Chapter overview
3.1
Auditor-General Report 31 (2019-20), Management of Defence Housing Australia, found that Defence Housing Australia (DHA) had not benchmarked the efficiency of its main function or established whether it had been effective in improving Australian Defence Force (ADF) retention. In addition, the DHA Board had not addressed specific enterprise-level risks in a timely manner.
3.2
At the time of the inquiry, DHA and the Department of Defence (Defence) were seeking to incorporate specified key performance indicators (KPIs) into a revised Defence service agreement, to address the audit findings. The Committee requests a detailed update on implementation of these KPIs, and also that DHA report on how the DHA Board is ensuring strategic oversight of regulatory compliance risks; the outcomes of the 2021 review of the use of civilian tenancies; and implementation of revised procurement arrangements.
3.3
Recommendations are made to this effect at the end of the chapter.
Background and audit findings
3.4
Chapter 3 sets out the findings of the Committee’s inquiry into Governance in the Stewardship of Public Resources, based on Auditor-General Report 31 (2019-20). Commonwealth entities included in the audit were DHA, Defence and the Department of Finance (Finance).
3.5
The audit objective was to assess whether DHA administers its functions efficiently and effectively, and in accordance with government business enterprise (GBE) guidelines. The Australian National Audit Office (ANAO) made four recommendations (agreed by relevant entities) in response to the following audit findings:
DHA has reported to Defence and shareholder ministers that it is both efficient and effective in the provision of housing to Defence. DHA has not benchmarked the efficiency of its main function. DHA has not established whether it has been effective in improving Australian Defence Force retention rates. The DHA Board, which is DHA’s accountable authority, has not addressed specific enterprise-level risks in a timely manner. DHA finalised a new business model in November 2019, addressing business sustainability risks that had been identified in 2015.
3.6
DHA is established under the Defence Housing Australia Act 1987 (the DHA Act) and is a corporate Commonwealth entity, and GBE, under the Public Governance, Performance and Accountability Act 2013 (PGPA Act). The DHA Board is DHA’s governing body and its accountable authority under the PGPA Act. DHA’s main function is to provide housing and housing-related services to members of the ADF and their families. As a GBE, DHA is expected to operate as a commercial organisation and deliver financial returns to the Commonwealth. DHA obtains income from land and property development ($140.1 million in 2018-19); its Property Investment Program ($156.6 million in 2018-19); and disposal of property DHA no longer requires ($35.4 million in 2018-19).
3.7
Historically, DHA adopted a business model as a ‘property developer’. Under this model, DHA built dwellings for Defence use on some of its property and sold the remaining developed lots to investors, with these properties then being leased back, for some six-to-twelve years, for the use of ADF members. DHA is currently implementing a revised business model, following an earlier review that found its former business model was ‘not sustainable’.
3.8
Chapter 3 focuses on:
Service agreements—performance reporting
Service delivery—effectiveness and efficiency
Procurement—value for money and conflict of interest declarations
Role of the DHA Board—managing risk
Finance review of GBE guidelines
Service agreements—performance reporting
3.9
The Commonwealth performance framework, established under the PGPA Act, requires Commonwealth entities to measure and assess the performance of the entity in achieving its purposes. At the time of the inquiry, DHA’s services to Defence under the DHA Act were provided through two agreements: the Defence Services Agreement (DCA) and the Members Choice Agreement (MCA). Defence monitored DHA service delivery using DHA reports against key performance indicators (KPIs) set out in the DSA and MCA. The audit found that, while there are agreed performance measures in the service agreements, these are ‘indicators of activity and do not provide an adequate basis for assessing whether DHA’s delivery of housing services has met the agreements’ objectives’. In the DSA, ‘none of the existing KPIs helps to gauge the stated objectives of achieving operational efficiency or value for money’, and ‘measuring the cost-effectiveness of the arrangement would require some comparator … but none is provided’. In the MCA, the KPIs ‘shed no light on efficiency, cost-effectiveness or value for money’, to measure performance against the agreement’s objectives. Accordingly, the audit recommended DHA and Defence agree on KPIs to measure performance against all the objectives of the service agreements.
