Chapter 6
External reviews of the 2010 tender process
6.1
The AFCD and PwC reviews did not dispel some of the disquiet surrounding
the probity of the 2010 tender process. Indeed, Defence felt the need to commission
two external reviews, one by Deloitte and the other by the Australian
Government Solicitor, concerning matters of probity and legal process
compliance. This chapter outlines the reasons for commissioning these reviews,
their approach and key findings. It also outlines the limitations in scope and
methodology under which the reviews operated. The chapter further identifies
the events of September 2010 that prompted the current AFP investigation into
the 2005 tender process.
Correspondence with Strategic on completion of the internal review
6.2
Following the completion of the AFCD and PwC reviews, Mr Brown, the Chief
Audit Executive, wrote to Mr Aisen on 26 August 2010 to inform him of the
outcome of the AFCD review. Mr Aisen responded on 28 August 2010,
expressing some 'very serious concerns' about the outcome and process.[1]
6.3
Mr Aisen disputed the finding that the tender process was compliant with
Commonwealth and Defence procurement policy. He stated that Mr Charlton's
employment within 1JMOVGP while providing services to Adagold amounted to at
least a perceived conflict of interest that should have disqualified Adagold's
tender response.[2]
Mr Aisen also raised concerns about other matters including:
- the financial circumstances of Major Charlton's business, Sky Air
World, which he submitted should have been assessed as relevant to Adagold's
suitability to contract with the Commonwealth;
- the limited scope of AFCD reviews of telephone records and email
correspondence between Major Charlton, Adagold and any member of 1JMOVGP in the
lead-up to, and following the release of, the tender; and
- the conduct of interviews with, and information sought from,
Major Charlton and Adagold.[3]
6.4
In the interests of transparency, Mr Aisen requested the public release
of the AFCD report and 'all relevant Defence-held records'. On 28 August 2010,
he forwarded a copy of his correspondence to the Shadow Minister for Defence
and to the Chair of the Senate Foreign Affairs, Defence and Trade Legislation
Committee seeking 'a full, independent inquiry into all matters associated with
this tainted tender'.[4]
Consideration of internal review findings
6.5
On 26 August 2010, Defence also provided a submission to the (then)
Minister for Defence, Senator the Hon John Faulkner, detailing the outcome of
the tender process and noting its intention to proceed to contract with
Adagold.[5]
6.6
On the request of the Minister and in accordance with caretaker
provisions, a copy of the submission was provided to the Shadow Minister for
Defence, Senator the Hon David Johnston, on 27 August 2010.[6]
Senator Johnston raised concerns at a meeting on 31 August 2010 and, on the
same day, documented them in a letter to the Secretary of the Department of
Defence, Dr Watt.[7]
Senator Johnston indicated that he was 'primarily concerned with Defence's
reputation and image, in entering a contract in all of the circumstances of
this matter'.[8]
In particular, he stated that:
Quite apart from questions around [Major Charlton's]
involvement pre-RFT, post-RFT and currently, the fact that he has a long and
substantial relationship with Defence Logistics and particularly the Joint
Movement Group whilst providing professional advice to tenderers, successful or
otherwise is frankly, not a good look.[9]
6.7
Promptly, Dr Watt convened an internal meeting to discuss and develop
terms of reference for external probity reviews before making any decision to
proceed to contract with Adagold.[10]
Defence stated that the terms of reference for the external reviews were
'specifically drafted to address the concerns raised by Senator Johnston'.[11]
6.8
The 2010 procurement process was suspended for the duration of these
external reviews. To minimise operational disruptions, and notwithstanding the
urgency, Defence entered into a short-term contract with Strategic to provide
air sustainment services to the MEAO from 23 October to 22 November 2010.[12]
Commissioning external reviews
6.9
Defence engaged the external reviewers, Deloitte and the Australian
Government Solicitor (AGS), through its professional services panel
arrangements.[13]
In respect of its engagement of Deloitte, Defence acknowledged that it had
considerable pre-existing contractual arrangements with the firm. Defence
considered, however, that these prior arrangements did not affect the
independence of Deloitte's review due to the strength of the firm's brand. Dr
Watt stated:
One issue about Defence is that no matter where you go...lots
of people have contracts with us. In the case of a major accounting firm, their
business is their brand not their contracts with us. If they felt there was a
conflict of interest because of the contracts they had with us, they would have
said so. They did not because their brand is worth much more than whatever
current contracts they have. I think there is a point where there are only a
limited number of service providers around Canberra or any other town. All
users of services rely on the brand.[14]
6.10
It should be noted that an article again raising concerns about the
probity of the tender process including the 2005 tender appeared in the Age on
2 September. The article reported that the newspaper had obtained
emails revealing that two Department officers working in the unit responsible
for the 2005 contract—David Charlton and John Davies—'were providing
information during the tender process to the company later declared the
winner'.[15]
Deloitte review
Terms of engagement
6.11
Deloitte was engaged on 2 September 2010 to undertake a review of
certain aspects of the tender process. These were:
- the governance framework and process of the tender, addressing
confidentiality and conflicts of interest in the lead-up to tender and during
the tender evaluation process;
- the decision to tender and whether it was based on achieving
value for money and was not structured to disadvantage certain potential
tenderers;
- the governance of the tender, including adherence to the TEP;
