Chapter 2 sets out the Joint Committee of Public Accounts and Audit (JCPAA) findings from its inquiry into Commonwealth procurement, based on Audit Report No. 1 (2016-17), Procurement of the International Centre for Complex Project Management to Assist on the OneSKY Australia Program. Airservices Australia (Airservices) was the audited agency. The chapter comprises:
Committee conclusions and recommendations
While the Committee was considering Audit Report No. 1, the ANAO tabled a companion audit, Audit Report No. 46 (2016-17), Conduct of the OneSKY Tender. Chapter 2 closes with a brief examination of this audit, including Committee conclusions and recommendations, and review of evidence.
Committee conclusions and recommendations
The Committee focused on four matters regarding the evidence provided from public hearings and submissions, and the Australian National Audit Office (ANAO) report findings:
implementation of ANAO recommendations
adherence to procurement policies and procedures
achieving value for money
Implementation of ANAO recommendations
The Committee considers that Airservices’ approach to the procurement of the International Centre for Complex Project Management (ICCPM) to assist on the OneSKY Australia (OneSKY) project was problematic on a number of fronts.
The Committee notes Airservices’ acknowledgment at the public hearing as to the extensive shortcomings in procurement controls and practice as evidenced by the ANAO’s reports. The Committee welcomes Airservices’ acknowledgment that improvements are required to its procurement framework and compliance with that framework, and also aspects of its probity management as regards procurement. The Committee notes Airservices’ advice on progress to date in implementing the ANAO recommendations, as well as the two additional improvements made as a result of the ANAO audit—development of a procurement assurance framework and the commissioning of an independent probity audit.
However, noting the seriousness of the Auditor-General’s overall findings, the Committee emphasises that cultural change in this area will need to be firmly embedded within Airservices. The Committee makes a number of recommendations on this matter below.
Adherence to procurement policies and procedures
The Committee was disappointed to note that Airservices had ‘routinely failed’ to adhere to its procurement policies and procedures, which in turn had contributed to a ‘lack of transparency’ over decisions to procure services from, or through, ICCPM.
Airservices, as a corporate Commonwealth entity, is not required to comply with the Commonwealth Procurement Rules (CPRs). However, the Committee emphasises that Airservices’ procurement policies and procedures still need to meet obligations under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) that agencies promote proper use of resources and employ effective internal controls, with Airservices then being duly required to adhere to these policies and procedures.
The Committee strongly supports the Auditor-General’s recommendation on how Airservices should address this matter, and therefore welcomes Airservices’ public commitment to implement this recommendation and notes the advice on progress. However, given the extent of cultural change required in this area, the Committee concludes that Airservices should report back on post-implementation progress for this recommendation. Airservices should also provide details of how its monthly procurement assessments to identify potential ‘non-compliant’ processes have improved procurement compliance monitoring, and how its new procurement assurance framework has driven cultural change in the agency’s procurement approach. (The Committee makes a detailed recommendation on this matter below.)
Achieving value for money
The ANAO observed that Airservices’ procurement policies and procedures are, ‘in most respects, appropriate’. However, the Committee was disappointed to note the ANAO’s overall finding that these policies and procedures had ‘two key shortcomings’—namely, not addressing Airservices entering into a strategic partnership (as it did with ICCPM) and not giving appropriate emphasis to the use of competitive processes. Airservices made extensive use of ICCPM to assist with the delivery of OneSKY. Airservices acknowledged at the public hearing that the strategic partnership formed with ICCPM was a ‘flawed construct’. There were 42 engagements of ICCPM employees and subcontractors through 18 procurement processes, but each of the 42 engagements was sole-sourced. As a result, Airservices’ procurement ‘did not deliver value for money’ and it largely operated as a ‘price-taker’. As the Auditor-General highlighted, ‘achieving value for money is expected to be a central consideration of Commonwealth procurement activities’.
The Committee strongly supports the Auditor-General’s recommendation on how Airservices should address this matter, and therefore welcomes Airservices’ public commitment to implement this recommendation and notes advice on progress—in particular, Airservices’ confirmation that ‘barriers’ to sole sourcing ‘have been put in place’ and ‘the norm is to do a competitive tender’. However, given the extent of cultural change required in this area, the Committee concludes that Airservices should report back on post-implementation progress for this recommendation. Airservices should also provide details of how its new procurement assurance framework has ensured an organisational focus on achieving a substantiated value for money outcome, and how many times, since the audit, it has not employed competitive procurement processes. (The Committee makes a detailed recommendation on this matter below.)
