Callaghan Innovation chief executive Vic Crone says lack of investment in commercialisation means highly valuable New Zealand research could go no further than the laboratory shelf.
Crown entity Creative New Zealand relied on an alleged misrepresentation in its due diligence in hiring embattled digital services firm We Are Indigo for work worth some $6.1m last year, however the agency said the information was not material to its contracting decision.
The alleged misrepresentation relates to two unfavourable due diligence reports that considered We Are Indigo’s (WAI) relationships with other firms it had done business with. These reports were commissioned by another public agency, Callaghan Innovation, and were relied upon by Callaghan to exclude WAI from competition for a large public contract earlier in 2022.
In the course of Creative New Zealand’s (CNZ) own due diligence on WAI, company director Andy Hamilton told the agency that Callaghan had accepted that there was a conflict of interest in the commissioning of its reports.
CNZ however never sought to confirm any information with Callaghan, and this week Callaghan CEO Stefan Korn rejected the conflict of interest description as a misrepresentation.
“Callaghan Innovation has consistently rejected conflict of interest allegations in the appointment of an external provider procured to carry out the due diligence report,” Korn told the Herald on Monday.
“We have previously sought a correction from Creative NZ to their statement regarding our interactions on this matter.”
The CNZ report, used to support that agency’s decision to hire WAI, noted that CNZ relied solely on a conversation with Hamilton to understand the nature of the company’s disagreement with Callaghan. The report was released to the Herald under the provisions of the OIA.
The report noted that, “Callaghan has accepted there was a conflict of interest present by the contractor that completed the due diligence...”. It cited an October 2022 email from Hamilton as the information’s source.
The assertion that Callaghan accepted that its due diligence entailed a conflict of interest was also repeated in a second CNZ report. The first report went to the entity’s decision-making governors in October last year, and the second went to the governors in November, when they made a final determination on awarding the digital services contract, following a pause in the process sparked by media reports of WAI’s chequered, past business dealings.
On Wednesday, a CNZ spokeswoman said the entity followed a “detailed procurement process” and that the WAI/Callaghan Innovation information “was not material to the [contracting] decision”.
She noted that CNZ has updated the document which summarises the digital services procurement process on its website. It now states that, “Callaghan Innovation does not accept We Are Indigo’s position that there was a conflict of interest”.
Earlier in 2022, Callaghan relied on its due diligence reports to exclude WAI from bidding in a multi-million dollar request for proposal process (RFP) to supply business founder and start-up support work.
It ultimately concluded that it would have made the decision to exclude WAI from the RFP regardless of whether there was a conflict of interest in the due diligence; the agency believed WAI’s past commercial partnerships “showed cause” and gave Callaghan the right to exclude the company. Callaghan and WAI remain in dispute over these reports.
The issues have sparked considerable feuding and legal threats in some circles of the business start-up scene. Much of this has been aired on LinkedIn.
WAI’s business model appears to rely heavily on providing digital training and related services to groups (often Māori, Pasifika and women) which the Government wants to better participate in business and business start-up. The CNZ contract pursues this aim for artists and their enterprises.
Treatment of the contested Callaghan reports is crucial to WAI’s ability to continue to win public contracts. While Callaghan itself relied on the work to exclude WAI from an RFP process, WAI’s assertion that they were based on a flawed and unfair process, so far, appears to have kept the reports (which have not been released publicly) from damaging the company’s ability to pursue other government work.
WAI is often known by its platform name Manaaki.
In an email exchange with the Herald, Hamilton said that Callaghan’s “process and communication with Manaaki has been challenging and confusing”.
He said Callaghan initially denied that there was a conflict of interest in its process for conducting the due diligence, but that Callaghan asked for evidence to substantiate WAI’s allegation and that WAI supplied evidence.
“We replied the next day (17th of August 2022) providing written evidence of the [alleged] conflict, which we consider to be clear and self-explanatory. We understood Callaghan to have accepted this when they wrote to us on 23 August 2022 notifying us of their decision to appoint Ernst Young to conduct a review of the due diligence process, saying: ‘...We have proceeded [to appoint EY] on the basis that there is at least a potential (undisclosed) conflict of interest in relation to this aspect of the due diligence, and that is the reason an independent review is being undertaken.’”
Callaghan hired Ernst & Young to review its due diligence process for the RFP. The review concluded that, while there were areas for improvement, the results of the process could be relied on, and the method used for undertaking the due diligence was in line with common practices.
The review did not consider whether investigator John Borland (Isacorp) had a conflict of interest, a scope which WAI objected was too narrow.
K&J Growth was Borland’s client in 2021, and the work involved supporting the company’s legal claim in a payment dispute with WAI. In 2022, as part of the Callaghan due diligence, Borland interviewed K&J about its dispute with WAI. These details are clear from emails released to the Herald under the OIA by MBIE.
Callaghan told the Herald it engaged Borland in May 2022, and as part of its standard contracting process, Borland signed a conflict declaration form confirming he had no conflicts of interest.
