The report notes
The objective of the audit was to assess whether the Department of Immigration and Border Protection (DIBP) had appropriately managed the procurement of garrison support and welfare services at offshore processing centres in Nauru and Papua New Guinea (Manus Island); and whether the processes adopted met the requirements of the Commonwealth Procurement Rules (CPRs) including consideration and achievement of value for money.The ANAO states
1. In 2012 the Australian Government established offshore processing centres1 in the Republic of Nauru (Nauru) and Papua New Guinea (PNG) with the agreement of the Nauruan and PNG Governments. Under the agreements, the Australian Government was to bear all costs associated with the construction and operation of the centres. Transfers of asylum seekers to Nauru commenced on 14 September 2012 and to PNG on Manus Island on 21 November 2012.
2. To underpin operations at the centres, the Department of Immigration and Border Protection (DIBP or the department) entered into contracts for the delivery of garrison support and/or welfare services with a number of providers. Garrison support includes security, cleaning and catering services. Welfare services include individualised care to maintain health and wellbeing such as recreational and educational activities.
3. The department has undertaken a series of procurements relating to the garrison support and welfare services functions. The department applied limited tender procurement methods to acquire the services initially in 2012 and then again in late 2013. In 2015–2016, the department conducted an open tender procurement process for the services (for a single contract across both islands).
4. In October 2015, Transfield6 became the sole provider of all garrison support and welfare services to asylum seekers at the offshore processing centres in Nauru and on Manus Island. In February 2016 these arrangements were extended through to 28 February 2017 and in August 2016 the contract with Transfield was further extended until 31 October 2017. The contracts for garrison support and welfare services are set out in Table 1.1. The total combined contract value as at the end of March 2016, as reported on AusTender, was $3 045 million.
5. The Australian Government is a significant purchaser of goods and services and has in place resource management legislation and related policies that establish a framework for Government procurement and contracting. The Commonwealth Procurement Rules (CPRs) establish procurement principles that apply to all Australian Government procurement processes. The CPRs combine both Australia’s international obligations and good practice, and enable Government entities to design processes that are robust, transparent and instil confidence in the Australian Government’s procurement activities. The CPRs are issued under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and articulate the requirements for officials performing duties in relation to procurement.
Audit objective, scope and criteria
6. The objective of the audit was to assess whether the Department of Immigration and Border Protection (DIBP) had appropriately managed the procurement of garrison support and welfare services at offshore processing centres in Nauru and Papua New Guinea (Manus Island); and whether the processes adopted met the requirements of the Commonwealth Procurement Rules (CPRs) including consideration and achievement of value for money.
7. The audit examined procurements conducted since 2012, when the arrangements were first put into place, through to the open tender process which commenced in 2015. The ANAO reviewed DIBP and service provider records; and interviewed relevant DIBP officials (past and present) and stakeholders including service providers, tenderers and Government officials from Nauru and Papua New Guinea. The audit team also visited Manus Island and Nauru during August and September 2015. Due to shortcomings in DIBP’s record keeping system, DIBP was not able to provide the ANAO with assurance that it provided all departmental records relevant to the audit.
8. The Department of Immigration and Border Protection’s (DIBP) management of procurement activity for garrison support and welfare services at the offshore processing centres in Nauru and Papua New Guinea (Manus Island) has fallen well short of effective procurement practice. This audit has identified serious and persistent deficiencies in the three phases of procurement activity undertaken since 2012 to: establish the centres; consolidate contracts; and achieve savings through an open tender process.
9. Of most concern is the department’s management of processes for contract consolidation and the open tender. The Australian Government intended that these procurement processes would rein in the growing expense associated with managing the centres. In both cases, the approach adopted by the department did not facilitate such an outcome. The department used approaches which reduced competitive pressure and significantly increased the price of the services without Government authority to do so. The open tender process was cancelled by the department on 29 July 2016 and consequently had no outcome.
10. The conduct and outcomes of the tender processes reviewed highlight procurement skill and capability gaps amongst departmental personnel at all levels. Procurement is core business for Commonwealth entities and the deficiencies have resulted in higher than necessary expense for taxpayers and significant reputational risks for the Australian Government and DIBP. The audit’s two recommendations are intended to address: the significant skill and capability gaps identified amongst personnel at all levels in the department, including within the central procurement and budget units; and persistent shortcomings in the planning and conduct of the procurements, including in relation to record keeping, consistency and fairness in the treatment of suppliers, and the assessment of value for money.
Establishing the offshore processing centres in 2012
11. For each of the procurements involved in this establishment phase, the department adopted limited tender arrangements. The department relied on the conditions for limited tender in the Commonwealth Procurement Rules, relating to urgent and unforeseen circumstances. Given the circumstances which existed—the department was expected to establish operations for the offshore processing centres in Nauru and on Manus Island immediately—the use of limited tender was justified. However, there was limited specification of the type of services to be delivered, and no estimation of the expected value of individual procurements, as required by the Commonwealth Procurement Rules.