3.10
DHA and Defence provided an update on implementation of the audit recommendation, noting that DHA and Defence had undertaken a review of the existing service agreements with the aim of creating a single agreement to cover all services provided by DHA to Defence. Objectives and KPI options had been drafted as part of the review, to ‘ensure greater clarity and transparency in relation to the services DHA provides Defence while also ensuring the services represent value for money for the Commonwealth’. DHA further confirmed that the revised agreement would include ‘a series of KPIs directly linked to the objectives’. DHA’s delivery of housing services would then be assessed against a series of performance measures, including ‘quality, location of housing, timeliness of services and member satisfaction with services’, with the results being reported to the Board and shareholder departments on a regular basis. DHA stated that the revised performance framework would come into effect at the same time as the revised service agreement, on 1 July 2021, ‘subject to relevant approvals’.
Service delivery—effectiveness and efficiency
Effectiveness
3.11
DHA has measures of effectiveness in place to assess its provision of housing for members of the Defence Force and their families. In its Corporate Plan 2018-19 to 2021-22, DHA established two purposes (along with a set of KPIs attributed to these purposes): to provide value to DHA shareholders, and to provide quality housing and related services. DHA had been ‘largely effective’ in returning a dividend to the Commonwealth and in the delivery of the services it provides under the DHA Act. In terms of the first purpose in the Corporate Plan, DHA had paid nearly $2 billion in dividends to the Commonwealth over the last 20 years and, since 2004-05, the mean dividend payment had been about $44.2 million. However, in terms of the second purpose in the Corporate Plan, the audit found that, while DHA’s performance in delivering services was ‘monitored and reported on regularly’, ‘no work’ had been done to ‘assess the effect of DHA’s services on ADF member retention’—yet a major reason for creating DHA was to improve the standard of Defence housing so as to address low ADF member retention rates.
3.12
Asked about this matter, Defence pointed to the feedback provided in surveys:
Over the 30-odd years of DHA’s existence we’ve seen a remarkable improvement in the quality of housing that we make available to our ADF members with dependants. We track through surveys … what people are thinking about why they might stay or why they might leave the ADF. We know through those surveys that the quality of housing, the location of housing and the configuration and size of properties we provide for people makes a difference in [ADF] people’s lives … … … We require a mobile ADF workforce. Many people in the ADF would be posted on a two-year cycle ... We post about one-third of the ADF every year, and many of those moves require geographic moves. The ability to know that, at the place you’re moving to, particularly if you have a family, there’ll be a good quality property available is a significant incentive for people to stay with us through what is really quite a difficult process.
3.13
Noting the audit statement that Defence ‘could not provide any metrics or data that indicate the effect of housing adequacy on member retention or separation’, Defence stated: ‘we’ve grappled with this issue of “is there a metric … [that] links the quality of a house that might be provided and the service through DHA with a quantifiable retention metric?”’. On this point, the Defence Deputy Secretary observed: ‘I don’t actually think there is, but if someone has an idea we’re happy to look at it … At the moment, we’ve been using survey data; people’s expressed views’. Asked about the audit finding that ‘no work’ had been done to ‘assess the effect of DHA’s services on ADF member retention’, the Defence Deputy Secretary stated:
I think in the report the statement is completely valid because it’s talking about quantifiable metrics. My view is that that’s quite hard. We’ve done a lot of work over the years in terms of understanding the effect of the whole employment offer that we offer to the Australian Defence Force … … … Housing is part of that mix. We look at it … through the various survey data … We’re looking at this and, if we can discover a metric that would link definitely an investment in housing or an adjustment of the housing policy to a definitive retention, we’d be very happy to use that, but what we know from surveys … is that there is always a range of factors that influence an individual’s propensity to stay or leave the Australian Defence Force.
3.14
In response to Defence’s observations, the Auditor-General emphasised that the audit findings on this matter were not necessarily about ‘having something that can quantifiably measure the impact’ but about ‘having a framework that can house the key reason for the organisation [having been] established to be identified and reported on to parliament … to provide some assurance that what the entity’s established for … is actually being achieved’:
It’s about providing an assessment and indicator framework which provides information to management and to the parliament about the success of the program. The framework that exists for public sector reporting is one which emphasises the importance of the qualitative as well as quantitative evidence and how that’s reported on to parliament to give them assurance about performance of entities.
3.15
As the ANAO further noted: ‘we did make a recommendation for the department and the agency to agree key performance indicators that relate to and support the measurement of performance against all the objectives of the service agreement … that’s got to be in a framework of the outcome and purpose of the organisation’—‘so what we’re looking for is whether there is some way in the performance reporting to address that purpose’.
