Kerry Schott: the inside story of ICAC, lobbying and Australian Water Holdings

Since my ICAC experiences people in the street and even restaurants have come up to me and congratulated me for standing up against corruption.

Its nice to be recognized but I do feel rather disconcerted about it. I have unexpectedly gained saintly status, but the reality is I am more like a hologram that the Independent Commission Against Corruption and the media have created.

When I became CEO at Sydney Water in 2006 I found that some principles were ingrained. As in other parts of the public service we had a job to do and what that job was, was very clear: make sure people had good quality drinking water all the time and making sure that the sewerage system worked. No cajoling was ever needed to get people to do these jobs and people felt proud to do them.

Another laudable feature of Sydney Water was the conviction that no one should ever lie or omit information that was relevant when briefing the minister, the board, or the CEO. And colleagues understood that honesty applied to their work and to each other.

This trait was in fact learned the hard way during the cryptospiridium crisis of the late 1990s. At that time less than full information was handed up the line and as a consequence a full commission was held into Sydney Water behaviour, the chairman and the CEO were both replaced, the Sydney Catchment Authority was created out of Sydney Water, and a strong tradition of full and honest disclosure was born.

But there was also behaviours that were not so acceptable. In no particular order this list included:

• A very low percentage of women in operational roles, like running sewerage treatment plants for example;
• Some pilfering of tools and material;
• Poor documentation and at times an unwillingness to share information;
• A lack of confidence to try and do things differently even when it was clear that change was needed;
• Relatively poor team work … those that needed to work together didn’t necessarily;
• No acceptance of the potential dinosaur status you held when contractors were significantly less costly than you were in your field of work.

On the honesty front a number of distressing things happened — not unusual in a utility. But it was the CEO role to front up to the community and honestly explain what was (and was not) happening. This was not a role for a line manager or the chairman or the minister.

One of the best examples was the major water main leak at Bellevue Hill that caused a large landslide and huge cavern to open just opposite the primary school. We were all very lucky no one was hurt.

I think the media were astonished at the explanation we gave, which was a show and tell of error upon error, and above all honesty.

What happened was a main break was reported in Bellevue St, Bellevue Hill. The call centre dispatch to the crew sent them to that street address, but regrettably in the wrong suburb of Ryde. No main break was found. The matter was reported again the next day and the same mistake happened. Finally on the third try the crew was dispatched to the right place — just as the road and footpath collapsed.

The build-up to this event was something that the control system alarm monitors — and their human watchers — should have picked up.

But the main point for everyone (after safety had been assured) was that not only were we honest about our mistakes to each other, to the board, and to the minister, but we were honest to the community and we gave them as much information as we could about when repairs would be done, when the road would be open, when the shops could open again.

The executive team, the board and in the end everyone else got together to fix the things that needed attention or, more accurately, to start fixing them. We moved to Parramatta, which became a catalyst for ensuring better teamwork, open plan offices and better documentation. More modern equipment was acquired along with better warehousing and inventory control to assist in the transition to efficiency in the civil maintenance workforce; electrical maintenance was partially outsourced and then completely outsourced and so on.

And then came ICAC

My first major dealings with the ICAC occurred over two corruption cases concerning Sydney Water employees. In the first case an employee decided he would consider teaming up with a private individual to consider producing and marketing bottled water. In the process of doing so he contributed several amounts of Sydney Water money to the joint venture, which was picked up by the financial controllers when invoices were incorrect and his delegation was exceeded. His employment was terminated after an investigation.

The other case concerned some Sydney Water plumbing inspectors being given “drinks” and in some cases asking for “drinks” from property developers. The culture on building sites is different from that in Sydney Water and refusing a gift of a slab of beer or $200 would be thought to be weird (and even rude) by the building site employees. Of course accepting such gifts is unacceptable and more so when such “drinks” may speed up an approval or jump it ahead in the queue.

One interesting thing was no one ever got plumbing approved that did not meet specifications. The pride in doing a good job did not get overturned by the “drinks” culture of the building site.

Several people had taken “drinks” that amounted to several thousand dollars and these folk were terminated. Others who appeared to be simply going with the flow were disciplined appropriately and the company undertook training about appropriate behaviour. Employees appearing before ICAC had an experience they did not want to repeat which was also a helpful training experience.

Part of the issue too was that Sydney Water were setting the specs and then inspecting the work — a conflict that should be avoided. This was amended by moving the inspectors to the building inspectorate area in the Department of Commerce, as it then was.

And then we had Australian Water Holdings. I should make it clear that Sydney Water did not report AWH to ICAC. From where we were sitting all we could see was invoices and charges that appeared to be well above market. The board, audit committee and senior managers involved did discuss raising the matter with ICAC on a number of occasions but we felt we didn’t have enough information. It is not unusual for contractors to try overcharging but what was odd here was the persistence. And we were going about attending to the overcharging and trying to get expense control and having some success. So we focused on fixing the problem while keeping good documentation as we expected that the matter may well end up in litigation and in court at some stage if the matter was not resolved prior to that happening.

I cannot stress enough how important it was to keep everyone briefed on the matter. The board and audit committee were briefed regularly, as were ministers, Treasury and the Department of Premier and Cabinet.

It was thus well known in the public service that Sydney Water was in some kind of disagreement with AWH. There is a complex legal history behind AWH but their main task was to provide the infrastructure for new water, sewer and recycled water mains in the North West Growth sector. AWH (previously Rouse Hill Infrastructure Consortium) initially had a contract with a group of developers (including LandCom as it was) to assist them in putting this infrastructure in the ground. This is not overly complex work and is very standard contracting for Sydney Water.

