3.1
Chapter 3 sets out the findings of the Joint Committee of Public Accounts and Audit (JCPAA) inquiry into Commonwealth procurement, based on Australian National Audit Office (ANAO) Audit Report No. 9 (2017-18), Management of the Pre-construction Phase of the Inland Rail Program. The Australian Rail Track Corporation (ARTC), the Department of Infrastructure and Regional Development (Infrastructure), and the Department of Finance (Finance) were the audited entities.
3.2
The objective of the audit was to assess whether value for money was being delivered by the ARTC’s management of the pre-construction phase of the Inland Rail program.
Committee conclusions and recommendations
Committee conclusions and recommendations
Implementation of ANAO recommendations
3.4
The Committee notes ARTC’s implementation of the ANAO recommendations to improve a number of aspects related to the management of the pre-construction phase of the Inland Rail program, including determining a way forward for a risk management system for the corporation as a whole and for the Inland Rail program in particular. The ARTC advised that is implementing improvements to its procurement and contract management systems. The Committee emphasises that ensuring this aspect of ARTC’s business is fit for purpose will be of vital importance as it begins to fully roll out the Inland Rail program. The Committee makes recommendations related to procurement policies and procedures below.
Governance arrangements
3.5
There is now a mechanism in place to provide progressive payments to fund the Inland Rail program, and the Committee notes that ARTC and the government have agreed a statement of expectation, a governance framework, and an equity financing agreement.
3.6
Infrastructure advised that ‘there is no specific reason’ that it took three years to sign a Deed of Agreement between the ARTC and the department and the Committee considers it desirable that such agreements are concluded in a more timely manner so as to avoid significant projects being managed pursuant to less formal arrangements such as exchange of letters.
3.7
The Committee requested information regarding the unpublished equity payment projections which are to be ‘drawn down by submission on a monthly basis against the forecast payments’, subject to ‘ongoing review and payment on a progressive basis as the project proceeds over the full term of the construction’. Infrastructure advised the Committee that it was not able to provide this advice due to ‘market and commercial sensitivities’. The Committee has elected not to pursue the matter further at this time, however it is noted that the Committee is able to seek and receive advice on a confidential basis and may seek to do so in the future in relation to this or other matters.
3.8
The questions that arose during the public hearings regarding the projected or anticipated draw down of equity funding in this project, raises a broader point regarding the transparency of easily available information in published Budget and portfolio documentation. Currently it is not possible to assess the extent to which equity commitments have been or are expected to be drawn across the portfolio of instruments, over the forward estimates (and beyond) or the changes in value of investments to an existing entity.
3.9
Budget documents indicate that this method of funding is proposed to be utilised more extensively, along with other instruments such as concessional loans which also sit outside the General Government Sector. Transparency of reporting of such commitments will be further explored by the Committee in its inquiry into the Commonwealth Financial Statements.
3.10
The Committee recommends that the Parliamentary Budget Office give consideration as to how information in the Budget papers could be augmented to enhance parliamentary scrutiny of the expected rate(s) of drawdown for investments and value of commitments without compromising commercially sensitive information.
Procurement and value for money
3.11
The Committee notes that ANAO’s review of ARTC procurement practices during the pre-construction phase of the Inland Rail program found areas for improvement. The Committee acknowledges changes made since the audit, driven by ARTC’s procurement transformation project team, and ARTC’s commitment to continuous improvement. Improvement of ARTC’s documentation and review procedures, as identified by the ANAO, will be of critical importance.
3.12
The Committee welcomes ARTC’s stated position on the use of single sourcing. ARTC has confirmed that it will be used only under exceptional circumstances. Clear procedures, documentation of decision making processes, and demonstration of value for money will be of utmost importance for ARTC to demonstrate that the Inland Rail program is being delivered according to best practice.
3.13
While the Committee acknowledges there was uncertainty over how the Inland Rail project would proceed prior to the government committing ARTC to the project, the Committee agrees with the ANAO’s finding that ARTC should have demonstrated ‘more mature procurement approaches’. The Committee shares the ANAO’s expectation that there should be ‘good procurement practices irrespective of whether it’s going to be a short-term or a long-term process’.