12. The department was unable to demonstrate the achievement of value for money in three of the four procurement processes. In engaging Transfield the department set aside an earlier approach to Serco. The department did not require Transfield to provide a proposal specifying services to be delivered and a price. As a result it was very difficult for the department to demonstrate that it had conducted a robust value for money assessment which considered the financial and non-financial benefits of the proposal. Transfield was instead assessed on its ability to respond in a short timeframe. The Salvation Army was also assessed as providing value for money on the basis of availability, without any specification of the services to be delivered or price. The department could not make available any records of how Save the Children was assessed as providing value for money. G4S was engaged following a limited tender procurement that involved a request for expressions of interest from five potential suppliers. This approach introduced competition in an otherwise limited tender procurement.
13. Contracts with service providers took between 16 and 43 weeks to negotiate, and the department relied on letters of intent or heads of agreement pending contract signature. Service requirements and prices were not settled until contracts were entered into. The approach adopted by the department introduced additional risk for the Commonwealth.
14. The department was not able to provide the ANAO with evidence that it implemented mechanisms to manage probity risk. The ANAO’s review, based on available evidence, of the conduct of these initial procurements indicates that suppliers were not always treated fairly or equally. In particular, Serco’s proposal was set aside without an opportunity to negotiate. The available records indicate that the department did not seek probity advice on this proposed course of action or document its decision-making. There are no available records of specific conflict of interest declarations having been made by departmental officers responsible for the initial procurements.
15. The department’s central procurement unit had limited effective oversight of the initial limited tender procurements. Available records indicate that program areas with responsibility for conducting the initial procurements obtained the necessary approvals to conduct limited tender procurements from the Chief Financial Officer, but not prior to commencing the procurement process as required by DIBP’s financial delegations. Consolidation of contracts in Nauru and on Manus Island in 2013–14
16. The department again relied on paragraph 10.3(b) of the CPRs16 to conduct a limited tender, on the basis of urgent and unforeseen circumstances, to engage Transfield in Nauru and on Manus Island as part of a contract consolidation process. At the time, consolidation was considered an interim measure pending an open tender process in 2014. The available record does not indicate that urgent or unforeseen circumstances existed but suggests that the department first selected the provider and then commenced a process to determine the exact nature, scope and price of the services to be delivered. The department decided not to continue with the existing provider (G4S), but did not clearly document its reasons. Advice prepared by the department’s Central Procurement Unit was not consistent with the CPRs and the Department of Finance (Finance) guidance on key issues. In seeking advice from Finance, the Unit made written statements implying underperformance by service providers which was not supported by the evidence. The department subsequently referenced Finance’s support in briefings for its Minister.
17. DIBP’s approach to engaging Transfield through limited tender procurement removed competition from the outset. The services to be provided and related costs were not agreed with Transfield prior to G4S and The Salvation Army being advised that they would exit from service delivery on Manus Island. The proposed costs submitted by Transfield were higher than the department had anticipated and exceeded those charged by G4S and The Salvation Army for service provision on Manus Island.
18. Ministers expected the consolidation of contracts to achieve innovation and savings. Savings were not realised and the basis which the department relied upon to demonstrate savings was unreliable. In particular: The department applied a benchmark model to demonstrate the achievement of value for money. Overall the benchmark was adjusted above historical costs to account for changes to the department’s service requirements and contractual approach, upwards to $372 million, to accommodate a number of service enhancements. The Government had directed the department to reduce per-head costs. The department had no authority to increase the funding value of the contract above historic costs. Separate benchmarks were developed for Nauru and Manus Island, but the department determined ‘value for money’ and claimed savings (against the benchmarks) on a combined basis. This allowed the department to demonstrate ‘savings’ by offsetting higher costs for Manus Island against lower costs for Nauru. While Transfield’s bid for Nauru was lower than historical costs, the bid for Manus Island exceeded historical costs by between $200 million and $300 million.
19. While the department based the negotiated contract price on a high capacity scenario, there was a steady drop off in new asylum seeker arrivals from a high of 1 647 in August 2013 to zero in March 2014. On this basis it was increasingly unlikely that the high capacity levels would eventuate. The resulting contract was volume driven, with significant economies of scale expected at high capacity levels. This contract exposed the Commonwealth to the risk of locking-in a high price for services delivered at lower capacity levels.
20. There is no available record of specific conflict of interest declarations having been made by departmental officers who were responsible for the procurement. There is also no available documentation to indicate whether the department performed due diligence checks on the successful tenderer (Transfield) or its subcontractors as part of the contract consolidation.
21. The Prime Minister had requested that per head costs be lower as a result of retendering the contracts, but the department did not calculate a per person cost. Finance advised the ANAO that under the consolidated contract, the per person per annum cost of holding a person in the offshore processing centres in Nauru and on Manus Island, was estimated at $573 111, at the time of the Mid-Year Economic and Fiscal Outlook 2015-16.18 Prior to consolidation Finance estimated the cost at $201 000.
