NSW Government procurement reform Part 4 – Integrity above all

When NSW Government officials undertake public procurement, they are spending public money, unlike when you fill your trolley at the supermarket. The public rightly expects that government officials will make good choices, motivated by what is best for NSW. They also expect suppliers to act ethically when participating in procurement processes and delivering on contracts.

This article is the final instalment in our series exploring the NSW Government’s procurement reform agenda.  The series addresses issues raised in the recent Upper House inquiry into government procurement practices (Inquiry)[1] and what this inquiry means for both government officials and suppliers. Here are the links to our first, second and third articles.

Obligations of public officials

NSW public officials must adhere to various integrity requirements including core values[2], a code of ethics setting minimum standards of behaviour[3] and specific values and principles relating to financial management[4]. A common thread is that public officials must prioritise the public interest above their own; this includes, including not misusing their position, or information they gain from it, for personal gain. This is particularly important in procurement, where suppliers have a significant financial interest in the decisions made by public officials.

Expectations of suppliers

The Government’s expectations of the relationship between NSW Government sector agencies and their suppliers is set out in the Supplier Code of Conduct. This Code, specifies expectations such as acting with integrity and openness, conducting business in an ethical and safe manner, disclosing any perceived or real conflicts of interest.  It also highlights the potential for contract termination and loss of future work as consequences for non-compliance[5].

ICAC experience

In its submission to the Inquiry, the NSW Independent Commission Against Corruption (ICAC) summarised learnings from recent investigations involving procurement activities, including[6]:

• Corrupt procurement conduct is more likely to occur amongst operational staff who are exercising delegated responsibility, rather than among those in a dedicated procurement unit.
• Corrupt procurement transactions tend to be relatively small, with individual transactions generally less than $1m and so less likely to attract attention or be subject to more robust controls; and orders are often split up to achieve this result.
• Although most agencies have adequate procurement policies and procedures, instances of corrupt conduct arise due to failure to monitor compliance and enforce these policies.
• Suppliers involved tend to be relatively small, usually with the same owner and manager, and often operate in industries with low barriers to entry, such as maintenance and consulting services.
• The Chief Procurement Officer within an agency has important responsibilities in establishing procurement policy and procedures. However, they typically lack formal authority to direct the conduct of procurement activities or enforce policy internally, as decision-making power tends to rest with the budget owner for each procurement.
• Breaches of procurement policy more often occur due to time pressures, resource limitations, or inadequate planning, making it difficult to detect corrupt conduct, which may be hidden within a larger pool of non-compliant procurement activities.
• Agencies frequently relax their procurement controls at the end of the financial year if they anticipate project underspending, reflecting a ‘use it or lose it’ mentality.  This is driven by the desire to maintain funding levels in future budgets.

The ICAC provided detailed observations on systemic integrity issues in its report on Operation Hector[7], a major investigation into the awarding of various contracts by Transport for NSW and Inner West Council, which ended in 2024. Key lessons from the recommendations include the need for[8]:

• Consistent enforcement of documented procurement policy and the establishment of mechanisms to proactively detect non-compliance (e.g., expenditure analysis to detect order splitting).
• Effective due diligence of prospective suppliers, including financial analysis and referee checks to test claims and experience, not just completing formal corporate checks.
• Robust cost estimation prior to commencing a procurement process to limit the potential for suppliers to inflate budgets, which facilitate corruption.
• Strong central oversight of conflicts of interest within an organisation and recognition of how organisational change may weaken the control environment[9].
• A range of control measures to detect corruption, recognising the inherent limitations of conflict declarations in detecting those who have a reason to conceal a conflict of interest.
• Enforcement of information security protocols to protect confidential information provided to prospective bidders, particularly in contracting structures that use a managing contractor framework.
• Enforcement of supplier sub-contracting restrictions and requirements in contracts, along with adopting assurance mechanism to monitor compliance.
• General understanding of corruption risks should be translated into specific analysis and plans for specific projects and contracting models, noting for instance the way in which safety and environmental risk mitigation requirements are operationalised in contracts.

Difficulty of due diligence

Substantive due diligence is challenging in environments where procurement processes must be completed in a timely way. The Procurement Board has issued specific guidance for agencies in relation to supplier due diligence.[10]  This includes a requirement for tenderers to provide information about any findings of dishonest, unfair, unconscionable, corrupt or illegal conduct against the tenderer, its directors or management.  Additionally, agencies are encouraged to ‘use their best endeavours to ensure that they are aware of any such adverse findings against a supplier with whom they have an existing relationship, and to report such findings to the Board’.

In its report on Operation Hector, the ICAC questioned whether agencies actually report adverse findings to the Procurement Board or whether any suppliers have been excluded from contracting opportunities[11]. The ICAC acknowledged the difficulty agencies face in conducting due diligence checks, including the absence of a repository where agencies could check corruption findings, criminal activity, environment and workplace health and safety compliance for example.