Procurement policies and procedures
3.14
The Committee acknowledges ARTC’s development of a procurement transformation project team, and advice that the team has already driven changes to procurement procedure addressing issues of documentation and procurement processes.
3.15
ARTC will now need to fully drive change to develop a risk management system for both the organisation as a whole and the Inland Rail program in particular. The Committee holds no firm position on whether a standalone system or two systems would better serve the needs of ARTC, and looks forward to seeing further development of a risk management system for this diverse and complex project.
3.16
The Committee recommends that the Australian Rail Track Corporation report back to the Committee on actions taken to develop an appropriate risk management system for both the Corporation and the Inland Rail program.
3.17
While the Committee acknowledges that ARTC is a Government Business Enterprise and is not bound by the Commonwealth Procurement Rules (CPRs), the Committee believes the CPRs represent a framework that may assist ARTC in the planning and delivery of the Inland Rail program. The removal of references to the CPRs was of some concern to the Committee, given it was unclear at one point what they had been replaced with. The Committee agrees with the Auditor-General that there at least needs to be a ‘thoughtful process to developing a procurement framework’.
3.18
The Committee was therefore pleased to hear from ARTC that its new procurement manual is aligned with the CPRs, the CPRs are referenced in the manual and relevant aspects are being reinforced during staff training.
3.19
The Committee recommends that the Australian Rail Track Corporation report back to the Committee providing a copy of the procurement rules and/or guidelines used for the Inland Rail project to demonstrate that Corporation staff have adequate guidance to assist them in procurement.
3.20
The Committee also notes the inconsistent use of probity advisors in the pre-construction phase of the Inland Rail program, and welcomes the ARTC’s tender to select a group of probity advisors for use across a range of projects.
Rate of return, equity funding, valuation and business case
3.21
The Committee will further consider matters related to rate of return, equity funding, valuation and the business case, with regard to the Inland Rail Program, in future inquiries, including its inquiry into the Commonwealth Financial Statements, based on ANAO Report No. 24 (2017-18).
Review of evidence
3.22
This section reviews the evidence received by the Committee, including:
Implementation of ANAO recommendations
Procurement and value for money
Procurement policies and procedures
Rate of return and business case
Implementation of ANAO Recommendations
3.23
The ANAO made three recommendations to the ARTC. The first was to accelerate the management of a risk management system for the Inland Rail program. The second sought to improve records management practice, and the third suggested ways to improve transparency and value for money in contracting arrangements. (see Appendix B for details)
3.24
The ARTC ‘agreed in principle’ with the first two recommendations, and ‘agreed in principle with qualification’ with the third. However, the ARTC’s submission to the inquiry noted that the corporation ‘accepts and agrees’ with the ANAO’s recommendations, making no mention of ‘agreement in principle’ or ‘providing qualifications’.
3.25
Asked why its initial agreement had been qualified, the ARTC stated that the recommendations had been taken ‘very much to heart’, and that ‘the reference to [agreement in principle] was more a recognition that some of the period covered by the audit went back quite a way’.
3.26
In its submission to the inquiry, the ARTC provided an update on progress towards implementing the ANAO’s recommendations.
3.27
Regarding recommendation 1, ARTC advised that it was proceeding with a tender process to implement a new risk management system, and in the interim was using a series of individual project risk registers.
3.28
Regarding recommendation 2, ARTC advised that it had reviewed the scope and timing of its approach to records management, and was implementing an Enterprise Content Management system across the entire organisation.
3.29
Finally, in accordance with recommendation 3, ARTC advised that it had strengthened policies and procedures for procurement and contract management, including strengthening probity advice and audit capability, and enhancing controls and delegations for the approval of single source procurement.
Governance arrangements
3.30
The Committee examined the deployment of equity funding and the governance arrangements around the Inland Rail program.
