Chapter 12
Findings on due diligence and other relevant matters
12.1
In this chapter, the committee provides its findings and recommendations
in relation to the balance of its four key areas of concern. The areas
remaining for consideration are:
- matters of due diligence—whether the tender
respondents (and their key personnel and associated companies) were fit and
proper persons to contract with the Commonwealth, and possessed the financial
and commercial capacity to deliver the contracted services to the requisite
quality and standard.[1]
- other relevant matters—any further issues
concerning the probity of the procurement and the tender respondents.[2]
Due diligence on tender respondents
12.2
The committee is required by its terms of reference to consider the
following matters in respect of tender respondents, their key personnel and
associated companies:
- the adequacy of the due diligence process around the choice of
potential suppliers from standing offer panels and, more specifically, whether
there was existing or any subsequently discovered evidence to warrant
non-selection of any of the panel members, or whether the information obtained
should have resulted in further inquiry and investigation;[3]
- whether the respondents, including directors and other key
personnel (whether employees, agents or contractors nominated in the tender
response) for the proposed contracts, are fit and proper for the purpose of
contracting with the Commonwealth, and the adequacy and methodology of this
process;[4]
- the adequacy and appropriateness of the processes in determining:
- whether the respondents and associated companies supplying
services to the respondents have the financial and commercial capacity to
deliver the services submitted in their responses;[5]
- whether the respondents have the capacity to deliver the services
submitted in their responses to a quality and standard that meets the
requirements of the Commonwealth and its regulatory authorities and, if so,
whether the department was fully satisfied with the services provided by the
foreign carrier when they last provided such services;[6]
- whether the department is in a position to guarantee the security
status of all foreign personnel involved in the air transportation of troops
between mainland Australia and its deployment base adjacent to a war zone;[7]
and
- whether issues relating to the respondents, or their related
companies, about their contracts in South Africa are such as to warrant their
exclusion from consideration on ethical or probity grounds.[8]
Matters of concern
12.3
The committee has limited its examination to Adagold—as the current
contract holder—and the company's key personnel and associated entities. The committee
comments below on the following matters of concern:
- the assessment by Defence of Adagold's fitness and propriety to
contract with the Commonwealth—namely, the consideration of the company's
connection to South African tender controversies; its association with Major
Charlton; and the safety record of Hi Fly;
- Adagold's financial and commercial capacity; and
- Adagold's capacity to deliver the contracted services to the
required quality and standard.
Fit and proper persons
12.4
The committee notes the findings of the Deloitte Review on allegations
about Adagold's connection with South African tender irregularities; its
association with Major Charlton; and the safety record of Hi Fly.[9]
For the reasons identified in chapter 8, the committee makes no findings
on the substance of these allegations, but records its concern that these
matters did not appear to have been the subject of due diligence during the
initial tender evaluation process.
12.5
In particular, it is unclear how, if at all, the TEP and tender
evaluation process considered reputational issues or other matters concerning
tender respondents' general fitness and propriety to contract with the
Commonwealth. Given the small and competitive nature of the air charter market,
the committee is of the view that such matters—and the assessment of their
associated risks—should be addressed expressly in the TEP.
12.6
The committee notes the findings of the Deloitte Review that there did
not appear to be any criteria within Commonwealth or Defence procurement policy
that specify requirements for being 'fit and proper' for the purposes of
contracting with the Commonwealth. Nor did Deloitte identify any authoritative
guidance on the relevant searches to be undertaken in assessing a respondent's
fitness and propriety to contract with the Commonwealth. The committee observes
that Deloitte assessed fitness and propriety in terms of whether proceeding to
contract with the relevant tenderer could cause the Commonwealth reputational
damage.[10]
12.7
In the committee's view, the overall fitness and propriety of potential Commonwealth
contractors falls squarely within an assessment of value for money. Value for money
requires a comparative analysis of all relevant costs and benefits of a
proposal—that is, both financial and non-financial—over the entire procurement
life-cycle. Two key considerations identified in the CPGs are 'fitness for
purpose' and 'the performance history of each prospective supplier'.[11]
12.8
Accordingly, the committee considers that the overall fitness and
propriety of tender respondents, their key personnel, proposed sub-contractors
and associated entities should be assessed routinely in all future procurements
of air sustainment services to the MEAO. Future TEPs should include criteria
setting out requirements or indicators for assessing a tenderer's fitness and
propriety to contract with the Commonwealth. TEPs should also identify key
searches that should be performed in undertaking assessments, and provide
guidance on the possible implications of the outcomes of those searches. These
criteria, indicators, searches and relevant persons and entities should be
based on those outlined in the Deloitte Review.[12]
12.9
In developing guidance on the consequences of relevant search results, the
sole focus should not be on identifying factors that would automatically
disqualify a respondent from further consideration. In this respect, the
performance of 'fit and proper' inquiries in the first instance should be
broader than the task of the AFCD and Deloitte reviews. Those reviews were
concerned with identifying reasons that the tender process should not continue.
While these factors are clearly important, consideration should also be given
to the risk of reputational damage associated with entering into a contract
with a respondent who is subject to allegations of impropriety. The potential
risk for proponent grievances on the basis of such allegations should also be
considered.
Recommendation 6
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.
Financial and commercial capacity
12.11
The committee supports the decision to obtain a performance guarantee
from Adagold, and to execute a novation agreement between the Commonwealth,
Adagold and Hi Fly. These are appropriate risk management measures having
regard to Adagold's business structure and financial position.
12.12
The committee notes, however, two key findings of the Deloitte Review
that identified shortcomings in the financial evaluation of tender responses.