The Committee welcomes Airservices’ acknowledgment of deficiencies and its commitment to revise its procurement policies and procedures to more strictly apply the majority of the CPR requirements. The Committee believes that corporate Commonwealth entities not subject to the CPRs should more closely model their procurement arrangements on the CPRs as a matter of best practice. Accordingly, the Committee sees benefit in the Department of Finance and the ANAO working together to consolidate the guidance on these matters (for example, the model ‘Procurement’ AAIs), to ensure such entities more strictly apply the CPRs. Further, noting that updated CPRs took effect from 1 March 2017, the Committee sees merit in Airservices reporting back on how it has updated its procurement policies and procedures to apply the new CPR requirements.
The Committee recommends that the Department of Finance and the Australian National Audit Office work together to consolidate procurement guidance as it relates to corporate Commonwealth entities, to ensure such entities more strictly apply the Commonwealth Procurement Rules in developing and implementing their procurement policies and procedures.
The Committee recommends that Airservices Australia report back to the Committee on how it has updated its procurement policies and procedures to accord with the new provisions in the Commonwealth Procurement Rules that took effect from 1 March 2017.
The Committee points to a number of deficiencies in Airservices’ management of probity risks regarding the ICCPM arrangements. Probity matters were not addressed in the decision to enter into a strategic relationship with ICCPM or in any of the 18 sole-sourced procurements prior and subsequent to that relationship being established. There was no documented consideration as to whether the engagement with ICCPM would give rise to perceived conflicts of interest. ICCPM sub-contractors with links to tenderers became involved in the evaluation of competing tenders, and subsequently undertook contract negotiations with the successful tenderer, without Airservices actively managing these probity risks.
The Committee maintains that the potential for probity matters to arise should have been clearly apparent to Airservices from the very establishment of the strategic partnership with ICCPM, given the lack of market testing to identify other possible partners and the lack of documentation by Airservices on the services it intended to obtain through ICCPM. In addition, the strategic partnership drifted from its original purpose of education and training into consultancy services—in contracting individuals to undertake particular roles similar to an employee for extended periods rather than building Airservices’ organisational capability.
The Committee strongly supports the Auditor-General’s recommendations on how Airservices should address this matter, and therefore welcomes Airservices’ public commitment to implement these recommendations and notes the advice on progress. In this regard, the Committee also notes the conclusion of the companion audit, Audit Report No. 46, Conduct of the OneSKY Tender, that ‘evaluation governance arrangements were appropriate … and guarded against the conflicts of interest issues identified in Audit Report No. 1 … impacting on the tender evaluation process and outcome’.
However, given the seriousness of the Auditor-General’s findings in the first audit, the Committee concludes that Airservices should report back on post-implementation progress for each of the recommendations. As the outcomes of Airservices’ independent probity audit were still pending at the time of the Committee finalising its report, Airservices should also provide the Committee with an extract of the findings from this audit and report back on investigations undertaken by its panel of independent probity advisors and auditors.
To demonstrate its implementation of transparent, effective and appropriate procurement processes and the requisite organisational cultural change, the Committee recommends that Airservices Australia report back to the Committee, providing a post-implementation progress report for each of the audit recommendations in Audit Report No. 1 (2016-17)—including:
an update on how its new procurement assurance framework has driven cultural change across the agency and ensured adherence to procurement policies and procedures, and also ensured a focus on achieving a substantiated value for money outcome
an update on how monthly assessments of completed procurement activities to identify potential ‘non-compliant’ procurement processes have improved procurement compliance monitoring and reporting
details of how many times, since the audit, competitive procurement processes have not been employed, and the resulting documentation, costing and reporting procedures
To demonstrate its improved management of probity in procurement, the Committee recommends that Airservices Australia:
provide the Committee with an extract of the findings from the September 2016 O’Connor Marsden probity audit, including actions taken with regard to any identified probity matters
report back to the Committee on how many investigations have been undertaken by its panel of independent probity advisors and auditors; any significant findings made; and changes implemented as a consequence
The December 2009 National Aviation White Paper identified expected benefits from synchronising civil and military air traffic management, including through procurement of a single solution to replace the separate civil and military systems. Delivery of the joint initiative commenced in 2010 under the OneSKY Australia program. Under OneSKY, Airservices is the lead agency for the joint procurement of Civil Military Air Traffic Management System (CMATS).
Airservices is a corporate Commonwealth entity under the PGPA Act, and develops and implements its own procurement policies and procedures. It has contracted extensively with ICCPM in relation to OneSKY. Since 2012, there have been 42 engagements of ICCPM employees and sub-contractors through 18 procurement processes, via six contracts. Under the various contractual arrangements, Airservices agreed to pay ICCPM total fees of more than $9 million.
Review of evidence
Implementation of ANAO recommendations
Airservices agreed to all six of the ANAO recommendations (see Appendix B for details). At the public hearing, Airservices acknowledged that its ‘procurement framework and its implementation could be improved’, and noted it had ‘accepted all of the ANAO’s recommendations … all of the recommendations in the report have been actioned and addressed as of 30 September this year’. Airservices had also made two additional improvements to its procurement practices as a result of the audit findings—developing a procurement assurance framework and commissioning an independent audit by O’Connor Marsden relating to the probity and governance of OneSKY.
