2. Common inquiry themes

Introduction

2.1This chapter considers evidence relating to the regulation of the procurement system, as well as a range of common themes that emerged from the five audit reports that are included in the inquiry’s terms of reference. In particular, the chapter considers:

• procurement capability within the Australian Public Service (APS)
• aspects of the Commonwealth Procurement Rules (CPRs)
• the role of the Department of Finance (Finance) as policy steward of the procurement framework
• the AusTender electronic procurement reporting platform
• the principle of value for money in procurement
• the use of standing offers or panels
• ethical procurement, and in particular the management of probity
• contract management practices, and
• the need for adequate record keeping.

Public sector procurement capability

2.2This section considers the problems of procurement capability and culture identified in the course of this inquiry and considers suggestions for addressing them.

2.3The Australian National Audit Office (ANAO) audit reports considered by the Committee during this inquiry indicate a considerable capability deficit with respect to procurement in the APS. Of the five audit reports, only the audit of the procurement of Evolved Cape Class Patrol Boats by the Department of Defence (Defence) was considered by the Committee to contain positive findings to any significant degree.

2.4The audits of the National Capital Authority (the NCA), the Digital Transformation Agency (the DTA), the Department of Industry Science and Resources (DISR), and the Department of Home Affairs contained significant adverse findings in relation to all stages of procurement from planning through to contract management.

2.5The audit reports highlighted inadequate procurement planning and practices that worked to limit competition at the NCA, weaknesses in approaches to market, tender evaluation and contact management at the DTA, problems with tender evaluation at DISR, contract management problems at Home Affairs, as well as probity management and record keeping issues at almost all of the audited entities. Later chapters will cover the issues uncovered by the ANAO in more detail.

2.6In response to the ANAO’s findings, the NCA engaged a Director of Procurement, implemented a range of new internal controls relating to procurement, provided its staff with improved guidance material, and began an internal audit program to examine its procurements to ensure their compliance with the CPRs.[1]

2.7The DTA implemented a centralised process of procurement controls, implemented mandatory employee education and performance management policies relating to procurement, conducted retrospective assessments of selected contracts, and made changes to its record management practices.[2]

2.8And DISR has put in place stronger probity policies and guidelines including stronger conflict of interest and probity frameworks, it has updated its procurement framework, and it has provided training on procurement and probity for all its Senior Executive Service level staff.[3]

2.9In light of these audits and their findings, the ANAO argued that ‘the regularity with which deficiencies in procurement activities are observed in performance audits suggests a deficit in institutional capability and proficiency’.[4]

2.10The ANAO noted that ‘an institutional capability to buy well and manage what is bought is fundamental to the delivery of many government services’, and further, that the issues identified by the ANAO in its audit work:

… frequently originate with officials who do not fully understand the procurement framework, including the requirements in the CPRs. This is often the case for officials for whom procurement is an infrequent or secondary responsibility. There is strong evidence that there are shortcomings in the Australian Public Service’s institutional capacity and capability for procurement and contract management.[5]

2.11Though procurements can be simple, they may frequently show a high degree of complexity, and when they do there is a significant risk that APS staff may not be negotiating with suppliers from a position of strength:

Many procurement processes involve complex requirements and judgements as well as substantial resources. There is a particular risk that the private sector service provider may have greater information and knowledge about the task than the Australian Government entity. If they are not to be disadvantaged, entities need a level of market knowledge and technical skills matching those prevailing amongst private sector service providers.[6]

2.12The ANAO argued that procurement is not given sufficient importance given the scale of Commonwealth expenditure on it:

Public procurement is an underdeveloped professional discipline. Despite the scale of procurement undertaken by many entities, the execution of the procurement process is often viewed as a compliance obligation, rather than as a strategic capability delivering broad benefits.[7]

2.13The Australasian Procurement and Construction Council (APCC) argued that government agencies are expected to do more with their procurement spend that simply acquire goods:

The procurement function has evolved from a primarily transactional role to one which is much more of a strategic enabler for government agencies to deliver value. This shift has required development of complex procurement skills.[8]

2.14As a consequence, according to the APCC, Australia needs to make use of qualified procurement professionals whose expertise is appropriately embedded in the procurement decision making process:

With the changing nature of procurement practices, which often involve multi-billion-dollar expenditures, the range and complexity of what the procurement and contract management professional needs to do must be properly recognised by public sector agencies and developed over a learning continuum that progressively builds the requisite cognitive and creative skills, specialist core procurement skills, and general employability skills that are required in the context of procurement policy, rules and guidelines.[9]

2.15The APCC listed a range of aims for staff development that it considers necessary to build procurement capability in the APS:

...staff development requirements need to draw on this learning/training continuum that needs to encompass on-the-job training, vocational qualifications, higher education in strategic procurement, and professional certifications, including micro-credentials (i.e. small, certification-style courses that focus on a particular area of study to hone proficiency over the shortest possible time).[10]

2.16Negotiation Partners, a Sydney-based consultancy, argued that procurement is best seen as ‘not an administrative task, but a commercial task’ requiring both training and real-world expertise:

Procurement is a specialist profession. It is a subject taught at universities, there is a chartered industry body and a curriculum of continuing professional development. That ‘process knowledge’ is typically embedded in an organisation’s procurement process. In addition to a sound process, effective procurement requires commercial skills, business acumen and professional negotiation skills. None of these are taught at universities and business schools. They require real-world expertise and training.[11]

2.17Negotiation Partners went on to argue that a process-driven focus is not sufficient to generate positive procurement outcomes, but that procuring officials must have adequate skills:

An open, transparent and ethically competitive process is necessary, but not sufficient, to produce a value-for-money outcome. Poor preparation, inappropriate specification, speculative tendering, inefficient resourcing, ineffective evaluation, political imperatives, unrealistic budgets, wishlist dumping, scope changes, time pressure, poor negotiation and weak contract management can all ensure that a highly competitive procurement that was executed ‘perfectly’ on paper still delivers a poor value outcome overall.

The skill with which a procurement is undertaken is arguably a much more significant driver of value-for-money than the process itself – and even more so in sole-source negotiations.[12]

2.18Law firm King & Wood Mallesons suggested that there are a range of areas where agencies would benefit from additional detailed training from Finance, including training on the Commonwealth accountability framework, especially the Public Governance, Performance and Accountability Act 2013 (PGPA Act) framework as it applies to procurement, CPRs best practice, and corporate practices, given that corporate concepts 'are sometimes not well understood' by officials.[13]

2.19In addition, King & Wood Mallesons argued that officials would benefit from access to additional contract templates beyond those currently offered in the Commonwealth Contracting Suite, as well as centralised relationship and information management services for repeat suppliers.[14]

2.20The Independent Reviewer’s Report of the Independent Review of Services Australia and NDIA Procurement and Contracting (the ‘Watt Review’) identified a need for a whole of government approach to procurement capability uplift:

… procurement outcomes and enhanced value for money will not be achieved by improved processes and capability at the department/agency level alone, no matter how energetically, how vigorously and how expensively they were to be pursued. Instead, it also needs a whole-of-government approach including professionalisation of the procurement capability, changes to the CPRs, and clearer identification of accountabilities.[15]

2.21In his evidence to the Committee, report author Dr Ian Watt AC argued that the APS does not have ‘the capability to do procurements’ as well as it should:

… there's no solution short of doing this systematically, across the board, for agencies as a whole. Unless that happens, I think you will be here for a long while to come, dealing with Auditor-Generals' reports you'd rather not have. Really, it's time for the Australian government and the Australian Public Service to look much more systematically at these issues.[16]

2.22Drawing on his long experience in senior public sector roles, Dr Watt noted that issues of public sector procurement capability are of long standing, and that past solutions attempting to deal with procurement problems on an agency-by-agency basis have not worked:

… in reading some of the Auditor-General's remarks, and reflecting on the previous Auditor-General, he said pretty much the same things ... I'm sure, if you go back to his predecessor, they were saying pretty much the same things as well. I think the only way to tackle this is systematically, and I hope you'll come to the same conclusion.[17]

2.23Finance advised the Committee that in addition to the training and capacity building activities it undertakes with the aim of improving compliance with the CPRs (see below), it is also exploring the development of a professional stream for procurement, similar to the pathways for Human Resources, Digital, and Data managed by the Australian Public Service Commission:

Finance is also exploring the development and delivery of professionalisation pathways for officials to become procurement and contracting specialists. A spectrum from basic training to specialist qualification and formal accreditation forms part of a professionalised procurement and contract management framework to be examined.[18]

The Commonwealth Procurement Rules

2.24The Committee heard evidence from a range of submitters that suggested changes to the CPRs to assist in positive reform of Australia’s procurement regime. This section considers aspects of the CPRs that have been drawn to the Committee’s attention during this inquiry, in particular:

• the comparatively narrow view of procurement informing the CPRs.
• the use of exceptions in the rules, and
• the application of the CPRs to different types of Commonwealth entity
  25. The CPRs regulate and guide government procurement processes. They aim to ensure that government procurement is conducted in a fair, equitable and transparent manner, and to ensure that procurement delivers value for money. The CPRs establish a framework of principles and processes to achieve open and fair competition and effective management of risks.
  26. Finance’s submission provided the following definition of procurement:

Procurement is the expenditure of public money to obtain goods or services for Government or third party use. It enables Commonwealth entities to acquire the goods and services needed to deliver the Government’s policies, programs and services.[19]