3.16
Defence noted that its work on the retention impacts of ADF housing was expected to be completed when the new services agreement was in place, by mid 2021, and confirmed: ‘we’re working at the moment on how that will look in terms of KPIs and, as the auditor suggested, the framework around how we consider the service provided by DHA. That goes particularly to retention’. Defence further observed that its existing services agreement has eight KPIs, but these didn’t ‘go to the “so what”, as highlighted in the audit—whether that affects retention. That’s the bit that will be the most difficult to grapple with’—‘in the end we’ll be looking more at qualitative assessment through surveys’. The DHA/Defence submission stated that, ‘while it is difficult to isolate DHA’s provision of housing and housing related services in determining retention rates, Defence considers it to be an important retention lever’. Defence confirmed that it was ‘investigating options (such as survey adjustments) with a view to providing more detailed insight in future into the retention impacts of ADF housing benefits’. In terms of such surveys, DHA and Defence noted that ‘Family and home benefits’ were ranked by ADF members as ‘one of the top five’ most important elements of the employment package in the 2019 Optimising the Defence Employment Package survey. In addition, the next Defence Census, to be conducted in 2023, will include ‘a set of survey questions related to housing that can support a better assessment of the role the services DHA provide impacts on ADF retention’. DHA had also started analysing the data from the 2019 Defence Census in relation to housing, ‘with a more detailed analysis, including demographic data, to be conducted in 2021’.
3.17
As to whether Defence had previously undertaken qualitative and quantitative assessment of the retention impacts of DHA housing, the Deputy Secretary, Defence, noted that the New Housing Classification Policy, implemented in 2007, was about ‘adjusting the quality’ of DHA housing—‘one of the key focuses at that time was about ensuring that what we provided … would serve to keep people attracted to staying … So I can assure you that within Defence it’s always one of those parts of the conversation: how does the housing offer contribute to the overall employment offer package, which is all about retention’.
Efficiency
3.18
DHA has three measures to assess its performance in terms of business efficiency, as required by the GBE guidelines, and reports publicly on these measures. The audit noted that DHA had ‘reduced the rate of growth of its operational expenditure in recent years’ and, while it had ‘not yet made the savings identified by its Project Symphony in late 2018’, DHA had developed savings initiatives to be implemented over the next 18 months as part of a revised business model agreed by shareholder ministers in December 2019. However, the audit found that DHA had ‘not developed a performance measure of its operating efficiency’ and could not report on ‘how much it costs on average to produce the services it delivers to Defence’. At the time of the audit, Defence advised the ANAO that it had developed a detailed costs allocation model to identify and allocate costs across its business activities, and that it continues to refine that model. DSA and Defence provided an update on this matter as part of the Committee’s inquiry, confirming that, as part of the work in reviewing and revising KPIs in response to the audit recommendation on this matter, they were ‘considering the introduction of a KPI to measure operational efficiency’.
3.19
The audit further noted that DHA had ‘not benchmarked’ the efficiency of its main function, in terms of comparing its internal processes with other organisations providing comparable services, to identify best practice. In 2012, DHA had analysed the costs of DHA service residences compared with the use of rent allowance, with this study indicating that Defence received better value from service residences—however, this work had ‘not been updated’. Accordingly, the audit recommended that DHA and Defence update this 2012 study. The DHA/Defence submission provided an update on implementation of the audit recommendation, noting that DHA had engaged PwC to conduct a study on this matter, based on the methodology applied in 2012, and using data from DHA and Defence. The PwC report, completed in February 2021, found that, ‘on the whole, service residences are of greater cost to Defence than rental assistance arrangements, and rental assistance arrangements were of greater cost to ADF members than service residence arrangements’. DHA further stated that, ‘although useful as a cost study of the alternative housing solutions, the report provides only limited support in the assessment of DHA operating efficiency over time, due to the difference in housing arrangements being compared and factors relating to ADF employment objectives’.
Procurement—value for money and conflict of interest declarations
3.20
As a corporate Commonwealth entity under the PGPA Act, DHA is not required to adhere to the Commonwealth Procurement Rules (CPRs)—however, DHA’s approach to procurement ‘reflects the core policies and principles of the CPRs’. DHA management established a single, organisation-wide procurement model with policies, procedures and an electronic workflow system. However, procurement policy documents posted to DHA’s intranet ‘lacked authorised version control information’, presenting a risk to DHA that key policies could be amended without authorisation of the DHA Board. Accordingly, the audit found there was scope to improve the controls underpinning the current procurement policy and the selection of an approver in the electronic workflow used for procurement—compliance checking conducted by DHA indicated ‘multiple instances of non-compliance with procurement policy, including non-compliance with delegations’.
