Chapter 4 sets out the findings of the Joint Committee of Public Accounts and Audit (JCPAA) from its inquiry into Commonwealth procurement, based on Audit Report No. 16 (2016-17), Offshore Processing Centres in Nauru and Papua New Guinea: Procurement of Garrison Support and Welfare Services. The Department of Immigration and Border Protection (DIBP) was the audited agency. The chapter comprises:
Committee conclusions and recommendations
The chapter also provides a brief examination of Audit Report No. 32 (2016-17), Offshore Processing Centres in Nauru and Papua New Guinea – Contract Management of Garrison Support and Welfare Services, including Committee conclusions and a review of evidence.
Committee conclusions and recommendations
The Commonwealth Procurement Rules (CPRs) are issued under the Public Governance, Performance and Accountability Act 2013 and articulate the requirements for officials performing duties in relation to procurement. DIBP is obliged to adopt processes that meet the requirements of the CPRs. The CPRs are there to ensure that entities undertake appropriate processes, obtain value for money and also provide some degree of certainty to businesses seeking to do business with the Australian Government. The development of the CPRs incorporates agency consultation, and should be fully supported and followed by Australian Government entities.
The Committee notes the Australian National Audit Office (ANAO) conclusion was that this audit identified significant deficiencies in all three phases of the procurement activity undertaken by DIBP since 2010 to:
consolidate contracts across Nauru and Manus Island
optimise value for money and efficiencies
In relation to the establishment of contracts, the Committee was concerned that a proposal from Serco was rejected yet no documentation was available to indicate whether a value for money assessment had been conducted; DIBP wrongly claimed that Transfield was on a Defence procurement panel; and DIBP entered into a Heads of Agreement with Transfield without prices or the scope of services being defined.
The Committee acknowledges that DIBP was operating in a complex and rapidly evolving environment under time pressures. This pressure particularly relates to the initial establishment of the contracts as, ‘by necessity’, the implementation of regional processing and settlement arrangements in Nauru and Papua New Guinea ‘were established swiftly’. However, the Committee considers that DIBP ought to have taken steps to improve its procurement activities within a reasonable time, particularly in relation to the subsequent phases of consolidation of the contracts and retendering, considering the substantive and serious nature of the deficiencies identified by the ANAO.
Of particular interest to the Committee was DIBP’s management of processes for contract consolidation and the open tender process. The Government intended that these procurement processes would rein in growing expenses. In both cases, the approach adopted by DIBP did not facilitate such an outcome. DIBP used approaches which reduced competitive pressure and significantly increased the price of services, despite the Prime Minister seeking a reduction in per head costs.
In relation to the consolidation of contracts, Transfield was selected as the consolidated provider of services involving expenditure of $3 billion. The Committee was concerned to note the ANAO’s findings that there was no record that DIBP considered an alternative proposal from G4S or responded to it; and issues about underperformance were not conveyed to service providers.
In relation to the retendering of the consolidated contract, the ANAO noted that DIBP had improved some of its controls, however deficiencies throughout the process were still highlighted. The Committee notes the ANAO’s advice that the benchmarking used in the negotiation phase ‘was, in effect, Transfield’s price that they had under the consolidated contract’ which gave the incumbent provider an ‘unfair advantage over other potential suppliers’. The Committee considers this a serious departure from the principle of value for money in procurement.
The conduct and outcomes of the tender processes reviewed by the ANAO highlighted procurement skill and capability gaps amongst departmental personnel. Procurement is core business for Commonwealth entities and these deficiencies have resulted in ‘higher than necessary expense for taxpayers and significant reputational risks for the Australian Government and DIBP.’
Staff turnover at DIBP was also an important issue identified by the ANAO. During the period under review there was considerable turnover of senior departmental personnel responsible for the administration of procurement processes. DIBP indicated that a number of staff working in the area at the time ‘were burnt out’.
The Committee notes DIBP’s focus on improving its procurement processes through specialised training to improve both the quality of procurement undertaken, and staff retention.
