Chapter 5
Internal review of the 2010 tender process
5.1
In response to Mr Aisen's grievances, Defence initiated a series of
reviews of the 2010 tender process. Basically, they were to determine whether
there were any legal or policy compliance related reasons that would prohibit
Defence from proceeding to contract. Defence stated that the total cost for the
reviews was in the vicinity of $700,000.[1]
5.2
This chapter outlines the findings, scope and methodology of the
internal review conducted by the AFCD, and the peer review conducted by PwC. It
also notes the limitations placed on the reviews and the necessary
qualifications to their findings. Chapter 6 then addresses the external reviews
undertaken by Deloitte and AGS.
AFCD review
5.3
On 15 July 2010, the Secretary requested Defence's Chief Audit Executive
to conduct a probity review of the 2010 tender process. Following preliminary
scoping work, the review commenced on 19 July 2010.[2]
Scope and methodology
5.4
The probity review addressed seven key questions:
(a) Was the tender process sound and did it comply with Commonwealth and
Defence procurement policy?
(b) Were all tenderers given equal opportunity to respond to the tender and
were all tenderers treated fairly and equally?
(c) Were the tender evaluation and value for money assessment processes
thorough, free of bias and was the basis for ranking the tenders a true
representation of the tenderers' compliance with the selection criteria?
(d) Did the request period of eight weeks provide sufficient time for
tenderers to provide tenders that could meet all conditions of the tender?
(e) Did the specified air sustainment support services relate to actual
operational needs?
(f) Did the specifications disadvantage any tenderers?
(g) Is there anything identifiable in the tender process that would justify
re-tender?[3]
5.5
The AFCD Review assessed the following steps in the tender process
against the policy framework in the Commonwealth Procurement Guidelines (CPGs),
the Defence Procurement Policy Manual (DPPM) and the Financial Management
Guidance 14 (FMG 14):[4]
(a) procurement planning and industry engagement;
(b) development of tender documentation and technical specifications;
(c)procurement risk and probity management;
(d) tender evaluation and coordination of the TEWGs; and
(e) value for money decision making process.[5]
5.6
To undertake this assessment, the AFCD Review accessed documentary
evidence and conducted interviews with key personnel. Documentary evidence
included the TEP, the 2008 contract, the draft 2010 contract and request
specifications, TEWG working papers and notes, an independent probity review
relating to the 2005 tender, and various other internal documentation such as
briefings.[6]
It also accessed data from sources including the Defence personnel records
management system, the Reservists' pay system, electronic document access
records, and telephone and email logs pertaining to Major Charlton.[7]
The following personnel were interviewed as part of the review:
- Air Commodore Peter Brennan, Director General Logistics
Assurance, on 21 July 2010;
- Mr Alan Scheckenbach, Director National Logistics, Joint
Logistics Command, 9 August 2010;
- Financial Investigations Services personnel, 4 August 2010;
- Clayton Utz legal advisors, 4 August 2010;
- Lieutenant-General Mark Evans,
Commander Joint Operation Command, 13 August 2010;
- Major David Charlton, 3 August 2010; and
- Mr Mark Clark, Mr Stuart Lee and Mr Anil Pattel, Adagold, 13 August
2010.[8]
Key findings
5.7
In summary, the AFCD Review found that the 2010 tender process was fair
and complied with Commonwealth and Defence procurement policy.[9]
Its key conclusions were that:
(a) the decision to re-tender was based on valid commercial and operational
considerations, including the likelihood of an improved value for money outcome
following changed aviation industry conditions due to the global financial
crisis;
(b) the above-mentioned decisions could have been better documented;
(c) the tender specifications—including an increase in the freight
capacity—were based on valid and objectively determined operational and
technical requirements, and were not specified to advantage or disadvantage any
tenderers;
(d) there was no relevant evidence to support claims that Adagold should
have been excluded from the contract due to alleged corrupt behaviour in
relation to dealings with the South African Defence Department;
(e) there was no evidence that Major Charlton had any involvement in, or
influence on, the RFT or tender evaluation process;
(f) no evidence was found to support claims that Major Charlton directly or
indirectly had privileged access to any information associated with the tender
specifications;
(g) there was no evidence to support claims that Hi Fly did not meet
essential Australian airworthiness requirements or that it had a history of
unsafe operations; and
(h) on the basis of the findings of an independent external probity audit of
the 2005 tender process conducted by Phillips Fox (now DLA Piper)—which found
that the 2005 tender process was conducted in a fair, open and transparent
manner—it was not necessary to perform additional assessment of the 2005 tender
process.[10]
5.8
Within these broad conclusions, some of the critical findings in
response to Strategic's matters of complaint related to the tender
specifications, conflicts of interest and the fitness and propriety of the
successful tenderer.