3.21
DHA and Defence confirmed that, following an Ernst & Young (EY) compliance review in July 2020:
DHA has been streamlining its procurement policies and procedures. An Accountable Authority Instruction for procurement has been implemented and DHA has chosen to adopt the Commonwealth Procurement Rules as its head of authority for procurement. Other Commonwealth entities’ procurement arrangements are being accessed where they represent better value for money, such as the whole of government travel and legal arrangements, and the digital marketplace. In addition, DHA is using the Commonwealth Contracting Suite and Source IT contract templates. The new approach enables consistency of decision making, documentation and compliance with the … PGPA Act.
3.22
The EY compliance review also recommended that DHA provide ‘additional training and information to those undertaking procurement processes to increase their understanding of record keeping and documentation requirements’, with DHA noting, in response, that ‘procurement policies, procedures, tools and training are currently being developed and will be implemented in the second half of 2021’. DHA confirmed that it was ‘in the process of implementing all three of the recommendations’ of an EY audit of DHA procurement processes in November 2020. EY recommended that DHA ‘embed’ the improvements underway at the time of the EY audit; ‘develop a governance framework for monitoring and managing procurements’; and ‘develop key system solutions to enable the procurement process’. A ‘rolling cycle of compliance audits’ will be included in DHA’s annual internal audit program, which periodically covers procurement.
3.23
The audit also noted that DHA had ‘appropriate processes in place to assure itself that it achieves value for money in property acquisitions,’ by having ‘independent valuations’ conducted for each purchase, completing ‘due diligence checks prior to committing to purchase’, and having ‘higher value purchases approved by senior staff’. However, assurance provided to the accountable authority, the DHA Board, regarding value for money in purchasing arrangements more generally would be ‘enhanced by improved management of financial delegations and powers of attorney’ (POAs). At the time of the audit, DHA advised the ANAO that it was reforming the delegations framework and the use of POAs. On the financial delegations framework, DHA and Defence confirmed that, in July 2020, DHA’s Section 65 Financial Delegations Instrument was ‘refreshed’, and additional systems controls, supporting the revised delegations, had also been implemented ‘across DHA’s financial management system and workflow management system’. On POAs, DHA advised the ANAO that:
General POAs registered in each jurisdiction continue to be valid and will remain so unless DHA decides to revoke them. Legal advice confirms that DHA is able to make POA appointments to a position or to an individual. As better practice is to appoint POA to a position, DHA executed an instrument under the DHA Act, which revoked all POA appointments to individuals and appointed POA to seven Senior Executive Group positions.
3.24
On a further matter, DHA policy requires annually updated conflict of interest declarations. However, some ‘one-in-five staff’ had not completed a declaration, and DHA ‘did not retain records for the completion of declarations for the 13 Senior Executive Service officers employed’. In March 2020, DHA advised that it had improved the completion rate for conflict of interest declarations by staff across all classifications, except DHA Level 5.
Role of the DHA Board—managing risk
3.25
The Commonwealth Risk Management Policy, established under the PGPA Act, requires Commonwealth entities to establish and maintain systems and appropriate internal controls for the oversight and management of risk.
AAIs, and DHA Board as the accountable authority
3.26
At the time of the audit, the DHA accountable authority, the DHA Board, had not issued accountable authority instructions (AAIs) under the PGPA Act. AAIs are not a requirement of the PGPA Act—entities may have a suite of policies that serve the same purpose—however, AAIs are binding on officials because they are an instrument made under the PGPA Act and form part of the finance law. During the audit, DHA provided the ANAO with a schedule of 30 documents representing DHA policies (with reference to corresponding items in the model AAIs). Five of these documents had been ‘approved by the managing director and others by lower level managers’—however, the audit found that, with one exception, there was ‘no evidence that key policies were endorsed by or issued with the authority of the Board’. As part of the Committee inquiry, DHA and Defence provided an update in response to this audit finding, confirming that, ‘in June 2020, the DHA Board approved AAIs’. The AAIs have been designed to ‘assist the DHA Board meet its duties under the PGPA Act by creating an environment that supports the proper use and management of public resources, while applying risk-based controls in order for DHA to achieve its objectives’.