- the financial and commercial capacity of the two top-ranked
respondents, and their capacity to meet the quality and standards required by
Defence; and
- the fitness and propriety of the two top-ranked tender respondents
to contract with the Commonwealth, including any reputational concerns and
issues arising from media reports.[16]
6.12
Deloitte was engaged from the Defence Management consultation panel,
following consultation with other panel members Ernst & Young and KPMG who
were excluded due to other engagements with Defence.[17]
The total cost of the review was $591,820 (GST inclusive). The timeframe to
perform the work was seven business days (extended from an initial five
business days). Deloitte engaged 23 staff on the inquiry, comprising seven
partners, seven directors and nine other senior staff members. Their total time
worked on the assignment was 996 hours.[18]
6.13
Defence provided Deloitte with the terms of reference. Deloitte
indicated that there were some 'minor modifications' to the terms of reference,
which it attempted to incorporate in outlining the scope of its work. One of
the partners leading the inquiry, Mr Peter Bars, characterised the process of
defining and scoping the terms of reference in the following terms: 'Defence
gave us terms of reference and then we said, "given that we have terms of
reference what does that actually mean in terms of work that we can execute to
meet those terms of reference?" That sort of feedback loop came in some
fine-tuning around the scope of what we would do'.[19]
Methodology
6.14
Deloitte undertook the following tasks in performing the engagement:
- interviewed certain members of the TEB and relevant Defence
stakeholders;
- read aspects of Defence documents and policies;
- read the draft AFCD report and working papers;
- examined the transcripts of AFCD interviews;
- read aspects of the shortlisted tender responses;
- supplemented the financial evaluation for the two top-ranked
tenderers with information obtained from additional searches; and
- conducted searches of public records and online media for agreed
individuals and companies.[20]
Key findings
6.15
Deloitte reported to Defence on 15 September 2010. It found that nothing
had come to its attention to indicate that the tender should not proceed.[21]
Its key findings in respect of individual terms of reference are summarised
below.
Decision to tender
6.16
Based on its review of the RFT and SER, and its interviews with Group
Captain Barnes and Squadron Leader Cole, Deloitte found that:
- the services detailed in the RFT were reasonable from an
operational perspective and did not disadvantage any of the tenderers;
- the tender response period of eight weeks provided sufficient
time for all parties to provide tender responses that could meet the
airworthiness certification requirements in the request; and
- the decision to tender was based on a reasonable expectation of
achieving a better value for money outcome for the Commonwealth.[22]
6.17
According to Deloitte, there was sufficient evidence to indicate that
the volumetric specifications were supported by operational need, based on
departure reports from Strategic Aviation indicating full use of cargo capacity
and historical and forecast analyses undertaken by Defence. Deloitte noted that
the RFT did not preclude separate passenger and cargo flight options.[23]
6.18
Deloitte cited AFCD interview records with successful and unsuccessful
tenderers indicating acknowledgement of the tight but achievable nature of the
tender response timeframe. Further, Deloitte noted that the global financial crisis
and the significant number of amendments to the 2008 contract suggested that
the decision to proceed to tender was based on an expectation of achieving
greater value for money.[24]
Governance around the development
of the RFT and tender evaluation process
6.19
Following its review of the supporting documentation and AFCD interview
records, Deloitte concluded that nothing had come to its attention to indicate
that:
- there was not an adequate plan in place covering the governance
of the tender; and
- the plan was not adhered to in all material respects.[25]
6.20
However, Deloitte identified three shortcomings in the implementation of
governance arrangements. Firstly, while the majority of risk management actions
in the procurement strategy were implemented, three were not—conducting market
research, involving an aviation consultant and providing advance notice to
standing offer panel members prior to the release of the request.[26]
6.21
Secondly, Deloitte found that probity risks were not documented in the
risk management plan, and a specific probity plan was not documented.[27]
Thirdly, it found that there was no documentation indicating that tender
evaluation team members had received a briefing on ethics, probity and fair
dealing.[28]
Governance in relation to conflicts
of interest
6.22
Deloitte was satisfied that nothing had come to its attention to
indicate that:
- the governance process did not address adequately potential or
perceived conflicts of interest in the lead up to tender and during the
evaluation; or
- any perceived or real conflicts of interest that were identified
had not been appropriately dealt with.[29]
6.23
In addition to the absence of a specific probity briefing to tender
evaluation team members addressing conflicts of interest, Deloitte also
identified shortcomings in the original conflict of interest declarations
signed by evaluation team members. These included an absence of a declaration
about possible conflicts arising from employment, prior employment or financial
interests in potential suppliers or relationships with persons who have
interests in these organisations.[30]
6.24
In respect of the management of conflicts of interest pertaining to
Major Charlton, Deloitte noted the steps taken to identify his background and
manage risk identified in AFCD interviews with Major Charlton, his statutory
declaration and interviews with other ADF personnel.[31]
It noted that, in reaching its conclusion, it had relied on the transcripts of
interviews undertaken by AFCD. Defence had prepared these documents.