Open Tender Process from 2014 to 2016
22. While aspects of the department’s open tender planning addressed the requirements of the CPRs, insufficient consideration was given to: The use of benchmarking to determine overall value for money. The department’s approach involved comparing only the preferred tenderer’s negotiated final costs with a benchmark, and was incompatible with the CPRs. The CPRs require each eligible tenderer’s financial and nonfinancial benefit to be compared on a like for like basis with other eligible tenders. The scope of services set out in the statement of requirement. In particular, whether the department had policy authority to expand the services or increase the value of the contract beyond the contracts which were in place. The value of expanded services was estimated by an external adviser (KPMG) at between $594 million to $835 million above historical costs. The Government had not provided policy authority to expand the services or increase the funding value of the contract to accommodate service enhancements or adjustments.
23. The department’s tender evaluation processes were not sufficiently robust to meet a range of applicable CPR requirements. In particular: the department was unable to demonstrate that the original tender documents lodged through AusTender were used by evaluation team members for the tender evaluation; individual assessor records were incomplete and there were missing documents in relation to various aspects of the process; using compact disks rather than TRIM20 files did not provide sufficient control over the security of the tender documentation and the commercial material contained within those documents; and there were significant unquantified pricing risks related to most of the tender bids, which the department did not clarify prior to selecting a preferred tenderer and forming an opinion on value for money of the preferred and reserve tenderers.
24. The assessment of value for money focused on provider claims and referee reports and did not take into account the department’s own contract management experience with suppliers.
25. The department determined to only enter into negotiations with the preferred tenderer (Transfield). During the course of negotiations the department amended its requirements and accepted enhancements and adjustments to services which flowed through to a $1.1 billion increase in Transfield’s overall price. The department did not seek clarification or repricing from any other tenderers and instead set out to determine value for money by comparing the negotiated price with a benchmark. The benchmark was the cost of services provided in Nauru and on Manus Island, which had been procured via a non-competitive limited tender process in 2013–14. The approach adopted was not consistent with an open tender which requires that eligible tender bids are compared on a like for like basis. 26. The delegate had determined to finalise the procurement process and sign the contract. There are no available records to demonstrate that the delegate: considered if sufficient funds were available to enter into the commitment; considered if additional policy authority was required to accommodate the service enhancements negotiated; or questioned the increased cost of the bid.
27. A steering committee and independent probity adviser were key oversight mechanisms for the open tender process. Both were consulted after the negotiation team had reached agreement on a final negotiated outcome with Transfield and prior to the anticipated contract signing. The probity adviser identified that the department’s negotiation report appeared to include substantial modifications to the statement of requirement from that released to the market and that Transfield appeared to have been permitted to make material changes to its original tender, including significant overall price increases. The probity adviser considered that these developments raised significant probity and process risks, including the risk that the department was not in a position to determine whether the changes continued to represent best overall value for money compared with other tenderers.
28. After considering this advice the steering committee decided it was unable to determine whether the final negotiated outcome with Transfield demonstrated best value for money. The effective operation of these oversight mechanisms contributed to the department initiating an amended tender process. The Minister was advised of the amended tender process prior to it commencing, and that approvals for funding would need to be reassessed. The amended process only involved the preferred and reserve tenderers and was in effect a limited tender process. On 29 July 2016, in the course of this audit, the department cancelled the initial and amended request for tender. DIBP extended its contract with Transfield until 31 October 2017 and the department advised the ANAO on 29 August 2016 that it was conducting market testing to determine its next steps.
29. Procurement is core business for Commonwealth entities and deficiencies in capability, process and advice can result in higher than necessary expense for taxpayers and significant reputational risks for the Australian Government and responsible entities. The audit recommendations are intended to address significant weaknesses in the Department of Immigration and Border Protection’s (DIBP) administration of procurement.
Recommendation No. 1 Paragraph 4.64 That the Department of Immigration and Border Protection address, as a priority: through training and staff selection—the significant procurement skill and capability gaps identified in this audit amongst personnel at all levels, including: the central procurement unit; budget unit; program area staff; and delegates; through guidance, training and staff selection—an approach to ensuring that officials have appropriate seniority and experience to undertake key procurement roles, such as chief negotiators and delegates, and effectively manage procurement risk; and through guidance, training and a strategic approach to records management—persistent shortcomings in record keeping for procurement activities.
Department of Immigration and Border Protection response: Agreed
Recommendation No. 2 Paragraph 4.65 That the Department of Immigration and Border Protection take practical steps to ensure adherence to the requirements of the resource management framework when undertaking procurements, including: the obligation to manage all aspects of a procurement process in accordance with the Commonwealth Procurement Rules; compliance with Government approved scope and contract value; in respect to open tender processes, adopting a value for money assessment which compares tenderers against other bids; the application of documented eligibility criteria in line with the Request for Tender and consistent with the Commonwealth Procurement Rules, with any modifications advised to all potential suppliers; the need for ethical conduct throughout the procurement to ensure consistent and fair treatment of suppliers; the need to recognise and manage actual, potential and perceived conflicts of interest; and the maintenance of clear and complete records of all tender bids, key actions, decisions, conflict of interest and SES disclosure declarations.
Department of Immigration and Border Protection response: Agreed