2.27Finance’s definition of procurement mirrors that provided in the CPRs themselves:

Procurement is the process of acquiring goods and services. It begins when a need has been identified and a decision has been made on the procurement requirement. Procurement continues through the processes of risk assessment, seeking and evaluating alternative solutions, and the awarding and reporting of a contract.[20]

2.28The CPRs also highlight the importance of contract management as an integral part of procurement:

Following the awarding of the contract, the delivery of and payment for the goods and services and, where relevant, the ongoing management of the contract and consideration of disposal of goods, are important elements in achieving the objectives of the procurement.[21]

2.29In considering this definition, which the ANAO audited against in the reports before this inquiry, the submission from procurement-focused consultancy Hypereal characterised this definition of procurement as narrow:

The ANAO, in its two reports covering the activities of the DTA, defines government procurement as “the process of acquiring goods and services”. Outside the sphere of federal government, however, the procurement function has been professionalising since the 1980s and defines itself much more ambitiously.[22]

2.30Hypereal said that following this period of professionalisation, the private sector approaches procurement with a much more wide ranging and in-depth focus:

In its most evolved forms, procurement now represents the commercial function accountable for all aspects of an organisation’s third party spend, across all categories from raw materials to contingent labour and from banking relationships to facilities management. The ANAO’s definition reflects the process aspect of the function that, in non-government settings, is now largely automated and standardised.[23]

2.31Similarly, the APCC highlighted the varied nature of procurement and noted that in addition to the acquisition of goods, procurement spend is expected to advance the Government’s social or policy agenda:

The procurement function operates on a continuum from simple to highly complex procurements and subsequent contract management. It is tasked with minimising transaction costs across the supply chain whilst maximising overall value for money in alignment with procurement policy, rules, and guidelines. It is increasingly leveraged to achieve broader strategic policy objectives whilst maintaining and improving service delivery. Public sector procurement is accepted as key enabler to deliver on economic, environmental, governance and social outcomes.[24]

2.32The Australian Constructors Association (ACA) argued that, at least in relation to construction industry procurements, the simple, transactional model of procurement embodied in the CPRs has given rise to a ‘hostile contracting environment’ which can be a brake on productivity. The ACA argued that this approach should be replaced with ‘more collaborative models focussed on shared accountability and problem solving between all parties’:

Streamlined tendering processes based on best value and past performance are far superior to transactional models based on cost alone - indeed, initial ‘costs’ can be spurious, often being based on partial design and mispriced risk ... It is time to break the tendering mould and rebuild around alternative contracting models focussed on long-term collaborative relationships.[25]

2.33The ACA went on to argue that, as it exists at present, the procurement regime too often gives rise to misperceptions of value:

A core concern of industry is that procurement assessments often interpret ‘value’ through the narrow lens of initial cost estimates ... The simple calculus of ‘lowest compliant tenderer’ has incentivised a ‘race to the bottom’ mentality in the industry. This mentality is the direct cause of the dysfunctional and risk-laden contracting environment in which we now find ourselves.[26]

2.34Ms Catherine Thompson, the principal of Hypereal, suggested an alternative concept of procurement:

I propose another definition, which is the active lifecycle management of supply markets in order to achieve transparently reported technology, financial and social outcomes that promote better government and the wellbeing of its people.[27]

2.35Ms Thompson argued that her approach would engender a shift from a focus on acquiring goods to one of expense management:

you're shifting from buying a thing towards generalised expense management... That would typically be how a professional procurement operation would run. You would have your hunters, the people who look at the cost base and structure new deals, and you would have your farmers, the people who make sure that the deals, once contracted, continue to maintain the value that's been identified with them.[28]

2.36In further unpacking her alternative definition, Ms Thompson said:

you're looking at everything from the expression of a need or demand. Why is it needed? Could it be satisfied by something we have already? Could it be satisfied in a different way that doesn't require procurement? If so, what's the most effective way to do that? Should it be part of a larger vendor relationship that we already have on foot? That looks at supplier performance management and it looks at supplier relationship management ... It looks at the best way of putting a negotiation together and putting together the needs of various stakeholders in government. Then government has another responsibility, which is ... to look at how you ... use government procurement as an instrument of social and economic policy.[29]

2.37The CPRs do not necessarily apply to every procurement. They permit entities to vary their application under certain limited circumstances. For example, paragraph 2.6 of the CPRs states that:

These CPRs do not apply to the extent that an official applies measures determined by their Accountable Authority to be necessary for the maintenance or restoration of international peace and security, to protect human health, for the protection of essential security interests, or to protect national treasures of artistic, historic or archaeological value.[30]

2.38Home Affairs used this provision to justify its renewal of the Maritime Surveillance Services Contract considered in Chapter 5 of this report:

In March 2021 the Secretary authorised seeking an extension for two years from December 2021 to December 2023 (with a further one year option to December 2024) to avoid a capability gap while the Department evaluated the long term requirement for aerial surveillance capability including the optimal capability mix and associated delivery timeframes. The total value of the contract including the proposed extension required approval by the Secretary. Section 2.6 of the Commonwealth Procurement Rules 2022 was applied ‘for the protection of essential security interests’.[31]

2.39Defence also invoked paragraph 2.6 of the CPRs to justify sole-sourcing its purchase of six patrol boats at a cost of approximately $356 million, a procurement which is considered in Chapter 6 of this report:

In this case the limited tender was confined to a single tenderer. To do so, Defence relied on paragraph 2.6 of the CPRs … The Defence Procurement Policy Manual (DPPM) outlines that the Secretary of Defence has determined, for paragraph 2.6 of the CPRs, that the procurement of goods under Federal Supply Code 19 Ships, Small Craft, Pontoons and Floating Docks is exempt from the operation of Division 2 of the CPR.[32]

2.40Generally, the CPRs require entities to use open approaches to the market when conducting procurements above given thresholds - $7.5 million for construction procurements or $80,000 for non-construction procurements. However, paragraph 10.3 of the CPRs permits entities to use limited tender approaches even when the procurement is above that threshold provided certain conditions are met.

2.41Most commonly used is paragraph 10.3.b, which permits entities to use a limited tender approach ‘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.’[33]

2.42In its 2022 update on Australian Government Procurement Contract Reporting, the ANAO noted that paragraph 2.6 of the CPRs was applied in some part to a total of 4,135 contracts between 2018-19 (when the requirement to specify a reason came into force) and 2021-22.[34] In relation to paragraph 10.3 exemptions, the ANAO noted that:

Seventy-three per cent of limited tender contracts that exceeded the procurement threshold and did not claim exemption reported the condition reason as 10.3.e (unforseen urgency) and 10.3.d.iii (no reasonable alternative or substitute, and/or exclusive rights or proprietary information) of the CPRs.[35]

2.43The DTA used paragraph 10.3.e to justify a limited tender for ‘additional deliveries of goods or services … or continuing services’.[36] This procurement is discussed in more detail in Chapter 3. The NCA reported a contract on AusTender which also claimed to use 10.3.e. However:

In fact, the documents seen by the ANAO showed that internally limited tender was justified 'on the basis that the services would be direct sourced from the incumbent supplier ‘rather than undertaking a full tender process and incurring administrative expenses including legal costs associated with such a process, and in light of the standard of services which has been provided’ - a basis that is non-compliant with the CPRs.[37]

2.44A final aspect of the CPRs worth noting is that they do not apply to all Commonwealth agencies. All non-corporate Commonwealth entities (e.g. departments of state and parliamentary departments) are covered by the CPRs, but they do not apply to all corporate Commonwealth entities (such as government business enterprises):

The requirements set out in the CPRs must be observed by what the rules term 'relevant entities'. This term is defined as all non-coporate Commonwealth entities and 'corporate Commonwealth entities as prescribed by the Finance Minister in section 30 of the Public Governance, Performance and Accountability Rule 2014 (the PGPA Rule). As at 15 November 2022, 24 out of 72 corporate Commonwealth entities are prescribed as ‘relevant entities’.[38]

2.45The ANAO invited the Committee to consider whether there is merit in the application of the rules to all Commonwealth entities by default. Its submission argued that that ‘the key principles in the CPRs, such as obtaining value for public money and acting fairly and ethically when conducting procurements, should not be seen as a barrier to operating commercially or at arms-length from the government of the day’.[39]

2.46As such, the ANAO argued that there may be merit in applying the CPRs to ‘all corporate Commonwealth entities by default and then permitting exemptions and modifications by legislative instrument, rather than only applying the CPRs to those entities prescribed by legislative instrument'.[40]

The Department of Finance’s role as policy steward

2.47The Committee heard evidence throughout the inquiry that touched on Finance’s role as manager of the Commonwealth Procurement Framework.