Firstly, the Deloitte review found that the particular risks arising from the sub-contracting
arrangements in Adagold's tender response were not initially identified in the
assessment undertaken by the FIS team. Deloitte observed that Adagold was
assessed as 'medium risk', suggesting that a performance guarantee may not have
been required.
12.13
Given that the membership of the Air Transport Standing Offer Panel
includes several charter brokers, the committee considers that future tender
evaluation documentation—at least for high value contracts such as the MEAO
contract—should contain specific provisions on conducting financial risk
assessments of tender responses involving charter broker arrangements.
12.14
Secondly, the Deloitte Review identified a further instance in which the
circumstances of charter brokers did not appear to have been adequately
considered. Under the terms of the request, tender respondents were required
only to submit the financial statements of 'the contractor' and not their sub-contractors.[13]
The Deloitte Review indicated that some proponents of broker-based solutions
submitted limited financial information on their subcontractors.[14]
12.15
Accordingly, the committee considers that all future requests should require
tender respondents submitting broker-based solutions to provide the complete
financial statements of their proposed sub-contractors.
Recommendation 7
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.
Capacity to deliver the contracted
services to the requisite quality and standard
12.17
In addition to its earlier comments on the limitations of the external
reviews of the tender process, the committee comments on two further issues.
First, in its submission to the committee CASA identified a possible limitation
in Defence's understanding of the application of the civil aviation safety
regulatory regime in respect of charter broker arrangements. CASA stated that:
Charter brokers have no regulatory obligations to CASA, and
CASA has no authority to regulate these charter brokers. It is only
operators—AOC and FAAOC and permission holders—who must comply with the
applicable safety requirements and over whose conduct CASA has any regulatory
authority.
Depending on the nature of the arrangements involved in any
given case, it is possible that the Department of Defence may not have a clear
or complete understanding about the operator that will actually be
performing the air services contemplated by the contract, as opposed to the
charter broker with whom the Department will have dealt.[15]
12.18
In light of this comment, the committee encourages Defence to ensure
that all personnel involved in the procurement of air charter services
understand the operation of the civil aviation regulatory framework in respect
of charter broker arrangements.
12.19
Second, while acknowledging that Defence has indicated its general satisfaction
with Adagold's contractual performance to date, the committee notes the
performance reporting, review and management provisions in the deed and the
request. The outcomes of future performance assessment under these provisions are
of interest to the committee.
Independent, expert scrutiny and
continuing monitoring
12.20
Finally, while welcoming the reform program announced by Defence, the
committee is concerned to ensure that:
- there is an independent, expert assessment of the lessons learned
from the tender—particularly in respect of probity risk management; and
- the implementation of these reforms is monitored
closely—especially to ensure that policy reforms are reflected in procurement
practice.
12.21
In the committee's view, the Auditor-General would be well placed to
conduct two further reviews of the procurement—first, to assess the immediate
lessons learned from the 2010 tender process, and subsequently to assess
Defence's progress towards implementing reforms.
Request to Auditor-General
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
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.
Broader application of the committee's recommendations
12.24
Consistent with its terms of reference, the majority of the committee's
recommendations are specific to the procurement of air sustainment services to
the MEAO. However, the committee recognises that the principles and practices
underpinning them are of broader application to other procurements,
particularly non‑equipment procurements. Accordingly, Defence should also
consider giving these recommendations broader application as part of its
program of non-equipment procurement policy reforms.
Recommendation 9
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.
Conclusion
12.26
The reviews of the 2010 tender identified deficiencies in the process
but, overall, concluded that the flaws were not sufficiently material to render
the process unsound. The committee is strongly of the view that Defence should
not take comfort from these findings. Aspects of the tender process were sloppy
and, in light of the nature of the industry and the behaviour of people in the
industry, Defence was particularly inattentive when it came to identifying and
managing probity risks. The committee is critical of Defence's heavy reliance
on the reviews to salvage the reputation of the tender process. The reviews
were concerned with identifying whether Defence had satisfied the barest
minimum requirement that would avoid invalidation of the tender process. Bare
compliance is not a desirable procurement outcome.
12.27
The committee remains concerned that the image and reputation of Defence
has been diminished by the circumstances which prompted the significant
parliamentary and public scrutiny of the 2010 tender process. The incident has demonstrated
a lack of understanding, on the part of Defence, of the critical need to
identify, assess and manage probity risks effectively.
12.28
The committee is especially concerned that the risks associated with perceived
conflicts of interest and the potential for proponent grievances were not
afforded appropriate weight in the circumstances of the procurement. Defence
possessed significant knowledge of the competitive nature of the market and the
long history of controversy associated with the MEAO contract. Despite this
knowledge, 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.
12.29
Accordingly, the committee cannot accept that these probity risks were identifiable
only in hindsight. In the committee's view, they were foreseeable from the
commencement of the procurement and should have been given due consideration in
risk assessment. Defence's emphasis on the benefits of hindsight[16]
and the non-mandatory nature of probity plans and advisors[17]
has done little to allay the committee's concerns about the Department's level
of insight into probity risk management.
12.30
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.
12.31
The committee has highlighted the need for ongoing monitoring of the
implementation and effects of these reforms. It is concerned to avoid an
'implementation gap' between documented policy reforms and procurement
practice. Accordingly, it has requested the Auditor-General to conduct a second
review examining Defence's implementation of these reforms after a suitable time
has elapsed.
12.32
The committee also notes the importance of ongoing parliamentary
scrutiny of Defence's progress towards implementing reforms, and the
performance of the 2010 contract and any subsequent contracts and has
recommended that Defence provides periodic updates on these matters.
SENATOR ALAN
EGGLESTON
CHAIR
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