Governance in relation to
confidentiality
6.25
Deloitte found that nothing had come to its attention to indicate that:
- governance processes for the procurement did not adequately address
confidentiality in the lead-up to the tender process; and
- any confidentiality issues were identified.[32]
6.26
Deloitte based its findings on:
- the remote geographical location at which tender planning and
evaluation was undertaken;
- the access controls applied to electronic files pertaining to the
tender and access logs indicating that no unauthorised access had occurred;
- Major Charlton's statement that he did not have access to the
files or provide Adagold with any tender-related information prior to the
release of the RFT;
- Adagold's statement that it did not have any knowledge of the
decision to re-tender or the tender specifications until the release of the
RFT; and
- the statements of key personnel involved in the tender planning
process that they did not have a personal or social relationship with Charlton
and nor did the staff within their areas of supervision.[33]
6.27
In relation to the last point, in his oral evidence to the committee, Mr
Dennis Krallis, Partner, Deloitte Touche Tohmatsu, stated that to his knowledge
Deloitte did not ask these persons whether they or the staff they supervised
had any contact with Major Charlton, Warrant Officer Davies or Adagold.[34]
Respondents' fitness and propriety
to contract with the Commonwealth
6.28
Deloitte examined an agreed list of companies and persons with Defence,
in respect of the top two ranked respondents.[35]
On the basis of searches of the public record—using an array of online
commercial databases and regulatory agency websites—it concluded that nothing
had come to its attention to identify that these persons and entities were not
fit and proper to contract with the Commonwealth.[36]
6.29
Deloitte noted that it had not identified any Commonwealth or Defence
criteria setting out requirements for being 'fit and proper' for the purposes
of contracting with the Commonwealth. In making its assessment, Deloitte
considered 'whether any information identified in the searches...could cause
the Commonwealth reputational damage'.[37]
Respondents' financial and
commercial capacity to deliver the requested services
6.30
Deloitte did not identify any evidence suggesting that the potential
risks associated with the financial and commercial capacity of the preferred
tenderer had not been recognised.[38]
It reviewed the RFT and evaluation documentation, interviewed members of the
tender evaluation team, undertook supplementary financial evaluation, and made
the following observations:
-
it appears reasonable that Adagold and Hi Fly were assessed by
the TEWG as viable but high-risk, such that a performance guarantee should be
obtained from Adagold;[39]
- the risk classification adopted by the financial TEWG appears to
be 'relatively subjective', in particular the requirement for certain
proponents considered to be at the higher level of risk to be subject to a
financial performance guarantee';[40]
and
- Adagold demonstrated commercial capacity to perform the services
through:
- its demonstrated understanding of the Australian operating and
regulatory environments, in both its tender response and previous experience in
performing air sustainment services in the MEAO; and
- its exclusive, informal agreement with Hi Fly.[41]
Adagold's capacity to deliver
services to the required quality and standard
6.31
Deloitte found that nothing had come to its attention to indicate that
Adagold lacked the capacity to meet the quality and standards required by the
Commonwealth to provide the contracted services.[42]
It adopted the following measures of quality and standard:
- technical and operational capacity;
- financial capacity;
- operational capability;
- aircraft availability; and
- aircraft certification and regulatory requirements.[43]
6.32
Deloitte examined the RFT documentation, Adagold's response and working papers
prepared by AFCD in the evaluation process. It based its conclusions on the following:
- Adagold's evaluation score 56.3 out of 70 on the seven technical
and operational criteria, which made it the highest ranked proponent;
- the demonstration of Adagold's operational capability through the
information provided in its tender response, its demonstrated experience
(including performing ADF and Danish defence force contracts to the MEAO), the
previous experience of Hi Fly, and Adagold's operational awareness activities
including a site visit to the Al Minhad airbase;
-
the existence of an exclusive agreement between Adagold and Hi