2.48Finance’s submission noted that it ‘is responsible for policy stewardship of the Commonwealth Procurement Framework’. However, the department pointed out that the framework is ‘devolved’, with the effect that each procuring entity ‘is responsible for its own procurement processes and decisions in order to meet its own business needs’.[41]

2.49Finance noted that a devolved framework provides entities with the freedom to decide how to implement their procurement policies, in a manner that best suits their circumstances:

The devolved nature of the framework provides entities the flexibility they need to meet their business needs. As a result, entity procurement governance structures and the operations of their central procurement teams vary widely amongst entities. Procurement governance varies from decentralised models, where individual business areas have more responsibility for procurements and central procurement teams conduct more supporting activities.[42]

2.50Despite being responsible for a devolved system, Finance characterised itself as ‘an active steward’ of the procurement framework, highlighting its work in ‘supporting and enhancing the procurement and contract management capability across the APS’. Finance noted that this active stewardship involves:

… initiatives to engage with officials and provide training and guidance on applying the Commonwealth Procurement Framework, promoting examples of excellence in and through procurement, provision of templates and tools, such as the Commonwealth Contracting Suite and BuyRight, and conducting outreach activities to provide tailored support to entities.[43]

2.51Finance also noted that it administers the Buy Australian Plan through the Future Made in Australia Office and hosts the Centre of Procurement Excellence, both of which aim to improve procurement capability in the public sector:

The [Future Made in Australia] Office supports the uplift of procurement and contracting capability across the Australian Public Service to provide government buyers with the skills, tools and resources they need, and strengthen relationships with business, industries, and communities by delivering targeted learning events to raise awareness on how to do business with the Australian Government. The Centre of Procurement Excellence (CoPE), which already existed in Finance, has moved into the Office and aligned its work to the Plan. Through CoPE, the Office leads and coordinates initiatives to build public sector procurement capability, strengthens partnerships with the business community and encourages innovation and best practice processes to drive value for money outcomes.[44]

2.52Finance emphasised to the Committee that as a policy owner, its focus is squarely on building the capability of procuring entities rather than on monitoring or compliance activity:

We don't run a separate compliance program where we will go and audit, for instance, how a procurement is done and then provide advice back to that entity or publicly do that. Our focus is very much on helping entities try to get it right upfront.[45]

2.53Finance argued that adopting a more compliance-focused regulatory approach would negatively affect its relationship with entities, and thereby result in worse outcomes:

Finance notes that the addition of any further compliance and monitoring activities within the Framework would need to be carefully assessed as this would potentially damage Finance’s strong relationships with procuring entities and place additional burden on procuring entities. Without the strong relationships with procuring entities, there is a risk that there will be less transparency and information sharing between entities, including with Finance.[46]

2.54In the absence of compliance activity, Finance noted that it relies on ANAO audit reports as a key indicator of entities’ performance in implementing the procurement framework:

We work through the ANAO's reports and audits and look to amend our framework where it's required, where there are shortcomings in the framework and it could be better. We are working to really improve the transparency of data around procurement so that entities can have greater information about their own procurements through AusTender but also so that that is transparent to the public as well.[47]

2.55When asked about Finance’s role as steward of the procurement regime, the audited entities provided varied assessments in terms of the usefulness of Finance’s guidance. Defence noted that it ‘works closely and collaboratively’ with Finance on its procurement activities, actively seeking Finance’s input in developing its procurement policy.[48] The DTA, the NCA and DISR likewise indicated that they seek advice from Finance on their procurements, especially complex or bespoke procurement activities.[49]

2.56By contrast, Home Affairs noted that it ‘has not specifically sought or received any feedback on its procurement practices’ and that ‘there is currently no requirement to provide data to Finance about the Department's procurement processes’.[50] Other entities noted that their provision of procurement information to Finance was limited to the voluntary Commonwealth Procurement Self-Assessment Survey or compulsory reporting of procurements on AusTender.[51]

2.57The Auditor-General argued that Finance’s position on its responsibilities as a regulator, especially its view that it cannot engage in compliance activity without affecting relationships with procuring entities was ‘a strange view to take’:

Whether you describe it as a stewardship or a regulatory framework, in most of the frameworks the Commonwealth operates where it's applied to outside of the Commonwealth there would be an expectation that, yes, you would do education but you would have a risk based approach to how you escalate a regulatory route based upon the likelihood of noncompliance. I think most of the community would be surprised if the answer was, 'We only ever do education because we don't want to hurt the relationship'.[52]

2.58Further, even when evidence from ANAO audits presents Finance with information that could shape a regulatory response, the department does not always act on that information. When asked how it would respond to the negative findings on the management of probity contained in four of the five audit reports that make up this inquiry, Finance said that it could not draw a conclusion as the sample size was too small:

Based on the sample provided in the ANAO audits (representing less than 0.1 per cent of procurements by volume entered into between 2019-20 and 2020-21) Finance has not drawn any conclusions relating to systemic or broader cultural issue across the Australian Public Service.[53]

2.59The Auditor-General emphasised that the key responsibility of a policy owner is to inform itself in relation to the framework it oversees:

At the end of the day, you are trying to achieve the policy outcome. In the first instance, to know whether you're achieving the policy outcome, you have to collect enough data to know whether there is compliance in the first place and what the level is in order to assess the risk.[54]

2.60The Deputy Auditor-General noted that, following the removal of a requirement that entities report on their procurement performance to Finance, the ANAO has seen even internal reporting on procurement decline at procuring entities:

Each entity was required to provide data to Finance on its compliance with certain elements, including procurement, and there was reporting. That was removed in around 2017. We've observed in audit work that since its removal even the internal reporting on compliance has started to fall away within entities. There's been a bit of a posture of, 'No-one's watching,' so no-one gathers the data anymore.[55]

2.61In the ANAO’s view, this dearth of compliance reporting has negatively impacted Finance’s ability to understand how procurement is being conducted in the wider APS, or to assess the performance of the framework it administers:

Reporting compliance with procurement requirements is limited to the inclusion of instances of significant non-compliance in entities’ annual reports. This impacts Finance’s ability, as the policy owner, to measure and assess the effectiveness of the procurement framework, identify areas of risk to the sector and to implement timely intervention strategies. Equally, the disaggregated reporting by entities in annual reports reduces transparency and accountability to the Parliament.[56]

2.62The ANAO argued that a more active regulatory posture could result in significantly better value for money outcomes from Australia’s procurement expenditure:

Whether you describe it as a stewardship or a regulatory framework, the policy owner has a responsibility for understanding if Commonwealth procurement policy outcomes are being achieved. Without evidence to the contrary, ANAO audits suggest there is opportunity to improve value for money outcomes and economic and social benefits from Commonwealth procurement activities.[57]

The role of audit committees

2.63Section 45 of the PGPA Act requires Commonwealth entities to set up an audit committee (also sometimes known as an audit and risk committee).[58] The functions of audit committees are set out in section 17 of the Public Governance, Performance and Accountability Rule 2014 (the PGPA Rule), which requires that, at minimum, an audit committee must review the appropriateness of the accountable authority's financial reporting, performance reporting, system of risk oversight and management, and systems of internal control.[59]

2.64The ANAO noted that 'an audit committee has no management responsibilities' and that the committees 'are intended to provide independent advice ... supporting the development of key practice and capacity within Commonwealth entities'.[60]

2.65In describing the role of audit committees, Ms Carol Lilley, the Chair of Home Affairs’ Audit and Risk Committee, told the Committee that:

We provide independent advice to the accountable authority - for example, the secretary or the CEO - on the appropriateness of four areas: financial reporting; performance reporting; system of risk oversight and management; and system of internal control. 'Appropriateness' is defined as being suitable or fit for purpose for the particular entity. These four areas are required by the PGPA Act and the Department of Finance resource management guide on the role of Commonwealth audit committees.[61]

2.66Ms Lilley said that audit committees review ‘the appropriateness of the systems the entity has set up’ to manage these four areas. In relation to risk management and internal controls, Ms Lilley noted that:

it's the appropriateness of the system of risk oversight and fraud risk and risk management as a whole. The fourth area is the system of internal control, focused on internal audit, so the internal audit program and internal audit reports but also business continuity planning, disaster recovery planning, the protective security policy framework, which includes security and cyber, legislative compliance and that key policies are in place.[62]

2.67Mr Allan Gaukroger, Independent Chair of the DTA’s Audit Committee, told the Committee that an agency's management is responsible for determining its internal audit program. An audit committee reviews the topics and makes recommendations to the accountable authority:

The audit work program is the primary function of management. In the DTA, for example, it gets put together after internal audit liaise with various executives - with the CEO, the executive board - and they have a look at what potential topics there may be against the particular strategic and enterprise risks. It then goes to the audit committee who review the proposed topics. We may make suggestions or changes to that, and after that it's put as a recommendation to the chief executives that the internal work program be approved for that year.[63]

2.68The Auditor-General highlighted that audit committees do not directly manage risks to an organisation, but rather provide advice on the systems and frameworks the entity has set up:

They are not the chief risk officer; their role is to oversee, to provide advice to the accountable authority on whether those people carrying out those roles, like chief risk officers and chief financial officers, have the frameworks and processes in place to do that appropriately, to carry out that role and give line advice next to it and to give some external oversight about whether things like the risk frameworks have the appropriate coverage of any entity of its ilk.[64]

2.69In relation to procurement, the ANAO noted that audit committees have 'no specific requirement' to advise on procurement, but that they can include procurement processes when reviewing entities' risks and internal controls:

However, in reviewing key risks and the appropriateness of internal controls, including the effectiveness of systems for monitoring the entity’s compliance with laws, regulations, and associated government policies with which the entity must comply, it may be appropriate for the audit committee to consider procurement processes, particularly given the scale of procurement in government activity.[65]

2.70The ANAO argued that, given the scale of expenditure on procurement, a greater focus on it in audit committees could be worthwhile:

Procurement is a major spend by entities across the Commonwealth and could warrant monitoring and oversight by audit committees, especially in entities with substantial procurement activities or where ANAO audit reports have identified risks.[66]