As to the appropriateness of Airservices’ response to date to implementing the audit recommendations, the Auditor-General confirmed that the ‘description of what they have undertaken sounds like the types of things that we would expect to have occurred. I think the emphasis on cultural change is quite important given the systemic nature of the issues that we identified’.
Adherence to procurement policies and procedures
Procurement by many Commonwealth entities is governed by the CPRs, issued under s105B of the PGPA Act. Compliance with the CPRs is mandatory for all non-corporate Commonwealth entities and some corporate Commonwealth entities. Airservices is not required to comply with the CPRs. Instead, as is the case with most corporate Commonwealth entities, Airservices develops and implements its own procurement policies and procedures. These policies and procedures are required to meet obligations under the PGPA Act that entities promote proper use of resources and employ effective internal controls.
The ANAO found that ‘departures from Airservices’ documented procurement policies and procedures were common in the approval processes for the various ICCPM procurements’. As Airservices acknowledged at the public hearing, ‘there was noncompliance with the procedures that were there, so regardless of what the framework would have been and what procedures there were, it would not have been applied’. In particular, the ANAO found that ‘internal controls intended to promote compliance were regularly bypassed. Where they were applied, the controls were often ineffective’. Records made by Airservices for each procurement decision were also ‘often perfunctory’, contributing to a ‘lack of transparency over the decisions to procure services from, or through, ICCPM’.
The ANAO therefore recommended that Airservices address ‘systemic failures in the adherence to the organisation’s procurement policies and procedures and the cultural underpinnings of those failures’.
Airservices provided an update on implementation of this recommendation, noting the establishment of awareness, monitoring and training initiatives to ‘improve adherence’ to procurement policies and procedures, and create a ‘cultural shift’ in its approach to procurement activities—in particular:
Airservices had ‘tailored communications and coaching’ for staff to ‘better explain the rationale behind the policies, describe the benefits of competitive procurement activities and to support the execution of defensible and transparent processes’
improved monitoring activities had been introduced, including ‘better oversight by Airservices Executive in relation to project delivery and governance, and improved procurement compliance reporting’—for example, monthly assessments of completed procurement activities are being conducted to identify potential ‘non-compliant’ processes
a more comprehensive training package was also being developed to cover ‘all aspects of the procurement lifecycle to drive both effective and efficient procurement processes’
In terms of organisational cultural change, Airservices confirmed that there had been ‘significant churn at the senior ranks of Airservices over the last couple of years’. Airservices further emphasised that ‘part of the change process’ is to build an ‘accountable performance culture’—‘no-one was being held to account … That is one of the areas that we are focusing on: people’s performance and whether they perform. If not, they need to be held to account’. Airservices also noted the development of a procurement assurance framework as an additional improvement in this area as a result of the ANAO audit.
Achieving value for money
Airservices develops and implements its own procurement policies and procedures, but these policies and procedures are required to meet obligations under the PGPA Act that accountable authorities:
govern their entity in a way that promotes the proper use and management of the public resources for which they are responsible (s15)
establish and maintain an appropriate system of internal control for their entity, including measures for ensuring that officials of the entity comply with the finance law (s16)
The ANAO noted that ‘Airservices’ procurement policies and procedures are, in most respects, appropriate’—the framework includes a finance policy that is ‘sound’ and, ‘in many respects, the procurement management instructions and workflows were also sound’. However, the ANAO identified as ‘two key shortcomings’ that these procurement policies and procedures ‘did not address Airservices entering into strategic partnerships’ (in May 2013, Airservices and ICCPM agreed to enter into a strategic partnership for the duration of the OneSKY program) and ‘did not give appropriate emphasis to the use of competitive processes’.
In terms of the strategic partnership with ICCPM, Airservices acknowledged this was a ‘flawed construct’ that had serious flow-on consequences:
To put it succinctly, there was a false premise that the strategic partnership that had been formed would be an area of sole source and that we would draw down certain expertise off that strategic partnership. But, as detailed in the audit report, the construct of that strategic partnership was flawed, so everyone was working off a false premise.