Fly giving Adagold access to a compliant aircraft, and the provision for a
replacement aircraft; and
- Hi Fly's airworthiness certification.[44]
6.33
In reaching its conclusion, Deloitte noted that, 'as would be expected
our work does not seek to comment on the likelihood that the respondent will be
successfully able to carry out operations as this will be subject to a range of
future events and circumstances which are outside the scope of this report'. It
also noted that it had not verified the representations made in Adagold's
tender response.[45]
Adagold's alleged interests in
South Africa
6.34
Deloitte reviewed allegations made in media articles from Australian,
South African and Danish media in relation to Adagold contracts in South
Africa. It concluded that the allegations did not raise matters of sufficient
substance to warrant excluding Adagold from consideration in the 2010 tender
process.[46]
In particular, its searches did not locate official records of alleged
complaints—including court decisions or records of tender defaults.[47]
It also noted the outcome of the Danish Complaints Board for Public
Procurement, in which all complaints were dismissed wholly or partially, and
that no action was taken to change the award of the contract.[48]
Other findings
6.35
Deloitte also found that:
- the governance process around the choice of potential suppliers
from the standing offer panel was adequate, noting that Defence invited all
panel members to participate in the tender for the 2010 contract;[49]
and
- nothing further had come to its attention that could improve the
probity of the procurement process.[50]
6.36
In addition to its terms of reference above, Deloitte further considered
matters raised in the Shadow Minster's letter to the Secretary dated 31 August
2010. These matters were:
(a) Major Charlton's 'long and substantial' relationship with 1JMOVGP while
providing professional advice to tenderers;
(b) Major Charlton's recent financial history;
(c) the financial and corporate integrity of the South African company, Adajet;
and
(d) Hi Fly's performance and quality of service in supporting previous MEAO
contracts.
6.37
Deloitte considered that issues (a) and (c) were addressed in its
existing terms of reference. Following consultation with the Chief Audit
Executive, it determined that issue (b) was not pertinent to the 2010 tender
process. In respect of Hi Fly's previous performance in issue (d), Deloitte
noted 2007 media reports of allegations of non-compliance with aviation safety
standards. It further noted that subsequent inspections undertaken by CASA and
ADF did not identify any breaches of regulatory requirements of other or
operational concerns. [51]
AGS Review
Terms of engagement
6.38
On 2 September 2010—concurrently with the Deloitte review—Defence
engaged AGS to undertake an urgent legal and legal process review of the
tender.[52]
AGS was instructed to provide advice on the following issues:
- whether the procurement process complied with the Deed of
Standing Offer under which the process was let;
- whether the procurement process complied with Commonwealth and
Defence procurement policy;
- whether the procurement process and the selection of the
preferred respondent was fair and defensible; and
- in light of the above answers, what were the legal risks of not
proceeding to contract with the preferred respondent, and what options were
there for contracting with a different provider.[53]
6.39
The AGS review was led by the Chief Counsel, Commercial Practice Group
and assisted by a Senior Lawyer. The total cost of the review was $74,203 (GST
inclusive).[54]
Methodology
6.40
AGS engaged the following methodology:[55]
- received an initial background briefing by Defence;
- identified, requested and received documentation relating to the
conduct of the procurement and the establishment of the standing offer panel;[56]
- conducted interviews with Defence personnel involved in the
conduct of the procurement.[57]
Key findings
6.41
AGS reported to Defence on 15 September 2010. In short, it found that
the procurement process was conducted in accordance with the standing offer and
was compliant with Commonwealth and Defence policy.[58]
It also found that the process and the selection of Adagold as the preferred
tenderer was fair and defensible, in that it had not identified any evidence of
impropriety.[59]
AGS concluded that—subject to the outcome of the Deloitte probity review—there
did not appear to be any reason for Defence not to proceed to contract.[60]
These findings are discussed in detail below.