AusTender

2.71Finance is responsible for the administration of AusTender, which is the Australian Government’s centralised online procurement information system:

AusTender provides a single portal to connect government entities with suppliers through the publication of business opportunities, and provides transparency of contracts awarded following a procurement process. AusTender can also be used for limited tenders, where allowed by the CPRs, enabling entities to invite particular suppliers to participate.[67]

2.72Finance noted that entities are required to publish annual forward looking procurement plans, current procurement opportunities, as well as the details of all procurements entered into above given thresholds. For non-corporate Commonwealth entities, the reporting threshold is $10,000.[68]

2.73Finance also pointed out that AusTender is the primary method by which entities can set up or make use of standing offers or panels:

Panel arrangements are usually established by approaching the market through an open tender on AusTender. Responses that meet the conditions for participation for a panel are considered for further evaluation and negotiations, and if found fully capable of undertaking the work and demonstrating the best value for money, are appointed to participate in the panel.[69]

2.74The Committee heard from a range of stakeholders that AusTender has a range of shortcomings for those attempting to access public information stored in it. Ms Catherine Thompson from Hypereal told the Committee that:

AusTender, as mentioned through the ANAO report and by the 2017 task force, is not easy to manipulate and doesn't contain the information you need. It's self‑coded by people who enter to it. There are something like 13,000 active codes for UNSPSC [the United Nations Standard Products and Services Code], and there are simpler and easier ways of getting to the information.[70]

2.75Procurement consultancy National Advisory also highlighted flaws in AusTender’s usability:

Austender is a great tool for analysis, but it has significant shortcomings. Firstly, it does not capture all of the government spend. There are types of contracts that are exempt … There is no overall curator of the information that is logged into Austender. This creates difficulty in assessing information without data manipulation first ... The lack of curatorial control means that many fields have variable, and in some cases, incorrect data. This then makes it difficult to identify and amalgamate spends or trends in the data without significant work.[71]

2.76King & Wood Mallesons noted that AusTender is not helpful for agencies looking to assess or process tenders:

Currently, AusTender is used solely as a platform communicating Commonwealth opportunities and through which tenders are lodged. We are not aware of the platform having any capability to assist agencies to assess or otherwise process tenders.[72]

2.77To address this, King & Wood Mallesons suggested that a range of improvements to AusTender would be beneficial, including efforts to ‘assist agencies in assessing whether the minimum form and content requirements are satisfied - and communicate outcomes directly to tenderers, saving agencies from expending effort in assessing tenders as compliant or not on that basis' as well as assisting agencies to ensure their tenders are CPR-compliant.[73]

2.78Finance noted in response that it is exploring the replacement of some free text fields with standardised data, which will in its view increase the transparency of AusTender data.[74] Finance also noted that it is continuously looking for opportunities to assist entities to improve practices around the use of panels. This is being addressed through ‘future updates to AusTender to report how many suppliers were approached when undertaking a panel procurement’.[75]

2.79National Advisory argued that Finance should do more to improve the information it provides on AusTender, particularly though exercising ‘curatorial oversight’ over the information there:

[AusTender] is a useful tool to generate historical data, but the data requires too much manipulation to be useful. Austender needs to be actively curated to ensure data input from agencies is accurate, consistent in form and answer, and standards are being met. Austender should also be enhanced to ensure more transparency. For example, at present it is not possible to work out how much the government spends in any category without significant work.[76]

2.80Finance noted, however, that changes to AusTender can be difficult to make due to the significant overhead they carry for users of the platform:

Just very quickly to give you an understanding: making a change to AusTender reporting requirements impacts on a very large number of entities across the Commonwealth and they have to implement system changes in terms of both their personnel and their ICT in order to make that happen.[77]

Value for money in procurement

2.81The audit reports considered by this inquiry highlighted a number of common problems about the operation of the CPRs. Among these is the demonstration of value for money, particularly through the use of competitive procurement approaches.

2.82The ANAO noted in its submission that the Commonwealth Procurement Framework is principles based, and that achieving value for money is its key principle:

The principles are straightforward and readily visible in the table of contents of the Commonwealth Procurement Rules (CPRs). The core principle is achieving value for money, and this is enhanced and complemented by other key principles such as encouraging competition; efficient, effective, economical and ethical procurement; accountability and transparency; and risk management.[78]

2.83The ANAO noted that officials must make a reasonable effort to satisfy themselves that the procurement to be undertaken achieves a value for money outcome:

To achieve this outcome, the CPRs state that relevant entities should:

• encourage competitive and non-discriminatory processes;
• use public resources in an efficient, effective, economical and ethical manner that is not inconsistent with the policies of the Commonwealth;
• make decisions in an accountable and transparent manner;
• appropriately consider the risks; and
• conduct a process commensurate with the scale, scope and risk of the procurement and business requirement.[79]
  84. Services Australia, in its submission to the inquiry stated the principle in this form:

All commonwealth procurements are required to consider and achieve value for money, as stated within Section 4 of the Commonwealth Procurement Rules (CPRs). Procurements which are not sufficiently justified based on value for money, pose a potential risk in not clearly demonstrating accountability, probity and transparency of decisions. Undertaking Commonwealth procurements on a value for money basis demonstrates that public resources are used in the most efficient, effective, ethical and economic manner, in accordance with the Public Governance, Performance and Accountability Act 2013.[80]

2.85The ANAO argued that the use of competitive approaches to procurement is among the easiest ways to demonstrate that value for money has been achieved in a procurement:

Generally, the more competitive the procurement process, the better placed an entity is to demonstrate that it has achieved value for money. Competition encourages respondents to submit more efficient, effective and economical proposals. It also ensures that the purchasing entity has access to comparative services and rates, placing it in an informed position when evaluating the responses.[81]

2.86The most obvious means of promoting competition in procurements is through the use of open tenders which allow any suitably qualified tenderer to bid for the procurement. However, the ANAO noted that:

Despite the CPRs emphasising the benefits of open and effective competition, limited tender is a commonly used procurement approach. ANAO analysis of AusTender data shows that the reported use of open tender procurement methods has increased from approximately 45% of all contracts and amendments in 2017-18 to approximately 54% in 2021-22.[82]

2.87Drawing on its extensive performance audit evidence base, the ANAO observed that entities frequently avoid competitive procurement approaches because doing so is less costly for them and an easier process to undertake, and not because their approach provides value for the taxpayer.[83]

2.88The audits reports considered as part of this inquiry provide examples that bear this analysis out. The NCA for example, made insufficient use of open and competitive procurement processes, with limited tender approaches occurring even when the value of the procurement required an open approach to market.[84]

2.89Even when it undertook competitive procurement process, the NCA was often unable to demonstrate value for money. Where open tenders were conducted, conditions for participation were frequently included that limited competition, and incumbent suppliers were often preferred, limiting access to new market entrants. When assessing tenders, the NCA awarded contracts to the candidate that demonstrated value for money in just over half the cases examined by the ANAO.[85]

2.90The audit of the DTA also identified a range of issues relating to achieving value for money. The DTA frequently directly sourced procurements from panels in ways that did not support the intent of the CPRs in achieving value for money. When conducting open approaches to market, the DTA’s tender evaluation processes did not stand up to ANAO examination, with the audit finding that ‘'none of the examined procurements fully complied with CPR requirements to consider value for money'.[86]

2.91Similarly, the audit of DISR’s conduct of the Entrepreneur’s Programme ‘did not demonstrate achievement of value for money, the core rule of the Commonwealth Procurement Rules’.[87] Following DISR’s open approach to market the ANAO noted that:

Although the Request for Tender (RFT) resulted in 53 compliant tender responses being received suggesting a competitive selection process, the department’s approach was deficient in significant respects such that there was not open and effective competition for the delivery partner roles.[88]

2.92DISR’s conduct of procurements associated with the Entrepreneur’s Programme was also noncompliant with the CPRs. For example, its engagement of a probity adviser did not demonstrate value for money.[89] Its engagement of consultants to develop a contract management framework for the program also failed to demonstrate value for money.[90]

2.93However, not all the audit reports had negative findings in relation to value for money. Defence’s procurement of the six Evolved Cape Class Patrol Boats was not conducted through an open approach to market, but showed that when properly conducted, such procurements can still demonstrate value for money.

2.94Defence argued that given the unique environment within which it operates, 'competition in procurement is not always possible or beneficial'.[91] In procuring the patrol boats, Defence undertook a benchmarking process to assess the cost of the proposed procurement and the ANAO found that its value for money assessment was largely appropriate.[92]

The use of panels for procurement

2.95The inquiry heard a range of evidence relating to the use of standing offers or panel arrangements for procurements. This section considers that evidence – in particular the rationale for panel procurements, their effective use and how competitive they are, reporting of panel procurements on AusTender, market concentration, and barriers to entry on panels.

