Introduction

1.1 In 2012, the Australian government established Regional Processing Centres (RPCs)⁹ in the Republic of Nauru (Nauru) and Papua New Guinea (PNG), with the agreement of both the Nauruan and PNG Governments.

1.2 Figure 1.1 shows the location of Manus Island and Nauru respectively.

Figure 1.1: Location of Nauru and Papua New Guinea

 

 

Source: Google Maps.

1.3 Initially, the RPC on Nauru was located at a single site. Following a riot and fire at the Nauru site in July 2013, RPC activities there were distributed across three sites.¹⁰

1.4 In PNG, the Manus Island Regional Processing Centre (MIRPC) was established in September 2012 at the Lombrum Naval base. Following the closure of the MIRPC in October 2017 (see paragraph 1.10), arrangements on Manus Island were distributed across three sites:

• East Lorengau Refugee Transit Centre (ELRTC)¹¹;
• West Lorengau Haus; and
• Hillside Haus.

Figure 1.2 shows the location of these facilities on Manus Island.

Figure 1.2: Manus Island

 

 

Source: UNHCR website.

1.5 The centres were established under Memoranda of Understanding (MOUs) between the Australian Government and the Nauruan¹² and PNG governments¹³ respectively. Under both agreements, the Australian Government was to bear all costs incurred under the MOUs.

1.6 Transfers of asylum seekers to Nauru commenced on 14 September 2012 and to Manus Island on 21 November 2012.

1.7 Since 2012, the Department of Home Affairs¹⁴ (the department) has been responsible for the procurement of garrison support and welfare services functions for the RPCs and the establishment and ongoing management of associated contractual arrangements. Garrison support includes security, cleaning and catering services. Welfare services includes individualised care to maintain health and well-being, such as recreational and educational activities.

1.8 The department advised that the total cost of regional processing arrangements in Nauru and PNG since establishment are as shown in Table 1.1.

Table 1.1: Cost of regional processing arrangements by financial year — 2012–13 to 2018–19

Source: ANAO analysis of departmental documentation.

Recent history of contractual arrangements for garrison support and welfare

1.9 In March 2014, the department contracted Broadspectrum (Australia) Pty Ltd¹⁵ (BRS) for the provision of garrison support and welfare services in both Nauru and PNG.

1.10 On 26 April 2016, the Supreme Court of PNG ruled that detention of asylum seekers was unconstitutional. On the following day, the PNG Government announced its intention to close the centre.

1.11 In May 2016, BRS advised that it would not participate in any further tenders or contracts to supply garrison support and welfare services to the Australian Government. It agreed to extend its existing contract until the end of October 2017.¹⁶

1.12 Between November 2016 and March 2017, the department commenced negotiations with the PNG Government in relation to the new policy arrangements, with the intention of PNG assuming independent management of arrangements for existing asylum seekers from October 2017. To support this transition, the department was assisting the PNG Immigration and Citizenship Authority (ICA)¹⁷ to procure associated services (refer paragraph 2.6).

1.13 On 5 July 2017, at a meeting of senior officials, ICA informed the department that, due to the forthcoming general election, the PNG State Solicitor had directed that officials not enter into any service contracts that would continue beyond 31 October 2017 before the formation of an elected government.

1.14 On 31 July 2017, the department obtained approval from the Minister to procure garrison support and welfare services for both Nauru and Manus Island in order to allow the continuation of these services after 31 October 2017. The department subsequently entered into four contracts¹⁸ as listed in Table 1.2.

Table 1.2: Contracts for garrison support and welfare services

Note a: The figure of $1,122 million is from departmental documentation. The figure recorded on AusTender is $1,116 million, a difference of $6 million.

Note b: Paladin comprises Paladin Solutions PNG Ltd and Paladin Holdings PTE Ltd. Paladin Solutions PNG Ltd initially provided garrison services at the ELRTC, under a Letter of Intent, between September 2017 and February 2018. Paladin Solutions PTE Ltd provided garrison services upon contract execution on 28 February 2018. For the purposes of this audit, the Paladin contracts are considered as one procurement.

Source: ANAO analysis of departmental documentation.

Previous audit reports on offshore processing procurements and contracts

1.15 The ANAO conducted two performance audits in 2016–17 for the procurement and contract management of garrison support and welfare services.¹⁹ These audits assessed whether the department had appropriately:

• managed the procurement of garrison support and welfare services at offshore processing centres in Nauru and PNG (Manus Island);
• established and managed the contracts for garrison support and welfare services at offshore processing centres in Nauru and PNG (Manus Island); and
• met the requirements of the Commonwealth Procurement Rules, including consideration and achievement of value for money (for both procurement and contract management).

