Executive summary and recommendations
In October 2009, the Department of Defence (Defence) elected to
re-test the market and commence a new procurement process for air sustainment
services to the Middle East Area of Operation (MEAO).
From the start, there were clear indicators that this tender
required particular and special attention. Indeed, both past experiences and
current circumstances signalled significant probity risks, particularly in
respect of conflicts of interest, breaches of confidentiality and proponent
grievances about these matters, including:
- a notorious history of controversy associated with the MEAO
contracts, particularly proponent grievances about the probity of an earlier
tender process in 2005 and a record of personal animosity between some
companies as played out in the national media;
- the small and extremely competitive nature of the commercial air
charter market—in the lead up to the 2010 tender there had been active market
monitoring and lobbying activities of suppliers, including an unsolicited
proposal;
- the high value of the contract and the limited timeframe for the
procurement; (just over eight weeks);
- the movement of personnel between tenderers and between Defence
and tenderers;
- prior to the release of the request, the incumbent contractor raised
concerns about probity matters involving the alleged disclosure of confidential
tender information by a Reservist who, in his civilian capacity, was employed
as a consultant to a potential tenderer;
-
the Reservist's continuing association with that tenderer after
the release of the request;
-
early concerns raised by the incumbent contractor about the
changed tender specifications, particularly the increased cargo volumetric
capacity and the preference for a single aircraft solution with suggestions
that the changes could advantage a particular tenderer; and
-
the complexity of the proposed procurement arrangements,
particularly the use of the standing offer panel to purchase longer term,
scheduled air sustainment services.
Although Defence had
at least constructive knowledge of these circumstances and the associated
probity risks, it failed to implement measures to enable the systematic
identification and management of potential probity risks arising from these
circumstances—for example, documenting a probity plan, integrating probity
issues into the risk assessment framework and appointing a probity advisor.
Confronted by serious
allegations of impropriety and before the contract was finalised, Defence
initiated four separate reviews of the tender process by the Audit and Fraud
Control Division in Defence, PricewaterhouseCoopers, Deloitte and the
Australian Government Solicitor. They identified a raft of serious deficiencies
in the process but, overall, concluded that the flaws were not sufficiently
material to render the process unsound.
While not fully
convinced, the committee agrees with their findings. It could find no
compelling evidence of outright fraud; of the use of insider knowledge; of
designing the tender to unfairly favour a preferred tenderer; or of the successful
tenderer's inability to deliver services as specified under the contract. Finally,
there was no concrete evidence to suggest that the successful tenderer was not
fit and proper for the purposes of contracting with the Commonwealth.
The committee is strongly of the view, however, that Defence
should not take comfort from these findings. This tender was not only valued at
over $122 million but provides a critical service to Australian forces serving
in the Middle East Area of Operations.[1]
Aspects of the tender process were plain sloppy and, in light of the nature of
the industry and the behaviour of people in the industry, Defence was notably
inattentive when it came to identifying and managing probity risks, especially
conflicts of interests. Thus a cloud of uncertainty lingers over the integrity
of this tender.
The reviews and the committee also uncovered weaknesses in
the procedures for preparing and evaluating the tender. For example, inadequate
documentation, poor consultation and lack of certification gave rise to
confusion, inconsistency and a failure to correct an error in calculations
during the evaluation. Although the Source Evaluation Report was re-validated
and confirmed the successful tender as top ranked, the problems identified in
the process cannot help but undermine the committee's confidence in the
robustness of the decision-making processes.
Undoubtedly, the circumstances which prompted the
significant parliamentary and public scrutiny of the 2010 tender process have
damaged Defence's image and reputation. It must also have undermined the
industry's confidence in the integrity of the process. While the lessons
emerging from this incident need not have been learned at such significant
cost, the committee welcomes the reforms announced by Defence during the
inquiry. These measures may go some way towards addressing the governance and
procedural shortcomings evident in the 2010 tender process. The committee has
made recommendations for further reforms to enhance those already in train. It
has also requested the Auditor-General to conduct a review of the tender
process and the reforms announced by Defence, to identify any additional
lessons to be learned.
