Direct negotiation in the public sector? Hot off the press – New ICAC guidelines released
The NSW Independent Commission Against Corruption (ICAC) has released an updated resource to guide public agencies in managing risks associated with direct negotiations (the Guidelines). While the Guidelines are an update to the Direct Negotiations: Guidelines for Managing Risks in Direct Negotiations Report dated May 2006 (2006 Report), the advice offered by ICAC is substantially similar. Most notably, ICAC continues to discourage the use of direct negotiations unless the practice clearly falls within the government's legislative and policy framework and/or the risk of corrupt conduct has been managed in accordance with the Guidelines.
Direct negotiations refer to exclusive dealings between an agency and a counterparty without first undergoing a competitive process. Due to the closed nature of direct negotiations, the opportunity to engage in dishonest and partial conduct is increased. For this reason, ICAC discourages the use of direct negotiations and suggests strict obligations should be imposed on officers who seek exceptions.
Direct negotiations, by themselves, are not corrupt and can be an acceptable means of transacting in some situations. For example, direct negotiations most commonly arise as part of some form of state or commonwealth government procurement.1 When claims are made that direct negotiation is the most suitable course of action, agencies should act with caution, carefully consider the merits of the claim and explore all other available alternatives. To assist in this process, ICAC have identified a number of circumstances where direct negotiations may be appropriate. The Guidelines mirror the circumstances identified in the 2006 Report, including an exemption by statute or government policy, uniqueness and when it is beyond doubt that only one counterparty can meet an agency's well-defined needs.
ICAC stresses that direct negotiations can be avoided with forward planning. ICAC continues to promote bundling and unbundling contracts, lowering bidding costs and avoiding lock-ins. An additional recommendation in the Guidelines is to establish panels of pre-qualified or approved suppliers, which have been established through competitive processes.
If an agency proceeds to engage in direct negotiations, steps should be taken to ensure the process is resistant to corrupt conduct. The Guidelines provide general guidance on how direct negotiations can be undertaken to avoid known corruption risks. ICAC's advice is substantially similar to the 2006 Report and includes the following steps:
- to consider the probity principles of fairness, impartiality, accountability, transparency and value for money
- to ensure the decision to enter into direct negotiations is made at a senior level
- to thoroughly document the process including:
- the rationale for deciding to enter into direct negotiations
- the agency's relevant cost estimates, public sector comparator, valuations or other evidence that value for money has been achieved
- the progress of the negotiation process itself and the personnel involved
- the disclosure and management of conflicts of interest
- all other key decisions and the reasons for those decisions.
- to conduct due diligence on the counterparty, its key staff and its offer
- to manage conflicts of interest and segregate duties
- to conduct the negotiations using similar techniques that would be used in a competitive process
- to agree on the price and finalise a formal agreement
- to monitor the counterpart, including the terms of the contract and the work being carried out
- to undertake post-completion steps, including audit review programs.
While the advice offered in the Guidelines is similar to the 2006 Report, ICAC's position on direct negotiations has been reinforced and clarified. Agencies must continue to take active steps to avoid direct negotiations or employ risk mitigation steps to reduce the known corruption risks.
To access the Guidelines and find more information about direct negotiations please visit the ICAC website.
1Local government is subject to stricter procurement rules under the Local Government Act 1993 (NSW) and Local Government Regulation 2005 (NSW) which limits their ability to enter into direct negotiations without first running a competitive tender process.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.