Compliance with deed
6.42
AGS advised that, in its view, the procurement process complied with the
deed of standing offer under which the process was let. However, it identified
two issues—the treatment of non‑compliant completed requests, and
post-separation employment issues.[61]
6.43
AGS identified that the deed did not specify how the Commonwealth would
treat a completed request that did not comply with requirements expressed in
mandatory language (for example, 'must' or 'shall'). It noted that this issue
had been raised by potential tenderers and during the evaluation.[62]
AGS concluded, however, that it was open to the Commonwealth to accept a
request that did not comply with 'mandatory' requirements, and that this was
stated expressly in the terms of the request issued under the deed.[63]
Interestingly, the other reviews did not mention this issue of the treatment of
non-compliance with 'mandatory' requirements.
6.44
In relation to post-separation employment issues, AGS noted the
provisions in clause 22 of the deed, requiring contractors to:
- ensure that any former Defence employees engaged by them complied
with the relevant Defence Instruction on post-separation employment, DI(G) PERS
25-4; and
- seek written approval to engage certain former Defence employees.
6.45
In AGS's view, it was apparent that Major Charlton 'did not adequately
comply with DI(G) PERS 25-4 as he did not submit a specific letter of
notification identifying the employing parties (other than a very general
email)'.[64]
AGS stated further that it was unclear whether Adagold was aware of Major Charlton's
Reservist employment and therefore required to seek Commonwealth approval prior
to obtaining his assistance in the preparation of its tender response.[65]
Once again, the other reviews did not refer to this important area of
non-compliance with the deed of standing order.
6.46
AGS concluded, however, that this issue did not support a finding of non‑compliance
with the deed for two reasons. First, although clause 22 was phrased in
mandatory terms, it was not specifically identified in the deed or the request
as a condition of participation, a minimum form and content requirement or an
essential requirement, meaning that non-compliance would lead to automatic
exclusion from the tender.[66]
6.47
Secondly, AGS considered that if Adagold had sought approval under the
deed to obtain Major Charlton's assistance via AIS, it was unlikely that the
Commonwealth would have withheld approval.[67]
AGS based its assessment on the fact that Major Charlton's work in 1JMOVGP was
unrelated to the 2010 tender process and, consequently, 'the potential for real
or perceived conflicts of interest or probity objections at that time would in
any event probably have been assessed [by Defence] as being low'.[68]
6.48
The committee is of the view that this was a rash and highly speculative
assumption in light of the doubts surrounding the probity of the 2005 tender
process, chaired by Major Charlton. Defence was aware of these reservations at
the time of the 2010 tender, which is now the subject of an AFP investigation. The
committee considers the matter of conflicts of interest and post-separation
employment in chapter 10.
Compliance with Commonwealth and Defence procurement policy
6.49
AGS advised that, in its view, the procurement process complied with
Commonwealth and Defence procurement policies, subject to three matters.[69]
Firstly, it proceeded on the assumption that the standing offer panel was
established in accordance with the requirements of the CPGs. It did not review
the relevant tender process to establish the panel conducted in 2009.[70]
6.50
Secondly, it noted that as a procurement under a panel arrangement, the
2010 tender process was not subject to the Mandatory Procurement Procedures in
the CPGs.[71]
It constituted a procurement-related task, meaning that it was still governed
by the other elements in the procurement policy framework—in particular the
requirement to achieve value for money. AGS stated that provided Defence is
able to establish that Adagold represented value for money, then it would be
compliant with the CPGs. It returned to the issue of value for money in its
advice on whether the process was fair and defensible.[72]
6.51
Thirdly, AGS noted that Defence did not appoint an independent probity
advisor. While acknowledging that this was not a mandatory policy requirement,
AGS noted the Department of Finance and Deregulation recommended that
consideration be given to the appointment of probity advisors in light of size,
complexity, sensitivity and potential risk of individual procurements.[73]
Whether the procurement process and selection of Adagold was
fair and defensible
6.52
AGS stated that it had not identified any impropriety in the way in
which the procurement process was conducted or in the selection of Adagold as
preferred tenderer. However, it identified five areas for improvement in
future.