The ANAO made two recommendations aimed at improving the training, staff selection and guidance available to staff involved in procurement, and improving DIBP’s compliance with the CPRs. Both recommendations were agreed to by DIBP.
The Committee was concerned at a consistent and repetitive theme identified by the ANAO throughout all three phases with respect to a lack of appropriate documentation by DIBP, including in relation to conflicts of interest, assessments and performance management of contracts. During the public hearing DIBP stated that ‘the record-keeping of the department was porous when it came to some of the decisions that were made.’ The Committee will continue to monitor DIBP’s record-keeping practices through its review of ANAO audits.
In its submission to the Committee, DIBP provided an update on progress made in implementing the ANAO’s recommendations, and the Committee notes the work done by DIBP since the audit. However, the Committee finds that a follow-up audit of DIBP’s procurement processes is warranted.
The Committee considers that the full implementation of both the ANAO’s and the Committee’s recommendations would improve procurement processes at DIBP. Improvements in record keeping and the documentation and dissemination of lessons learned should enable DIBP to demonstrate in the future that it is fully compliant with the CPRs.
The Committee recommends that the Department of Immigration and Border Protection report back to the Committee providing a post-implementation progress report for each of the audit recommendations in ANAO Audit No. 16 (2016-17) including:
an update on procurement processes and their compliance with the CPRs
an update on staff training , development and guidance on procurement practices.
The Committee recommends that the Australian National Audit Office consider conducting a performance audit of the next Department of Immigration and Border Protection procurement of garrison support and welfare services to determine whether lessons have been learnt and that the Commonwealth Procurement Rules have been followed.
In 2012 the Australian Government established Offshore Processing Centres in Nauru and on Manus Island in Papua New Guinea.
DIBP sought to enter into contractual arrangements for the delivery of garrison support and/or welfare services. Garrison support includes security, cleaning and catering. Welfare services include healthcare and recreational and educational activity.
The initial timeframe to establish offshore processing was short. DIBP used a limited tender procurement method in 2012 to acquire services, and again in 2013-14 when consolidating contracts. In 2015 DIBP conducted an open tender for a single contract across both islands, which was underway during the audit and cancelled in July 2016.
The CPRs establish procurement principles that apply to all Government procurement processes. Achieving value for money is the core purpose of the CPRs and requires the consideration of financial and non-financial costs and benefits, and the efficient, effective, economical and ethical use of public resources.
Entities determine their own procurement practices consistent with the CPRs through Accountable Authority Instructions. Entity Central Procurement Units (CPUs) provide procurement expertise and advice to entity officials.
Review of evidence
In considering the evidence before it, the Committee focused on five matters:
Implementation of ANAO recommendations
Procurement phase 1 – Establishment of Contracts
Procurement phase 2 – Contract Consolidation
Procurement phase 3 – Optimising Value for Money and Efficiencies
Other audit findings – record keeping and policy authority
Implementation of ANAO recommendations
The ANAO made two recommendations (see Appendix B for details). The first was to address procurement skill and capability gaps using various means. The second was to ensure that DIBP complies with the CPRs, maintains adequate records, and manages actual, potential and perceived conflicts of interest. Both recommendations were agreed to by DIBP.
In its submission to the Committee, DIBP stated: ‘A skills and competency framework has been developed that addresses the prerequisite requirements needed to effectively manage contracts’.
At the public hearing, the Committee asked about the status of the skills and competency framework, and whether a copy of it could be provided. DIBP replied that the framework was ‘currently under development’, was ‘a continually evolving document’, and had been developed ‘at a high level’. In its supplementary submission, DIBP provided a high level diagram of the Contract Management Framework which has been implemented in the department’s Detention Services Division, and stated:
Elements of the Framework specifically relate to skills and capability of officers conducting these functions and the Contracts Profession Learning Pathway outlines the necessary competencies and skills required by staff to effectively manage complex contracts.