The tender specifications
5.9
The AFCD probity review formed the view that:
- The cargo volumetric specifications did not advantage or
disadvantage particular tenderers because they were functionally specified, and
the preference for a single aircraft solution was based on evidence of
logistics complications arising from the existing load-splitting solution.[11]
- There was no requirement to favour an Australian solution in the
tender specifications or evaluation process. While Australian industry participation
and the promotion of small-to-medium enterprises are important considerations,
the overriding principle is the achievement of value for money. Australian
industry participation was appropriately taken into account in the value for
money assessment of responses. For example, while the request did not mandate
the use of Australian crews, a number of tender responses offered Australian
crews and this factor contributed to the overall value for money assessment
undertaken by the TEB.[12]
- While the eight-week tender response timeframe was tight, it was
achievable, not unusual for the aviation industry and based on operational
need.[13]
5.10
Overall, the review found that 'the tender evaluation process was
conducted appropriately' and the selection of the preferred tenderer and the
second and third ranked tenderer was 'based on objective VFM [value for money]
and risk assessment processes'. It noted, however, that there was 'very little
difference between the top three ranked tender options'.[14]
Conflict of
interest and confidentiality issues in relation to Major Charlton
5.11
The AFCD Review considered conflict of interest and confidentiality
matters and found:
- Major Charlton immediately and appropriately declared a potential
conflict of interest shortly after becoming aware of the release of the request
on 29 March 2010, and Defence acted immediately to ensure that he could
have no involvement in the tender process.[15]
- A review of documentary evidence (including physical and
electronic security processes, data from Defence records management systems and
ICT access and usage records) and interviews with key personnel indicated that
Major Charlton:
- had no role in the development of tender specifications or the
procurement process more broadly;
- had no access to the electronic or physical files relating to the
tender; and
- did not appear to have received or communicated any evidence in
relation to the tender process (on the basis that no contrary evidence had been
identified).[16]
- Adagold was aware generally of increasing load requirements by
virtue of industry knowledge of the performance of the 2008 contract, including
monitoring separate freight forwarding arrangements.[17]
- There was no evidence to connect the application made by Hi Fly
to add a second Airbus A340-300 aircraft to its FAAOC to any inside knowledge
acquired by Adagold. Rather, it appeared that Hi Fly had taken a pre-emptive
business decision on its own initiative. In light of its strategic partnership
discussions with Adagold and its record of servicing previous MEAO contracts,
there was a reasonable possibility that it may be approached by any panel
member, should the contract be re-tendered.[18]
- No evidence was identified to support the assertion that Major
Charlton was approaching Strategic pilots to recruit them to Adagold. Even if
evidence did emerge, the AFCD Review considered that it would still need to be
established whether they relate to the 2010 tender. It also observed that any
such approaches would not necessarily demonstrate impropriety. Given that
Strategic was the continuous contract holder since 2005, 'it would be logical
that any preferred tenderer might look to target their skilled and experienced
workforce upon winning the contract'.[19]
The fitness and propriety of
Adagold to contract with the Commonwealth
5.12
Finally, in respect of Adgold's fitness and propriety to contract, the
AFCD Review found:
- There was no cogent evidence to support allegations concerning
tender irregularities involving Adagold (South Africa) or Adajet. There did not
appear to be any conclusive findings of wrongdoing by South African
authorities, and the outcome of a similar review undertaken by the Danish
military was consistent with this finding.[20]