6.53
Firstly, AGS identified that no overarching probity framework for the conduct
of the procurement was established. It stated:
The need for the possible engagement of a probity advisor was
not identified in the initial risk assessment, and legal advice was not sought
on this matter until mid-way through the process. As a result no probity plan
for the project was developed. In addition we have identified that there were
no specific probity arrangements established to cover the process relating to
the development of the Request documentation (although we have been advised
that all drafts of the Request were stored on a secure Defence server. [74]
6.54
The review also observed that:
- Defence personnel who assisted in developing the Request
documentation were not asked to sign a conflict of interest declaration unless
they also participated in the evaluation of tender responses;
- members of the tender evaluation team did not sign conflict of
interest declarations until after the evaluation commenced; and
- no specific probity protocols were developed to cover the
industry briefing.[75]
6.55
Secondly, AGS identified some instances in which the SER and the
supporting TEWG reports could more accurately and transparently reflect the
assessment of tender responses. It noted that it held discussions with Defence
about these matters, which led to the refinement of the SER and the TEWGs to
address these matters.[76]
6.56
Thirdly, AGS noted that the scoring methodology adopted by the TEB and
the TEWGs was not referenced in the TEP. It noted that best practice is to set
out the evaluation methodology in full in the TEP.[77]
6.57
Fourthly, AGS identified overlap in some of the tender evaluation
criteria—particularly in terms of assessing compliance with the request. It
further considered that there was a lack of clear guidance in the TEP as to how
each of the criteria were to be assessed. It stated that without such guidance,
'there was a possibility that the same issue could be double or even triple
counted' in the evaluation.[78]
While acknowledging that all tenderers would have been affected equally in this
regard, it recommended the inclusion of more detailed evaluation guidance in
future TEPs.[79]
6.58
Finally, AGS noted a disparity between the TEP and the request
documentation, in respect of minimum form and content requirements, conditions
of participation and essential requirements.[80]
It observed that the TEP referred to initial screening being undertaken to
check tenders against these matters. However, the request documentation did not
expressly classify provisions in this way. This meant that no screening report
was prepared.[81]
Similar to its observations on the deed, AGS noted that several requirements in
the request were expressed in mandatory language but it was unclear whether
non-compliance would result in exclusion from the process.[82]
Mr Scala, AGS, explained:
...although we had things identified as 'must' in the various
request documentation, and indeed a standing offer, none of those were actually
expressly identified as conditions of participation or essential requirements
and the like and none of them specifically had any sanction attached to
them—that is 'If you fail to meet this requirement you will automatically be
excluded' or 'we reserve the right to exclude'.[83]
6.59
AGS recommended that future request documentations clearly identify
minimum form and content requirements, conditions of participation and
essential requirements to avoid potential confusion.[84]
Consistency with advice from
Clayton Utz
6.60
In chapter 3, the committee considered Clayton Utz's advice to Defence on
the SER and areas identified for improvement. These included providing more
complete information and detail, especially on the extent to which each tender
had met the evaluation criteria; the need to substantiate some statements and
the use of imprecise language such as the term 'compliant' when 'having no
deficiencies' would be more accurate.[85]
The AGS review identified similar areas of weakness such as the opaque scoring
system and the use in some places of inappropriate language—in this case the
use of terminology that was mandatory in nature.
6.61
Also, the committee took in camera evidence from Clayton Utz on a
comment made in its advice to Defence that the SER did 'not appear to have
treated tenderers equally on the leasing arrangements with the respective
aircraft owners'.[86]
This observation on 'unequal treatment' was of particular interest to the
committee and was subjected to further consideration when the committee was
taking evidence from AGS. Mr Scala informed the committee that the review team
identified this as a matter of concern where:
...there appeared to be a failure to equitably assess the risk
associated with tenderers not having entered into formal leasing arrangements
with aircraft owners. That was an issue where it appeared to us that one
tenderer who did not have a formal lease in place but more a letter of comfort
seemed to be assessed as if, effectively, the lease was in place, not as if the
alternative was the case, as other tenderers were.[87]
6.62
According to Mr Brown:
...it was not that people were scored down—the issue was taken
evenly across all of them—but the grading of the outcomes there was not a
specific score of five out of 10 if they were graded through the process. If we
take the leasing as an example, no-one was disadvantaged by that. It would be
extremely unusual to have a broker come into the process with a signed lease.[88]
6.63
Mr Scala understood that the issue was 'then rectified in the final
source evaluation report'.[89]
The committee returns to this matter in chapter 11.