The Committee notes the statement from DIBP that it was doing ‘an enormous amount of work’ to improve procurement, and to automate lower level and transactional procurement to the extent possible to enable specialist staff to focus on high-risk procurement.
Further, DIBP stated that strong governance and oversight mechanisms had been developed throughout the contract periods, and that these had come to the fore during the third procurement phase:
We saw those improved mechanisms and controls work where that open tender, had it not been for those controls, may have compromised value-for-money objectives, particularly given the procurement’s risk profile and financial value.
Addressing the ANAO’s findings regarding record keeping, DIBP acknowledged that its decision making processes were not adequately documented (particularly for the first two procurement phases), and noted that the ANAO’s recommendations would strengthen DIBP’s capability to undertake efficient, effective and ethical procurement.
The ANAO found that ‘during the period under review… …there was a complete turnover of senior departmental personnel responsible for the administration of the procurements’. DIBP noted that offering specialised training in procurement would encourage staff to remain in the department and gain further experience in procurement matters.
Procurement phase 1 – establishment of contracts
The Committee examined the first procurement phase in which DIBP sought to establish contracts for the provision of garrison services over short timeframes due to policy pressures.
In its submission to the inquiry, DIBP commented on the time pressures it was under to establish the regional processing centres:
As you can appreciate, the pressure placed on the Department to simultaneously manage thousands of asylum seekers, negotiate with host governments, engage service providers and operationalise the logistics for the RPCs, whilst continuing to manage the immigration detention network in Australia, was immense in anyone’s judgement. Staff were redirected from almost every business line to stabilise the immigration detention network and implement regional processing arrangements. This period of intense and sustained pressure has had a long-term impact across all of the Department’s operations.
The audit identified several key issues in the first phase of procurement.
The first issue was that a proposal from Serco to provide garrison services was rejected, with no documentation available to indicate whether a value for money assessment had even been conducted. Related to this point, of the successful bid from Transfield the ANAO stated:
Available records indicate that the department solicited limited information from Transfield, making it very difficult for the department to demonstrate that it had conducted: a process commensurate with the value of the procurement; and a robust value for money assessment which considered the relevant financial and non-financial benefits of the proposal.
The CPRs required DIBP to consider Transfield’s experience and performance history. One of the key reasons DIBP selected Transfield during the first procurement phase was because DIBP believed Transfield was on a Department of Defence procurement panel for the provision of garrison services. Defence advised that it had no such panel arrangement at the time, and DIBP could not provide any documentation that supported its assertion. At the public hearing, Mr David Nockels of DIBP addressed this issue:
My recollection at the time was that they certainly had contracts in place for similar activities. Whether that is a panel arrangement or it was communicated that, ‘Yes, we are utilising those services,’ that has not been able to be identified’.
DIBP later clarified that Transfield had contracts with Defence for garrison services. Defence confirmed that these agreements existed, but had been made through specific term contracts, not procurement panel arrangements.
A further issue under the first procurement phase was DIBP entered into a Heads of Agreement with Transfield without prices or the scope of services being defined. Services totalling $31.6 million were delivered under the Heads of Agreement over the five month period it took for contracts to be prepared and signed.
There was no documentation available to confirm that probity advice was sought on the decision to select Transfield ahead of Serco. The then Secretary advised he recalled speaking to internal lawyers about probity matters, however DIBP was unable to provide the ANAO with evidence that it had implemented mechanisms to manage probity risks, or that it had recorded conflict of interest declarations for officers responsible for the initial procurements.
Procurement phase 2 – contract consolidation
According to the then Secretary of DIBP, the purpose of the second procurement phase was to consolidate contracts by selecting one provider to work across both Manus Island and Nauru. It was expected that this would lead to lower costs through logistical improvements and other efficiencies. This ultimately resulted in Transfield (who were already operating on Nauru) also providing services on Manus Island, replacing G4S.
The audit indicated the then Secretary of DIBP was approached by G4S with a proposal to deliver services on both Nauru and Manus Island, but there was no record that DIBP considered G4S’s proposal or responded to it.