“In this particular instance, an interviewee during the due diligence process suggested previous clients of Manaaki [WAI] were suspected of being treated unethically and should be contacted as part of the inquiries. Based on this information it was decided that K&J Growth should be part of the investigation.”
Callaghan said that allegations were raised about a “potential conflict of interest” in August and “promptly followed up”.
It said that based on the evidence in the due diligence reports there was no evidence to suggest that any previous work carried out by the external provider (Borland) with K&J Growth influenced how information was collected and provided to it. “Therefore we do not consider there to be a relevant conflict of interest,” Callaghan said.
“Even when disregarding the information in relation to K&J entirely there were several other significant findings in the due diligence report that supported our procurement decision.”
Callaghan said the expertise to carry out due diligence in New Zealand is limited and that it is inevitable that previous clients may feature in subsequent inquiries: “this does not necessarily mean those crossovers meet the definition of a conflict of interest.”
In performing due diligence, CNZ’s project manager did not approach Callaghan about its reports on WAI because “both the report and Callaghan’s handling of it were (and remain) matters of contention,” the agency’s documents say.
Neither did CNZ seek any advice from government procurement at the Ministry of Business Innovation and Employment (MBIE), to which Callaghan provided both due diligence reports in June 2022.
WAI has filed a complaint with the Office of the Auditor-General, and a spokesperson confirmed the office is pursuing “some inquiry work into the procurement process Callaghan carried out for its Founder and Startup Support programme”.
The CNZ contract appears to be WAI’s largest public contract; it was awarded to the firm’s newly formed subsidiary, Toi ki Tua (now Toi Hourua), to establish and deliver “a new Digital Arts Commissioning and Capability Service”.
WAI is a digital agency formed relatively recently, in 2019, and controlled by high-profile figures: former Icehouse head Andy Hamilton, former Xero executive Pat MacFie, and sportsman Monty Betham.
In recent years it has won an estimated $11m of government business. The figure includes the CNZ contract which is broken into two parts. The first half runs to June 2024. The balance, worth more than $3m, is for the period July 2024 to January 2027, an extension that is at CNZ’s discretion.
In addition, WAI also has a separate contract with CNZ to provide business development skills and training to a handful of ethnically Pacific people involved in creative enterprises.
In the first half of 2022, Callaghan commissioned two due diligence reports, which were part of an additional layer of external scrutiny the agency required in seeking bidders for its Founder and Startup Support work.
The first report was preliminary, the second was more in-depth. These reports catalogue a number of disputes, including that of K&J, between WAI and typically small supplier or partner companies (though not all companies interviewed recounted problems in working with WAI and not all were small).
Technology entrepreneur Robett Hollis has been especially vocal online in pushing for the reports’ release, and in championing what he maintains is the cause of business founders and small players who are too frightened to speak out. Some, he says, are additionally bound by non-disclosure agreements with WAI.
Callaghan has withheld the reports on OIA grounds that include the likelihood that they “unreasonably prejudice the commercial position of the person who supplied or is the subject of the information”. Requests for their release are currently before the Ombudsman.
The Herald and other media outlets have been provided copies of the reports. In the Herald’s case the reports were partially redacted and provided anonymously. They contain testimony and descriptions of business interactions and dealings supplied by parties who have worked with WAI (the second report also contains one account by a third party). Many of these were unfavourable.
WAI’s lawyer Michael Heron KC has warned the Herald against repeating the allegations made in the reports and claimed that they contain “false and defamatory information” which was the result of a “deeply unfair process”.
CNZ’s own report, relied upon to award its digital services contract to WAI, also included a consultation with an MBIE manager; one of two referees provided by WAI.
The report shows that, in October last year, CNZ spoke to Malcolm Luey, MBIE director of a programme called Digital Boost, a $6.8m Covid-era digital training and support programme, contracted to a consortium of firms including WAI.
CNZ told Luey the conversation was to be strictly limited to a description of WAI’s “performance as a supplier to MBIE” and not to discuss a (then) recent NBR article concerning a financial dispute between WAI and K&J Growth.
In the course of the Digital Boost work for MBIE, WAI fell into a financial dispute with its subcontractor K&J Growth. The dispute ultimately ended when K&J took legal action to recover $161,000 it said it was owed by WAI. The money has now been paid.
Luey and MBIE were aware of the dispute at the time but neither WAI nor K&J were direct contractors to the ministry (WAI was a subcontractor, and K&J was a subcontractor to WAI). At the time, MBIE officials took the view that the ministry could not legally be involved in the resolution of the dispute.
The CNZ report (which constituted due diligence on WAI) includes the question, put to Luey as referee: “Would you recommend them [WAI] to be awarded a government contract:” The answer, however, is redacted on the basis that this protects information which is subject to an obligation of confidence.
A CNZ spokeswoman said that reference checks, as part of a procurement process, “are generally confidential”.
Ultimately, she said, the agency is “comfortable” with its decision to engage WAI. CEO Stephen Wainwright has previously said that of all the proposals received, WAI consistently ranked highest and aligned most closely with Creative New Zealand’s strategic goals for the digital service.
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