5. Probity and due diligence
Chapter 3. Probity and due diligence
Agencies must follow probity and due diligence requirements to show their procurement for a project has been fair and objective. These are set out in NSW Government procurement policies, and in national and state PPP guidelines.
Overall, TfNSW met these requirements for the CSELR project.
TfNSW adopted a detailed probity framework. An independent probity advisor concluded its evaluation process to select the managing contractor and PPP contractor was fair and had due regard to probity. TfNSW also applied due diligence to the PPP bidders consistent with its guidelines for projects of this kind.
We also found no evidence that the PPP contract will not be delivered. TfNSW has included safeguards to mitigate the risk that the contractor cannot fully deliver on its obligations.
At the same time, the early works package should have been included in a key gateway review.
The tender evaluation process was comprehensive. However, TfNSW had used incorrect assumptions in the Public Sector Comparator (PSC) benchmark to assess value for money. It is normal practice for the PSC to be updated as a project evolves. TfNSW presented the first PSC calculation with the CSELR project business case. It then updated the PSC on a number of occasions to reflect changes in the project costs and benefits. It is unfortunate that TfNSW discovered the incorrect assumptions in the PSC so late in the process, and after tenders for the PPP were evaluated. We note that external reviews found that the PSC update process was consistent with the national PPP guidelines and did not unfairly impact proponents.
Exhibits 7 and 8 outline the delivery strategy for the CSELR project, divided into two packages.
Exhibit 7: CSELR delivery packages
Source: Transport for NSW 2013.
Exhibit 8: CSELR delivery strategy
Source: Transport for NSW 2013.
Our audit reviewed the procurement and tendering processes for these two major contracts. We assessed whether TfNSW:
- applied adequate processes to assure probity and due diligence in tendering
- complied with relevant NSW Government procurement policies and guidelines, the capital assurance system and PPP contract requirements.
3.1 Governance and probity in procurement
We found there was a strong governance structure for the procurement of the works packages, including:
- independent review
- detailed probity framework
- extensive due diligence.
However, a potential conflict of interest was not recognised or addressed.
Procurement processes were independently reviewed
Good governance of large capital projects calls for independent scrutiny of procurement processes to ensure objectivity and value for money. NSW Treasury and the Advisory Board played a major role in reviewing the procurement processes for the works packages.
The Advisory Board conducted detailed reviews and guided all aspects of procurement for the main works PPP package. Board meeting papers for the two years to January 2016 showed an active interest in all aspects of the package, including critical review and endorsement of:
- PPP procurement planning, such as the request for proposal documents
- updates to the public sector comparator
- increases in the project budget
- the outcome of the main works PPP package tender evaluation.
The Advisory Board also monitored procurement progress for the early works managing contractor package.
NSW Treasury worked with TfNSW to finalise the main works PPP package tender and largely finalise the evaluation documents before releasing the request for proposal (RFP). NSW Treasury was also involved in the tender evaluation, and was satisfied with contract negotiations and finalisation. It confirmed that TfNSW materially complied with the NSW and national PPP guidelines.
NSW Treasury also reviewed each of these key stages for the main works PPP package in response to TfNSW reports.
There was a detailed probity framework
TfNSW engaged an independent probity advisor to oversee the tender and evaluation phases of both works packages. The advisor concluded TfNSW’s evaluation of both works contractors was fair and had due regard to probity.
The overall probity framework was detailed and included:
- probity induction and briefing for all project staff
- audits of the four key project advisors’ premises and systems to confirm agreed probity measures were in place
- probity advice throughout the delivery phase
- probity review of all key procurement activities for consulting, construction contracts and the PPP.
TfNSW applied extensive due diligence processes
We found no evidence that the PPP contract will not be delivered. TfNSW has included provisions that mitigate the risks of the contractor not fully delivering on its obligations.
During the tender evaluation, TfNSW identified issues that could affect the financial strength of both bidders, including a serious fraud conviction in one of the bidder’s related entities. TfNSW applied its standard risk assessment process and put in place contract provisions to manage this risk. This is consistent with the usual approach for this type of risk.
