Chapter overview
5.1
The audit found that DAWE’s arrangements in support of its purchase of water entitlements were not fully effective, including through a lack of consistency in applying policy, incomplete information was provided to decision makers (including the Minister), that there was no framework to support the maximisation of value for money in the procurements and the department did not adequately evaluate the program.
5.2
The Committee is concerned that these shortcomings make it difficult for DAWE to demonstrate that the procurements undertaken met the policy objectives and provided value for money.
5.3
Recommendations to address these concerns are made at the end of the chapter.
5.4
This chapter focuses on:
Implementing recommendations
Identifying decision-makers
Consistent application of policies
Managing conflicts of interest
Maximising value for money; and
Background and audit findings
5.5
Chapter 5 sets out the findings of the Joint Committee of Public Accounts and Audit (JCPAA) inquiry into Governance in the Stewardship of Public Resources, based on Auditor-General Report No.2 of 2020-21 Procurement of Strategic Water Entitlements (the audit).
5.6
The audited entity was the Department of Agriculture, Water and Environment (DAWE). DAWE is a non-corporate Commonwealth entity under the Public Governance, Performance and Accountability Act 2013 (PGPA Act).
5.7
The Murray-Darling Basin (the Basin) is a water catchment of significant national importance. Encompassing over one million square kilometres of south-eastern Australia, across New South Wales, Queensland, South Australia, Victoria and the Australian Capital Territory – the Basin is Australia’s largest and most complex river system. Water from the Basin is used for drinking, agriculture, manufacturing and community activity (such as tourism and leisure).
5.8
Declining health of the Basin led to government plans to recover water through infrastructure investment and water purchasing activities.
5.9
The Murray-Darling Basin Authority describes infrastructure investment as ensuring water flows to where it is needed; ‘Dams, barrages and weirs regulate water flows and help deliver of water to communities, irrigators and the environment’.
5.10
Water purchasing activities include strategic water procurements. These aim to recover water from communities, industries and irrigators to ensure that enough water remains in the Basin for environmental purposes.
5.11
As the Australian National Audit Office (ANAO) explained in the audit:
Water entitlements are rights to an ongoing share of water within a particular area of the Basin. An entitlement to water in the Basin can be bought or sold, either permanently or temporarily.
Water allocations are the amount of water entitlement holders are allocated in a given year, and can change based on factors such as rainfall, inflows into storages and how much water is already stored. Allocating water to entitlement holders is the responsibility of the Basin states, and each has its own processes and rules for allocating water.
Water is traded on markets: within catchments, between catchments (where possible) or along river systems. This allows water users to buy and sell water according to their individual needs. The financial value of a water entitlement is determined by the water market.
5.12
In their submission to the inquiry, DAWE explained:
The government’s approach has generally been to prioritise water recovery through infrastructure investment. This has helped strengthen Basin communities and industry while delivering on the Basin Plan’s water recovery targets. Water purchase activities were pursued to secure high priority water to secure environmental outcomes, including the strategic purchases that Auditor-General’s report No.2 (2020–21), Procurement of Strategic Water Entitlements reviewed.
5.13
Previously, water allocation was managed under a cap system. However since 2019 Sustainable Diversion Limits (SDLs) limit ‘the amount of water that can be taken from the rivers for towns, industries and farmers in the Murray–Darling Basin. Each of the 29 surface water areas and 80 groundwater areas has their own limit.’
5.14
There are competing interests for access to water in the Basin. Human uses include drinking, agriculture and manufacturing. But catchments also require a level of water to stay within the system for environmental purposes. Following a number of adjustments, the current recovery target (often referred to as the gap) for surface water is 2075 gigalitres. Whilst SDLs contribute to managing water levels, strategic water procurements help bridge the gap between what the SDLs secure and what is needed to keep the basin flowing with enough water to remain healthy.
5.15
DAWE elaborated on the role of water procurements:
As at 30 September 2020, 1,231.2 gigalitres in long term average annual yield (LTAAY) of surface water entitlements and 35.3 gigalitres LTAAY of groundwater entitlements have been purchased at a cost of around $2.6 billion. This represents around 11% and 2% of long-term surface and groundwater diversions respectively. This water has made a significant contribution to Murray–Darling Basin Plan water recovery targets and the health of rivers, wetlands and floodplains in the Basin while ensuring Basin communities can run their businesses from a sustainable footing.