3.27
An accountable authority ‘cannot delegate the duty to govern the entity nor the duty to establish and maintain systems relating to risk and control’. Under section 11 of the DHA Act, determining DHA policy with respect to any matter is a function of the DHA Board. Against this background, there was interest at the public hearing in a statement by DHA and Defence that, ‘in issuing the AAIs, the DHA Board instructed the Managing Director to approve DHA policies and internal directives—which are integrated with the Managing Director’s power of delegation under section 65 of the DHA Act’. Asked whether this was an appropriate delegation or represented a ‘devolving of responsibility’ from the Board to management, DHA responded that ‘what the AAIs do is provide a framework on key areas of decision-making and policy, and then, from there, certain delegations can flow. For example, under the AAIs sits section 65 of the DHA Act, which relates to financial delegations that the managing director issues to the staff’. In terms of who determines the financial thresholds of expenditure at different levels of the organisation, DHA confirmed that, ‘under section 65, financial delegations, it’s the managing director—within certain parameters’. As DHA further added:
in effect, the board, as the accountable authority, does establish the policies, which are dictated through the accountable instructions. Those … do include delegations. The board does set parameters about what level of expenditure needs to come back to the board … … … In effect, the act basically says the managing director is responsible for the operation of the business.
3.28
As to whether the DHA Board has line of sight to these delegations throughout the organisation, DHA stated that ‘the board is the accountable authority, and the board is ultimately responsible, in accordance with their duties under the PGPA Act’. Finance provided additional information on how such delegation instruments are consistent with Board directors’ obligations:
It’s quite usual in the governance of organisations within the public sector, and certainly for GBEs such as DHA, for the board to establish systems of internal control, as is their responsibility as the accountable authority; to establish delegations for the managing director; and also establish the frameworks around the operation of the organisation, which includes what they require line of sight on and what they would like to approve. Then they will delegate the residual matters—everything else they want to delegate to the managing director … —and then that individual will establish the delegations below them within the organisation under the broader authorities provided by the board through the accountable authority instructions.
3.29
Finance further explained that line of sight on the managing director’s exercise of such delegations ‘would ordinarily occur through regular financial and other reporting back to the board’. DHA stated that, ‘in the creation of financial delegations and, indeed, the AAIs before them, legal advice was sought along the way to ensure that the delegations were (1) fit for purpose and (2) legally appropriate’. Noting the DHA Board’s governance responsibilities, and that regular reporting to the DHA Board is critical to such arrangements, to provide line of sight, DHA were asked whether regular reporting to the DHA Board had occurred. The DHA Managing Director responded:
Yes, it has. I took over as managing director in May 2019, and since that time there has been significant work done with the board, assisted by the ANAO audit, on issues around accountable instructions and around the board audit and risk committee, enhancing the role that they play. Certainly my reporting through to the various committees, such as audit and risk, and the board is fulsome and transparent, to ensure that the board is fully aware of how I am running the business … I’m very comfortable now that the operation between me and the board members and the various committees is fully meeting expectations.
Enterprise-level risks
3.30
The audit concluded that the DHA Board had ‘not addressed specific enterprise-level risks in a timely manner’:
The DHA Board has not established effective governance arrangements to support the provision of housing and housing-related services to ADF members and their families. In regards to specific enterprise-level risks examined by the ANAO, the DHA Board:
took until November 2019 to finalise a new business model addressing risks to business sustainability identified in 2015—a matter that was resolved only after ministers intervened and set a deadline;
only recently refocused its attention on risks relating to DHA’s scope of power, which were originally identified over a decade ago; and
had not sought assurance from DHA management regarding compliance with state and territory residential tenancy legislation.
3.31
Each of these matters is discussed below.
Revised business model
3.32
Since 2015, Finance has undertaken two reviews of DHA—the Defence Housing Australia Scoping Study (April 2015), which found that DHA’s operating and funding model required change as it was ‘not sustainable’ in future; and the Forensic Review of Defence Housing Australia (February 2016), which found that DHA’s business model was ‘no longer viable’. The audit noted that the DHA Board took until November 2019 to finalise a revised business model addressing risks to business sustainability identified in 2015—‘the new model … was finalised some four years after DHA had been warned that its former business model was not sustainable, and after the DHA Board had received a specific request and deadline from ministers’. Asked about this matter at the public hearing, noting a delay related to the Accounting Standard (AS) on leases, DHA explained that:
there had been considerable work done by DHA, in conjunction with Finance and Defence, in looking at its operating models and, in particular, the impact around our focus on the development work. Certainly in the corporate plan that we provided to shareholder ministers in June 2019 … we highlighted that there was a need for a dramatic shift. We haven’t seen the impact of AS 15 and 16 and, given we have some 16,000 leases, it was a huge job to design a system to allow us to do it. We identified in that corporate plan that we needed to make a change. The ministers wrote back to us on 30 August agreeing that we needed to make that change, so that is the letter the ANAO is referring to. They quite rightly said that they would like this settled by 18 November.