AWH were project managers and hired contractors through a tender process to do this work. The work was paid for by developer charges and where there was a shortfall, debt was raised to cover it and underwritten by Sydney Water and subsequently retired by Sydney Water. Sydney Water owned the network of pipes and related assets.

There were two major problems with this particular arrangement. First AWH argued (incorrectly in our view) that they had a legal right to be the exclusive provider of this work in the NWG sector. Second, their charges, after the first precinct, appeared to us to be excessive. Normally in a job like this you might pay a margin or proportion of the total project cost for the project management role. With AWH their margin was double what appeared to be reasonable to us, and at times much more, and they thought we should support their offices and upkeep even when there was no development work underway. Many disputes between us ensued as they refused to fully inform us of the way in which our money was being expended; and the differences between us about their legal status continued.

Since ICAC we have had more information on where our money for their expenses may have been going.

The trips to Queensland were particularly interesting as we thought we were their only client at the time, and Sydney Water had no business in Queensland. It is also of course not done in a public sector context to hire limos, dine grandly or have Melbourne Cup lunches on expense accounts.

At this stage you might ask how AWH were paid excessive expenses. One regrettable fact was that the contracts with Sydney Water were poorly drafted and difficult to interpret and enforce. The contracts were also being administered in a part of Sydney Water that was not used to contract management on this scale. To their credit they were asking for help.

So we began overtime to amend the precinct work contracts as each new precinct came up for development, and the aim was to make them tighter. This was succeeding but took time, and happened every time a new precinct came up for development. The other thing we did was move the contract to an experienced team of contract managers in Sydney Water. These folk were familiar with contract management and by the time ICAC got involved were very close to controlling the expenses as we wished.

AWH also had future plans, which in my opinion could only be classified as audacious. They wanted to set up a water utility in the NWG sector. They wanted to take over the existing assets for a price that on our estimation was millions less than their value; they wanted to operate and maintain all the water and sewerage and recycled business in that sector. And they wanted to bill their retail customers.

Their lack of understanding of the skill needed to do this astounds me. Companies in Australia with that skill would have wanted to act under their own banner. They did not need AWH if this was indeed a great idea. The reality was that AWH were a small company, frequently worth only nominal amounts. As far as we knew they had no billing system, no control system, no evidence of the finance needed and no experience. They apparently did not appreciate the risks of new development roll outs or the risks of running a water company.

They discussed this proposal with Sydney Water and we went through all the reasons why this would not stack up. As a company we were open to new ideas and it was not unusual for proposals to be put to us, but this one was never going to work commercially in our view.

Undeterred AWH lobbied politicians on both sides of politics. They were not encouraged by the Water ministers who did understand Sydney Water and who thought we did a reasonable job. They were also not encouraged by the central agencies of Treasury and Premier and Cabinet who were used to analysing the merits of public private partnership proposals.

To bring the disputed matter to an end, one way or another, the Premier’s Department commissioned an independent review, of which Sydney Water was not part. This review then led to a cabinet minute which recommended rejecting the proposal from AWH. To our surprise we were asked to comment on a second cabinet minute a week or so later that reversed the stance, recommending proceeding with the proposal.

At this stage we drafted a ministerial letter from the Water minister to the premier setting out, yet again, why this was not a good proposal. I know from ICAC evidence that this letter was delivered from the minister to the premier.

I imagine that the Premier’s Department were also dealing with the issue and in due course I had a call from the Premier’s Department to say that no minutes of any kind on this matter were going to cabinet or any committee of cabinet and that the premier had put a total stop to the issue. This outcome became public when Premier Kristina Keneally gave evidence at ICAC.

What did we learn?

• The principles of an organisation are important. They are its ethics. Strengthen the good and improve the others. And as the CEO you should walk the talk — however difficult that may be.
• Keep focus on what your main task is; in my case at Sydney Water this was managing water demand in the drought, increasing supply, providing good quality water etc. The matters before ICAC were secondary to our main business and were issues that popped up regularly but were not the main focus. Unless you are ICAC or the police your main task is not hunting out improper or corrupt practices.
• You are not alone. There are people with skills who can help — both in the organisation and outside it.
• Tell anyone who will listen what is going on — and do it in writing.
• Keep your superiors across what is happening — your board, audit committee, ministers, their officers, central agencies, etc. Leave a written trail of updates and actions. Seek their advice. You are not alone.
• You are a public servant. Your task is not to hand out excessive bundles of your customers’ money, or tax payers’ money, to those who are charging excessively or who are engaged in practices that, in your judgment, are unreasonable.
• This matter was finally resolved not because of me, but because of help and effort from a lot of people, the board, the Premier, the Ministers for Water, the audit committee, the Department of Premier and Cabinet, Treasury, the employees who kept the records, managed the contract, and others.
• Where there have been less favourable outcomes in the upholding of public service principles, I think it has been because of a lack of support, particularly at senior levels — and perhaps a lack of bravery at times.
• It is up to senior public servants to assist and champion ethical behaviour. This applies to all improper practices including the more common charges of harassment, petty theft, gender bias and plagiarism. We are, after all, here to serve the public, not each other — and certainly not those who may be behaving inappropriately.

This is an edited extract from a presentation Kerry Schott gave to the NSW Public Service Commission’s Ethics and Leadership in the Public Sector Conference this month.

Read more at The Mandarin: Framing ethics from good principles: Graeme Head’s new guide