2.96Finance noted that the Commonwealth procurement framework enables standing offer panel arrangements to be established to streamline the buying and selling process for commonly used goods and services:

Panel arrangements are usually established by approaching the market through an open tender on AusTender. Responses that meet the conditions for participation for a panel are considered for further evaluation and negotiations, and if found fully capable of undertaking the work and demonstrating the best value for money, are appointed to participate in the panel.[93]

2.97The Independent Review of Services Australia and NDIA Procurement and Contracting: Taskforce report to the Independent Reviewer noted that panels can be more efficient and cheaper means of conducting procurement:

Use of a panel (or standing offer) arrangement can be a way to procure goods or services regularly acquired by entities more efficiently, with reduced cost and enhanced service and quality. Panels can be established by open or limited tender, and although the term 'panel' implies multiple suppliers, standing offers with a single supplier can also be referred to as panels.[94]

2.98The ANAO, however, highlighted that panels are designed to improve efficiency and reduce risk, not to reduce competition:

Panel arrangements are designed to improve efficiency and reduce risk, not reduce fair and transparent competition. Establishment of a panel should be viewed as a preliminary process intended to facilitate future procurement processes, which themselves should be conducted in a manner commensurate with the scale, scope and risk of the procurement and business requirement.[95]

2.99The CPRs note that officials ‘should report the original procurement method used to establish the standing offer when they report procurements from standing offers’.[96] And following their most recent amendment in July 2022, they also state that ‘[t]o maximise competition, officials should, where possible, approach multiple potential suppliers on a standing offer’.[97]

2.100The ANAO noted that the requirement to report only the method by which the panel was established is not suitably transparent:

Under the CPRs, procurements involving a panel arrangement, even where only one supplier is approached to tender, are reported on AusTender as an open tender if this was the method used to select the panel. This means that the limited competitive pressure on the tenderer arising from a sole source approach is not transparent to the public. A requirement to more accurately report these procurements would support entities to choose competitive processes more often.[98]

2.101The ANAO also noted that, increasingly, a small number of suppliers on a panel are capturing a large proportion of the contracts awarded through that panel:

Contracting through procurement panels has been growing significantly both in terms of the number of contract notices and their value. It remains common for a relatively small proportion of suppliers on a panel to be awarded the majority of contract value when the panel is accessed.[99]

2.102Evidence from Andrew Smith, Special Consultant with National Advisory, concurred with this conclusion:

Market concentration is another concern, with some of the panels we have examined showing one or two suppliers dominating the contracts awarded under the panel - in contrast with similar contracts in the state governments, where there's a greater spread of contracts to suppliers.[100]

2.103The National Advisory submission also noted specific instances of market concentration on a particular panel:

In one ICT panel, with fifteen registered suppliers, and for a commonly used service, agencies have let contracts for over $700 million in the first 8 years of the panel. One supplier has received over 80 per cent of this market and the top two providers have shared 92 per cent.[101]

2.104Mr Smith noted National Advisory’s observations that when a panel member has been single-selected for a contract, entities are ‘often rewarding that supplier with amendments that take contracts out to 10 years or more’, leading National Advisory to conclude that ‘incumbency is the greatest determinant of future supply contracts in the public service’.[102]

2.105Mr Smith argued further that panels as they exist at present often function to exclude new market entrants:

There are barriers to entry that make it difficult for companies to win work from panels; that panels can freeze out new entrants for the life of a panel, which is sometimes nine to 10 years; and that agencies often seek to renew or amend contracts towards the end of a panel's life, further restricting the work available to prospective new suppliers on a replacement panel.[103]

2.106National Advisory therefore argued for reforms to the CPRs to ensure that panels are refreshed often and that new entrants can apply to join a panel at any time:

That means that the panel remains innovative and competitive because the people who were on the panel before realise there are new entrants coming in, so when they get a chance to bid on a project and there are two or three bids coming in, they know they've got to be competitive.[104]

2.107The ANAO found problems with the way panel procurements were conducted at the DTA and the NCA, which are discussed in more detail in Chapter 3 and 4. The problems involved single-sourcing procurements from panels in a way which did not demonstrate value for money, and using panels in a way that lessened competition and thereby reduced value for money.

2.108Finance noted that changes to the reporting requirements for procurements conducted by panel are under consideration:

Changes to AusTender reporting requirements are being considered as part of broader policy development which gives due consideration to the ANAO audit findings, including the audit of the National Capital Authority.[105]

2.109The ANAO’s review of Procurement Contract Reporting noted that in the last 10 years the value of procurement conducted through standing offers (including panels) has increased from 12 per cent in 2012-13 to 34 per cent in 2021-22.[106] The report found that the top four suppliers, by number, of standing offers were KPMG, Ernst & Young, PricewaterhouseCoopers, and Deloitte.[107]

2.110The report notes that ‘among the top 10 suppliers by number of consultancy-related contracts, PricewaterhouseCoopers Consulting (Australia) Pty Limited had the largest proportion of its contracts that were consultancy-related with 39 per cent.’ PricewaterhouseCoopers appears twice in the top 10 suppliers by number of consultancy-related contracts, as its legal and consulting arms each appear on the list.[108]

Probity and ethics

2.111The inquiry frequently heard evidence relating to the management of probity during procurement processes. Most of the audited entities were found to have conducted procurements without properly managing probity appropriately.

2.112The ANAO noted that ethical use of public resources is a key responsibility of officials, particularly via the duties set out in sections 25-29 of the PGPA Act:

In particular, officials must not improperly use their position, or information obtained because they are an official to gain or seek to gain a benefit or advantage for themselves or any other person or seek to cause detriment to the Commonwealth or another person (sections 27 and 28). Moreover, officials must disclose details of any material personal interest that relates to the affairs of the entity.[109]

2.113The ANAO also noted, however, that most of the audit reports identified failings in the ethical conduct of procurements:

Four of the five audits subject to this inquiry contained adverse findings relating to ethical behaviour and probity risks in line with those outlined in paragraph 6.6 [of the CPRs]. Issues identified in the audits included failure to adhere to policy requirements such as mandatory fraud training, flawed processes for appointing a probity adviser, and a failure to take action in response to identified probity risks and proposed treatments.[110]

2.114Specific probity management issues were identified in relation to Defence, the DTA, DISR and the NCA.

2.115Defence’s procurement of six patrol boats resulted from an unsolicited proposal from Australian ship maker Austal. The audit found that Defence did properly manage probity, but that its probity process began only after a delay of five months. Given that Defence shared information with Austal relating to the development of the proposal during this time, the ANAO found that Defence should have considered probity earlier than it did.[111] Defence accepted the recommendation while noting that the conduct of its officials was appropriate in spite of the lack of formal probity arrangements during that period.[112]

2.116The audit of the DTA uncovered more significant probity issues. Of note, the DTA found but failed to properly investigate a possible case of fraud, in contravention of its own internal probity policies.[113] The DTA also failed to properly identify and manage actual, potential or perceived conflicts of interest, including requirements for activity-specific conflict of interest declarations.[114]

2.117In its administration of the Entrepreneur’s Programme, DISR did not make proper use of the probity advisers it engaged, in one case even putting their probity adviser to work on a project on which they were supposed to be advising on and thereby compromising their independence.[115]

2.118The ANAO also found that the NCA did not conduct procurements ‘to a consistent ethical standard under the CPRs’. NCA staff did not complete conflict of interest declarations in 39 per cent of contracts examined by the ANAO, and where a probity adviser was appointed, the NCA commonly did not have a conflict of interest declaration on record for the adviser.[116] Finally, records of the adviser’s role and conclusions on the probity of the procurement were often not retained.[117]

Record keeping

2.119Record keeping is the issue that arises most regularly in JCPAA inquiries. Entities have an obligation to keep adequate records; without adequate records an entity cannot demonstrate that its policies and practices are appropriate, which reduces the transparency and accountability of an entity for its procurement activities. Further, the ANAO's ability to audit the entity’s performance can be significantly impeded if they do not keep proper records.

2.120In relation to procurement, record keeping requirements are specified in paragraph 7.2 and 7.3 of CPRs. Officials 'must maintain for each procurement a level of documentation commensurate with the scale, scope and risk of the procurement'. The documentation should accurately and concisely record the requirement for the procurement, the process it followed and how value for money was 'considered and achieved', as well as relevant approvals, decisions and the basis for those decisions.[118]

2.121Paragraph 7.4 of the CPRs also notes that entities should retain evidence of agreements with suppliers – that is, contracts, purchase orders, invoices or receipts.[119]

2.122The ANAO found issues with several aspects of the DTA’s record keeping practices. The audit checked nine DTA procurements. Approach to market documentation was not kept properly for seven of them.[120] In relation to one procurement which used a limited tender approach, the justification for avoiding an open approach to market was not recorded, meaning value for money could not be demonstrated.[121] The DTA also failed to keep proper records of its tender evaluation processes, including how it established value for money.[122]

2.123In relation to DISR’s management of the Entrepreneur’s Programme, the ANAO found that 'appropriate procurement records were partly maintained' by DISR, and recommended that the department improve its procurement record keeping so that accurate and concise information on its procurement processes, including value for money assessments, is maintained.[123]

2.124The NCA’s record keeping was not appropriate, with the ANAO finding that 'poor transparency and record keeping' meant the NCA 'could not demonstrate value for money across its procurement activities'.[124] The audit also found that:

The NCA did not maintain records commensurate with the scale, scope and risk of the procurement. While records of approvals and the contracts awarded were largely maintained, it was common for there to be gaps in the records of the planning and conduct of the procurements.[125]

2.125Defence’s record keeping was not identified as an issue in the audit of the patrol boat procurement. Throughout the report the ANAO makes reference to Defence records of its receipt and treatment of the unsolicited proposal, its value for money assessment process, and its management of probity, among other issues.