1.16 The audits found, respectively, that the department’s management of procurement activity and management of contracts for garrison support and welfare services at the RPCs had ‘fallen well short’ of effective practice.²⁰ The audits made a total of five recommendations.

Other relevant performance audit reports

1.17 Prior to the 2016–17 audits, the ANAO had conducted five audits²¹ since 2004 that focused on the department’s management of detention centre contracts. Each of these audits identified shortcomings in the department’s contract management and procurement activities of detention services.

Joint Committee of Public Accounts and Audit

1.18 Auditor-General Report No. 16 2016–17 was one of three ANAO reports²² selected for an inquiry into Commonwealth Procurement by the Joint Committee of Public Accounts and Audit (JCPAA) in October 2016. In September 2017, the JCPAA published Report 465: Commonwealth Procurement. The JCPAA made two recommendations²³, which are discussed further in Chapter 4.

Commonwealth Procurement Framework

1.19 Figure 1.3 summarises the core elements of the Commonwealth procurement framework. Key aspects of the framework which are relevant to this audit are discussed in paragraphs 1.21 to 1.33.

Figure 1.3: The Commonwealth Procurement framework

 

 

Source: Commonwealth Procurement Rules 2017, Department of Finance.

Public Governance, Performance and Accountability Act 2013

1.20 The Public Governance, Performance and Accountability Act 2013 (PGPA Act) came into force on 1 July 2013. Section 15 of the Act requires entities to promote the proper use²⁴ and management of public resources for which the authority is responsible.

1.21 Under section 23 of the PGPA Act, the accountable authorities of non-corporate Commonwealth entities have power to enter, vary or administer an arrangement, and approve commitments of relevant money, on behalf of the Commonwealth.

Commonwealth Procurement Rules

1.22 The Commonwealth Procurement Rules (CPRs) are issued by the Minister for Finance under subsection 105B(1) of the PGPA Act.

1.23 The CPRs govern how entities buy goods and services. The CPRs state:

Procurement encompasses the whole process of acquiring goods and services. It begins when a need has been identified and a decision has been made on the procurement requirement. Procurement continues through the processes of risk assessment, seeking and evaluating alternative solutions, the awarding of a contract, the delivery of and payment of goods and services and, where relevant, the ongoing management of the contract and consideration of disposal of goods.²⁵

1.24 A core principle of the CPRs is achieving value for money. The CPRs provide that officials must be satisfied, after reasonable enquiries, that a procurement achieves a value for money outcome. Value for money is determined by: encouraging competition and being non-discriminatory; using public resources in an efficient, effective, economical and ethical manner; facilitating accountable and transparent decision-making; appropriate engagement with risk; and being commensurate with the scale and scope of the business requirement.

1.25 The CPRs consist of two divisions:

• Division 1 — rules applying to all procurements regardless of value. Officials must comply with the rules of Division 1 when conducting procurements; and
• Division 2 — additional rules that apply to all procurements valued at or above the relevant procurement threshold (unless exempted under Appendix A of the CPRs).

The department’s procurement of garrison support and welfare services

1.26 The department conducted procurement activity for the garrison support and welfare services engagements using two key elements of the CPRs.

for the maintenance or restoration of international peace and security, to protect human health, for the protection of essential security interests, or to protect national treasures of artistic, historic or archaeological value.

• For Nauru, Canstruct was issued with a Request for Quotation (RFQ) under paragraph 10.3, which allows for the conduct of procurement through limited tender in certain circumstances.
• For Manus Island, RFQs were issued for separate services at specific sites to JDA, NKW and Paladin under paragraph 2.6, which allows an accountable authority to apply ‘special measures’ determined to be necessary:

1.27 On 10 August 2017, the Secretary of the department, as the accountable authority, exercised his authority to invoke paragraph 2.6 in relation to the Manus Island procurements ‘for the protection of essential security interests and human health’.

1.28 The provisions of paragraphs 2.6 and 10.3 are set out in full in Appendix 2.

Accountable Authority Instructions

1.29 In addition to the requirements of the CPRs, section 20A of the PGPA Act authorises accountable authorities to give instructions, known as Accountable Authority Instructions (AAIs), to assist officials to understand their duties and responsibilities under the PGPA Act. AAIs are legally binding and may contain links to relevant legislative requirements, guidance material, authorisations and other instructions.