5.16
The audit focused on DAWE’s 27 completed strategic water procurements between January 2016 and December 2019, undertaken by limited tender arrangements valuing $190 million. Two procurements which commenced but were not completed during audit fieldwork were not included in the audit. These were the purchase of 13,506 megalitres in New South Wales — Murrumbidgee and the purchase of 1159 megalitres in New South Wales — Lower Darling.
5.17
The bulk of procurements (transactions) were from Queensland – Upper Condamine Alluvium catchment area. This included 19 grouped purchases of ground water totalling 912 megalitres. However, the largest procurements in relation to value was the New South Wales – Lower Darling surface water procurement at $79 million and the Queensland – Condamine Balonne surface water procurement at $78.9 million.
Table 5.1: Strategic water procurements through limited tender 2016–2019
|
|
|
|
|
|
|
|
|
No.1
|
Queensland – Border Rivers
|
Surface water
|
April 2016
|
1500
|
256
|
0.4
|
|
No.2
|
South Australia – Murray
|
Surface Water
|
May 2016
|
2500
|
3200
|
8.0
|
|
No.3
|
Queensland – Central Condamine Alluvium
|
Ground water
|
May 2016
|
1850
|
500
|
0.9
|
|
No.4
|
Queensland – Central Condamine Alluvium
|
Ground water
|
June 2016
|
1850
|
334
|
0.6
|
|
No.5
|
New South Wales – Murrumbidgee (Lowbidgee)
|
Surface water
|
January 2017
|
370
|
12,117
|
4.5
|
|
No.6
|
New South Wales – Lower Darling
|
Surface water
|
June 2017
|
1356 3253
|
21,901
|
78.0
|
|
No.7
|
Queensland – Warrego
|
Surface water
|
June 2017
|
1600
|
10, 611
|
17.0
|
|
No.8
|
Queensland –Condamine Balonne
|
Surface water
|
July 2017
|
2745
|
28,740
|
78.9
|
|
No.9
|
Queensland – Upper Condamine Alluvium (19 grouped purchases)
|
Ground water
|
February – May 2019
|
1800 – 2000
|
912
|
1.7
|
|
Total
|
|
|
|
|
78,571
|
190
|
Source: Auditor-General Report No. 2 2020-21 Procurement of strategic water entitlements, p.20. Data is ANAO analysis of information from the department.
5.18
The audit offered further explanation relating to the second largest procurement (in terms of value):
The Lower Darling purchase included 19,361 megalitres of general security entitlements at $1356 per megalitre and 2540 megalitres of high security entitlements at $3253 per megalitre. The purchase also included $40 million (plus GST) in compensation for the transformation of the property to dryland farming, cancellation of works approvals and the decommissioning of irrigation infrastructure.
5.19
The audit also clarified the details of the 19 grouped purchases in the Queensland – Upper Condamine Alluvium catchment:
DAWE conducted the Queensland — Upper Condamine Alluvium limited tender procurement following six open tender rounds held between February 2014 and July 2018. The department sought approval from the Minister to pursue a number of procurements within the unspent budget utilising the maximum price and evaluation criteria published under Round 6 of the open tender.
5.20
The objective of the audit was to examine whether strategic water procurements by DAWE were:
5.21
Conducted consistent with government policy;
5.22
Supported by appropriate program design;
5.23
Planned and executed appropriately; and
5.24
Achieved value for money.
5.25
The audit report found procurement processes were not fully effective and made recommendations relating to:
Internal procurement guidance;
Managing real and perceived conflicts of interest; and
Developing evaluation strategies.
5.26
DAWE agreed to the recommendations and have taken action to implement change.
5.27
Themes emerging from the inquiry that can be applied across the wider Commonwealth include:
How can decision-makers or delegated authorities be better identified;
How can approved policies, planning and guidance be consistently applied; and
How can frameworks for maximising value for money be developed.