- Hi Fly met the relevant ADF airworthiness requirements because it
is registered by the Portuguese civil aviation authority, INAC. The Portuguese
authority is a recognised National Aviation Authority in accordance with the
relevant requirements in the ADF Airworthiness Manual.[21]
-
As Major Charlton was neither a tenderer nor a subcontractor to a
tenderer, his commercial history was not relevant to the tender evaluation
process or probity review.[22]
Deficiencies in the tender process
5.13
While ultimately concluding that the tender process was sufficient from
a technical compliance perspective, the AFCD Review identified several deficiencies
in 'the tender planning process, and in the completeness of the tender
evaluation methodology and assessment documentation'.[23]
5.14
Although it formed the view that these deficiencies were 'not to the
extent to cause the tender process to be suspended', the AFCD Review singled
out areas for improvement and made several recommendations. These included:
- the panel deed of standing offer was suitable for simple
charters, but may not have been suitable for the more complex air sustainment
procurement activity being contracted for under the MEAO air sustainment
services contract;[24]
-
the Air Transport Standing Offer Panel Administrator should obtain
a complex procurement competency as soon as possible, in accordance with the
recommendation in the Defence Procurement Policy Manual (DPPM). The AFCD Review
further recommended that this competency should be designated as a prerequisite
to appointing future personnel to this position;[25]
- the procurement planning process should be strengthened through
the following measures:
- an improved commercial risk assessment and the appointment of a
dedicated, independent probity advisor prior to the release of the request and
in lieu of placing excessive reliance on the 'assurance' provided by the
standing offer panel risk assessment;[26]
- utilisation of standardised ASDEFCON (template Defence contracts
and tender documentation) requirements, terminology and templates where
practicable;[27]
- early consultation with relevant line areas in the development of
the TEP—for example obtaining Financial Investigation Service advice on the
agreed pricing model and financial evaluation processes;[28] and
- the TEP should provide a detailed outline of the scoring and
pricing model to ensure a standardised and complete assessment of tender
responses; [29]
- the tender evaluation process should be improved through the
following measures:
- the TEB should produce a separate report for its initial
compliance assessment against the five evaluation criteria for which it was
responsible, in addition to its overall compliance assessment; [30]
- improved consultation between elements of the tender team in the
evaluation process—particularly between the technical/operational and financial
TEWG staff;[31]
- a clearer explanation of rankings in the SER, to better
communicate the processes used, the level of relative risk and the assessed
mitigation strategies, as well as clearly communicating the relative compliance
aspects of each tender response;[32] and
- on the basis of the number of flights undertaken under the 2008
contract, the contract pricing analysis should be based on 80 flights per annum
rather than the figure of 65 originally used by the financial TEWG. (The AFCD
Review requested the financial TEWG to conduct a price sensitivity analysis
based on 80 flights and concluded that it did not materially affect the
preferred tenderer ranking).[33]
5.15
The AFCD Review findings on the appointment of a probity advisor are especially
pertinent to the committee's inquiry. The review found that:
While the advice not to appoint an independent probity
advisor may have been reasonable at the time, with the benefit of hindsight the
probity review concluded that a complete risk assessment of the 2010 request by
Defence should have identified the desirability for an independent probity
advisor, particularly given that the panel is comprised of highly competitive
companies within an industry operating on tight margins and offering almost
identical services.[34]
5.16
The committee considers a number of these identified deficiencies and
weighs up the importance of appointing a probity advisor in chapter 9.