Contractor performance was identified as a significant issue in the second procurement phase. DIBP used the Department of Finance’s (Finance) advice to seek approval from the departmental delegate to conduct the procurement as a limited tender under paragraph 10.3(b) of the CPRs, which reads:
A relevant entity must only conduct procurement at or above the relevant procurement threshold through limited tender in the following circumstances:… b. when, for reasons of extreme urgency brought about by events unforeseen by the relevant entity, the goods and services could not be obtained in time under open tender or prequalified tender
In supporting information provided to Finance, DIBP stated that there are:
…areas of underperformance amongst other issues. We have had a scrutiny and recommendation report recommending that we not take up the extension option available to us due to the underperformance by the service providers and the risk to us knowing this and not ending the contracted services.
…we cannot simply end the services whilst we approach the market through an open approach. We therefore seek to engage another service provider who is already providing similar services at another Immigration site…
DIBP provided further advice to Finance that Transfield had previously been assessed as ‘representing value for money’. However, the ANAO found no value for money assessment was conducted on Transfield’s bid during the first procurement phase in 2012.
The audit stated that both G4S and The Salvation Army were advised that the decision to consolidate services and move away from using their services was not based on performance. This assertion ran counter to the information provided to Finance and to the Minister for Immigration and Border Protection.
The Committee asked DIBP about the ANAO’s finding that, while underperformance was cited in correspondence to Finance to obtain advice on moving to a single provider, both outgoing providers were not told that underperformance was an issue. In reply, DIBP stated:
The Department’s decision to move to a single provider, and thereby consolidating services, was to enhance value for money through the improvement of consistency, innovation, security and efficiency of service delivery. This decision was communicated to both service providers in writing on 12 December 2013.
Procurement phase 3 – optimising value for money and efficiencies
The ANAO noted that DIBP had improved some of its controls for the third procurement phase, including establishing a steering committee to provide strategic direction and advice to the delegate, and a Senior Executive Service (SES) level reference group to provide support and guidance to the project team. Further, the head of DIBP’s CPU was a member of the SES reference group.
On 3 December 2013 the then Minister for Immigration and Border Protection noted that contract consolidation must be managed, and an external contract negotiation advisor should be engaged. DIBP engaged KPMG in this role. KPMG proposed benchmarking Transfield’s tendered price against existing contractor payments (the combined costs of G4S and the Salvation Army on Manus Island).
The CPRs in effect at the time required Request For Tender (RFT) documentation to include a complete description of evaluation criteria to be considered in assessing a submission. The ANAO outlined in the public hearing three inconsistencies with the CPRs in relation to the use of benchmarking: not all suppliers were assessed on the same basis; non-disclosure of this approach to the market; and some technical shortcomings. The ANAO elaborated further at the public hearing:
Essentially the shortcomings were that not all suppliers would be assessed on the same basis. The negotiation process might substantially change the tenderer’s bid and that may no longer represent value for money when compared against other tender bids. Also it provided the incumbent provider with an unfair advantage over other potential suppliers. The reason for that is that the benchmark was, in effect, Transfield’s price that they had under the consolidated contract.
DIBP responded that benchmarking figures were only used after the identification of a preferred tenderer and a second tenderer, and that benchmarking was only used to manage the negotiation process.
Prior to signing contracts to conclude the third procurement phase, the probity advisor raised several concerns, including a significant price increase from the price tendered by Transfield and substantial amendments to the existing Statement of Requirement released to the market. Accordingly, the probity advisor stated that the negotiated outcomes ‘potentially raise significant probity and process risks in the context of an open and competitive tender process’.
The probity advisor concluded that:
[alterations to the Statement of Requirement and associated price increases raise] significant probity and process risks, including the potential risk that the Department is not currently in a position to adequately assess and/or determine whether the changes to Transfield’s tender resulting from the negotiation… …continue to represent best overall value for money for the Department compared with other tenders received and evaluated.
