, personnel changes, budgets contract.

Robert Pedler, SAP’s Queensland state manager and formerly its national sales manager, calls such negotiations “long chess games”. He says probity is a fundamental issue that neither vendor nor client can afford to treat lightly. “We always need to be careful to behave in a manner that not only is real and fair and open, but can be perceived only as being real and fair and open,” Pedler says.

“If anything you do can be construed to be otherwise then you leave both parties open to complaints that can result in them losing their entire investment — just because somebody perceived something as being not quite right. With some of the big outsourcing deals in Canberra, organisations spend multimillions in the cost of sale. And remember, only one organisation can ever win. You can write off hundreds of thousands of dollars.”

When Things Go Wrong

Late last year, major shortcomings in probity were revealed in the $351 million Health Group IT Outsourcing tender conducted by the Office of Asset Sales and Information Technology Outsourcing (OASITO). Sensitive pricing information from CSC and EDS was inadvertently passed to the third tenderer, IBM Global Services Australia. IBM GSA subsequently won the contract.

Following an investigation, the Australian National Audit Office (ANAO) report was scathing: “On the basis of the evidence available, ANAO is not able to provide an assurance that no tenderer unfairly gained a competitive advantage in the Health Group tender process.”

And later in the report: “There was a lack of transparency of the manner in which probity issues were considered by OASITO . . . Deficiencies in the documentation . . . together with inconsistencies in individuals’ recollections . . . did not allow ANAO to conclude that probity issues . . . were appropriately and effectively managed . . .”

And later still: “ANAO identified a number of areas in which the handling of the probity issues . . . could have been improved to provide more transparency, accountability and rigour”

As part of a wider report on public sector agencies in Victoria, its auditor-general (AG) recently declared misgivings about the probity failures in RMIT’s PeopleSoft rollout. In December 1999, RMIT commenced its Academic Management System (AMS) information technology implementation. The AMS project was largely outsourced and went “live” in October 2001, but suffered many technical problems and the anticipated cost of the project to the end of 2003 was $47.2 million — 3.7 times the original budget. The AG says the current system has not provided the functionality planned and RMIT faces significant challenges to transform it into a student administration system that is sustainable in the long term.

The AG says RMIT did not plan for and apply appropriate contract and project management practices. It did not establish the required governance arrangements to ensure the implementation was effectively managed.

Late last year the NSW Audit Office tabled a report called Outsourcing Information Technology in the NSW Public Sector, which also revealed that probity had taken a holiday. The audit reviewed how five agencies had spent about $25 million in 2001—02 outsourcing their IT functions. The AO found “that there is no objective evidence to demonstrate that agencies have achieved their goals in outsourcing IT”.

The AO said agencies were not able to demonstrate that the actual costs of outsourcing matched the expected costs, and few agencies had negotiated prices with service providers that reflected the trend towards lower costs.

“No agency had developed performance measures that show whether IT outsourcing has improved the efficiency or effectiveness of its IT operations or service quality,” the AO report said.

An important but lesser-known role of the NSW AO is to consider allegations made by public officials under the Protected Disclosures Act 1994 that involve “serious and substantial waste of public money”. In 2001—02 the AO received 27 complaints, 20 of which met the criteria to be classed as protected disclosures. One of the complaints was that the Department of Fair Trading wasted public money when it selected a telecommunications provider without following government purchasing policy and procedures.

Previously, the department had used Optus and Telstra. In December 2000 the department transferred certain telecommunications services to Optus for a two-year contract period. The department estimated that the transfer would reduce costs from $370,000 to $232,000 per annum — a saving of $138,000. The estimate was based on an analysis provided by Optus. The department took the approach that it could hire Optus without calling for tenders because the service was covered by a government period contract.

The AO said the department should have sought quotations or called tenders. It said the department entered into a long-term contract which “was not based on a well-considered business case and did not demonstrate in a transparent way that value was obtained from the expenditure of public money”.

The AO also quoted from the NSW Office of Information Technology Code of Conduct and Ethics. That document states that all parties in a contract “must not engage in any practice that gives one party an improper advantage over another”.

That is a rule all public servants should bear in mind.

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More about Australian National Audit OfficeAustralian National Audit OfficeCSC AustraliaDepartment of Fair TradingEDS AustraliaGSA GroupIBM AustraliaIBM GSANational Audit OfficeNSW GovernmentOASITOOffice of Information TechnologyOptusPeopleSoftRMITSAP AustraliaTelstra Corporation

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