3.31
As to how equity funding was to be used, ARTC stated that the first $5 million of equity funding had been provided in December 2017, and the remainder of the total of $8.4 billion would be provided progressively by submission on a monthly basis against the forecast payments, with these payments being subject to ongoing review.
3.32
Infrastructure declined to provide the projected equity payment projection, citing ‘market and commercial sensitivities, including the potential to influence future tenderers submissions.’
3.33
The ARTC stated that all the governance arrangements for the Inland Rail program had now been put in place and that there had been a statement of expectation agreed between the board of the ARTC and the government. A governance framework and an equity financing agreement had been agreed, and the project development agreement that specifies the ARTC’s role was approaching finalisation.
3.34
The inquiry sought further information on the timeline relating to the delay in settling the governance arrangements for the project. ARTC responded that in 2014, it was provided $300 million in grant funding to commence preconstruction activities and develop a business case with this being completed in 2015. In 2016, $594 million of equity funding was allocated for land acquisition, and in May 2017 the government announced it would fully fund the project with an equity injection of $8.4 billion.
3.35
Finance advised that following the 2016 Budget, it had commenced a market testing process with the assistance of Macquarie Capital and Herbert Smith Freehills. A report was then provided to government, and funding, as discussed above, was then made. The process took into account a full range of options, including debt and grant funding, with a sensitivity analysis also being undertaken.
Procurement and value for money
3.36
The inquiry considered a range of issues relating to procurement, including the use of competitive pressures to drive down price, and ARTC’s use of single source procurement.
3.37
The ANAO found that competitive pressures in tendering processes delivered both probity and value for money outcomes, however, ARTC’s opening statement at the public hearing did not mention the importance of competitive pressures. ARTC noted that it had a ‘well-established procurement system’, and that the audit had identified areas for improvement, agreed to by the ARTC. ARTC also advised that a procurement transformation project team had been established by its Chief Financial Officer to implement the changes required to implement the findings of the audit report. Further, ARTC committed to ‘continuously improve the procurement processes’, noting the size and scale of the Inland Rail project.
3.38
ARTC noted that there had been ‘an extremely diverse range’ of procurements associated with the process, and that ‘a key aspect had been the establishment of robust documentation and review procedures’.
3.39
ARTC further advised that there were now ‘particular restrictions’ around single sourcing, to make sure that the use of single sourcing was only used under exceptional circumstances, such as when driven by geographical requirements, specialist knowledge, and requirements under regulatory arrangements, or because of original equipment manufacture. ARTC added that there were now ‘established processes to control and require documentation and demonstration of value for money in the decision making process.’
3.40
ANAO noted that its audit had found ‘stronger documentation’ of procurement over time, but that there was ‘still work to be done to improve risk management, to get the draft procurement policies and procedures finalised and to improve the document records’.
3.41
The inquiry also focused on the effect the uncertain future delivery status of the Inland Rail project had upon the development of ARTC’s procurement practices. In its response to the ANAO’s review, the ARTC commented:
As a general observation, ARTC considers the findings do not adequately reflect the uncertainty and lack of clarity associated with the initial funding, longevity and responsibilities for the Programme during the period when decisions were being made as to the future of the Inland Rail project.
3.42
In his opening statement, the Auditor-General commented:
In reaching our audit conclusion and findings, we took account of the operating environment of the ARTC, including the uncertainty surrounding the future of the Inland Rail program, against the backdrop of the Commission’s experience in procuring rail infrastructure and maintenance services more broadly. Given that broader procurement experience, we expected more mature procurement approaches to have been in place at the outset of the pre-construction phase of the Inland Rail program.
3.43
ARTC stated that in 2014, when it was given the task of commencing work on Inland Rail, it was an uncertain environment and:
…we were between the devil and the detail about whether we should embrace our own systems and apply them to the Inland Rail project, knowing that at a later date they could have been separated into a separate company or a separate delivery agent.
