In September 2019 Victoria’s Independent Broad-based Anti-corruption Commission (IBAC) released a special report into local government procurement and corruption risk (Special Report).1
The Special Report is notable given the wider context of heightened formal scrutiny by integrity agencies in Australia of governance and organisational practices across different industry segments, including Royal Commissions into financial services,2 aged care,3 and disability services.4
IBAC’s touchstones for the Special Report were the council staff ‘conduct principles’ provided for by the Local Government Act (Act),5 and the principles governing local government procurement contained in the Victorian Local Government Best Practice Procurement Guidelines:6 The former requires council staff to act impartially, to act with integrity including avoiding conflicts of interest, to accept accountability, and to provide responsive service. The latter formalises the principles of value for money, open and fair competition, accountability, risk management, and probity and transparency that should characterise all procurement activities of councils. These principles should be enshrined in councils’ staff codes of conduct and procurement policies.
Referring to its local government investigations experience, including two case studies (‘Operation Dorset’ and Operation Royston’), IBAC has identified a number of “key corruption risks” inherent in council procurement processes within four areas of council activity encompassing sourcing suppliers, internal controls, ethical culture and leadership, and complaints and investigations. Answering these, IBAC has described a number of risk mitigation measures councils can take to more effectively manage and control their corruption risk exposure.
Key Corruption Risks and Mitigation Measures
- Inadvertent or deliberate failure by council staff to treat all suppliers fairly and in an open and transparent way that causes impairment to genuine competition in contract allocation.
- Allocating contracts on a discretionary basis to ‘panel’ or pre-approved suppliers/tenderers without requiring them to provide competing bids for the contract.
- Inadequate scrutiny of procurement involving lower value contracts for which council staff directly negotiate with a select group of potential suppliers to obtain only a single or small number of quotes.
- Failure to identify, to declare, and to manage conflicts of interest.
- Implement control measures to ensure compliance with procurement policies and processes during the entire procurement lifecycle.
- Conduct ongoing risk assessment to identify procurement ‘blind spots’ such as departments/teams that process higher volumes of lower value purchases and where there is discretion to allocate contracts through direct negotiation.
- The process for awarding any contract must be transparent, including that any discretion exercised be open to ongoing oversight, audit, and assessment to verify a competitive process is being maintained.
- Policies and procedures must be in place for effective management of all actual, potential, and perceived conflicts of interest identified in the procurement lifecycle.
- Implement ongoing staff communication and training measures and programmes to ensure staff understand the procurement lifecycle and risks, including what it means to act in the public interest, guidance how to identify and make a declaration of conflict, and a formal requirement that staff confirm their understanding of their obligations and the consequences of non-compliance.
- Poor administrative practice including inadequate invoice detail, and account and record keeping.7
- Staff use of personal computing devices to generate and store procurement-related electronic documents outside Council’s IT network and data capture systems and processes.
- Concentration of authority on one staff member to initiate, approve, and review any single procurement.
- Unfettered access to tender submissions and information.
- Financial controls that fail to identify overspends relative to the original value of an awarded contract and corresponding purchase order, aggregated payments to any one supplier, invoice splitting to avoid exceedances of delegation limits, and inappropriate use of contingency funds.
- Inadequate internal audit practices.
- Inadequate management and supervision of staff involved in the procurement lifecycle.
- Robust systemic information management to ensure all procurement activities are sufficiently documented, accurate records are generated and filed consistently and securely with defined access permissions, and are susceptible to formal audit.
- Formal and regular monitoring by staff independent of the procurement process of overall spend on any particular contract, including any variation(s) and their quantum relative to the value of the original contract and relevant purchase order.
- Segregate amongst different staff key procurement tasks including tender preparation and tender submission assessment, and rotate into different teams those staff with significant delegated authority to conduct procurement.
- Formal and regular internal audits of procurement approvals and related financial records by properly trained and qualified staff who are independent of the procurement process.
- Managers at all levels must actively supervise their staff and scrutinise procurement requests to maintain the integrity of all approval processes.
Ethical culture and leadership
- Staff are not aware of or do not understand either their legal obligations under the Act to comply with the conduct principles, and/or the best practice procurement guidelines.
- Poor management practices that fail to instil in staff the importance of the conduct principles and best practice procurement guidelines and the potentially severe legal and financial implications of non-compliance.
- Senior managers and supervisors must lead by example and champion compliance with the conduct principles and best practice procurement procedures and integrity in all aspects of procurement.
- Tailored on-going education and training of staff in, and communication with suppliers’ staff about, proper procurement procedures, probity and transparency requirements, community expectations, and legal and financial implications of non-compliance.
- Provide the information, tools, encouragement, and protection to staff necessary for them to know how to raise and to report suspected corrupt conduct and practices.
Complaints and investigations
- Poor management and supervisory practices that fail to properly and independently address complaints and enable thorough and impartial investigations.
- Staff are not aware of or do not understand complaint handling processes and procedures and their roles in ensuring their operation and effectiveness.
- Complaint handling and investigation must be impartial and account for any actual, potential, or perceived conflicts of interest that may affect outcomes.
- Complaint investigations must be robust and sanction poor staff compliance, behaviour, and performance to promote confidence in the process.
- Staff responsible for complaints handling and investigations must be fully trained to know how to properly and effectively raise and report suspected corrupt conduct and practices.
Councils can expect continuing scrutiny by IBAC and other integrity agencies of suspect conduct connected with their procurement activities.
Councils must have robust and actively managed procurement management regimes in place that recognise corruption risks and incorporate measures to control and ideally nullify those risks to ensure nefarious conduct is addressed as early as possible.
Councils must respond quickly to any report of corrupt or potentially corrupt conduct, including by fully co-operating with any integrity agency investigations. Concurrently, councils must ensure they manage their financial and other resources in a responsible and accountable manner8 and advocate and promote response proposals which are in their local community’s best interests.9 This necessarily includes acting to mitigate any potential loss to council and ultimately ratepayers, including excessive legal and other professional advisor costs.
1IBAC, Special report on corruption risks associated with procurement in local government, September 2019.
2Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, 2017.
3Royal Commission into Aged Care Quality and Safety, 2018.
4Royal Commission into Violence, Abuse, Neglect and Exploitation of People with Disability, 2019.
5Local Government Act 1989 (Vic) s 95.
6Victorian Local Government Best Practice Procurement Guidelines (2013) 13.
7Amongst other things, Councils have a duty under s 140 of the Local Government Act to do all things necessary to develop and maintain adequate internal control systems (s 140(2)(g)).
8Local Government Act 1989 (Vic) s 3D(2)(c).
9Local Government Act 1989 (Vic) s 3E(1)(a).