The committee has also highlighted the need for ongoing
monitoring of the implementation and effects of these reforms to avoid an
'implementation gap' between documented policy reforms and procurement practice
and has recommended that Defence provides the committee with periodic updates
on these matters.
The committee's recommendations are listed below.
Recommendation 1 paragraph
9.28
The committee recommends
that Defence:
- requires the documentation of a dedicated probity plan for all
future procurements of air sustainment services to the MEAO;
- ensures probity plans for all future procurements of air
sustainment services to the MEAO identify expressly and address the risks
associated with:
(i) proponent grievances and
(ii) the small and highly competitive nature of the commercial air charter
market;
- implements its proposed policy of appointing probity advisors to
all complex and strategic procurements and monitors closely the implementation
progress and impact of this policy—in particular, ensures that a probity
advisor is appointed to all future procurements of air sustainment services to
the MEAO; and
- amends chapter 3.2 of the Defence Procurement Policy Manual on
risk management in procurement to include references to probity risks. In
particular, Defence should consider cross-referencing chapter 3.13 on ethics
and probity in procurement.
Recommendation 2 paragraph
10.9
The committee recommends
that Defence reviews all Defence Instructions and related documents in respect
of Reservists, full or part time, to ensure that real and potential conflicts
of interest that might arise as a result of past, current or post separation
employment are identified, reported and managed appropriately. In particular:
a) Defence
considers whether Defence Instructions DI(G) PERS 25-2 (Employment and
voluntary activities of ADF members in off-duty hours) and DI(G) PERS 25-3
(Disclosure of interests of members of the ADF) should be extended to
Reservists who are not engaged in continuous full-time service; or
b) if there
is no intention to extend the application of DI(G) PERS 25-2 and DI(G) PERS
25-3 to Reservists who are not engaged in continuous full-time service,
Defence develops specific policies covering the civilian employment of, and the
disclosure of conflicts of interests by, those personnel.
Recommendation 3 paragraph
10.21
The committee recommends
that, prior to the re-tendering of any future contracts for the provision of
air sustainment services to the MEAO, Defence ensures that:
a) all
Reserve personnel involved in the procurement complete a conflict of interest
declaration; and
b) commanding
officers or supervisors in 1JMOVGP:
(i) make a risk-based assessment as to which other Reserve personnel must
complete a conflict of interest declaration and which personnel do not;
(ii) in making a risk-based assessment, give consideration to identifying and
obtaining conflict of interest declarations from Reservists who have
associations with the commercial air charter industry. Such associations may
include:
- present or previous civilian employment with air transport
providers;
- financial interests in these companies or related companies; or
- professional or social relationships with members or employees of
these companies; and
(iii) document
their decisions whether or not to require these Reservists to complete a
conflict of interest declaration.
Recommendation 4 paragraph
10.22
The committee recommends
Defence ensures that, in all future procurements of air sustainment services to
the MEAO:
- All members of tender evaluation boards and working groups, and
all persons involved in the development of requests, sign conflict of interest declarations.
Such declarations:
a) should be
signed prior to the commencement of the tender evaluation process or the
development of the request (as applicable); and
b) include
declarations about possible conflicts of interest arising from their
employment, prior employment, financial interests in potential suppliers or relationships
with persons who have interests in potential suppliers.
- All members of tender evaluation boards and working groups
receive specific briefings on conflicts of interest and other probity matters,
prior to the commencement of tender evaluations.
Recommendation 5 paragraph
11.20
The committee recommends that
Defence:
- In line with the findings of the AFCD Review, considers
strategies for the improved documentation of the business case for any future
decisions to re-test the market for the provision of air sustainment services
to the MEAO.
- Reviews its procurement plan for the current MEAO contract, to
ensure that sufficient lead time is provided for the making of any future
decisions to re-test the market, and the planning and execution of a
procurement process.
- In all future procurements of air sustainment services to the
MEAO:
a) continues
to include in procurement strategies a requirement that members of the Air
Transport Standing Offer Panel are given advance notice of any decisions to
re-tender the contract, prior to the release of the RFT; and
b) ensures
that such requirements are implemented.