In terms of not giving appropriate emphasis to the use of competitive processes, the ANAO found that Airservices’ procurement framework ‘did not … adequately contemplate, or regulate, non-competitive approaches being adopted for procurements with a value of $50 000 or more’—for example:
although Airservices documented the approval of each procurement valued at more than $50 000, ‘the relevant approval memos did not state that the sole sourcing approach was at odds with a key element of its procurement framework’
variation to one of the ICCPM contracts created an on-call services schedule that, in effect, ‘established a panel consulting arrangement, albeit with only one provider on the panel’, with the contract variation being ‘undertaken without the endorsement of Airservices’ Office of Legal Counsel’
Airservices’ records also made ‘little mention of value for money considerations’—Airservices ‘largely operated as a price-taker; obtaining quotes from ICCPM without seeking to benchmark the proposed rates to similar services obtained by other Commonwealth entities’
for each of the 18 procurements, ‘Airservices did not seek to inform itself as to the proportion of the fee that was to be retained by ICCPM … or consider whether the same services could be obtained by contracting directly with [a] particular sub-contractor’
Airservices acknowledged the ‘way we previously worked was that there was a culture of authorised exemptions. In other words, you would go along to the financial delegate and get a delegation to do a sole source’. Airservices also acknowledged that ‘we made a number of errors where we did not reassess or we did not test and benchmark appropriately those particular costs’, and ‘our documentation of those decisions was inadequate’. As the Auditor-General noted at the public hearing, Airservices’ procurement of services from ICCPM was therefore ‘ineffective in providing value-for-money outcomes’:
Achieving value for money is expected to be a central consideration of Commonwealth procurement activities. We see competition in procurement as being important for a number of reasons, including the benefits that competitive pressure brings to demonstrating probity and value-for-money outcomes, but it remains quite commonplace for entities to adopt approaches that reduce competitive pressure. For example, Airservices Australia made extensive use of ICCPM to assist with the delivery of the OneSKY Australia program, with 42 engagements of ICCPM employees and subcontractors through 18 procurement processes, but each of the 42 engagements were sole-sourced.
The ANAO therefore recommended that Airservices improve the value for money it obtains from procurement by requiring that, ‘except in genuinely rare circumstances’, competitive procurement processes are employed. On those ‘rare occasions’ when competitive procurement processes have not been able to be employed, Airservices should document the reasons why, benchmark quoted rates and record how this represented value for money.
Airservices provided an update on implementation of this recommendation, confirming that ‘barriers’ to sole sourcing ‘have been put in place, so that if we go there the norm is to do a competitive tender’:
we changed … the delegation level for what we would call going down a sole-source path … We have changed it around so that you have to do a competitive process. There are times when a sole source is required and Mr Logan [the Chief Financial Officer] is now the authoriser; it has to come to him to sign, rather than to the financial delegate to approve.
Overall, Airservices confirmed that it had updated procurement processes to include clearer guidance on assessing value for money, the importance of competitive processes and record keeping requirements. Airservices’ new procurement assurance framework will further ensure ‘a focus on the requirement to achieve a substantiated value for money outcome’.
There was also interest at the public hearing in exploring how Airservices, as a corporate Commonwealth entity, develops its procurement framework. Finance’s Resource Management Guide 213 provides a set of model ‘Procurement’ AAIs for corporate Commonwealth entities that are not subject to the CPRs. Importantly, the guide notes ‘these entities may find it beneficial to develop procurement arrangements that are modelled on the CPRs as a matter of good procurement practice’.
As to whether it would bring about the necessary cultural change if it were not optional but compulsory for Airservices to comply with the CPRs, Airservices responded that, ‘in effect, we have cut and pasted almost all of the procurement rules into the policy and procedure … in terms of competitive processes and the policy and procedure, we have cut and pasted most of the principles and processes back in’. As Airservices further noted:
This goes to the cultural aspect of the area we are working on. The thought is that because we do not have to comply with something it meant that you could just toss it aside, rather than actually looking at what you draw out of the current Commonwealth procurement guidelines and what you accept as best practice. That is one thing that we are trying to change because that was one of the attitudes that was around—that if you do not have to comply with something then you could just do whatever you want. We have moved around to say that we should be adhering to things like the Commonwealth procurement guidelines and only deviating, because we can, where it is necessary to actually suit the organisation’s needs.
The Auditor-General emphasised that ‘Commonwealth procurement rules … set out a robust framework for ensuring value for money and probity. I think it is a fair expectation that entities who are not bound by the rules would have something similar in place to deal with it’.
It is further noted here that updated CPRs took effect from 1 March 2017.
Airservices’ documented procurement framework requires that probity be a key consideration in undertaking procurement, including effectively identifying and managing potential, actual or perceived conflicts of interest. While the Probity Plan and Protocols established for the CMATS joint procurement process provided a ‘reasonable basis for managing the probity aspects of the tender process’, the ANAO found that ‘Airservices did not commission independent probity audits of any phase of the tender process subsequent to the release of the RFT’:
The policy documentation has not provided any guidance as to the different roles played by probity advisors and probity auditors. The inclusion of such guidance would assist in avoiding mistaken reliance on a probity advisor (or internal audits) as having fulfilled the role of an independent probity auditor.
The ANAO therefore recommended that Airservices improve its procurement framework by including ‘enhanced guidance’ on the different roles performed by probity advisors and probity auditors. Airservices provided an update on implementation of this recommendation, confirming that it had improved procurement processes to provide ‘clearer guidance’ on active management of probity, including the ‘different roles performed by probity advisors and probity auditors’. In addition, Airservices had established a ‘panel of independent probity advisors and auditors’ for its procurement activities.