2.126In relation to Home Affairs, the ANAO reported that its analysis of the departments management of the contract was 'made difficult by the state of the department’s records' and was 'impeded by the department not meeting the requirement for it to maintain adequate records of the original procurement'.[126] The audit also noted that 'Home Affairs’ invoice records were also incomplete, with a gap totalling $17 million of expenditure that cannot be supported by invoices’.[127]

Contract management

2.127Contract management is a key component of the procurement process, and the audits uncovered a range of problems with entities’ contract management processes.

2.128According to the ANAO:

Procurement should be seen in a whole-of-life context, from the initial tender of the goods/service to negotiation and finalisation of a contract and planning for what occurs next. A procurement process that results in a favourable contract does not actually achieve value for money if a contractor fails to perform in accordance with the terms of the contract.[128]

2.129In its Defence audit report, the ANAO expanded on this principle:

Sound project governance and contract management arrangements support the effective management of procurement risks and the timely delivery of capability on budget and against requirements. The delivery of contracted capability on time and on budget also supports the actual achievement of value for money in procurement.[129]

2.130A key element of contract management drawn to the Committee’s attention by the ANAO is the management of contract variations and extensions:

The value of public funds committed through contract extensions is significant: AusTender reporting for 2021-22 shows roughly $29.8 billion of contract amendments, compared to roughly $50.9 billion of parent contracts.51 Entities should ensure that contract managers, and any individuals advising them, understand that contract extensions and variations that are inconsistent with the key procurement principles can be detrimental to the conduct of a transparent and accountable process and to the achievement of value for money for the taxpayer.[130]

2.131Chapter 5, which discusses the audit of Home Affairs' Maritime Surveillance contract is primarily concerned with contract management issues. However, contract management issues were identified in other audits before this inquiry.

2.132For example, the ANAO identified significant deficiencies in the DTA's contract management processes:

The DTA has not established effective contract management arrangements for the procurements examined by the ANAO. None of the nine procurements had a contract management plan. The DTA did not consistently report contract variations to AusTender within 42 days or with the correct value. All nine procurements had issues with the timeliness of payments, and there were weaknesses in the DTA’s internal payment controls that led to duplicate payments being made.[131]

2.133The DTA also made significant use of contract variations in ways contrary to the intent of the CPRs:

The DTA varied seven of the nine procurements examined by the ANAO. In one case, a directly sourced contract was ‘leveraged’ multiple times, increasing in value by 40 times with substantial changes to scope. Varying a contract in this way is not consistent with ethical requirements.[132]

2.134In relation to contract management at the NCA, the ANAO noted that 'Contract variations pose particular risk to maximising value for money where they are negotiated in a non-competitive environment with an incumbent supplier’:

Of the top four contracts in terms of percentage increase at the NCA the value was subsequently varied by between 165 per cent and 880 per cent of their initial contract value, increasing them in aggregate from $771,546 to $2.8 million.[133]

2.135By contrast, the ANAO found that Defence 'implemented largely appropriate contracting, governance and reporting arrangements to support the acquisition' of the patrol boats. The contract Defence entered into included milestones with clear entry and exit criteria, due dates, and payments tied to achievement of the milestones.[134] Defence was also found to have managed project milestones appropriately.[135]

Committee comment

2.136These five audit reports, read together with the evidence from other inquiry participants, paint a concerning picture of procurement in the APS. There appears to be a significant capability deficit among procuring officials. As a consequence, there is widespread non-compliance with the procurement rules and frequent failures to demonstrate the achievement of value for money when conducting procurements.

2.137Procurement can be a complex endeavour. While the CPRs themselves are relatively simple, they sit within a financial governance and assurance framework that can be hard to grasp, especially in the case of officials for whom procurement is an infrequent or secondary responsibility.

2.138Given the sums of public money expended on procurement each year, it is clear that improvements in procurement practices and processes must be made, so that money spent generates as much value for the taxpayer as can possibly be expected. And given the scale of the problems evident from these five audit reports, it is equally clear that the improvements must be made systematically, across the APS as a whole rather than on an entity-by-entity basis.

2.139The Committee is encouraged that Finance is exploring the development of professionalisation pathways for APS staff to become procurement and contracting specialists. The Committee agrees with the department that an appreciable career progression incorporating subject matter expertise will assist to ensure that procurement skills and knowledge is built and retained in the APS.

2.140The Committee also acknowledges the evidence from private sector procurement professionals in relation to the development of procurement as a discipline in recent years. While not detracting from the critical importance of improving process, administration and the implementation of the framework, the Committee agrees that the current narrow focus on procurement as “a process” is too limiting and has failed to mirror this development in its conceptual underpinnings

2.141Without pre-empting the outcomes of a considered update of the Commonwealth’s definition of procurement, the Committee considers there is merit in considering procurement as more than just process and instead is attracted to considering procurement as ‘an holistic endeavour to minimise transaction costs across the supply chain whilst maximising overall value for money’ in alignment with the rules. This would require more active lifecycle management of supply markets especially in areas such as technology, health and categories where government is a large and sometimes even monopoly procurer. In many respects Defence already appears to operate in this way.

2.142In light of these factors, the Committee considers that Finance should expedite its work to professionalise procurement in the APS to the maximum extent possible, and ensure that in doing so it embeds a view and broader definition of procurement that reflects current best practice as seen throughout the procurement profession.

2.143The Committee recommends that the Department of Finance work to advance public sector procurement capability and professionalisation by:

• prioritising the development and rollout of a procurement professional stream within the Australian Public Service, to facilitate the creation of procurement and contracting specialists, and
• expanding the current definition of procurement in the Commonwealth Procurement Rules, to empower and better reflect modern, professionalised procurement practices, including more active management of supply markets and supply chains to maximise value for money.

Finance should report back to the Committee within 12 months on its progress to develop and deliver these outcomes.

2.144The Committee notes that the CPRs do not apply to corporate Commonwealth entities (CCEs) by default. Only 24 out of 72 CCEs are prescribed as ‘relevant entities’ in the CPRs and therefore must comply with the rules.

2.145The Committee shares the ANAO’s view that obtaining value for money and acting fairly and ethically should not be seen as a barrier to the commercial operation of CCEs. The Committee acknowledges that in some cases an exception could or should apply, but considers that the default approach should be for the CPRs to apply to CCEs with exceptions to be specified by the Finance Minister by way of legislative instrument.

2.146The Committee considers that the onus in relation to CCEs should be reversed so that the CPRs will apply to CCEs by default unless exceptions are made via legislative instrument issued by the Minister for Finance. There is no sensible justification for CCEs such as the NDIA to remain outside the CPRs.

2.147Reversing the onus so that CCEs are included unless exempted is preferable to a ‘point-in-time’ review of current arrangements. This is because it:

• requires Finance to make a conscious judgment in advising the Minister for Finance in implementing this change to, in effect, re-baseline the current application of the CPRs agency by agency, and then
• draws a line so that if new CCEs are created in the future the CPRs will automatically apply unless exempted.
  148. This change would mean that the integrity of the regime cannot unconsciously be eroded over time when new CCEs are created as is currently the case.

2.149The Committee recommends that the Department of Finance amend the Commonwealth Procurement Rules to reverse the onus such that they apply to corporate Commonwealth entities by default, with any exceptions to be made by the Finance Minister via legislative instrument.

2.150Paragraph 2.6 of the CPRs gives procuring entities the ability to suspend the operation of the rules in certain circumstances, namely the maintenance or restoration of international peace and security, to protect human health, for the protection of essential security interests, or to protect national treasures of artistic, historic or archaeological value.

2.151The Committee notes that Home Affairs invoked this clause to exempt itself from the requirement for an open approach to market for the Civil Maritime Surveillance contract procurement. While the Committee understands that the department’s rationale for invoking this provision was that there was no time left to procure a replacement, it notes two key things. First, that the only reason for urgency was the shared failure of the previous government and the department to initiate a procurement in a timely fashion. Invoking urgency where there has been a failure to manage procurements in a timely way is frustrating and sub-optimal. Second, that the provision’s use does not absolve the department from its obligation to achieve value for money in the expenditure of public money, and to conduct procurement in a fair transparent and ethical manner.

2.152In the Committee’s view, Finance should amend the CPRs to make clear that the exemptions from the CPRs under paragraph 2.6 do not excuse entities from their obligations under the Resource Management Framework to act in such a manner.

2.153The Committee recommends that the Department of Finance amend paragraph 2.6 of the Commonwealth Procurement Rules to emphasise that the core principles of achieving value for money and conducting procurements in a fair, transparent and accountable manner continue to apply to the procurement even when an exemption to the rules was obtained under the paragraph. Finance should develop and issue guidance on paragraph 2.6 to reflect this amendment.

2.154The Committee notes Finance’s evidence on its role as what it calls the ‘steward’ of the procurement system. The training and guidance material that Finance makes available is of great use.

2.155The Committee notes evidence from Finance that it looks to the results of ANAO performance audits for information on aspects of the procurement framework that may need attention or reform. While recognising Finance’s genuine and constructive actions to support entities to implement the framework, its approach is too passive and not adequate approach for a policy owner to take, not even when in charge of a ‘devolved’ system.

2.156The Committee notes that while some entities, Defence in particular, engage closely with Finance on procurement matters and share information with it freely, others do not, and provide little information to Finance on the conduct of their procurements beyond compulsory AusTender reporting requirements. The Committee acknowledges and accepts evidence that since the removal in 2017 of requirements for agencies to report to Finance on procurement outcomes, less systemic attention has been paid to procurement within many agencies. While this may have been well intentioned in the name of ‘cutting red tape’ the practical impact has been that Finance has been ‘flying blind’ with too little information and assurance on how the CPRs are being implemented by entities to enable it to advise the Minister for Finance on compliance with the framework and any changes that may be needed.