5.17
It should be noted that on 12 August 2010, before the AFCD team had
concluded its review, an article appeared in national newspapers that raised
serious probity concerns about the 2005 contract. It reported that soon after
the 2005 tender process had concluded, Mr Charlton and another Defence member,
both of whom had links to the logistics group, were given senior management
jobs by the successful tenderer. The author of the article understood that Mr
Charlton had been involved in the tender process, creating 'serious
conflict-of-interest concerns'.[35]
Review limitations
5.18
The committee questioned Defence about various limitations in the scope
and methodology of the AFCD Review.[36]
Mr Bromwich, Inspector-General, Defence, acknowledged that the AFCD review team
was 'working to a very tight time line'.[37]
According to Mr Brown:
We were working to try to have a report delivered on the
probity around the process of the tender evaluation so that the contract could
be signed in time to establish a RIP, a relief in place, which is about moving
a lot of troops into and out of theatre.[38]
5.19
While the committee understands that Defence was under pressure to have
the contract in place to save disruption to its air services to the MEAO and the
extra costs of putting in place an interim arrangement, it finds this
explanation highly unsatisfactory. Surely, the most important and overriding
objective was to ensure that the tender process was valid and the contract
sound.[39]
5.20
Other relevant limitations to the review included:
- the decision not to investigate a possible connection between the
2005 and 2010 tender processes, on the basis of the findings of the Phillips
Fox (DLA Piper) probity review of the 2005 tender;[40]
and
- the fact that the probity review was not a fraud or criminal
investigation, but rather a process review focused on the identification of
evidence showing why the tender process should not proceed.[41] This emphasis contributed to:
- the decision not to interview Mr Aisen, in particular to ascertain
his basis for making his allegations;[42] and
- the fact that the personal telephone and email records of Major
Charlton were not examined.[43]
5.21
The committee also notes that the AFCD team did not interview any of the
unsuccessful tenderers. Because of its limitations including the nature of the
available evidence, the AFCD Review in some cases could only reach conclusions
that still left room for doubt. For example, although it conducted a forensic
examination of physical and electronic security processes and records,
including Major Charlton's Defence email and storage drives, it could not prove
either way whether Major Charlton 'may have or could have had access to
relevant discussions'. The committee returns to these limitations in chapter 8.
The PwC review
Engagement
5.22
On 18 August 2010, Defence engaged PwC to conduct a peer review of the
AFCD review process to ensure that it was thorough and robust.[44]
PwC was engaged to assess the AFCD process in accordance with the principles
outlined in FMG 14[45]
in respect of ethics and probity in Australian Government procurement—namely:
(a)
fairness and transparency;
(b) consistency and transparency of process;
(c) use of an appropriately competitive process;
(d) appropriate security and confidentiality arrangements;
(e) identification and management of actual and potential conflicts of
interest; and
(f) compliance with legislative obligation and government policies.[46]
5.23
The PwC review started a month after the AFCD review commenced. Two
directors and one partner undertook the work for a fixed amount of $20,625 (GST
inclusive), calculated on an estimated 11 days of work.[47]
5.24
Defence contracted PwC under a co-source internal audit services
contract.[48]
Mr Brown explained the process of appointment:
I went and discussed [the peer review] with
PricewaterhouseCoopers in my office. They were there because they are normally
working on jobs for us at any point in time. I took advantage of that. We had a
discussion and I said to the partner at the time, Steve Baker...'Can you
construct a terms of reference for me? Whatever you need to do to complete the
job and make a thorough review, please do it.' He responded to me with that
letter to my assistant, David Anderson. I was aware of the content of that and
they undertook the review. The review was done to provide assurance that there
were no steps in the process that we were not following. We chose them because
I could call on them immediately. I am sure the PricewaterhouseCoopers brand is
worth a lot more than any one assignment to Defence, so I had confidence that
they would have employed Chinese walls to ensure that the person undertaking
the review had not been working on audits in our area—indeed, I know that for a
fact.[49]
Methodology
5.25
In conducting the peer review, PwC adopted the following approach:
- conducted interviews with key AFCD executive and probity review
team members to ascertain:
- their understanding of what led to the probity review and the
associated risks to the Commonwealth if the allegations proved to have
substance;
- their understanding of the probity review objectives and
processes and their roles;
- the application of the probity principles in FMG 14 to the
conduct of the probity review;
- whether there were any inconsistencies with respect to the
information provided by interviewees;
- whether they had any concerns relating to how the probity review
progressed; and
- whether they were kept informed throughout the review regarding
the issues and risks detected; and
-
reviewed relevant source documentation including working papers;
and
-
reviewed the processes that AFCD followed.[50]
5.26
PwC emphasised that it did not re-perform any of AFCD's procedures or
investigate the basis of any allegations made in respect of the 2010 tender.