The ANAO also found that ‘Airservices demonstrated a lack of organisational commitment to the effective implementation of probity principles in respect to the ICCPM arrangements’:
Given the links between ICCPM subcontractors and tenderers, it was reasonably foreseeable that Airservices’ contracting of ICCPM to assist with the OneSKY Australia project would give rise to perceptions of conflicts of interest and, potentially, actual conflicts of interest.
Airservices did not identify or actively manage the attendant probity risks. Airservices’ approach to administering declared conflicts and monitoring ICCPM subcontractors’ compliance with the Probity Plan and Protocols was inconsistent and largely passive. This was reflected in a number of missed opportunities to avoid or effectively manage conflict of interest concerns associated with engaging key subcontractors via ICCPM.
There was an inadequate appreciation within Airservices of probity principles and their effective implementation. Overall, the ICCPM engagements were not effectively managed so as to ensure the CMATS joint procurement tender process was free of any concerns over conflict of interest that could impact on public confidence in the outcome.
Box 2.1 provides a summary of the ANAO’s findings in this area.
Box 2.1: Summary of ANAO probity findings
‘Neither the decision to enter into a strategic relationship with ICCPM for the duration of the OneSKY program, nor any of the 18 sole-sourced procurements that occurred both prior, and subsequent, to that relationship being established, addressed probity matters’.
‘On no occasion was there documented consideration as to whether the engagement would give rise to potential actual or perceived conflicts of interest that should either be avoided (by not proceeding with the procurement) or for which a specific management strategy should be established’.
‘ICCPM sub-contractors with links to tenderers (including through past employment and as a result of the membership of the ICCPM board) became involved in the evaluation of competing tenders. They subsequently undertook contract negotiations with the successful tenderer. But Airservices did not identify or actively manage the attendant probity risks’.
‘The potential for actual and/or perceived conflicts of interest arose due to the Board of ICCPM including employees from companies that were expected to participate, and did participate, in the CMATS tender process. One subcontractor was also a Director of ICCPM, and was engaged via ICCPM to undertake the Lead Negotiator role (which included being involved with tender evaluation activities). The Managing Director of the successful tenderer with whom contract negotiations were occurring was also Chair of the ICCPM Board. Potential conflict of interest matters also arose due to the two key subcontractors engaged via ICCPM, including one ICCPM Board member, having had substantial recent employment histories with companies involved in tenders submitted to the CMATS tender process’.
The ANAO found that the approach taken by Airservices to developing and formalising the strategic partnership with ICCPM ‘did not involve any approach to the market that would have identified any other possible strategic partners, what they could offer the organisation and the related costs and benefits’. Further:
there was no business case prepared by Airservices and no performance indicators were established to enable monitoring and evaluation of whether the partnership was delivering the expected benefits (including, the extent to which Airservices’ internal capability was being built). In this latter respect, the ANAO’s analysis was that it was quite common for Airservices to use the relationship with ICCPM to engage individuals to undertake particular roles akin to an employee for extended periods, rather than build the organisation’s own capability … … … Airservices did not document at that time [May 2013], or subsequently, the nature of the services it intended to obtain from or through ICCPM.
At the public hearing Airservices confirmed that, while ICCPM’s original brief was to provide education and training (build organisational capability), this had then extended into consultancy services and subject matter expertise: ‘from our perspective, our initial engagement … was around that education skills and capability piece. But as time went on, we set up a strategic partnership where they could help us source subject matter expertise to help supplement’.
There was interest in understanding how Airservices had established that ICCPM had the necessary expertise for the role—whether, for example, it had conducted a market assessment. Airservices explained that, ‘in hindsight, we should have gone out to the market’—however, ‘because we had had a relationship with ICCPM, we were forming up with the Department of Defence to do this procurement and they had extensive expertise in Defence procurement practices, processes and complex management expertise, it was naturally assumed that they were the best people’.
As to whether there was a documentation trail available on why ICCPM had been selected to enter into the strategic partnership, Airservices confirmed that, ‘as articulated in the audit report, our documentation trail—or the lack of—is one of the things that it is a significant finding, particularly around the formation of the strategic partnership’. In terms of whether ICCPM ‘pitched for work’ or whether Airservices approached ICCPM—Mr Harfield, Chief Executive Officer, Airservices, confirmed that, post the strategic partnership, Airservices would go to ICCPM:
Before getting into realising the capability deficiencies we would have in the organisation and what we would require for this particular program, I am unaware whether ICCPM pitched that to move into this strategic partnership space; I cannot answer that. But post the strategic partnership, it was the premise that there was a partnership that we could draw down and go to them to get expertise and what capability required at whatever time; that was Airservices going to ICCPM.