Legal risks of not proceeding to
contract with Adagold
6.64
AGS concluded that—subject to the outcome of the Deloitte Review—there
would appear to be no reason preventing Defence from proceeding to contract
with Adagold. It considered that, unless there were evidence to indicate that
Adagold was in some way implicated in causing the procurement process to fail,
cancelling the request or not proceeding to contract would result in a claim
for damages or costs from Adagold. AGS understood these expenses to be in the
vicinity of $500,000.[90]
6.65
AGS stated further that if the request process were cancelled, it would
be necessary to undertake a new procurement process.[91]
It stated that if not cancelled but a valid reason existed for excluding
Adagold from consideration, it would be possible for Defence to enter into
contract negotiations with the second ranked tenderer, however this would have
to be assessed against value for money requirements.[92]
Allegations concerning the 2005 tender and AFP investigation
6.66
As noted earlier, on 2 September 2010, while the external reviews were
under way, an article published in the Age newspaper reported
allegations of impropriety in the 2005 tender process, which resulted in the
awarding of the contract to Strategic.[93]
The allegations concerned the 'leaking' of tender specifications to Strategic
prior to the release of the RFT. The article reported that it had uncovered
email correspondence between Strategic directors which suggested that two
members of 1JMOVGP—identified as Major Charlton and Warrant Officer John
Davies—had 'fed' this information to Strategic.[94]
This matter was not taken up by the reviews of the 2010 tender process, on the
basis that the Phillips Fox (DLA Piper) review of the 2005 tender process did
not identify any probity related compliance issues that would require the
process to be set aside.[95]
6.67
On 10 September 2010, Defence referred the allegations concerning the
2005 tender to the AFP. Defence stated that it had not previously been aware of
any allegations that Strategic had received inside information in 2005. It
noted that, 'if proven, these allegations would give rise to a range of
possible criminal offences'.[96]
At the time of writing, the matter remained under investigation by the AFP.[97]
Defence responses to the external review findings
6.68
Following receipt of the external review reports and consideration of
their findings, Defence formed the view that it should proceed to contract with
Adagold. It also took action to remedy several issues identified in the reviews—in
some cases before the reviews had reported, in response to issues raised
progressively by the reviewers. These included:
- requiring TEB members to sign revised conflicts of interest and
probity declarations, subsequent to the tender evaluation process, addressing
the deficiencies identified by Deloitte;[98]
- revising the SER and the supporting TEWG reports to reflect more
accurately and transparently the assessments of tenders which were carried out;[99]
- reconvening the TEB to re-validate the SER. The re-validated SER
confirmed Adagold as the preferred tenderer but reversed the order of the
second and third preferred tenderers in order to correct a mathematical error
in the totalling of evaluation scores;[100]
and
- requiring Adagold to provide a performance guarantee to the value
of $2 million, and negotiating a novation agreement between Defence,
Adagold and Hi Fly.[101]
6.69
Defence stated that it was also developing and implementing broader process
and policy reforms in respect of non-equipment procurement and the management
of conflicts of interest.[102]
These initiatives are outlined in chapter 7.
6.70
The committee looks more closely at the re-validation of the SER which
resulted in a re-ordering of the second and third ranked preferred tenderers in
chapter 11.
Limitations of the external reviews
6.71
In the previous chapter, the committee drew attention to the limits
placed on the two earlier reviews. The external reviews conducted by Deloitte
and AGS were also subject to significant limitations in time, scope and
methodology.[103]
They also seemed to be designed to support the argument for proceeding with the
preferred tenderer. In other words, their efforts were really focused on
defending the integrity of the process, rather than genuinely testing it.
6.72
Deloitte noted that its work was confined to reading documents,
interviews and listening to interviews performed by others. Deloitte also noted
the following limitations on its engagement:
-
it relied on transcripts from interviews undertaken by others (it
should be noted that Major Charlton and Mr Clark's Statutory Declarations were
drafted for them by a member of the AFCD team);[104]
-
it did not interview any of the tenderers or Major Charlton;
- it did not verify the information obtained through interviews or
tender responses, or from online media sources;
-
it did not check the integrity or accuracy of the information
contained in the financial viability spreadsheets produced by Defence as part
of the tender evaluation;
- while believing that the statements made in its report are
accurate, it did not give any warranty of completeness, accuracy or reliability
in relation to the statements and representations made by, and the information
provided by, Defence personnel. It did not attempt to independently verify
these sources; and
- the scope of its engagement did not include examination of the
2005 contract, the extension in 2008 or the establishment of the standing offer
panel in 2009.[105]
6.73
Deloitte stated that the limitations of its work were due to the
following:
-
the limited timeframe of seven business days;
- the fact that Defence had conducted interviews and obtained
statutory declarations from Adagold representatives and Major Charlton.