Post-award compliance checking

The Inquiry found that post-award contract and supplier compliance checks are not conducted frequently or systematically by agencies[12] and recommended that the Government implement measures to enhance compliance and enforcement in procurement processes, focusing on systemic post-award compliance checks[13]. The Government response indicates that the new Jobs First Commissioner may have a role in improving procurement policy compliance[14].

Debarment scheme

The NSW Government has announced the introduction of a debarment scheme to address supplier misconduct.  This includes fraudulent conduct of directors or senior managers and extends to ‘phoenix’ operations that attempt to avoid sanctions by forming new entities[15]. This policy reflects the recommendation of the Inquiry, which called for measures to enhance compliance and enforcement within procurement processes[16], as well as the recommendation of ICAC related to Operation Hector[17] and earlier recommendations for agencies to create ‘watch’ and ‘do-not-engage’ lists[18].

A debarment scheme involves a systematic program of excluding suppliers from doing business with the Government based on identified grounds and processes for effecting exclusion. The concept of a debarment scheme is not new; Western Australia has operated a debarment scheme since 2022[19] and similar schemes have been adopted in the UK[20] and international bodies[21]. The Commonwealth has adopted a similar approach by suspending PricewaterhouseCoopers Australia (PwC) from participating in Commonwealth procurement processes, albeit by mutual agreement[22].

The Western Australian scheme (WA scheme) features a graduated set of sanctions depending on the severity of misconduct, which ranges from agreed undertakings through suspensions for a period or outright exclusion for up to five years[23]. The WA scheme includes a public register of debarred entities which allows officials to identify entities when assessing responses in procurement processes. There are presently only two entities listed on the register[24], which may reflect the progressive nature of sanctions and the effectiveness of the threat of debarment in changing behaviour.

The WA Scheme is likely to influence the development of the NSW scheme; with the NSW Government already indicating that it will include a graduated range of sanctions[25]. The NSW Government has committed to consulting with the market in designing its scheme, focusing on the debarment criteria, ensuring procedural fairness, and establishing appropriate review and appeal mechanisms.  The new Jobs First Commission is also expected to oversee the debarment scheme.

We will keep you informed as the Government’s integrity and compliance reforms take shape.

[1] Parliament of NSW Legislative Council Standing Committee on Social Issues Procurement practices of government agencies in New South Wales and its impact on the social development of the people of NSW [Link].

[2] Government Sector Employment Act 2013 (NSW), s7.

[3] PSCC 2024-02 Code of Ethics and Conduct for NSW Government Sector Employees [Link].

[4] Government Sector Finance Act 2018 (NSW), s.3.7.

[5] Supplier Code of Conduct (NSW Treasury: Feb 2020) [Link].

[6] Submission of the NSW Independent Commission Against Corruption to the Inquiry into Procurement Practices of Government Agencies in New South Wales and Its Impact on the Social Development of the People of New South Wales (19 January 2024) [Link], p 4.

[7] Investigation into Inner West Council and Transport for NSW – allegations concerning conduct of employees and others (Operation Hector) (Independent Commission Against Corruption: 2023) [Link].

[8] Note 7, pp 153 – 176.

[9] See also Managing Conflicts of Interest in the NSW Public Sector (Independent Commission Against Corruption: 2019) [Link].

[10] PBD 2017-07 Conduct by Suppliers (NSW Procurement Board: 2017) [Link].

[11] Note 7, p 176.

[12] Procurement practices of government agencies in New South Wales and its impact on the social development of the people of New South Wales  - Final Report (Parliament of NSW Legislative Council Standing Committee on Social Issues: Report No.63: October 2024) [Link], Finding 7.

[13] Note 12, Recommendation 9.

[14] NSW Government Response to Standing Committee on Social Issues’ Inquiry into procurement practices of government agencies in New South Wales and its impact on the social development of the people of New South Wales – Final Report (NSW Government: December 2024) [Link], p 11.

[15] Media Release: Dodgy suppliers to be banned from NSW Government contracts (NSW Minister for Domestic Manufacturing and Government Procurement: 1 September 2024) [Link].

[16] Procurement practices of government agencies in New South Wales and its impact on the social development of the people of New South Wales  - First Report (Parliament of NSW Legislative Council Standing Committee on Social Issues: Report No.63: June 2024) [Link], Recommendation 9.

[17] Note 7, Recommendation 17.

[18] Supplier due diligence: A guide for NSW public sector agencies (Independent Commission Against Corruption: June 2020) [Link], pp 18-19.

[19] Procurement Act 2020 (WA) and Procurement (Debarment of Suppliers) Regulations 2021 (WA).

[20] Procurement Act 2023 (UK), ss 59-66).

[21] For instance, United Nations High Commissioner for Refugees [Link].

[22] Procurement Policy Note: Procurement of Goods and Services from PricewaterhouseCoopers (Department of Finance: April 2024) [Link], Procurement Policy Note: Update on Procurement of Goods and Services from PricewaterhouseCoopers (Department of Finance: November 2024) [Link].

[23] Debarment Regime: Guide for Western Australian Government agencies (Department of Finance: December 2021) [Link].

[24] Western Australian Supplier Debarment Regime – Register of Debarred Suppliers [Link].

[25] Note 15.