Nor did it repeat the tender evaluation process or provide an opinion on the
tender evaluation decisions or the ranking of tender respondents.[51]
PwC indicated that it had placed reliance on the representations made to it by
AFCD staff during interviews and on the content of working papers and other
documentary evidence provided to it. It did not independently verify any of
this information.[52]
5.27
In its review, PwC indicated further that it had not carried out an
audit or other assurance engagement in accordance with applicable professional
standards, or had it attempted to detect fraud or accept responsibility for
detecting fraud.[53]
5.28
The observations made in its peer review were discussed with AFCD staff
throughout the peer review process, who agreed with, and acted upon, them prior
to the finalisation of their AFCD probity review report in September 2010.[54]
Findings and AFCD's response
5.29
PwC concluded that the probity review was conducted in a manner that was
consistent with the key principles underlying ethics and probity in
procurement.[55]
It considered that the work undertaken by AFCD had not 'identified any
significant issues, unreasonable observations or serious deficiencies in their
probity review process, which would lead us to conclude that the probity review
has not been completed in an impartial manner'.[56]
PwC made six observations about the probity review process, five with
accompanying suggestions, which were:
-
PwC noted that due to a departure from normal practice as a
result of time constraints, a probity review methodology was not documented in
a review plan prior to commencement. It observed that a methodology was
developed by AFCD concurrently with its fieldwork.[57]
-
PwC observed that Mr Aisen had not been interviewed by AFCD and
suggested that 'in the interest of being seen to conduct a fair and transparent
process, consideration should be given as to how to address the issue of not
having interviewed [him]'.[58]
-
PwC suggested the inclusion of timelines of key dates to
'demonstrate to users what occurred at what point in time, particularly with
respect to David Charlton and where and when he was working for Defence';[59]
-
PwC suggested the inclusion of commentary detailing the work
undertaken by the Inspector-General with respect to investigating Major
Charlton's handling of procurement documents or related information;[60]
-
PwC suggested the inclusion of commentary addressing the
unsolicited bid received from Adagold, since it 'could be seen as a catalyst
for the decision to re-tender';[61]
and
-
PwC suggested the obtaining of statements from two persons who
made unsolicited calls to Mr Brown in the course of the probity review—one from
an ex-Strategic Aviation finance officer and the other from the CEO of another
tender respondent.[62]
5.30
The first observation was agreed to by AFCD with no further action
required.[63]
The suggestions for the third, fourth and fifth observations were agreed to and
included in the AFCD report.[64]
While the sixth was agreed to by AFCD, reference was not made to the relevant
phone calls in the report because they were not considered relevant.[65]
AFCD chose not to act on the second observation, as discussed below.
5.31
AFCD was of the view that there was no material benefit in interviewing
Mr Aisen, given the limited time available and the scope of the matters to be
examined. It explained:
In the lead up to, and during the course of, the AFCD probity
review, Mr Aisen sent nine separate emails to Defence in which he clearly set
out his concerns. While Mr Aisen's initial email stated that he had 'other'
concerns to raise and indicated a preparedness 'to elaborate on them, should
you so wish', his subsequent emails detailed his further concerns.
At no time did Mr Aisen seek to be interviewed but adopted
the course of detailing his concerns in writing through emails. It was apparent
from his emails that he had expressed the totality of his concerns,
demonstrated by the fact that in later contacts there was repetition of issues.