3.33
DHA’s revised business model, launched in February 2020, will reduce acquisitions and developments and increase leases from the market, to align with DHA’s operational requirements and reduce exposure to construction risks. The DHA/Defence submission provided further information about the revised DHA business model—in particular, that the revised model ‘refocuses DHA on its core purpose’. DHA and Defence further noted that DHA had ‘successfully undergone significant transformation’ since the launch of the revised model, ‘moving closer to a purpose-led service delivery organisation where service delivery is more aligned with contractual requirements, without reducing services to ADF members’.
Scope of power—land development and civilian tenancies
3.34
On land development, the DHA Board was ‘advised over a decade ago … of a risk of DHA exceeding its statutory powers in developing land, particularly where the greater proportion is intended for sale and not for housing ADF members’. The audit found that the Board had ‘not acted’ to control this risk and had ‘not ensured that DHA has operated only within its authority’. Defence was provided with legal advice by the Australian Government Solicitor (AGS) in 2005 that there are ‘limits on DHA’s power to develop land’—specifically, Defence was advised that ‘the Commonwealth does not have power to establish an authority to carry on generally the business of a land developer’. Over subsequent years, one of DHA’s principal means of providing housing for ADF members has been by buying vacant land and developing it. DHA has retained a proportion of this land to build housing for Defence members, and then sold the remaining developed blocks, with the resultant revenue forming a source of capital for DHA’s ongoing operations. In December 2019, DHA received final advice from its legal advisers, confirming that it ‘can acquire and develop land in circumstances where the provision of housing to the ADF is the specific and genuine purpose of the development’.
3.35
On civilian tenancies, DHA received legal advice in 2013 that, under the DHA Act, it can maintain civilian tenancies properly ‘only in narrow circumstances for short-term vacancies’—however, ‘a legal risk arises as DHA maintains some civilian tenancies in circumstances which it identifies as permanent’. On 18 December 2019, DHA received updated legal advice on this matter, incorporating a procedural guide to help it decide whether it can reasonably lease a DHA house to members of the public, according to the circumstances of each case.
3.36
The audit recommended that DHA follow procedural advice received on decision-making on land development proposals and civilian tenancy to ensure its activities remain within its statutory powers and within Commonwealth constitutional power, and record its deliberations on such decisions. The DHA/Defence submission provided an update on implementation of the audit recommendation, stating that DHA is committed to ‘continuing to conduct its activities in accordance with its statutory powers, for the principal purpose of providing adequate and suitable housing to members of the ADF, Defence and their families’. On land development, DHA noted that it had sought ‘legal advice on this matter in 2005; 2008 … 2012; 2013; and 2018. The legal advice was always consistent, but it was repeatedly done to ensure that some of the larger projects were still fitting into the broader analysis’, with AGS having provided ‘a matrix, almost a decision-making tree, to go through when we can play the role of developer and when we shouldn’t’. DHA and Defence further noted that DHA was undertaking a review of its use of civilian tenancies, following receipt of procedural advice from AGS and changes in provisioning strategy, and had ‘suspended entering into new civilian tenancies in September 2020 while the review occurs’.
State and territory legislation
3.37
In 2016, DHA identified that, in a number of state and territory jurisdictions, its standard lease agreement with sale and leaseback investors was not in the form prescribed by legislation in those jurisdictions. The audit noted there was ‘no evidence that, subsequent to the matter being drawn to its attention, the DHA Board sought assurance from management regarding compliance with state and territory residential tenancy legislation, or considered the risks of non-compliance’. As of late 2019, DHA efforts to resolve these issues were underway but not yet complete. DHA provided an update on this matter at the public hearing, stating that:
the work was transferred to the AGS. The reason for the transfer was that … this work involves constitutional issues, which the AGS are placed to do. Mindful of the fact we have some 17,000 leases out there across multiple jurisdictions, we are comfortable in saying now that version 7 of the lease does comply with the various territories and states that it’s operating in, and that has involved a significant piece of work in separating the lease agreements with some of DHA’s operating practices … … … we then had the issue of washing through some 16,000 legacy leases to try and bring them up to speed … … … We are managing that very closely through our operational requirements.