Deloitte stated that 'given the scope of our engagement, the timeframes
involved and the information contained in the interviews and statutory
declarations, we did not believe further interviews were required';
- the fact that Deloitte was not engaged to re-perform the tender
evaluation; and
- the scope of the work was not an audit, hence Deloitte did not
perform audit procedures to verify the accuracy of information.[106]
6.74
It should be noted that with regard to its schedule, Defence conveyed to
Deloitte 'the importance of completing its review expeditiously'. Defence
stated:
Timeframes were set in order to avoid disruption to the
critical air sustainment services, to take advantage of greater load
requirements, and to minimise the additional costs associated with the interim
solution...a short term contract was estimated to cost an additional $1 million
for each week of delay.[107]
6.75
Even so, measures were taken to enable the review team to conduct its
work effectively and to ensure that its findings were understood in the context
of the review's limitations. As required by the Accounting Professional and
Ethical Standards Board, Deloitte was 'obliged to set out the scope of work as
well as any limitations on that scope.[108]
In addition:
- the review was undertaken by senior staff who worked intensively
within the limited timeframes;[109]
-
limitations of scope in respect of reliance on secondary evidence
were identified largely by the reviewers themselves, on the basis of need.[110]
- they were 'given complete and unfettered access at all times to
all tender and probity review documentation and personnel who participated in
the Request for Tender';[111]
and
- reviewers were informed by Defence that their work 'should not be
compromised in any respect by artificial constraints, time or otherwise', and
were able to undertake any additional work that they identified as necessary in
the course of the assignment. [112]
6.76
Deloitte stated that no restrictions were placed on it by Defence in the
conduct of its engagement.[113]
It acknowledged that although Defence was its client, its view was that 'we
were carrying out an independent examination'.[114]
Indeed, the evidence of one of the partners leading the review, Mr Dennis
Krallis, was that Deloitte received instructions from the Chief Audit Executive
to the effect that 'if there is something to be found, if there are issues, we
want you to find them'.[115]
Limitations on the AGS Review
6.77
AGS was similarly aware of 'the importance of completing its review
expeditiously'. In addition, it identified the following limitations to the
scope of its review:
- its instructions from Defence not to address probity related
issues under consideration by Deloitte;[116]
-
its full reliance upon 'the accuracy and completeness of
information provided...by Defence';[117]
and
- its assumption that the underlying working papers of the TEB and
the TEWGs—which it did not examine—supported the assessments contained in the
high-level summary TEB and TEWG reports that it examined.[118]
6.78
Mr John Scala, Chief Counsel, AGS, also made clear that their legal
process review was 'not asked to look into whether or not it was appropriate to
use the deed of standing offer as the starting point for the procurement'. Thus,
although the terms of reference explicitly asked for advice on 'whether the
procurement process complied with the Deed of Standing Offer', it did not go to
the suitability of this arrangement for this specific procurement process. Notably
in this regard, he observed that 'it would be arguable to say that the deed of
standing offer appeared to us to be designed more for ad hoc types of service
provision as opposed to this type of service'.[119]
The AFCD review made a similar observation that the deed ‘may not have been
suitable for the more complex air sustainment procurement activity’.[120]
6.79
Also, the review team was not required to consider issues of alleged
impropriety involving Mr Charlton or allegations concerning any previous tender
process in which Adagold may have participated.[121]
In the committee’s view, the findings of the reviews should be viewed in light
of the limits placed on them.
Conclusion
6.80
Numerous allegations have been raised about the integrity of the 2010
tendering process for the delivery of air sustainment services to MEAO. There
have been four reviews of the tender process, which focused broadly on the
identification of any reasons that should impede Defence from proceeding to
contract. The total cost of these reviews was in the vicinity of $700,000.
Additional costs were incurred in the awarding of an interim air sustainment
services contract, pending finalisation of the 2010 tender process.
6.81
While concluding that the procurement process was not fatally flawed
from a technical compliance perspective, the relevant reviews identified
several opportunities for improvements to Defence practices and procedures.
6.82
Both the external reviews acknowledged that there were limitations on
their work, particularly severe time constraints which meant that they relied
heavily on the work done by the AFCD team including transcripts of interviews
and on the accuracy and completeness of working documents provided by Defence.
Also, the reviews specifically excluded consideration of the 2005 tender whilst
allegations concerning serious impropriety in the conduct of that procurement emerged
during the course of the inquiries. The allegations were referred to the AFP
and were under investigation at the time of writing.
6.83
Given the limitations of, and directions imposed on, the reviews as
outlined in this chapter, the committee is aware of lingering concerns about
some of their conclusions, and about the overall reputation and image of
Defence's procurement processes and practices. In the next chapter, the committee
outlines Defence's decision to proceed to contract with Adagold and its
performance to date. The committee also outlines several procurement reforms
being implemented by Defence, some of which have been prompted by identified
weaknesses in the 2010 tender process. Suffice to say, there is an inference
that the process was the issue not the outcome.
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