1.30 Paragraph 3.81 of the department’s AAIs requires that the Chief Financial Officer (CFO) authorise the use of limited tender for procurement at or above the relevant procurement threshold, as described in paragraph 10.3 of the CPRs.

Other relevant internal documentation

1.31 To meet the department’s undertakings in response to Auditor-General Report No. 16 2016–17, on 12 March 2017, the department mandated additional governance arrangements for high risk, high value procurements. The governance arrangements for procurements allocated high risk, high value status is shown at Appendix 3.

1.32 The key additional governance arrangements for procurements classified as high risk, high value include:

• high risk, high value status is allocated by the CFO, Chief Risk Officer (CRO) and General Counsel (GC)²⁶;
• financial delegation sits at the deputy secretary or deputy commissioner level;
• oversight of the procurement by a steering committee of Senior Executive Service members, including the CFO and CRO;
• written endorsement from the CFO and GC to the delegate at four mandatory gateways²⁷ to provide the delegate with confirmation that each stage of the procurement complies with the department’s AAIs, financial guidelines and legal principle and practice;
• mandatory documentation requirements for all high risk, high value procurements;
• Procurement and Contracts Branch (PCB) coordinates all high risk, high value processes and also reports quarterly to the Capability Planning and Resource Committee; and
• potential audits are identified by the PCB²⁸ in consultation with the relevant business area’.²⁹

Rationale for undertaking the audit

1.33 On 19 February 2019 and 18 March 2019, the Auditor-General received correspondence from the Hon Shayne Neumann MP, Shadow Minister for Immigration and Border Protection, requesting ‘an urgent audit into the circumstances surrounding the Department of Home Affairs’ procurement of garrison support and welfare services in Papua New Guinea.’³⁰

1.34 Implementation of the Australian Government’s policies on offshore detention of refugees and asylum seekers over the last ten years has cost billions of dollars. The operation of RPCs have been a subject of substantial parliamentary and public interest. The ANAO’s two previous audit reports into the department’s management of offshore garrison support and welfare contracts identified a range of shortcomings and deficiencies. Since the tabling of the audit reports, the department has entered into further contracts totalling in excess of $1 billion; and it is timely to assess whether the department has improved its procurement and performance management processes.

Audit approach

Audit objective, criteria and scope

1.35 The audit objective was to assess whether the Department of Homes Affairs has appropriately managed the procurement of garrison support and welfare services for offshore processing centres in Nauru and PNG (Manus Island).

1.36 To form a conclusion against the audit objective, the following high-level criteria were adopted:

• procurements were conducted in accordance with the CPRs and value for money principles;
• contractor performance is adequately reported and monitored; and
• the department has implemented recommendations and actions arising from previous JCPAA and ANAO reports on the procurement of garrison support and welfare services.

1.37 The audit scope for the selected procurements and contracts entered into by the department, and its predecessor agencies, were based on the following:

• procurements involving the provision of garrison support and welfare services at RPCs; and
• procurements which were material³¹ and have been undertaken following the tabling of the two ANAO performance audit reports in 2016–17.³²

1.38 On this basis, four³³ procurements were identified and are shown above at Table 1.2.

1.39 Auditor-General Report No. 32 2016–17 identified deficiencies in the department’s contract management practices, particularly around contract reporting and management. Consequently, while this report is principally concerned with the department’s management of the procurement process, it also examines contract reporting and management arrangements for each of the contracts.

1.40 Finally, the report examines whether the department implemented the recommendations from Auditor-General Report No. 16 2016–17 and the JCPAA’s recommendations in Report 465: Commonwealth Procurement.

Audit methodology

1.41 The audit methodology included:

• examination and analysis of departmental records;
• interviews with relevant departmental staff;
• interviews with relevant non-departmental stakeholders; and
• sworn testimony under oath obtained using the powers provided by section 32 of the Auditor-General Act 1997.

1.42 The audit was conducted in accordance with the ANAO Auditing Standards at a cost to the ANAO of approximately $900,000.

1.43 The team members for this audit were Julian Mallett, Amanda Ronald, Robyn Clark, Renee Hall, Shane Armstrong, Mary Huang and Paul Bryant.

2.1 Paragraph 4.4 of the CPRs states that ‘officials responsible for a procurement must be satisfied, after reasonable enquiries, that the procurement achieves a value for money outcome’. The CPRs state that competition is a key element of the procurement framework and, generally, an open and competitive tender process helps entities to achieve a value for money outcome. However, as noted in Chapter 1, the CPRs recognise that there can be circumstances (such as urgency) which militate against conducting a full open tender process.