Given the lack of documentation in this area, Airservices was asked how there could be certainty that it went to ICCPM rather than ICCPM ‘pitching’ to fill the gaps. Airservices explained that ‘there is documentation about going and asking for quotes from ICCPM for some of these pieces … around some of the determinations around value for money for some of those capabilities … as well as … around the setting up of this strategic partnership’.
As to whether other entities in Australia might have been able to provide services similar to ICCPM and how it had become aware of ICCPM, Airservices stated that, ‘because of our relationship with Defence and the work that they had been doing through the Defence area, they were recommended to us’. As to who in Defence might have ‘recommended’ ICCPM to Airservices and the circumstances around such a recommendation, Mr Harfield responded:
I am not sure, because this was back in 2010, but there were interactions with Defence because a number of the capabilities that we required from ICCPM were joint decisions, so to speak, on certain roles … … … It has been a relationship that has evolved since 2010. The issues around that lack of documentation means that it has become folklore rather than an actual understanding of what the arrangements were.
In terms of whether, over the period since 2010, any of its senior managers had socialised with ICCPM employees and contractors, Airservices replied that ‘there would be the normal interactions of people working closely together for a long period of time’. As to whether any hospitality arising might have been paid for by the contractor, Airservices responded that ‘there may have been, for example, ICCPM putting on an evening where there were people talking about complex program things, where they have paid for the drinks et cetera’. On whether it had any policies or record-keeping around such matters, Airservices responded:
Across the board for any suppliers that we have, we have declarations of interest and conflict of interest protocols … … … There are a couple of examples that are detailed in the audit report where those occasions did occur. There were declarations made afterwards to ensure that there was not seen to be conflict of interest … … … Some of those declarations were not made, and some of them were actually highlighted as not having been made in the audit report. That is one of the areas of improvement that we have made.
A further matter discussed at the public hearing was Airservices’ response to the audit, signed off by the Airservices’ Chair (as reprinted in the ANAO report). This response noted concern that the audit could potentially lead people to make a connection between perceived conflicts of interest creating actual conflicts of interest. Asked if this response implied that perceived conflicts of interest did not matter, Airservices emphasised ‘we had acknowledged—and the chair has acknowledged in public—that our handling of perceived potential conflicts of interest was not adequately done’.
As a result of its probity findings, the ANAO recommended that Airservices ‘proactively manage probity in procurement activities’, through a range of initiatives. It also recommended that Airservices’ governance arrangements address a range of requirements in terms of key probity management roles. The ANAO further recommended that Airservices improve procedures for managing probity in procurement to require documented consideration of the potential for actual or perceived conflicts of interest to arise when engaging external contractors to participate in tender evaluations and contract negotiations.
Airservices acknowledged issues with aspects of its probity management and provided an update on implementation of the audit recommendations:
We acknowledge that our management of it was not as good as it should be, particularly around the perceived potential conflicts. There were certain assumptions made that just having individuals sign off conflict-of-interest registers and probity aspects was done, and some of those things were done early in the piece but were not updated subsequently. There was also an assumption made in setting up the strategic partnership, and part of one of the criteria of that strategic partnership was that the conflict-of-interest aspects were to be addressed, and then there was noncompliance with some of those procedures … … … Instead of actively managing things, people say, ‘There is a process in place, therefore it is all done.’ But, when you have put a process in place, you have to actually manage it to make sure that you are achieving the outcomes. This goes back to that cultural element that we talked about that needs to be addressed.
In particular, Airservices had updated its procurement processes to provide ‘clearer guidance’ on the active management of probity. Airservices’ procurement governance framework had also been updated to ‘clarify expectations’ regarding probity roles, and ‘ensure a clear understanding that conflict of interest declarations are to be completed by all individuals, including external contractors, involved in the evaluation and subsequent negotiation activities for Airservices procurements’. Airservices further highlighted that it had ‘just conducted a probity audit of the OneSKY program to ensure that the changes that we have made to the probity framework, as a result of this audit, have been implemented appropriately and are effective’.
While the Committee was considering Audit Report No. 1, the ANAO tabled a companion audit, Audit Report No. 46 (2016-17), Conduct of the OneSKY Tender. In light of the probity findings of Audit Report No. 1, Audit Report No. 46 examined ‘any impact of potential conflicts of interest on the tender evaluation process’. The audit concluded that the ‘evaluation governance arrangements … guarded against the conflicts of interest issues identified in Audit Report No.1 … impacting on the tender evaluation process and outcome’. This matter is further discussed below.
Audit Report No. 46 (2016-17), Conduct of OneSKY Tender
Under OneSKY, Airservices is the lead agency for the joint procurement of CMATS. CMATS is intended to be delivered through contracts between Airservices and the successful tenderer, with a separate agreement being established between Airservices and Defence for the on-supply of services and goods. A Request for Tender (RFT) for the joint procurement was released on 28 June 2013. The RFT closed on 30 October 2013, with six respondents. On 27 February 2015, it was announced that an advanced work contracting arrangement would be entered into with Thales Australia, as a next step for the delivery of OneSKY.
