New York City Comptroller William C. Thompson, Jr. today announced that he has rejected the $126 million contract naming Snapple as the exclusive beverage vendor for all City public buildings.

“After thoughtful and thorough review of the matter, I have concluded that Snapple was selected through a tainted process with a predetermined outcome that was not the best deal for the City of New York,” Thompson said.

Thompson’s decision was triggered by his audit – which also was released today - of the separate agreement to exclusively place Snapple in the City’s 1,200 schools. The audit found that the Department of Education (DOE) conducted a flawed and inconsistent selection process.

The audit found that Snapple’s monetary offer to the DOE was less than that offered by other beverage suppliers. “Despite the low offer, the DOE continued negotiations solely with Snapple,” Thompson wrote the Mayor in a letter of objection to the Citywide pact.

Thompson cited two clauses in the City Charter as additional grounds for his actions. Under Charter Section 328 (b), Thompson is refusing to register the contract because the Administration failed to submit the entire Citywide agreement to the Franchise and Concession Review Committee (FCRC). Instead, only the licensing portion of the agreement was submitted for review.

Charter Section 328(c) allows the Comptroller to object to the registration of a contract if “in the Comptroller’s judgment there is sufficient reason to believe that there is possible corruption in the letting of the contract.”

Supporting Thompson’s citing of Charter Section 328(c) is evidence of misrepresentation by the New York City Marketing Development Corporation (MDC) about its role in the selection of a vendor for the DOE as well as potential conflict of interest issues concerning Octagon, Inc., the marketing agent for the DOE selection process.

“Notwithstanding the gross deficiencies in the DOE process,” Thompson wrote, “NYC Marketing selected Snapple for the $126 million Citywide Agreement based solely on the DOE award.”

Last year, the MDC signed the Citywide deal with Snapple to exclusively sell water, iced tea, and chocolate drinks in all City buildings. The contract was sent to Thompson’s Office on February 20th.

Thompson’s letter cites the following problems with the Citywide agreement:

• MDC President Joseph Perello, when testifying before the FCRC, misstated when discussions began on the Citywide deal. Perello at the time said there was no citywide marketing opportunity contemplated prior to the DOE selection of Snapple.

However, email communications reviewed during the audit counter that. On August 21, five days before the MDC’s recommendation of Snapple to the DOE, Perello told Deputy Mayor Dan Doctoroff of the “larger City deal.”

• Octagon has potential conflict-of-interest issues in its selection of Snapple. Octagon represents Cadbury, which is owned by Snapple’s parent company, Cadbury-Schweppes, which stands to benefit substantially through the sale of its products Citywide.

• The Comptroller maintains that the Citywide contract was illegal under the City Charter because it pre-empts the authority granted to the Comptroller and Borough Presidents as members of the FCRC to review all franchises and concessions for City property. The marketing portion of the agreement was never submitted to the FCRC for approval.

Today’s audit reviewed the process by which the DOE awarded the vending machine agreement to Snapple. In June 2003, the DOE, based on a 2001 request for proposals (RFP), signed an interim authorization for Octagon, Inc. to serve as the DOE’s agent for a vending machine marketing and administration program. Octagon began a process to pick a vendor. In September 2003, the DOE signed an interim agreement giving Snapple the exclusive right to sell water and 100 percent fruit juice products in machines in schools, guaranteeing that Snapple would pay it a minimum of $40.2 million by August 2008.

The DOE is not required to adhere to the New York City Procurement Policy Board or FCRC rules that other City agencies must follow. Instead, New York State Education Law authorizes the Schools Chancellor to establish DOE contract rules. The audit noted that the DOE did not even follow its own rules. The audit found that:

• Snapple’s "best and final offer" was not the most lucrative deal for the City: it was the lowest combined juice and water bid placed by an individual company, was lower than three juice only bids and was lower than three possible combinations of juice only and water only bids placed by different beverage companies. Inexplicably, Snapple was the only beverage company given the chance to improve its "best and final offer." (See Audit, Table 1, Page 13)

• There were significant inconsistencies in the information provided to potential bidders. This led to vendor confusion.

• Octagon’s evaluation of bids was flawed and led to incorrect conclusions about the most lucrative offer.

• The DOE did not follow a fair vendor selection process. The process for awarding the deal was “fundamentally flawed” and the DOE failed to properly monitor the marketing agent it selected to implement the process.

• Octagon made minimal efforts to solicit bids, prepared an “inadequate” RFP and failed to hold a pre-proposal conference. The DOE’s RFP manual states that selection committee members should complete rating sheets on bids received. A summary sheet showing each evaluator’s scores also should be prepared; this was never done.

• The process for selecting the marketing agent became questionable when its ownership changed hands prior to the interim authorization. The DOE did not reopen the process or require a revised proposal from Octagon after the ownership change.

• Octagon stands to collect “exorbitant compensation” for its DOE services. The amount initially was $11.6 million, but rose to $15.3 million, according to the DOE’s Jan. 29, 2004 contract with Octagon. After the audit raised these concerns, the DOE informed the Comptroller that the contract would be amended. If the DOE does amend the contract, Octagon’s compensation could be reduced to a still staggering $7.6 million.

• Thompson called the additional compensation expected to go to Octagon for the Citywide deal “unwarranted.” Part of this compensation is an effort by the MDC to assume some of the financial burden of the DOE agreement with Octagon.

“We conclude that the fundamentally flawed DOE vendor selection process did not ensure that the New York City schools received the best offer for the school vending opportunity, and was neither fair nor reasonable,” Thompson said. “A better vendor selection process could have led to additional and higher bids.

“A more careful review of the bids that were received could have led to a more lucrative deal for DOE and our schools. This has a direct effect on the level of funding for athletic programs for our children."

Thompson made 10 recommendations, urging the DOE to cancel the school vending machine contract with Snapple and conduct a new process that complies with the DOE’s RFP manual and ensures a “fair and reasonable result.”

He also recommended the DOE ensure that any concession and sponsorship opportunities be handled through a well-structured RFP process in which there is extensive public notification of potential bidders. Such a process must provide detailed specifications and clear standards to evaluate proposals; include a pre-proposal conference to ensure all bidders receive consistent information, and, include a written assessment of each proposal based on the stated standards.

Additionally, Thompson asked the DOE to: reopen an RFP process or require a revised proposal before entering into any agreement with a company that has experienced a change in ownership after being selected through an RFP process; restructure and greatly reduce Octagon’s compensation for its marketing and administration work on the vending machine deal; not award any new marketing assignments to Octagon in relation to the 2001 marketing RFP; and, seriously consider the benefits of implementing the concession and sponsorship RFP process itself or seeking the assistance of other City agencies before hiring a marketing agent for any similar work.

The DOE has challenged many of the audit’s findings and recommendations. Thompson, however, said the DOE’s response contained “numerous falsehoods, misrepresentations, obfuscations and contradictions about our findings.”