3.44
ARTC had used contractors on the business case and pre-construction work because of this uncertainty, but now that ARTC’s long-term role in the project had been clarified, it was now in the process of converting contractors into full-time employees. Additionally, ARTC stated that ‘we did use as many ARTC people as we could release from the business as usual into the project’ to avoid using recruitment processes and to harness pre-existing expertise.
3.45
In reply, the Auditor-General stated:
…we would have expected that [ARTC] would have been at a better starting place to use their existing processes in the Inland Rail process, recognising that the audit wasn’t focused on that area.
Secondly, we’re not convinced by an argument that says, ‘We don’t know what government’s going to do, so we’re not certain whether we should do it or we should invest as much into it.’ At the end of the day, we’d have an expectation that people have good procurement practices irrespective of whether it’s going to be a short-term or a long-term process.
3.46
Finance agreed with the Auditor-General, stating ‘good procurement practice is really important regardless of the circumstances. I think that the comment’s been made about uncertainty not being a relevant consideration.’
Procurement policies and procedures
3.47
ARTC outlined recent staffing changes aimed at improving procurement processes, including the development of a procurement transformation project team.
3.48
The inquiry was interested in progress to date as a result of these staffing changes, noting that the procurement transformation project team consisted of two streams, one in charge of overview and examining what needs to be changed, and the other in charge of delivering transformation. ARTC replied that it had ensured greater attention to sole sourcing and additional requirements in relation to documentation and processes had been implemented.
3.49
Mr John Fullarton of ARTC advised that late in 2017, ARTC decided on a corporate restructure, creating a new position of Group Executive, in charge of safety and corporate services, and reporting to the CEO of ARTC. Accordingly, ARTC now had heads of procurement, risk management, safety, and IT:
We’ve got a dedicated senior executive focusing on those key corporate areas, recognising the scale and size of Inland Rail to make sure that our systems and processes are moving at a rate to be able to provide that support across the organisation.
3.50
The ANAO also found that ARTC’s risk management system had experienced roll-out delays, and that business requirements had evolved since the original requirements were identified in 2014.
3.51
ARTC advised that it was looking at implementing a new risk management system, had gone out to the market for expressions of interest, and was expecting a request for tender in March prior to a June 2018 roll-out. Further, ARTC had not yet decided whether it would use a single system to deal with all the corporate requirements of ARTC, as well as Inland Rail, or whether there would be two systems. It was expected that this issue would be explored further through the tendering and evaluation process.
3.52
At the public hearing the ANAO noted that in 2015 ARTC purchased a risk management system and applied it within the organisation, but that it did not use this system for the management of Inland Rail risks. The ANAO expressed no view as to whether a standalone system or two systems would be best.
3.53
The ANAO report noted that, as the ARTC was a Government Business Enterprise, it was not required to comply with the CPRs. However, the Inland Rail Procurement Management Plan included the CPRs under applicable legislation, and an earlier version of Inland Rail procurement management documentation included references to the CPRs. In August 2017, the ARTC informed the ANAO that reference to the CPRs had been removed from all procurement documentation in recognition that the legislation does not apply to the ARTC.
3.54
Asked whether the presence of sound procurement policies at the beginning of a project reduced the risks of poor outcomes, the Auditor-General replied:
Things like the CPRs – recognising that they don’t apply to organisations like the ARTC – are put in place in order to have a requirement that ensures that risk of poor outcomes is minimised by mandating minimum approaches. Now what we’re expecting to see in organisations, even where the CPRs don’t directly apply, is that there’s been a thoughtful process to developing a procurement framework to manage those risks to maximise the chance of a good procurement outcome.
3.55
As to why references to the CPRs were removed from ARTC documentation, Mr Fullerton of ARTC stated that he was confident that its documentation was ‘in alignment’ with the CPRs.
3.56
In response to a question on notice concerning the removal of references to the CPRs, ARTC stated:
The company has undertaken a further recent comprehensive review of the CPRs and given detailed consideration to their application in the conduct of procurement and contract management activities for the Inland Rail program to ensure appropriate application of the CPR principles. The new procurement manual has been designed to align with the CPRs. The CPRs are specifically referenced in the manual and the relevant aspects are being reinforced during training sessions.