2.2 As outlined in Chapter 1, the department used limited tender³⁴ processes to conduct the four procurements for garrison support and welfare services on Manus Island and Nauru. This chapter examines whether the department met the CPR requirements for using this procurement method, together with the identification of potential providers, demonstration of value for money, management of probity and the conduct of due diligence in relation to the Manus Island and Nauru procurements.

Did the department meet the CPR requirements for conducting limited tenders or direct engagement?

Manus Island

2.3 As outlined at paragraph 1.11, BRS, the incumbent garrison support and welfare services provider, advised in May 2016 that it would not participate in any further tenders or contracts for the supply of garrison support and welfare services to the Australian Government. It agreed to extend its existing contract until 31 October 2017.

2.4 It was agreed between the Australian and PNG governments that the latter would assume independent management of the delivery of services to existing asylum seekers from October 2017.

2.5 To that end, in June 2017 ICA issued ‘Requests for Offer’ (RFOs) to a number of potential service providers inviting them to tender for various aspects of garrison support and welfare services.

• Paladin — an Australian registered company who had been providing security at the East Lorengau Transit Centre (ELRTC) since late 2013, initially under Decmil during the planning/construction phase and then under Wilson Security during the BRS contract.
• TSI — a PNG provider who provided security under Wilson Security during the BRS contract.
• Loda — a PNG provider who provided security under Wilson Security during the BRS contract.
• C5 Crisis Management — an Australian registered provider of security training and consulting services who had previously provided services to ICA.
• Spic-n-span — a PNG provider who provided laundry services under the BRS contract.

2.6 The department was assisting ICA in the procurement process through departmental officers who had been embedded through the Strongim Gavman Program.³⁵ The department also engaged KPMG to provide procurement advice to ICA.

2.7 During the procurement process, an election was called in PNG. The department’s records state that at a meeting on 5 July 2017 between ICA and departmental senior officers, the PNG State Solicitor advised that he had directed PNG officials not to enter into new contracts until after the election.

2.8 On 7 July 2017, the department’s First Assistant Secretary, Detention Services Division emailed the department’s Deputy Commissioner (Support):

It is proposed that DSD will take over all procurement processes, which were previously the responsibility of PNG ICSA. This will result in the Commonwealth having contracts with potential end dates beyond the 31 October 2017.

It is proposed that Paladin Group Ltd (Paladin) will be engaged to provide Garrison and Security Services and oversight at both sites. They will subcontract services to a number of local providers – including security providers TSI and Loda, Spic-n-span. In effect they will replace BRS.

These services will be the essential services required to promote the self-agency and safety of Residents and ensure the protection of assets for the Department.

2.9 Attached to the First Assistant Secretary, Detention Services Division’s email was ‘a visual of how this would work’ (see Figure 2.1).

Figure 2.1: Proposed garrison support and welfare contracts — Manus Island

 

 

Note: Procurement activity associated with health services is not considered within the definition of ‘garrison support and welfare services’, and was therefore not considered within the scope of this audit.

Source: Department of Home Affairs.

Selection of a procurement method

2.10 On 12 July 2017, the department submitted a brief requesting approval from the Minister to procure garrison support and welfare services for both Nauru and Manus Island in order to allow the continuation of these services after 31 October 2017. Approval was subsequently provided on 31 July 2017.

2.11 On 28 July 2017, the First Assistant Secretary, Detention Services Division emailed the Deputy Commissioner (Support) attaching a document outlining three options for the procurement process, including a brief description of the risks, mitigations and benefits of each option. The document noted that the BRS garrison support and welfare contract would end on 31 October 2017 and that ‘[t]he Department has a limited timeframe to put in place contracts and transition a service provider to support Regional Processing in PNG.’ The procurement options presented in this context were:

• Option 1: Using the provisions of paragraph 2.6 of the CPRs;
• Option 2: The limited tender provisions of paragraph 10.3 of the CPRs; and
• Option 3: The ‘exemption’ provisions of the CPRs relating to procurements outside Australia (known as exemption 8).³⁶

2.12 On 31 July 2017, the First Assistant Secretary, Detention Services Division emailed a number of his staff stating:

I spoke with DCS on this today – she is minded to go for the first option 2.6.

Can we start constructing the approach around 2.6 – and mention the other options (and why we didn’t go with them).