2.157In proposing that Finance can and should take more responsibility for the outcomes being achieved as the policy owner in a devolved implementation framework the Committee is not proposing that Finance police or second guess entities or take responsibility for individual procurements. Nor that Finance should tie the system up in red tape with unduly onerous reporting.

2.158As a regulator, however, Finance must take better responsibility for the procurement system. This should include the collection of sufficient information to allow it to identify risks to the system and manage them appropriately.

2.159In making this recommendation the Committee is conscious of the need to ensure any new requirements are as simple and streamlined as possible to minimise any additional internal regulatory burden, and anticipates that implementation of these recommendations would be core ongoing business for agencies and should not require additional appropriation, while recognising that these are matters for Government to consider in the ordinary way.

2.160Noting that reporting on compliance with the Commonwealth Procurement Rules (CPRs) is currently limited to the inclusion of significant non-compliance in annual reports, the Committee recommends that the Department of Finance:

• introduce requirements for entities subject to the CPRs to report, at least annually and certified by the accountable authority, on their compliance with the CPRs
• publish a report annually, commencing in the 2023-24 year, aggregating this information across the sector to help assess the effectiveness of the procurement framework, identify areas of risk, and inform changes to the procurement framework to ensure it remains fit-for-purpose, and
• require Commonwealth entities subject to the CPRs or the Public Governance, Performance and Accountability Act 2013, by 31 December 2023, to provide Finance with a report on their internal procurement and delegation policies that outlines how value for money will be ensured when procuring from panels.
  161. In relation to the role of audit committees with respect to procurement, the Committee is concerned that oversight of procurement risks and entities internal procurement controls is insufficient. The audits considered in this inquiry, especially those of the DTA and DISR, do not show an obvious appreciation of the entity’s substantial lack of compliance with the CPRs by its audit committee. As such, the Committee considers that, especially where entities are engaging in significant or complex procurements, audit committees should provide increased scrutiny of these activities and the consider the prioritisation of procurement in an entity’s program of internal audit.

2.162The Committee recommends that the Department of Finance amend its guidance to Commonwealth entities to recommend that, where an entity engages in significant or complex procurement activity:

• the entity’s audit committee should increase its scrutiny of procurement risks and internal procurement controls commensurate with the scale and risk of the procurements, and
• the entity’s internal audit program should provide assurance over the conduct of those procurements.
  163. The Committee notes with concern the adverse findings made against audited entities with respect to the management of probity. The obligation to conduct procurements in an ethical manner is a fundamental one, and entities must be capable of demonstrating that they have met that obligation.
  164. In this inquiry, four out of the five audited entities were found to have flawed processes for managing probity in their procurements in one way or another. Defence has accepted that although its probity process was appropriate, it did not commence early enough in the context of an unsolicited proposal. Probity management at the DTA was much more problematic, and its failure to properly investigate a possible case of fraud is of great concern.
  165. The management of actual, potential or perceived conflicts of interest is particularly important in procurement. Conflicts of interest will inevitably arise – if they do not, it may be a sign that that officials do not sufficiently understand the market that they are procuring from. What matters is how conflicts are treated, and if these audits are representative, there are deficiencies in probity management across the Commonwealth. The NCA could not demonstrate that it had managed conflicts of interest in nearly 40 per cent of its procurements, and the audits found significant problems with the use of probity advisers at both DISR and the NCA. The Committee considers it worthwhile to remind procuring entities of their probity management obligations and to provide them with guidance on how to properly engage and use probity advisers.
  166. Having a probity advisor is not a magic spell that cures all problems or ensures integrity and probity. Agencies need to use them properly, actively manage and actually pay attention to advice received and the Committee was bemused and concerned at the evidence revealed through the inquiry. The Committee intends that probity and ethical issues will be a key focus of its future work.

2.167The Committee recommends that the Department of Finance write to the accountable authorities of Commonwealth entities with guidance on how to use probity advisers, and reminding them of their obligation to manage probity in a thorough and consistent manner when conducting procurements.

2.168The Committee considers that the proper understanding of panels is as a pre-vetted and pre-qualified list of potential suppliers. Panels should not operate to unfairly and unreasonably limit competition through:

• the exclusion of new market entrants from the panel,
• limiting too narrowly the number of participants invited to quote or tender, or
• seeing prices as a fixed value ceiling, as opposed to a value floor from which to negotiate and sharpening the pencil accordingly.
  169. The inquiry raised a number of concerns about the use of panels for procurement. Both the DTA and the NCA had misused panels in ways that limited competition and did not achieve value for money for the Commonwealth. Single-sourcing from panels, especially when it involves selecting an incumbent supplier, is poor procurement practice and should be avoided if at all possible.
  170. The Committee agrees with the ANAO that entities must still undertake a value for money assessment when procuring from a panel, as should be done with any procurement. And further, that entities should seek multiple offers from panel members whenever possible, so that they can more convincingly demonstrate that they have achieved value for money. Finance should take steps to ensure that procuring entities are reminded of these best practices.

2.171The Committee recommends that the Department of Finance amend its guidance on the use of panels to make it explicit that:

• a separate value for money assessment must still be undertaken when conducting a procurement from a panel, even though value for money has been considered when forming the panel, and
• panel procurement should involve multiple competing tenders from panel members, with sole-sourcing from a panel generally considered inadequate to demonstrate value for money.
  172. A further problem with panel procurements is the extent to which a small number of suppliers are dominating the contracts awarded through them. Panel procurements can provide significant benefits in terms of efficiency and risk reduction for entities, but they should not come at the cost of the core principles of competition and value for money. The Committee notes the evidence it heard that panels are often exhibiting and may be facilitating concerning levels of market concentration and anti-competitive behaviour. Instead of assisting small and medium enterprises to compete for government work, panels are too often funnelling work to a small number of large companies. Panels should not continue to be a protection racket to channel work to the Big 4 consulting firms.
  173. Panels should not trade away value for money in exchange for convenience to the procuring entity, and incumbent suppliers should not be unduly favoured by them. Competition on panels and new market entrants should be supported. In the Committee’s view, Finance should ensure that the rules around panel procurements facilitate ongoing competition and make room for new entries to markets. Panels should be refreshed regularly enough that they do not become insulated from newcomers, and new market entrants should be able to apply for entry to panels if the situation arises.

2.174The Committee recommends that the Department of Finance require panel procurements to facilitate ongoing competition and foster new entries to markets, by requiring:

• panels to be refreshed at regular intervals, for example, at least once every two years and at least before a panel is extended, and
• an ability for new entrants to seek to be listed on the panel, at any time where possible or at least periodically during the life of the panel.
  175. AusTender is a useful tool for information on and reporting of Commonwealth procurement activity. However, the requirements for reporting on certain types of procurements has not always generated the level of transparency which the Committee considers was intended at its establishment. Of most concern are the reporting requirements for panel procurements, where the procurement method reported is the method which established the panel, rather than the method used in the procurement itself. The Committee notes that Finance plans to address this but reiterates that this requirement should be amended.
  176. Also of concern are the reporting mechanisms for contract amendments. The Committee is particularly concerned that the reasons for contract variations are not being reported in a sufficiently useful and transparent way, in that free text reasons for contract variations do not provide useful data. Consequently, it is recommended that a more standardised approach is adopted.

2.177The Committee recommends that the Department of Finance amend the reporting requirements on AusTender to ensure it is clear for every procurement:

• how many suppliers were invited to submit quotes for a procurement, including when procuring from panels and standing offers as recommended by the Australian National Audit Office in its audit of the Digital Transformation Agency, and
• reasons for any amendments or variations to a contract, by standardising the relevant field to produce more structured data.
  178. The Committee also heard evidence that suppliers find that AusTender has significant shortcomings in terms of its usability. One of the biggest problems raised was the difficulty of extracting useful information from AusTender to conduct analysis or identify business opportunities. Inconsistent data is a significant issue, arising in part from entries coded differently or from the use of free text fields where structured data from standard fields would be more useful. The Committee considers that Finance should exercise greater curatorial oversight over this data so that is more consistent, structured and accessible to its users.

2.179To facilitate a greater level of transparency in procurement, the Committee recommends that the Department of Finance exercise greater curatorial oversight over the information on AusTender, by, among other things, ensuring data is consistent, properly structured, and easily accessible, and by making standard format reports available to prospective tenderers.

2.180In considering these changes to AusTender the Committee also sees merit in Finance considering the many positive suggestions made by submitters for improvements to AusTender, including by King & Wood Mallesons, that may assist agencies with procurements and compliance with the rules.

Footnotes

[1]National Capital Authority, Submission 7, pp. 2-3.

[2]Digital Transformation Agency, Submission 1, pp. [3-5].

[3]Department of Industry, Science and Resources, Submission 5, p. 3.

[4]Australian National Audit Office, Submission 12, p. 5.

[5]Australian National Audit Office, Submission 12, pp. 12-13.

[6]Australian National Audit Office, Submission 12, p. 13.

[7]Australian National Audit Office, Submission 12, p. 13.

[8]Australasian Procurement and Construction Council, Submission 9, p. 3.

[9]Australasian Procurement and Construction Council, Submission 9, p. 3.