3.57
The ANAO further found that, while the ARTC guidance recognised the importance of the use of probity advisors, such advisors had been utilised in 15 of the 26 identified tenders, and that there was insufficient information to confirm that the guidance surrounding probity advisors had been used during the pre-construction phase of the Inland Rail program.
3.58
ARTC noted that the use of probity advisors ‘was not absolutely comprehensive across the Inland Rail project’, as use was assessed on a case-by-case basis ARTC advised that it had gone out to market to establish a tender, so that a group of probity advisors could be used across a range of projects.
Rate of return and business case
3.59
Asked whether the Inland Rail project would produce a positive rate of return, as would be expected under the Budget rules to qualify as equity funding, Finance advised that the project would ‘return a real rate of return over the life of the project.’ Further, Finance advised that the dividends had been modelled on the basis of the business case, and that expected dividends would be confirmed with the company through the corporate planning process. Considering the process, Finance stated:
With a project of this size, obviously we rely on estimates that have been provided through business cases. They’ve been rigorously assessed…
…the government’s obviously taken a decision on the best estimates that are available.
3.60
Finance declined to publicise the project’s rate of return as: ‘it is based on future cost and revenue assumptions, which are commercially sensitive’, and ‘publication of the rate of return would disadvantage ARTC and the Commonwealth as shareholder in …yet to be negotiated transactions.’
3.61
Asked what would happen if the project’s commercial rate of return was not realised, Infrastructure stated that the estimates in the Corporate Plan and within the budget would be updated to reflect the change.
3.62
ARTC added that revenues would only flow after the entire Melbourne to Brisbane project was completed, and that the construction phase was expected to run until ‘around 2025’. The inquiry was advised that a return on equity would be recovered in freight and access charges, and that the track currently under management was a long-term commercial lease until 2064.
3.63
The inquiry discussed Inland Rail’s business case and returns on investment. ARTC explained that [freight] would flow from the project on day one and build over time, and ‘will provide a positive return to ARTC.’ Asked what would happen if the project was not used to the same extent anticipated by the business case, ARTC replied that ‘it’s no different than running the business today’, the business case was ‘well considered’, and it was anticipated that the project could change ARTC’s market share from 25 per cent of north-south corridor traffic to 60 per cent.
3.64
Noting that a portion of the track was scheduled to be delivered as a public-private partnership, there was interest at the public hearing whether there was a business case for that section of the route and there had been testing on why to whether use of a public-private partnership was the best solution. ARTC advised that the section planned for delivery via a public-private partnership was 126 kilometres of track in Queensland from Gowrie Junction to Kagaru, and that this decision was made by the government due to ‘complexity and the opportunity to pass… …risk on to the private sector’.
3.65
The inquiry sought clarification as to whether there had been a business case made, with ARTC replying that, ‘within [the] 2015 business case, there were estimates done for the cost of that construction’, and that the cost estimate for that section of track was included in the overall project cost of $8.4 billion. Further, ARTC would make a contribution to the project ‘because the project, to a level, is commercial to us – it generates significant uplift in access revenues, which will flow to us once that line’s open.’
3.66
There was also interest in whether ARTC had undertaken assessments of what would happen to the commercial case and to taxpayers’ equity if project construction costs blew out between 30 to 40 per cent, noting studies (including those from the University of Melbourne) had found that public sector infrastructure projects saw an average overrun of 32 per cent.
3.67
ARTC replied that Inland Rail was a large project over a long timescale, there was a risk of overrun and this was significant in the business case. Further ARTC advised that it was going through a process of further refinement as the project continued through more detailed design and final alignment, and that ‘significant contingency’ would be built into the project.
3.68
Asked whether this contingency would cover an overrun of 30 per cent, and whether ARTC would remain comfortable that commercial returns and taxpayer equity would be maintained, ARTC replied that these sensitivities had been considered and there had been ‘conservatism built into the volumes that the project can generate in terms of market share, pricing and the market size itself.’