Potential conflict of interest was not recognised
We identified a potential conflict of interest with two members of the main works PPP contract pre-tender assurance review panel. This was because they worked for organisations actively involved in the development of the CSELR project.
One of these members declared the conflict of interest, and the probity advisor monitored it. The other member did not, and TfNSW did not address this in its submissions to the NSW Government. Rather, the submissions for approval of the RFP for the main works PPP highlighted the independence of the consultants.
We do not question the capability or diligence of these members. But to maintain confidence in a procurement process, it is vital that any potential perception of conflict of interest is recognised and addressed.
3.2 Tender process
While the underlying governance structure was sound, we found that unresolved issues increased risks in tendering and that the early works package should have been included in a gateway review.
The tender evaluation process itself was comprehensive and met relevant guidelines. But, late in the process, TfNSW identified an error in the PSC benchmark used to assess value for money.
TfNSW released the RFP on time, but uncertainties increased risk
TfNSW met the March 2014 timeframe to release the RFP for the CSELR project. However, many unresolved issues increased the risks and decreased value for money, including:
- the scope, duration and extent of the early works package
- the scope of utility works solutions
- outstanding third party agreements affecting the design and scope of works
- planning consent conditions.
We found that TfNSW did not adequately finalise the following information for the RFP:
- third party agreements with key stakeholders
- the submissions report
- early works contract scope and status for handover to the PPP contractor
- in-principle traffic prioritisation.
Not having this information available meant PPP proponents may have applied risk pricing in the tender estimates, in turn reducing value for money.
Chapter 2 discussed the implications of not finalising key third party agreements by the time TfNSW signed the PPP contract.
Early works package should have been part of the gateway review
Overall, the pre-tender assurance review was thorough and provided a greater level of scrutiny than would normally be expected from a mainstream gateway review. This reflects the transport-specific assurance framework that TfNSW uses and NSW Treasury endorsed.
However, the review did not adequately address the:
- risk of managing the integration of work covered by the two main contracts
- outstanding issues with the capital cost estimate.
The review also did not include the early works package, even though it acknowledged the potential risks of not managing the overlaps with the main works PPP package. This is a concerning omission, particularly after the CSELR project business case assurance review made similar observations.
TfNSW advised that, given the value, criticality and complexity of the PPP compared to the early works package, the PPP was its primary focus. However, we believe it was necessary to consider the early works managing contractor package in the context of the potential risks of overlaps with the main works PPP package.
The review also did not address concerns the peer review identified about the underestimated capital cost in the business case. This is despite the review being required to consider the robustness of the cost estimate. As noted earlier, these uncertainties led to increases in the project budget.
The tender evaluation process was comprehensive
The main works PPP tender evaluation process was comprehensive. TfNSW completed the evaluation in line with the evaluation plan and followed NSW and national PPP guidelines.
The evaluation report, including the probity comments, confirmed the assessment complied with relevant NSW Government policies and guidelines. The probity advisor validated the process and did not raise any probity issues.
The tender evaluation report concluded that:
- neither of the bidders’ proposals represented value for money against the PSC quantitative benchmark
- there were outstanding commercial issues that required resolution.
It is normal practice for the PSC to be updated as a project evolves. TfNSW presented the first PSC calculation with the CSELR project business case. It then updated the PSC on a number of occasions to reflect changes in the project costs and benefits.
In October 2014, TfNSW made the final adjustment to the PSC because it found that a key assumption was incorrect. The incorrect assumption was that management effort and associated contract interface risks would be the same for a traditional delivery model as a PPP.
It is unfortunate that TfNSW discovered this error so late in the process, and after tenders for the PPP were evaluated. National PPP guidelines permit the PSC to be adjusted after bids are received in certain circumstances, including where changes to assumptions are required.
It is evident that PSC updates were scrutinised and endorsed by the Advisory Board and reviewed by the probity advisor. Those reviews found that the PSC update process was consistent with the national PPP guidelines and did not unfairly impact proponents.
TfNSW also worked with its independent advisors and NSW Treasury to develop a negotiation plan to resolve the outstanding commercial issues, including risk sharing parameters, identified in the tender evaluation report.