2.13 The email from the First Assistant Secretary, Detention Services Division did not include any explanation of, or reason for, the Deputy Commissioner’s (Support) preference. There was no other document that demonstrated how or why this approach was pursued.

2.14 On 10 August 2017, the Secretary, as the department’s accountable authority, approved the use of the paragraph 2.6 ‘special measures’ provisions of the CPRs. Notwithstanding the First Assistant Secretary, Detention Services Division’s direction that the minute to the Secretary should refer to ‘the other options (and why we didn’t go with them)’, there is no reference to these in the minute, and no reference to why the department chose to use paragraph 2.6 of the CPRs rather than the other options shown at paragraph 2.11.

2.15 Paragraph 2.6 of the CPRs permits accountable authorities to determine ‘special measures’ for reasons including the protection of ‘essential security interests’ and ‘to protect human health’. The minute requesting the Secretary’s approval stated:

The MRPC Procurements will result in contracts that will secure essential services (security and accommodation) and critical infrastructure (minor works, sewerage, water, power) and health care. Without contracted service providers in place providing these services there is a high risk to human health and the maintenance of peace and security at the Manus Regional Processing Centre and other relevant Sites.

In addition, the reasons that were provided to the Secretary to justify the use of paragraph 2.6 were:

The complex operating environment in Papua New Guinea, which requires the engagement of particular service providers with the right service capability, experience and risk appetite, with short lead times.

Procurement processes that are flexible to respond to the changes in either the operating environment, service delivery requirements or the impact of external factors, that allows contracts to be established and implemented quickly.

2.16 The Secretary’s decision to invoke paragraph 2.6 in the terms that he did removed the requirement for the department to comply with the rules relating to encouraging competition (which are contained in Part 5 of the CPRs) and the requirement to comply with Division 2 (which imposes additional requirements). The minute noted that the department would still comply with the rules relating to:

• Value for money (CPRs Part 4);
• Efficient, effective, economical and ethical procurement (CPRs Part 6);
• Accountability and transparency in procurement (CPRs Part 7); and
• Procurement risk (CPRs Part 8).

2.17 While the minute to the Secretary broadly described the procurement process that would be followed, it did not provide information on who were preferred providers and why they were preferred.

Selection of providers for Manus Island

2.18 In addition to the providers referred to in the First Assistant Secretary, Detention Services Division’s proposed model for garrison support and welfare services at Figure 2.1 (Paladin, Loda, TSI, and Spic-n-Span), the department was also aware of other providers. Specifically:

• the 28 July 2017 email (referred to at paragraph 2.10) outlining options for a procurement process also included a diagram which referred to JDA Wokman Ltd (JDA)³⁷ and ‘Host’;
• as noted at paragraph 2.5, one of the companies to which ICA had issued an RFO during its procurement process was C5 Crisis Management; and
• in August 2016 and December 2016, the department had conducted a ‘market sounding’ exercise intended to identify and gauge interest in the provision of garrison support and welfare services on Manus Island and Nauru. As part of this process, Serco, Decmil and Canstruct³⁸ had expressed interest in tendering for the supply of services, albeit with qualification.³⁹

2.19 Another provider which ultimately became part of consideration in the procurement process was NKW Holdings Ltd (NKW). In May 2017, due to the decommissioning of the MIRPC (refer paragraph 1.4), the department was seeking accommodation on Manus Island to supplement the ELRTC. It became aware that NKW held a lease on land which had some existing barracks style accommodation, with the potential for further similar accommodation to be constructed. The department entered into a Letter of Intent on 8 September 2017 to refurbish the existing accommodation⁴⁰ and to construct new accommodation.⁴¹

2.20 There were 11 providers⁴² of which the department was aware that could offer some or all elements of the required garrison support and welfare services. However, the department issued RFQs to only three potential providers. Paragraph 7.2 of the CPRs states that officials must accurately and concisely document ‘relevant decisions and the basis of those decisions’.⁴³ The department did not document why Paladin, NKW and JDA were the only providers selected to receive RFQs.

2.21 Aside from the department’s expressed preference for a particular contracting model, at the time of issuing the RFQs, the department’s records included information on the following factors which may have influenced the decision as to which companies should be asked to quote:

• the performance, experience and track record of providers;
• the ability of providers to attract, retain and manage a workforce of largely local Manus Island residents; and
• the views of ICA, since novation of the management of contracts to ICA was likely.