Following this advice, the steering committee decided to seek a revised offer from Transfield and the reserve tenderer (Serco). The ANAO described this process as ‘in effect a limited tender involving the preferred and reserve tenderers’. Four months later, the tender process was cancelled by DIBP.
Other audit findings – record keeping and policy authority
Other findings of concern identified by the ANAO in its review included: record keeping processes at DIBP, and matters relating to policy authority during the second procurement phase.
An ANAO review of DIBP records found that 122 records management folders were created by DIBP over the course of three procurements, and that 94 of these files contained no records. Further, the ANAO noted:
The department continued to create files for months after the identification of the preferred tenderer, including during the course of this audit. For example, individual evaluations [of bidders] were collected and filed in January 2016 after an ANAO request for these documents. This activity occurred around six months after the preferred tenderers were selected. As a result, there is a lack of evidence that these were the actual evaluations prepared by each evaluator… …the integrity of these documents cannot be guaranteed.
DIBP reported that the matter had been referred to its Integrity and Professional Standards Branch. After forensic examination, DIBP had found that 154 documents across 10 files had no integrity issues - investigations into the remaining 19 files continued. Further, DIBP stated:
In most cases there did appear to be a time delay between when the department first created certain documents identified by the ANAO and when they were uploaded into TRIM [DIBP’s records management system]. However, whilst this was the case, the documents themselves were created prior to the finalisation of the procurement process.
After completing its assessment, the findings of DIBP’s Integrity and Professional Standards Branch were forwarded to the Committee. The assessment concluded that:
All tender evaluation documents were drafted prior to the selection of the preferred tenderer.
These individual documents were subsequently uploaded into TRIM files (i.e. ‘storage folders’) after the identification of the preferred tenderer, including during the course of the ANAO audit.
There was no evidence of maladministration or fraudulent activity by departmental officers.
The matter did not warrant further investigation.
Record keeping during the third procurement phase was also found to be inadequate by the ANAO. The records of the team responsible for evaluating tenderers were incomplete. Further, evaluators were not clearly identified; the document creation issues identified above made it unclear to the ANAO whether the documents provided were the final versions of documents; and there were no records available on the technical assessment of the alternative tenderers.
There was an extensive discussion at the public hearing between the ANAO and DIBP on the issue of policy authority and decision making during the second procurement phase.
The ANAO found that in his submission to colleagues, the then Minister for Immigration and Border Protection proposed to consolidate existing services. The aim of this exercise was to find efficiencies and make savings ahead of an open tender process scheduled for 2014. On 3 December 2013 the then Minister sought and gained Prime Ministerial approval to consolidate contracts at an indicative cost of $2.6 billion. The Prime Minister indicated that he expected per head costs to be reduced as a result of consolidation. The audit states:
The Prime Minister’s agreement to proceed with consolidation did not provide DIBP with authority to increase the value of the contract to accommodate service enhancements or adjustments.
On 3 December 2013 the then Minister noted contract consolidation should be managed, and an external contract negotiation advisor should be engaged. As noted above, DIBP engaged KPMG and KPMG proposed the use of benchmarking.
The prices offered by Transfield reduced costs on Nauru, however the ANAO stated ‘for services on Manus Island the prices represented a significant price increase (KPMG referred to this increase as a premium) when compared to the price benchmark’.
After negotiation, the price moved $150 million in favour of the Commonwealth. This is characterised by the ANAO as follows:
The advice to the [DIBP] delegate indicated that the $150 million movement in the bid price demonstrated a ‘saving’ against the benchmark, whereas the KPMG report reflected that these were price adjustments agreed to during the negotiation.
The delegate approved the adjusted price on the basis that it represented value for money, and signed a letter of intent on 21 February 2014 to cover service delivery by Transfield until a contract could be prepared.
ANAO analysis compared the benchmarking figures used with a projection of historic costs. It found that overall, the benchmark was above historical costs by $372 million ($166 million on Nauru, and $206 million on Manus Island). The ANAO stated:
The Government had directed the department to reduce per-head costs. The department had no authority to increase the value of the contract above historic costs to cover service enhancements, and was aware of this.