- Implements strategies to ensure that potential tenderers have a
clear and accurate understanding of how Australian industry participation is
taken into account in the evaluation of tender responses, as part of the
overall value for money assessment.
- On the release of future requests for air sustainment services to
the MEAO, implements the following actions to minimise the risk of potential proponent
grievances:
a) provides
potential tenderers with an explanation of the reasons for re-tendering the
contract and any changes to tender requirements from the previous request;
b) provides
potential tenderers with an explanation of how the evaluation criteria in the
request documentation will be assessed; and
c) includes
in the request documentation, where applicable, an express statement of
Defence's:
(i) preferred solution for meeting tender requirements, including technical
specifications; and
(ii) intention to consider alternative solutions.
- As a matter of priority in future tender processes for the
provision of air sustainment services to the MEAO, takes action on the tender
evaluation issues identified by the Deloitte, AGS and AFCD Reviews, as
documented at paragraph 11.15 of this report.
Recommendation 6 paragraph
12.10
The committee recommends that in all future procurements of air
sustainment services to the MEAO, Defence develops and implements tender
evaluation processes for assessing respondents' fitness and propriety to
contract with the Commonwealth. Such evaluation processes should:
a) identify
criteria setting out requirements or indicators for being 'fit and proper' to
contract with the Commonwealth;
b) specify
searches that may be conducted on tender respondents, their key personnel,
proposed subcontractors and any associated companies (for example, parent or
subsidiary companies)—including guidance on the scope of the searches;
c) identify
the possible implications of the findings of each of the specified searches;
and
d) enable the
identification and assessment of potential risks arising from issues identified
in these searches including:
(i) reputational damage to the Commonwealth, should it proceed to contract
with the relevant tenderer; and
(ii) proponent grievances about the relevant tenderer's fitness and propriety
to contract with the Commonwealth.
Recommendation 7 paragraph
12.16
The committee recommends
that Defence includes in all future tender evaluation documentation for the
procurement of air sustainment services to the MEAO:
- specific provisions on conducting financial risk assessments of
tender responses involving charter broker arrangements; and
- essential requirement that proposals involving any form of
broker-based solution—including sub-contracting arrangements—must include the
complete financial statements of the proposed air charter operator and any
other proposed sub-contractors.
Request to Auditor-General paragraph
12.22
The committee requests that
the Auditor-General:
- Conduct a performance audit of the tender process in respect of
RFT AO/014/09, with a focus on probity risk management. In particular, the
audit should evaluate the following matters, with a view to identifying any
further areas for future improvement:
a) Defence's
governance arrangements for the identification and management of significant
probity risks to the procurement process, including conflicts of interest,
confidentiality and proponent grievances;
b) Defence's
program of procurement governance and process reforms, including those outlined
in its evidence to the committee; and
c) any other
matters considered relevant to probity risk management, or related governance
matters, in respect of the procurement of air sustainment services to the MEAO.
- After sufficient time has elapsed, conduct a second review to
examine Defence's implementation of its program of procurement governance and
process reforms. In particular the review should:
a) evaluate
the implementation progress and impact of the reforms outlined in Defence's
evidence to the committee; and
b) recommend,
as necessary, any further reforms to probity risk management and other
governance arrangements in respect of the procurement of air sustainment
services to the MEAO.
Recommendation 8 paragraph
12.23
The committee recommends
that Defence report back to the committee by 1 May 2012 on the progress being
made to implement the reforms it has announced including:
- the ongoing performance of the 2010 contract, including the cost
per mission, the realisation of projected savings, the continuing need for the
increased cargo volumetric requirements and the contractor's compliance with
the tender requirements;
- progress on the establishment of the Centre of Excellence that is
intended ‘to support a more robust and consistent commercial approach to
non-equipment procurement’;
- the work of the newly created Non-Equipment Chief Procurement
Officer; and
- the strategies for the recruitment and retention of suitably
skilled procurement professionals.
Recommendation 9 paragraph
12.25
Although the majority of
recommendations apply to the procurement of air sustainment services to the
MEAO, the committee recommends that Defence consider incorporating the
principles and practices underpinning them as part of Defence wide
non-equipment procurement policy.
Navigation: Previous Page | Contents | Next Page