Service agreements
3.38
The audit found that, while DHA and Defence had established long-standing service agreements for the provision of Defence housing, they were ‘not wholly fit-for-purpose’, as DHA had ‘not clearly established’ whether some of the persons provided with housing to satisfy Defence requirements—such as philanthropic representatives and military exchange personnel—are encompassed by the DHA Act. DHA management sought legal advice in October 2013 on whether it could provide housing for foreign military personnel and was told ‘it could not’. Accordingly, the audit recommended that DHA and Defence align Defence requirements for housing philanthropic organisations assisting the ADF, and foreign exchange and visiting military personnel, with the DHA Act.
3.39
The DHA/Defence submission provided an update on implementation of the audit recommendation, noting that DHA and Defence had adopted AGS advice in determining the approach to resolving the recommendation. As an interim arrangement for philanthropic organisations, Defence had implemented changes to its agreements to enable eligible philanthropic personnel to be housed by DHA, ‘on the basis that DHA is able to provide housing to “persons contracted to provide goods and services” to the ADF, Defence and their families’—with reference to subsections 5(1)(c) and (d) of the DHA Act. However, DHA and Defence confirmed that ‘legislative change is required in order to properly resolve the provision of housing to both philanthropic and foreign military personnel’. Asked about the expected timetable for this legislative change, DHA responded that, ‘subject to approval to proceed, it is expected that a Bill to amend the Defence Housing Australia Act 1987 will be introduced in 2022’.
Capability of the DHA Board
3.40
The Committee sought and received advice regarding the DHA Board’s periodic capability reviews and assessments, which concluded that not all essential and desired capabilities were assessed as present on the Board.
Finance review of GBE guidelines
3.41
Finance stated that, in response to the audit, it was ‘committed to: providing key lessons to GBEs relating to good practice governance, performance measurement, procurement and contract management; and considering the findings of the [audit] when reviewing Resource Management Guide (RMG) 126, Government Business Enterprises (GBE guidelines)’. Finance also noted that it hosts regular GBE Forums with senior GBE representatives, to provide shared lessons and improve governance practice, including with regard to performance measures and procurement. A key item on the agenda for each GBE Forum is to review recent audit reports and their lessons for GBEs, with Finance confirming that ‘the relevant lessons from the Management of Defence Housing Australia Report will be discussed in detail’.
3.42
In 2020, Finance commenced a review of the GBE guidelines ‘to ensure currency and consistency, and to reflect key learnings from recent Auditor-General reports of GBEs as well as recent updates to legislation, good governance practice, and other matters identified in recent GBE reviews’. At the time of the Committee’s inquiry, Finance was consulting with relevant stakeholders on proposed amendments to the guidelines, ‘including the GBEs, joint shareholder departments, the ANAO, the Institute of Company Directors, other responsible ministers, and states and territories who also have similar frameworks in place’. Finance indicated that this work would be ‘completed through the course of 2021 and an updated version of the guidelines will be issued’:
It will take into account a range of factors, including ANAO audits, not limited to this one, that have made a range of recommendations going to things like the application of the Commonwealth Procurement Rules, for example, to GBEs. It will take into account developments in contemporary governance practice, including some of the findings, for example, out of the royal commission into banking misconduct, and a range of other relevant matters.
3.43
The ANAO further noted that, in May 2019, the Auditor-General released an audit insight into board governance, based on a series of audits, ‘to help inform the community, including not only the community of GBEs … but the corporations and companies as well’.
Committee comment
3.44
The Committee notes that DHA has ‘appropriate processes’ in place to assure itself that it achieves value for money in property acquisitions, and has been ‘largely effective’ in the delivery of the services it provides under the DHA Act and in returning a dividend to the Commonwealth. At the time of the inquiry, DHA and Defence were reviewing the Defence service agreements, to create a single agreement covering all services provided by DHA to Defence, including a revised performance framework.