2.22 In January 2020, the ANAO took evidence under oath from the First Assistant Secretary, Detention Services Division, under s.32 of the Auditor-General Act 1997, about whether there was ever any pressure brought to bear by the PNG government or officials to appoint one or all of Paladin, NKW or JDA. He replied:

Absolutely not. These were decisions that were made by the Commonwealth and officials in the Commonwealth. The delegations all sit within the Commonwealth, the decision-making, the evaluation, value for money, all of that, which you’ve got all of that documentation, all sat with Commonwealth officers and in the Department. So the PNG Government, either through its ministers, politicians or officials, had no part in our decision-making. It was all within the Commonwealth. Now, the policy context that we were operating in, they had some views around that and we were mindful of that, but they did not get directly involved in any of the procurement processes. It was all done by Commonwealth officials here in Australia.

Nauru

2.25 As noted at paragraph 2.3, in May 2016, BRS announced that it would not participate in any further tenders or contracts to supply garrison support and welfare services for the Australian Government, but agreed to extend its contract until 31 October 2017.

2.26 Following ‘market soundings’ in August and December 2016 which demonstrated that there was some interest in the market in participating in a procurement process, in January 2017, the department commenced preparations for an open tender process to replace BRS. However, the department stated that this process did not proceed due to concerns that it could prejudice discussions that were underway with the Government of Nauru.

2.27 In February 2017, BRS approached the department with a proposal that it novate its existing contract to Canstruct.⁴⁴ The department held discussions with BRS and Canstruct in May 2017, but decided against this proposed course of action.

2.28 On 20 June 2017, the department’s Assistant Secretary, Services Management obtained approval from the CFO to conduct a procurement by limited tender to replace BRS using the provisions of paragraph 10.3(a)(i) of the CPRs, which permit a limited tender⁴⁵ in circumstances where a previous approach to market did not result in a submission that represented value for money.

2.29 The provisions of paragraph 10.3 are shown in Appendix 2. In order to justify using paragraph 10.3(a)(i), the department needed to be able to show that in the earlier response to market, ‘no submissions that represented value for money were received’.

2.30 In 2015, the department had commenced a process for the procurement of garrison support and welfare services in both Manus Island and Nauru, which was cancelled in July 2016 (the 2016 limited tender process).⁴⁶ The process was cancelled because two participating tenderers (BRS and Serco) withdrew: BRS withdrew after its takeover by Ferrovial; and Serco withdrew because of a disagreement with the department over a number of terms and conditions in the draft contract. On this basis, there were no submissions that represented value for money.⁴⁷

2.31 On 29 June 2017, a detailed minute to the Deputy Commissioner (Support) outlined the various options (including risks and benefits) and sought agreement to proceed with a limited tender under paragraph 10.3(a)(i) by way of an RFQ to Canstruct. By this time, with only four months to go before BRS ceased providing services, a number of the ‘options’ presented to the Deputy Commissioner (such as conducting an open market procurement) were unrealistic.

2.32 On 1 August 2017, the Nauruan Government certified the Nauru (RPC) Corporation Act 2017. A brief to the Minister on 5 December 2017 stated:

On 1 August 2017, the Department was informed of the Nauru (RPC) Corporation Act 2017 when it was introduced into the Nauruan Parliament. This Act enabled the Corporation to administer, manage and facilitate commercial operations associated with regional processing.

The introduction of the Act meant that the Department could not continue the procurement process for a period of time immediately following this introduction, thereby delaying the process. The Department worked with the Government of Nauru to understand the intent and implications of the legislation. The Government of Nauru subsequently amended the legislation on 14 August 2017.

The amended Act now requires the Department to seek endorsement from the Nauruan Cabinet for any contract for the provision of Garrison and Welfare services at the Regional Processing Centre or Settlement sites in Nauru. The Department has complied with this requirement.

2.33 The department satisfied the requirements of paragraph 10.3(a)(i), however it had adequate time to plan for the procurement of garrison and welfare support services in Nauru in a manner which could have allowed a more competitive approach to the market. Notwithstanding the introduction of the Nauru (RPC) Corporation Act 2017, the department had 14 months between May 2016 — when BRS formally advised the department that it would cease operations on 31 October 2017 — and the certification of this legislation in August 2017, to explore a range of possible procurement options and suppliers.⁴⁸

Procurement risk

2.34 The CPRs require that when conducting a procurement, entities must establish processes for the identification, analysis, allocation and treatment of risk. The department created a Risk Management Strategy and Plan for each of the four procurements.⁴⁹ Three of the four plans had a risk assessment template⁵⁰ which identified risks such as:

• services are not in place by 31 October 2017;
• lack of sufficient funds;
• inability to sign a contract with the service provider; and
• service provider unable to obtain necessary visas to deliver services.