Committee conclusions and recommendations
Given the probity findings in Audit Report No. 1 (2016-17), Procurement of ICCPM to assist on OneSKY, the Committee notes the ANAO’s conclusion in Audit Report No. 46 that the OneSKY tender process was ‘appropriate’, and that the tender evaluation governance provided an approach ‘capable of identifying the best value for money tender’ and, in particular, that ‘guarded against the conflict of interest issues identified in Audit Report No. 1 … impacting on the tender evaluation process and outcome’.
However, the Committee also notes the ANAO’s findings that: it was ‘not clearly evident that the successful tender offered the best value for money’ because adjustments made to tendered prices when evaluating tenders against the cost criterion were ‘not conducted in a robust and transparent manner’; there was a ‘lack of adequate records’ explaining the adjustments; the adjustments suggested that the ‘successful tenderer offered the lowest cost solution when the acquisition and support prices it submitted were actually considerably higher than those of the other tenderers’; there had been ‘significant delays’ in the conduct of the tender process; and it was ‘not clearly evident’ that the successful tender was affordable in the context of available funding.
The Committee was particularly disappointed to note Airservices’ continuing issues with adequate record keeping and documentation. In Audit Report No. 1 (2016-17), the ANAO found that ‘on no occasion was there documented consideration’ as to whether the engagement with ICCPM would give rise to perceived conflicts of interest and also that Airservices ‘did not document’ the nature of the services it intended to obtain from ICCPM or how sole sourcing through ICCPM would provide value for money. In its recommendations from that audit, the ANAO made multiple references to the need for Airservices to improve its procurement framework by documenting its decisions on a range of matters. As Airservices noted at the public hearing:
As articulated in the audit report, our documentation trail—or the lack of—is one of the things that it is a significant finding, particularly around the formation of the strategic partnership … The documentation around that and the decision making is actually one of the areas that gets pointed out in the report as a significant deficiency.
The Committee emphasises a substantive evidentiary trail requires procurement records that evidence decision making and that are created contemporaneously with the decision making process. In short, as part of good governance and effective risk management, the record keeping and documentation trail needs to be clearly evident and commensurate with the scale, scope and risk of a procurement. In this way, Commonwealth entities ensure transparency and accountability to the Parliament and the Australian public for expenditure of taxpayers’ money.
Of further concern to the Committee were the statements in the ANAO report that: there was ‘no planned methodology’ for how analysis in terms of the adjustment activity would be undertaken in the Tender Evaluation Plan (TEP); the ANAO ‘could not identify’ that it had been clearly flagged to tenderers in the Conditions of Tender (COT), or set out in the TEP, that such analysis would be undertaken; and the risk-adjustment activity undertaken by the Tender Evaluation Committee was ‘not subject to probity scrutiny’.
Accordingly, the Committee sees value in Airservices reporting back on progress in implementing action to address the conclusion and supporting findings of Audit Report No. 46. If the Committee is not satisfied with Airservices’ response and/or with the findings of the (potential) third ANAO audit (recommended below), the Committee may determine to reopen its inquiry into Airservices’ procurement practices and procedures with reference to the OneSKY Australia Program.
The Committee recommends that Airservices Australia report back on progress in implementing action to address the ‘Conclusion’ and ‘Supporting findings’ of Audit Report No. 46 (2016-17), including details of how Airservices has:
revised its procurement practices and procedures, to ensure adequate record keeping and documentation in terms of its tender evaluation processes—particularly with regard to evaluating tenders against cost criteria, and inclusion in Tender Evaluation Plans and Conditions of Tender of planned methodologies for such analysis—and probity scrutiny of any adjustment activities
updated its business case for the OneSKY Australia project (noting advice that this would be completed by March 2017) and progress in working with the Department of Defence towards developing a joint business case.
The Committee further notes that, as a contract for the entire acquisition and support scope had not yet been executed at the time of this audit, as such the OneSKY tender process remained ongoing and the ANAO had not examined criterion 3 of its audit objective. Given that this audit criterion was not examined and the significance of the ANAO’s findings in its first and second stage audits, the Committee believes a third stage audit on the conduct of the OneSKY tender may be warranted, to complete the audit process. This may further enable the ANAO to revisit Airservices’ updating of its business case in terms of the tender’s affordability and any associated matters. The ANAO may also see merit in broadening this third audit to encompass wider governance issues; the effectiveness of Airservices’ procurement practices and procedures more generally; and progress in implementing ANAO and JCPAA recommendations.