Implementing the recommendations
5.28
DAWE provided evidence to the inquiry regarding how it was implementing the changes recommended by the audit:
The department is establishing new governance arrangements to enhance the effectiveness and efficiency of programs administered or overseen by the Water Division, within the Department of Agriculture, Water and the Environment (DAWE).
5.29
The new governance arrangements include the establishment of a Water Implementation Board, which brings together a multi-disciplinary team lead by DAWE’s Deputy Secretary responsible for Water and will include:
5.30
The Chief Executive Officer of the Murray–Darling Basin Authority;
5.31
The Chief Executive Officer of the National Water Grid Authority;
5.32
The Commonwealth Environmental Water Holder;
5.33
The department’s First Assistant Secretary of Water Division;
5.34
The department’s Chief Financial Officer; and
5.35
An independent member with experience in program delivery and risk management.
5.36
The Water Implementation Board acts as an advisory body that provides advice to the Water Division senior executive. It provides:
5.37
Strategic advice on the implementation and delivery of water programs and initiatives in the context of the government’s national and Murray–Darling Basin priorities; and
5.38
Considers any changes in the government or department’s strategic direction that might have implications for Water Division program scope or budgets.
5.39
DAWE did not establish how often the Water Implementation Board will meet and what issues would be brought forward for consideration by the Board.
5.40
DAWE also noted that ‘A new area focusing on program excellence is also being established within the department’s Water Division to complement existing corporate services.’ This new area will:
5.41
Provide best practice advice and support in program design, development, administration and review;
5.42
Ensure effective program evaluation is in place for Water Division programs; and
5.43
Ensure, as part of the department’s culture of continuous improvement, that staff are aware of new developments in program design, implementation and evaluation and what is needed to comply with requirements.
5.44
The implementation of recommendations made by the Auditor-General are discussed in further detail below.
Identifying and informing decision-makers
5.45
The audit highlighted the need to identify who could make decisions relating to the procurement, including sign-off powers and the importance of ensuring decision-makers were adequately informed. The ANAO found that materials provided to both the Minister and internal decision-makers did not include all relevant information:
Briefings to the Minister did not provide a clear indication of how the procurements would obtain a triple line outcome as in the original commitment. The department did not consistently provide complete information to enable departmental decision-makers to make informed decisions.
5.46
The ANAO also noted that there were inconsistencies in internal briefings on advice as to under what delegation an individual was authorised to provide approval. This included 21 procurements where the statement about the individual’s delegation authority was either absent or incorrect.
5.47
Accordingly, the ANAO recommended:
The Department of Agriculture, Water and the Environment review and update internal procurement guidance to ensure delegations are accurately identified in approval briefs.
5.48
DAWE agreed to the recommendation, clarifying:
The department has extensive procurement guidance and templates available to support procurement processes which are periodically updated and reviewed.
5.49
In its submission, DAWE elaborated on how it was improving internal procurement guidance. Measures include:
Day to day support from the Financial Compliance Section and Office of General Counsel to all staff, regarding delegations;
Templates that ensure sufficient information on the delegation is captured and included in decision making briefs;
Mandatory e-learning modules, completed as part of staff induction, or annually or biannually thereafter;
A staged communication campaign over September and October 2020 to promote procurement guidance and templates; and
Plans to continue regular communication activities.
Consistent application of approved policies, planning and guidance
5.50
The audit found that DAWE did not consistently apply approved policy, planning and guidance to the assessment of all limited tender procurements, and that ‘it is not clear’ whether two of the Minister’s seven instructions to the department were fully executed. Therefore the ANAO recommended:
The Department of Agriculture, Water and the Environment develop assurance mechanisms for procurement processes to ensure all necessary documentation is completed and documented in a timely manner prior to the execution of contracts.
5.51
DAWE agreed with the recommendation.
5.52
DAWE did not consistently apply the guidelines it developed to procurements, including four which were assessed and provided to the Minister for approval before the guidelines had been fully developed and approved.
5.53
In their submission DAWE explained how they had improved assurance mechanisms:
The department’s Water Division has updated its administrative and other procurement-related processes for conveyance of water entitlements, including the Water Division Conveyance Manual. This manual now includes specific instruction regarding ensuring contracts are dated when signed, and that due diligence processes are conducted prior to execution of contracts.