2.35 In February 2019, the department conducted an internal audit of the Paladin procurement process. Among other findings, this audit noted that ‘the nature of the operating environment in PNG heightens the potential for fraud and corruption procurement risks’ and considered that such risks should have been identified and documented. The ANAO agrees that these risks should have been recorded. In responding to the internal audit’s finding, the department stated:

During the procurement process, no issues were identified in relation to fraud, corruption and/or collusion. [Property and Major Contracts Division] followed all procurement processes including conducting a risk assessment in relation to the procurement in compliance with the CPRs. Should issues have been identified, the procurement process would have explicitly addressed these concerns, and mitigations would have been put into place before any arrangement was entered into.

2.36 The purpose of a risk assessment is to anticipate and identify risks before they arise rather than to deal with them once they have.

Did the department ensure that principles of probity were applied?

2.37 Ethical behaviour is a key CPR principle. The 2017 CPRs stated:

Ethical relates to honesty, integrity, probity, diligence, fairness and consistency. Ethical behaviour identifies and manages conflicts of interests, and does not make improper use of an individual’s position.⁵¹

2.38 Department of Finance guidance⁵² states that external probity specialists should be appointed where justified by the nature of the procurement. The department engaged external probity advisors for all four procurements.⁵³ The engagement of probity advisors was commensurate with the scale, scope and risk of these procurements.

2.39 The Probity Advisors prepared probity plans for delegate approval and prepared and delivered probity briefings to all staff involved in the procurement process. The probity plans for each procurement required all relevant staff to sign a conflict of interest declaration form at the commencement of the procurement, and review and update as necessary at key stages in the process. Staff were also required to acknowledge that they had read and understood the probity requirements by signing a probity acknowledgement form.

2.40 While probity planning was adequate, there were failures in execution. An internal audit report on the three PNG procurements⁵⁴ conducted in August 2018 found that:

• the register of conflict of interest declaration and probity acknowledgement forms for the three procurements had not been maintained or completed;
• five key staff involved in the procurements had not completed either of the required forms; and
• 38 staff involved with the procurement had not completed a probity acknowledgement form.

2.41 The report recommended that the department update the conflict of interest and probity register to record and validate the completion of all relevant forms for all staff, including addressing any gaps. The department accepted the recommendation.

2.42 The ANAO’s examination of email traffic showed that the Director, Services Procurement engaged with JDA and NKW before and after their RFQs were lodged:

• prior to the lodgement of NKW’s RFQ, the Director, Services Procurement asked NKW whether it required ‘any further assistance with the RFQ response’; and
• the Director, Services Procurement met in Canberra with a representative of JDA after its RFQ was lodged, but before the assessment of the RFQ took place.

2.43 Subsequently, the same officer chaired the pricing assessment and technical evaluation teams for the procurement processes which recommended that JDA and NKW be awarded contracts. There was no evidence that details of these interactions and discussions — including what ‘assistance’ may have been given to NKW — were recorded as required by the Probity Plans for the procurements. To that extent, there may have been a breach of probity.

2.44 KPMG was engaged by the department as Commercial and Financial Advisors for the PNG procurements and also provided assistance to ICA during the conduct of its procurement processes for garrison services. One of the KPMG advisors was a key point of contact between ICA and the department. On 4 July 2017, after the department had preliminary discussions about approaching Paladin, a KPMG employee contacted Paladin on behalf of the department to discuss surge security required at the ELRTC. Along with its active involvement in conducting the procurements, KPMG was also engaged to conduct the department’s financial strength assessments for all four procurements.

2.45 In the period immediately following the establishment of the first letter of intent on 21 September 2017, Paladin commenced a process of engaging required personnel to support the commencement of operations. Departmental records showed that on 5 December 2017, Paladin advised the department that it was encountering difficulties in obtaining visas for workers, but that these difficulties could be resolved ‘via a payment from Paladin’, which it had refused to make. The department advised Paladin on the need to ensure that all activities were conducted in a manner which was consistent with Australian law.

Did the department demonstrate the achievement of value for money in Nauru?