Consequently the full nature and scope of Mr Aisen's concerns and allegations
was self-evident from his various email correspondence.[66]
5.32
The committee pursued this matter with AFCD at its public hearing on 29 March
2011.[67]
Dr Bromwich stated that:
There was nothing in any of the communications that Mr Aisen
had with us that indicated he had source material beyond that which he provided
us. The nature of the concerns that he raised were by definition speculative
and conjecture. He was putting together issues and events and posing questions
to say, 'it just seems incomprehensible to me that [Major] Charlton couldn't
have had some involvement that advantaged Adagold in the tender process'. They
were of that nature...Bearing in mind the time constraints that we were under,
the judgment that we made at the time was that we really were not going to get
any more productive evidence out of speaking to Mr Aisen directly. We were focused
on investigating the allegations that he had made.[68]
5.33
He stated further that:
...had we at any stage...identified what I would call prima facie
evidence of fraud—as distinct from merely allegation which, if true, could
amount to fraud—I would have had that matter remitted to me in accordance with
my responsibilities for fraud control.[69]
5.34
The Secretary of Defence, Dr Ian Watt, stated that, even if AFCD had
interviewed Mr Aisen, Defence 'would have, in all likelihood' proceeded to
commission the external reviews.[70]
He stated that 'we would still have probably had to do a great deal of work
because of the widespread arguments that there were some problems with the
tender'.[71]
Dr Watt continued:
Hindsight is a wonderful thing. We found no evidence of any
fraud in the work we did. You can say, 'if you had looked at it differently you
might have found something different, or quicker'. I do not think we would have
found anything different. Had there been any evidence [of fraud] you can be
assured we would have taken it to the AFP immediately.[72]
5.35
The AFCD concluded its review on 26 August 2010. The committee notes PwC
comments on the conduct of the AFCD's review, particularly with respect to its
failure to interview Mr Aisen. Despite Defence's view that no material benefit
was to be gained from interviewing Mr Aisen, the committee notes PwC advice
that to do so would certainly have been in the 'interest of being seen to
conduct a fair and transparent process'. It may also have been advisable to
comment in the AFCD review on the two unsolicited telephone calls to Mr Brown,
if only to discount them on the grounds of irrelevance. The committee returns
to the issues raised in the reviews in chapter 8.
Limitations
5.36
It should be noted that the peer review had quite specific and narrow terms
of reference. Mr Steve Baker, Partner PwC, informed the committee that they did
not conduct an audit under the professional standards. He explained:
The peer review was to perform an assessment of the probity
review process by AFCD in accordance with FMG 14. That is what we were
approached to do, that is what our terms of reference identified and that we
agreed to perform, and that is what we did perform. I can only really comment
on the work that I was asked to do and the conclusions based upon that.[73]
5.37
According to Mr Baker, they were not undertaking a review of the 'underlying
tender process in any way' and 'not for the purpose of providing an opinion on
the tender evaluation decisions or ranking of the respective tenderers'.[74]
The team relied on representations made to it by AFCD personnel and on the
content of working papers and other documentary evidence provided to it.[75]
5.38
Also, although not directed to conduct the review within a set timeframe,
PwC was aware of Defence's strong desire to have the AFCD review completed. Mr
Baker explained that the PwC team was aware there was 'urgency in regard to the
contract'. It was not told that the review had '"to be done within a week",
although there was an awareness of urgency'.[76]
Conclusion
5.39
While concluding that the procurement was not fatally flawed from a
technical compliance perspective, the AFCD review of the procurement identified
several shortcomings in the process. These included:
- concerns about the suitability of the panel arrangement for
complex air sustainment procurement activities;
- gaps in the training of the standing offer panel administrator in
respect of complex procurement competencies;
- the fact that Defence should have identified the desirability of
an independent probity advisor during the procurement planning stage; and
- a range of process issues relevant to the procurement planning
and tender evaluation stages—better consultation between those involved in
developing the TEP, more detail on scoring and pricing models, clearer
explanations of rankings in the SER.
5.40
The review also operated under limitations of time and scope, some of
which undermine the reliability of its conclusions. These limitations included:
- the decision not to interview the complainant, Mr Aisen,
notwithstanding the observations made in the PwC peer review; and
- the determination that the 2005 tender process and Major
Charlton's financial history were irrelevant to the consideration of the 2010
tender process.
5.41
Naturally, the pressure placed on the AFCD team to complete its task affected
the timeframe and scope of the PwC peer review. Within its limited terms of
reference, the PwC identified a number of areas where AFCD could improve and
strengthen its review. While AFCD agreed with PwC's six observations, it did
not act on the suggestion to interview Mr Aisen.
5.42
Despite the positive findings of the two reviews, they failed to quell
the controversy dogging the 2010 tender process. Further events unfolded that
led to the establishment of two external reviews in September 2010. These
external reviews are considered in the following chapter.
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