Managing conflicts of interest
5.54
While no conflicts of interest were found by the ANAO, the audit identified inconsistencies with the declaration process for limited tender and open tender procurements, and valuers undertaking work on behalf of the department.
5.55
The ANAO recommended:
The Department of Agriculture, Water and the Environment review and update arrangements for managing real or perceived conflicts of interest including assurance mechanisms to ensure these are consistently implemented and applied.
5.56
DAWE agreed with the recommendation, and updated its conflict of interest policy in March 2021. A communications campaign to raise staff awareness of their obligations was scheduled for June 2021.
5.57
More specifically, the Water Division has ‘implemented a separate Water acquisition and divestment declarations of interests policy’.
5.58
The Water Division specific policy requires any person involved in the process – including independent valuers – to make regular declarations of real or apparent conflicts of interest.
Maximising value for money
5.59
The ANAO found that DAWE ‘did not develop a framework designed to maximise value for money’, and that ‘in the advice to the Minister and the departmental delegate, information relating to a value for money assessment as well as triple bottom line outcomes was limited’. In only one instance did DAWE negotiate the price of the water entitlements it purchased.
5.60
While DAWE commenced work on two value for money approaches for the procurement of strategic water entitlements, neither was completed. As the ANAO observed, ‘a documented and approved value for money approach would have assisted the department to more clearly demonstrate its achievement of value for money’.
5.61
DAWE explained that price is one element, but not the only one, in determining value for money:
Price was one component of the decision, but, in accordance with the Commonwealth Procurement Rules, the delegate also considered other factors, including non-financial benefits. Essentially, the main reason for this acquisition was to recover water for the environment from irrigation purposes, in accordance with the Basin Plan.
5.62
Non-financial benefits considered as part of the acquisition included:
There was the low risk of acquiring the water, which had a security of tenure through to 2111. There was the fact that it was quite a large amount of water. In the Condamine-Balonne, the Basin Plan requirement was to recover 100 gigalitres of water for that particular catchment, and these two entitlements amounted to 78 gigalitres. There was the environmental value of the water to the Commonwealth Environmental Water Holder. We saw that come to fruition last year, when she was able to use this water basically to keep the Narran Lake Ramsar wetlands alive. And the fourth non-financial consideration of the delegate was the low socioeconomic impact of acquiring this particular parcel of land.
[…] There were concerns about acquiring parcels of land from a range of primary producers in the area and the impact that it would have in terms of taking water out of productive use on small regional and rural communities. The view—and this is also set out in the question on notice—was that acquiring this water wouldn't have a significant socioeconomic impact.
5.63
Therefore, while acknowledging that the process could have been improved, DAWE maintains that it achieved value for money:
While the department considers value for money and targeted Australian government outcomes that have been achieved under these programs, the department appreciates that improvements can always be made to program administration.
5.64
In light of the suggestion that the procurements did not represent value for money, DAWE responded:
the delegate based his decision on the basis that the market valuation provided by Colliers included advice that, if the analysed sales were offered today, an improvement in value could be anticipated in the order of 10 to 30 per cent. It was on the basis of that advice that the price per megalitre that was ultimately paid was determined, as part of the delegate's decision. I would also note that the Auditor-General provided advice in Senate estimates that the interpretation was reasonable.
5.65
However, as the audit identified, DAWE did not undertake negotiations on all but one of the procurements. The Auditor General explained how critical negotiations are to demonstrating value for money:
The audit doesn’t go to the point of saying that the price paid was value-for-money. In fact, it makes comment which indicates that’s not our view, that the departments didn’t maximise value-for-money. This is from our commentary on the framework that was put in place and, more particularly, the point that our expectation would be that, even when you establish a benchmark and start talking to willing buyers within the benchmark, the job our public sector procurer is to try to negotiate the best price for the taxpayer. The audit report is critical of the department not undertaking negotiations.