The Committee recommends that the Australian National Audit Office consider conducting a third stage audit into the conduct of the OneSKY tender and any associated matters, once the contract for the entire acquisition and support scope has been executed, to complete its audit objective on this matter as set out in Audit Report No. 46 (2016-17)—in particular, criterion 3 of the audit objective.
Review of evidence
While the ANAO made no recommendations in Audit Report No. 46, it reached a number of conclusions and made supporting findings.
In Audit Report No. 1, the ANAO found that, while Airservices’ Probity Plan and Protocols established for the CMATS joint procurement process provided a ‘reasonable basis for managing the probity aspects of the OneSKY tender process’, a number of ‘shortcomings increased probity risks to the conduct of tender evaluation activities’. In Audit Report No. 46, the ANAO examined ‘any impact those shortcomings had on the tender evaluation process’. The ANAO concluded that Airservices had employed an ‘appropriate’ tender process, and that evaluation governance had provided an approach ‘capable of identifying the best value for money tender’ and that ‘guarded against the conflicts of interest issues identified in Audit Report No. 1’:
A two-stage tender process was employed involving a Request for Information (RFI) followed by an RFT … This approach was appropriate for the scale, scope and risk of the joint procurement. It promoted a healthy level of competition for the procurement, with 23 responses to the RFI and nine tender responses received from six tenderers.
The evaluation governance arrangements were appropriate. They provided an approach that was capable of identifying the best value for money tender. They also guarded against the conflicts of interest issues identified in ANAO Report No. 1 2016–17 impacting on the tender evaluation process and outcome … by:
providing for a four stage review process, including a number of opportunities for dissenting views to be raised and recorded;
requiring input from a large number of Airservices and Defence personnel (and contractors); and
providing for evaluation findings and recommendations that were built up from detailed evaluation work.
However, the ANAO also concluded: it was ‘not clearly evident that the successful tender offered the best value for money’ because adjustments made to tendered prices when evaluating tenders were ‘not conducted in a robust and transparent manner’; there was a ‘lack of adequate records’ explaining the adjustments; there had been ‘significant delays’ in the conduct of the tender process; and it was ‘not clearly evident’ that the successful tender was affordable in the context of available funding:
Tender evaluation proceeded through the planned phases, with competitive pressure maintained until late in the process. The records of the evaluation process evidence that the successful tender was assessed to be better than the other remaining candidates from a technical and schedule risk perspective. It is not clearly evident that the successful tender offered the best value for money. This is because adjustments made to tendered prices when evaluating tenders against the cost criterion were not conducted in a robust and transparent manner … … … There was not a clear line of sight across the phases of the evaluation and the work of the Tender Evaluation Working Groups and the Tender Evaluation Committee (TEC) in relation to the adjustments made by the TEC to tendered prices for evaluation purposes. Of particular significance was the lack of adequate records explaining the TEC adjustments. Those adjustments suggested that the successful tenderer offered the lowest cost solution when the acquisition and support prices it submitted were actually considerably higher than those of the other tenderers.
The acquisition and support prices tendered by Thales were significantly higher than the other two tenderers that proceeded through Phases 3 and 4 of evaluation. Specifically, the Finance evaluation working group’s report outlined that Thales’ acquisition price was 108 per cent higher than the lowest price of the three shortlisted tenders, and 47 per cent higher than the price of the other shortlisted tenderer. Similarly, the working group’s report outlined that Thales’ support price was 114 per cent and seven per cent higher than the prices submitted by the other two shortlisted tenderers.
In addition to the Finance evaluation working group’s analysis, the TEC undertook its own risk-adjustment process. There was no planned methodology for how this analysis would be undertaken in the TEP. The ANAO also could not identify that it had been clearly flagged to tenderers in the COT, or set out in the TEP, that such analysis would be undertaken. Further, the risk-adjustment activity undertaken by the TEC was not subject to probity scrutiny.
There have … been significant delays with the conduct of the OneSKY tender process … The RFT was released to the market in June 2013, 18 months later than the expected December 2011 release. This delay was further compounded by tender evaluation activities taking more than twice as long as planned. Contracts are unlikely to be signed prior to mid-2017, at least 40 months after tender evaluation commenced.
It is also not clearly evident that the successful tender is affordable in the context of the funding available to Airservices and Defence … … … An overarching business case was not prepared for OneSKY. Separate business cases were developed by Airservices and Defence. The Airservices business case has not been reviewed or updated since 2011. In December 2016, Airservices advised the ANAO that it had commenced an update of its business case, which is due for completion in the first quarter of 2017.
Importantly, the ANAO also noted that, as a contract for the entire acquisition and support scope has not yet been executed at the time of its audit, as such the OneSKY tender process remained ongoing and the ANAO had not examined criterion 3 of its audit objective:
Did negotiations with the successful tenderer result in constructive contractual arrangements that ensured continuity of safe air traffic services, the managed insertion of an optimum system of systems outcome within required timeframes, and demonstrable value?