3.45
The Committee notes that DHA has measures of effectiveness in place to assess its provision of housing for ADF members and their families. However, while DHA’s performance in delivering services is monitored and reported on regularly, work was required to assess the effect of DHA’s services on ADF member retention. Some of the challenges in developing metrics to indicate the effect of housing adequacy on ADF member retention were explored at the public hearing. However, the Committee emphasises the larger point, as reinforced by the Auditor-General, that DHA’s KPIs sit within a performance framework that should reflect the stated purpose of the entity, as well as the objectives of the revised service agreement, and include qualitative and quantitative information, to provide assurance to the Parliament and the Australian public that what the entity was established for is being achieved. The Committee acknowledges the work undertaken to date by DHA and Defence to use survey data to track ADF members’ views on a range of matters. The Committee understands that the 2023 Defence Census will include a set of survey questions to better assess the effect of DHA’s services on ADF retention, and that DHA was also analysing data from the 2019 Defence Census in relation to housing.
3.46
The Committee notes DHA has measures in place to assess its performance in terms of business efficiency, as required by the GBE guidelines, and that it reports publicly on these. DHA has reduced the rate of growth of its operational expenditure in recent years and developed savings initiatives to be implemented over the next 18 months as part of its revised business model. However, DHA needs to develop a performance measure of its operating efficiency. The Committee is aware that Defence has developed a detailed costs allocation model to identify and allocate costs across its business activities, with a KPI also under consideration to measure operational efficiency.
3.47
At the time of concluding the inquiry, a revised performance framework, encompassing the matters discussed above (with KPIs directly linked to objectives), was to come into effect at the same time as the revised service agreement, on 1 July 2021. Accordingly, the Committee believes there would be merit in DHA and Defence reporting back to the JCPAA on how the revised performance framework has implemented the audit findings and recommendations.
3.48
The Committee recommends that Defence Housing Australia (DHA) and the Department of Defence report back on how the revised performance framework, introduced as part of the revised service agreement, implements the findings and recommendations of Auditor-General’s Report 31 (2019-20). In particular, the Committee seeks details on how the performance information in the revised framework:
relates to and supports the measurement of performance against all the objectives of the service agreement, including efficiency, cost-effectiveness and value for money
provides a measure of DHA operating efficiency
assesses the impact of DHA housing on Australian Defence Force member retention, and provides assurance to the Parliament that DHA is achieving its purpose.
3.49
The Committee believes there would be merit in DHA reporting back to the JCPAA on its staff procurement training and the outcomes of its next procurement compliance audit, under the revised procurement arrangements.
3.50
The Committee recommends that the Defence Housing Authority (DHA) report back:
on staff training provided with regards to its revised procurement arrangements and on implementation of the November 2020 EY procurement audit recommendations
whenever its next procurement compliance audit takes place, on the outcomes of this process, particularly in terms of instances of non-compliance with DHA procurement policy
3.51
The Committee considers there would be merit in DHA reporting back to the JCPAA on:
the DHA Board’s strategic oversight of regulatory compliance risk; and
the outcomes of the DHA Board’s next capability assessment and review.
3.52
The Committee recommends that Defence Housing Authority (DHA) report back to the JCPAA on how the DHA Board, as DHA’s governing body and accountable authority:
is ‘determining the policy of DHA with respect to any matter’, as set out in the Defence Housing Australia Act 1987;
is ensuring strategic oversight of regulatory compliance risks, such as those related to land development and civilian tenancy; and
has concluded the next capability assessment and review.
3.53
The Committee further notes that, at the time of the inquiry, DHA was undertaking a review of its use of civilian tenancies and had ‘suspended’ entering into new civilian tenancies in September 2020 while the review occurred.
3.54
The Committee recommends that the Defence Housing Authority report back on the outcomes of its 2021 review of the use of civilian tenancies, particularly with regard to previous legal advice received on this matter and the relevant audit findings in Auditor-General Report 31 (2019-20).
3.55
The Committee emphasises that DHA needs to clearly establish whether providing housing to philanthropic representatives and military exchange personnel is encompassed by the DHA Act. DHA and Defence have adopted an interim arrangement for philanthropic representatives, but legislative change is required to properly resolve the provision of housing to both philanthropic and foreign military personnel. The Committee understands that a Bill to amend the Defence Housing Australia Act 1987 is expected to be introduced in 2022.
3.56
At the time of its inquiry, the biannual review of the DHA Board had recently taken place (as required under the DHA Act), resulting in an updated skills/composition matrix. The Committee notes that DHA Board members are paid in line with Remuneration Tribunal requirements and appointed according to Cabinet Handbook procedures and the GBE guidelines.