More simply: if the offer fell within the range, just accept it. In an environment where you don’t have active markets and so you don’t necessarily know what the prices and are using benchmarks, we would have an expectation that, to achieve value for money, there should have been a stronger negotiation process. So I wouldn’t like our report to be typified as saying that we think that every price paid maximised value for money for the taxpayer, because I don’t believe that’s what it says.
5.66
The ANAO also addressed the use of benchmarks:
Effective stewardship also requires thoughtfulness on achieving value for money. Officials focus on achieving deliverables within time and within budget. The limit of the available budget, however, should not be used as a benchmark for what is reasonable or appropriate price to pay. Similarly, the upper limit of an estimated price range should not be the starting point for making an offer. Although the program design and planning to support strategic water procurement was largely appropriate, its application was not sound with inconsistencies and design flaws in tender assessment (methodology). There was little negotiation of price offered and valuations accepted at face value.
Too often we see entities operating as price-takers in the market. Entities need to drive value in procurement by maintaining competitive pressure, by negotiating or by at least asking for a better deal for the taxpayer.
Evaluation strategies
5.67
Related to the question of achieving for value for money is the evaluation of the program. The audit found that DAWE had not reviewed or updated the Water Recovery Strategy or the water purchasing program. The ANAO recommended:
The Department of Agriculture, Water and the Environment implement a framework which requires the development of evaluation strategies early in the program design process and regular monitoring and review throughout the lifecycle.
5.68
DAWE agreed with the recommendation, and engaged RM Consultancy Group Pty Ltd to undertake an evaluation of the water purchasing program. DAWE expected this to be finalised mid-2021.
Committee comment
5.69
The Committee notes that the ANAO audit identified a number of concerns with the governance arrangements DAWE had in place for the water procurements considered in the audit. These included issues with consistently applying approved policy, planning and guidance; adequately advising the Minister; making delegations clearer; ensuring contracts were properly executed and reviewing the strategy. The Committee notes that these are fundamental practices which agencies should have in place, and is concerned by the extent of the ANAO’s findings in this audit.
5.70
The Committee notes that DAWE has agreed to the recommendations and was able to outline measures it is taking to address the audit’s findings.
Delegations and advice to decision-makers
5.71
The Committee notes that the audit found deficiencies in DAWE’s briefing to both internal delegates and the Minister. Adequate advice to decision-makers is vital for procurements to be appropriately considered and approved. The Committee therefore welcomes DAWE’s advice regarding improvements it has made to its internal procurement guidance and hopes this leads to improvements in future procurement activities.
Consistent application of policies
5.72
Noting that DAWE outlined measures it has taken to ensure consistent application of policies in the future, the Committee emphasises that agencies undertaking procurement programs must ensure that that they have appropriately approved and consistently applied guidelines and policies.
5.73
While procurement training materials and templates were available to staff, there appears to be a gap with staff actually understanding and applying these tools. The Committee notes DAWE’s attempts to better communicate with staff about procurement standards, including mandatory training, and looks forward to improvements to DAWE’s procurement practices.
Managing conflicts of interest
5.74
Although no conflicts of interest were identified by the ANAO, it is of concern that there appears to be a lack of consistency around the declaration of conflict process. The Committee notes the departmental conflict of interest process and the Water Division specific policy. The Committee will be seeking assurance from DAWE that all staff comprehend their procurement responsibilities in the future.
5.75
The Committee recommends that the Department of Agriculture, Water and the Environment provide a report on whether the Water Division’s conflict of interest policy has identified any direct or perceived conflicts of interest that would not have been identified by the department’s broader policy in this area.
Value for money
5.76
The Committee notes that whilst DAWE agreed with the Auditor-General’s recommendations, there are several key areas where there remains a difference of opinion, including the question of whether DAWE achieved value for money with its procurements. The Committee notes that DAWE’s lack of a framework designed to maximise value for money, and that it negotiated price in only one procurement, falls short of best-practice procurement.
5.77
Acknowledging that many factors need to be considered in assessing value for money of procurements under the water purchasing program, the Committee emphasises to DAWE that establishing a framework by which value for money can be measured and assessed should be fundamental to any procurement program.
5.78
The Committee recommends that relevant delegates at the Department of Agriculture, Water and the Environment undertake probity and negotiation training to develop staff capacity for future procurement activities.