[10]Australasian Procurement and Construction Council, Submission 9, pp. 3-4.

[11]Negotiation Partners, Submission 4, p. 1.

[12]Negotiation Partners, Submission 4, p. 2.

[13]King & Wood Mallesons, Submission 15, p. 4.

[14]King & Wood Mallesons, Submission 15, p. 4

[15]Dr Ian Watt AC, Independent Review of Services Australia and NDIA Procurement and Contracting: Independent Reviewer’s Report, March 2023, p. 18.

[16]Dr Ian Watt AC, Committee Hansard, 14 April 2023, p. 14.

[17]Dr Ian Watt AC, Committee Hansard, 14 April 2023, p. 15.

[18]Department of Finance, Submission 11, p. 14.

[19]Department of Finance, Submission 11, p. 4.

[20]Commonwealth Procurement Rules, paragraph 2.7.

[21]Commonwealth Procurement Rules, paragraph 2.10.

[22]Hypereal, Submission 8, p. [1].

[23]Hypereal, Submission 8, p. [1].

[24]Australasian Procurement and Construction Council, Submission 9, p. 2.

[25]Australian Constructors Association, Submission 3, p. [3]

[26]Australian Constructors Association, Submission 3, p. [3].

[27]Catherine Thompson, Principal, Hypereal, Committee Hansard, 16 December 2022, p. 12.

[28]Catherine Thompson, Hypereal, Committee Hansard, 16 December 2022, p. 12

[29]Catherine Thompson, Hypereal, Committee Hansard, 16 December 2022, p. 12.

[30]Commonwealth Procurement Rules, paragraph 2.6.

[31]Department of Home Affairs, Submission 2.2, pp. [3-4]

[32]Australian National Audit Office, Auditor-General Report No. 15 2021–22, Department of Defence’s Procurement of Six Evolved Cape Class Patrol Boats, p. 14.

[33]Commonwealth Procurement Rules, paragraph. 10.3.

[34]Australian National Audit Office, Auditor-General Report No.11 2022–23, Australian Government Procurement Contract Reporting – 2022 Update, pp. 73-74.

[35]Auditor-General Report No.11 2022–23, p. 72.

[36]ANAO, Auditor-General Report No.5 2022–23, p. 43.

[37]ANAO, Auditor-General Report No.30 2021–22, p. 23.

[38]ANAO, Submission 12, p. 2.

[39]ANAO, Submission 12, p. 2.

[40]ANAO, Submission 12, p. 3.

[41]Department of Finance, Submission 11, p. 5.

[42]Department of Finance, Submission 11, p. 5.

[43]Department of Finance, Submission 11, p. 8.

[44]Department of Finance, Submission 11, pp. 10-11.

[45]Andrew Jaggers, Deputy Secretary, Department of Finance, Committee Hansard, 2 February 2023, p. 3.

[46]Department of Finance, Submission 11, p. 9,

[47]Andrew Jaggers, Department of Finance, Committee Hansard, 2 February 2023, p. 2.

[48]Department of Defence, Submission 10.1, p. [6].

[49]Digital Transformation Agency, Submission 1.1, p. [6]; National Capital Authority, Submission 7.1, p. [4]; Department of Industry, Science and Resources, Submission 5.2, p. [5].

[50]Department of Home Affairs, Submission 2.1, p. [22].

[51]National Capital Authority, Submission 7.1, p. [4]; Department of Industry, Science and Resources, Submission 5.2, pp. [5-6].

[52]Grant Hehir, Auditor-General, Committee Hansard, 2 February 2023, p. 3.

[53]Department of Finance, Submission 11.1, p. [13].

[54]Grant Hehir, Auditor-General, Committee Hansard, 2 February 2023, p. 3.

[55]Rona Mellor PSM, Deputy Auditor-General, Committee Hansard, 2 February 2023, p. 4.

[56]Australian National Audit Office, Submission12, p. 4.

[57]ANAO, Submission 12.2, p. 4.

[58]Public Governance, Performance and Accountability Act 2013, section 45.

[59]Public Governance, Performance and Accountability Rule 2014, section 17.

[60]ANAO, Submission 12.2, p. 4.

[61]Carol Lilley, Chair, Audit and Risk Committee, Department of Home Affairs, Committee Hansard, 2 February 2023, p. 1.

[62]Carol Lilley, Chair, Audit and Risk Committee, Department of Home Affairs, Committee Hansard, 2 February 2023, p. 1.

[63]Allan Gaukroger Independent Chair, Audit Committee, Digital Transformation Agency, Committee Hansard, 2 February 2023, p. 5.

[64]Grant Hehir, Auditor-General, Committee Hansard, 2 February 2023, p. 3.

[65]ANAO, Submission 12.2, p. 5.

[66]ANAO, Submission 12.2, p. 5.

[67]Department of Finance, Submission 11, p. 7.

[68]Department of Finance, Submission 11, p. 7.

[69]Department of Finance, Submission 11, p. 7.

[70]Catherine Thompson, Hypereal, Committee Hansard, 16 December 2022, p. 13.

[71]National Advisory, Submission 6.1, p. 1.

[72]King & Wood Mallesons, Submission 15, p. 2.

[73]King & Wood Mallesons, Submission 15, pp. 2-3.

[74]Department of Finance, Submission 11.1, p. [22].

[75]Department of Finance, Submission 11.2, p. [8].

[76]National Advisory, Submission 61., p. 4.

[77]Gareth Sebar, Acting First Assistant Secretary, Procurement and Insurance Division, Department of Finance, Committee Hansard, 2 February 2023, p. 15.

[78]ANAO, Submission 12, p. 4.

[79]ANAO, Submission 12, p. 5.

[80]Services Australia, Submission 17, p. [39].

[81]Auditor-General Report No. 42 2021–22, p. 18.

[82]ANAO, Submission 12, p. 7.

[83]ANAO, Submission 12, p. 7.

[84]Auditor-General Report No. 30 2021–22, pp. 17-18.

[85]Auditor-General Report No. 30 2021–22, p. 8.

[86]Auditor-General Report No. 5 2022–23, p. 9.

[87]Auditor-General Report No. 42 2021–22, p. 19.

[88]Auditor-General Report No. 42 2021–22, p. 19.

[89]Auditor-General Report No. 42 2021–22, p. 40.

[90]Auditor-General Report No. 42 2021–22, p. 65.

[91]Department of Defence, Submission 10, p. 3.

[92]Auditor-General Report No. 15 2021–22, p. 35.

[93]Department of Finance, Submission 11, p. 7.

[94]Independent Review of Services Australia and NDIA Procurement and Contracting: Taskforce Report to the Independent Reviewer, March 2023, pp. 12-13

[95]ANAO, Submission 12, p. 7.

[96]Commonwealth Procurement Rules, paragraph 9.13.

[97]Commonwealth Procurement Rules, paragraph 9.14.

[98]ANAO, Submission 12, p. 8.

[99]ANAO, Submission 12, p. 8.

[100]Andrew Smith, National Advisory, Committee Hansard, 16 December 2022, p. 21.

[101]National Advisory, Submission 6, p. 4.

[102]Andrew Smith, National Advisory, Committee Hansard, 16 December 2022, p. 21.

[103]Andrew Smith, National Advisory, Committee Hansard, 16 December 2022, p. 21.

[104]Andrew Smith, National Advisory, Committee Hansard, 16 December 2022, p. 34.

[105]Department of Finance, Submission 11.1, p. [16].

[106]Auditor-General Report No. 11 2022–23, p. 76.

[107]Auditor-General Report No. 11 2022–23, p. 79.

[108]Auditor-General Report No. 11 2022–23, p. 55.

[109]ANAO, Submission 12, p. 9.

[110]ANAO, Submission 12, p. 9.

[111]Auditor-General Report No. 15 2021–22, p. 9.

[112]Rear Admiral Wendy Malcolm, Department of Defence, Committee Hansard, 14 December 2022, p. 1.

[113]Auditor-General Report No. 5 2022–23, pp. 30-32.

[114]Auditor-General Report No. 5 2022–23, p, 33.

[115]Auditor-General Report No. 42 2021–22, p. 9.

[116]Auditor-General Report No. 30 2021–22, p. 9.

[117]Auditor-General Report No. 30 2021–22, p. 9.

[118]Commonwealth Procurement Rules, paragraphs 7.2-7.3.

[119]Commonwealth Procurement Rules, paragraph 7.4.

[120]Auditor-General Report No. 5 2022–23, p. 43.

[121]Auditor-General Report No. 5 2022–23, p. 44.

[122]Auditor-General Report No. 5 2022–23, p. 56-59.

[123]Auditor-General Report No. 42 2021–22, pp. 46-47.

[124]Auditor-General Report No. 30 2021–22, p. 7.

[125]Auditor-General Report No. 30 2021–22, p. 42.

[126]Auditor-General Report No. 6 2021–22, p. 18.

[127]Auditor-General Report No. 6 2021–22, p. 24.

[128]ANAO, Submission 12, p. 11.

[129]Auditor-General Report No. 15 2021–22, p. 47.

[130]ANAO, Submission 12, p. 11.

[131]Auditor-General Report No. 5 2022–23, p. 10.

[132]Auditor-General Report No. 5 2022–23, p. 72.

[133]Auditor-General Report No. 30 2021–22, p. 28.

[134]Auditor-General Report No. 15 2021–22, p. 48.

[135]Auditor-General Report No. 15 2021–22, p. 65.