In its submission to the inquiry, DIBP responded:
The Department rejects the report’s conclusion that the Department acted outside Government authority during the consolidation of contracts…
…Expenditure… …is consistent with the Department’s overall policy authority under the policies of both Governments. Funding and appropriation levels for the implementation and ongoing delivery of the Government’s policy have always been adjusted, in accordance with the Cabinet agreed processes, at the Commonwealth Budget updates over the period in question.
At the public hearing, the Auditor-General clarified the point made by the ANAO:
[Our comments] were specific to one particular element of authority related to a contracting process, and it related to the decisions the authority provided for the organisation to undertake the consolidation and at the same time the open tender process. At the time it made decisions around those things, the government, from the evidence we have seen, said that those processes should be undertaken on the basis of reducing per capita costs. On the basis of the evidence we have seen, that did not occur.
In response, the Secretary of the Department of Immigration and Border Protection replied:
There is no clean way, frankly, to have a snapshot at one point in time and say, ‘That’s the contract; that’s the amount of money you’ve got; don’t ever vary this,’ because you have got other government directives and you have got intergovernmental discussions going on… …Finance was perfectly comfortable… …to make those adjustments at midyear. So, even on the narrow point – I listened very carefully to what the Auditor-General said about a narrow definition of policy authority – we say we disagree.
Brief examination of ANAO Audit No. 32 (2016-17)
While the Committee was considering the ANAO audit into DIBP’s procurement of garrison support and welfare services, the ANAO tabled a companion audit titled ANAO Audit No. 32 (2016-17) Offshore Processing Centres in Nauru and Papua New Guinea: Contract Management of Garrison Support and Welfare Services.
The findings of the contract management audit reinforce the findings of Audit No. 16 into the procurement process. The Committee was disappointed that the ANAO found DIBP had not applied lessons learnt through previous contract management processes, both specifically relating to offshore processing centres as well as more broadly. The example of a $75 million building being uninsured due to poor record keeping, (the building subsequently burnt down) should provide DIBP with a concrete example of the ANAO’s finding that the department’s practices have led to ‘higher than necessary expense for taxpayers and significant reputational risks for the Australian Government and the department.’
Review of evidence
In Audit Report No. 32, the ANAO pointed to similar issues in the contract management audit to those found in the procurement audit:
Contract management fell ‘well short of effective contract management practice’
DIBP ‘did not have a detailed view of what it wanted to purchase or the standards to apply’
The ‘2014 contract consolidation process was not informed by lessons learned’
‘Substantial contract variations totalling over $1 billion’ were made without a documented value for money assessment
The ANAO found DIBP had not learned the lessons of previous ANAO audits of DIBP contract management, and noted that recurring deficiencies had ‘resulted in higher than necessary expense for taxpayers and significant reputational risks for the Australian Government and the department’.
The audit also found that DIBP ‘did not develop a systematic approach to establishing and maintaining records’—in one instance, DIBP did not:
…update its asset register and advise Comcover of new facilities in Nauru valued at $75 million. As a consequence the facility was not insured when it burnt down in a riot in 2013, shortly after being commissioned.
Further, the ANAO reviewed whether DIBP appropriately used staff delegations to authorise payments, and found:
In respect to $2.3 billion in payments made between September 2012 and April 2016, delegate authorisations were not always secured or recorded: an appropriate delegate provided an authorisation for payments totalling $80 million; $1.1 billion was approved by DIBP officers who did not have the required authorisation; and for the remaining $1.1 billion there was no departmental record of who authorised the payments.
DIBP’s response to this finding was:
The Department disagrees with the claim that a large volume of claims were not appropriately authorised. The vast majority of these payments were fixed monthly contractual fees which are dependent on the numbers of residents in the [Regional Processing Centres].
Senator Dean Smith
13 September 2017