2.46 A core principle of the CPRs is the achievement of value for money.⁵⁵ Auditor-General Report No. 48 2014–15 Limited Tender Procurement⁵⁶ noted that it is generally more difficult for entities conducting a limited tender to demonstrate value for money, but identified two activities that entities may undertake to increase the likelihood of achieving value for money in such situations: benchmarking costs for similar services procured previously; and negotiating strongly for discounted pricing or additional services rather than accepting initial quotes provided.⁵⁷

2.47 This section examines whether the department:

• effectively benchmarked costs for similar services; and/or
• negotiated to receive discounted pricing and/or additional services.

Benchmarking of proposed costs — Nauru

2.48 In July 2017, the department, in consultation with its external financial advisor (KPMG), developed a baseline using actual service costs under the most recent BRS contract (for the period 1 May 2016 to 30 April 2017), adjusted for service differences and inflation.⁵⁸

2.49 Using this baseline, three pricing benchmarks were then developed to account for different resident and refugee volumes and servicing assumptions (Table 2.1).

Table 2.1: Benchmarks for Nauru procurement

Note: All benchmark estimates excluded pass-through costs, and additional service requests as Canstruct was not required to provide an estimate of these costs in its RFQ response.

Note a: Scenario 1 — assumed April 2017 volumes of residents and refugees and associated cost bands would not change until 31 October 2018; and Level 1 Servicing Requirements for Settlement Support Services.⁵⁹

Note b: Scenario 2 — as per scenario 1, however with Settlement Support Services delivered in accordance with Level 2 Servicing Requirements.

Note c: Scenario 3 — as per scenario 1, except RPC Additional Family Services cost bands would gradually decline over the contract term. As at April 2017, the bands for RPC refugees was already at the lowest possible band.

Source: ANAO analysis of departmental documentation.

2.50 The three benchmarks used were based on previous trends and anticipated future scenarios. Figure 2.2 illustrates changes in population and service costs on Nauru from 2013 to 2019.

Figure 2.2: Changes in population and service costs on Nauru, 2013 to 2019

 

 

Source: ANAO analysis of departmental documentation.

2.51 At the point in July 2017 when the department was undertaking its evaluation, the population at the Nauru RPC had decreased since mid-2014, however service costs had fluctuated. Since 2013 the service cost per month had gradually increased (as indicated by the trend line). However, departmental documentation noted:

The contract value is not expected to materially decrease if the number of refugees and non-refugees residing on Nauru declines. This is due to the fact that the fees for the bands between 0–200 and 201–400 are the same, reflecting the fixed cost of keeping baseline services operational on Nauru.⁶⁰

2.52 The department did not estimate the cost per person. This would have enabled the department to benchmark against the Mid-Year Economic and Fiscal Outlook 2015–16 (December 2015) estimate of $573,111 per person per annum. While this estimate was prepared in the context of the budget preparation process, in a situation where there are limited relevant benchmarks, a cost per person could have been a potential indicator of value for money.⁶¹

2.53 Noting this, the benchmarks used by the department were appropriate given that BRS’ actual costs in 2016–17 were based on the fee structure from its 2014 bid, which the ANAO had previously found to have been lower than historical costs for similar services at the Nauru RPC⁶² and the department applied the most recent resident and refugee volumes to develop a series of scenario benchmarks.

Impact of negotiations — Nauru

2.54 Following the assessment of Canstruct’s submission, on 3 October 2017, the delegate agreed and endorsed the report’s conclusion that Canstruct’s RFQ response be considered value for money. Negotiation processes were completed in the same month.

2.55 Table 2.2 summarises departmental contract value estimates at key steps in the procurement process for garrison and welfare services in Nauru.

Table 2.2: Departmental contract value estimates at key steps in the Nauru procurement

Note a: Based on volumes under benchmark model scenario 1 (Table 2.1).

Source: ANAO analysis of departmental documentation.

2.56 The basis of the estimated overall contract value ($385 million) was not documented. The department was unable to explain the reason for the difference between the negotiated outcome of $260.2 million and the estimated overall contract value.

2.57 While Canstruct’s bid increased by $1.9 million as a result of negotiations, the department assessed the negotiated outcome as continuing to represent value for money as it: was comparable to the expected cost of services (benchmark scenario 1); and incorporated into the scope of services a range of additional items in relation to transport, school lunches, infant care and asset maintenance with a modified pricing impact.

2.58 Notwithstanding approved contract estimates, the department’s actual expenditure under the contract in 2018–19 was $301.2 million.

Did the department demonstrate the achievement of value for money in PNG?

Benchmarking of proposed costs — PNG

2.59 The department identified four benchmarks, which were used to varying degrees in the JDA, NKW and Paladin procurements respectively, as summarised in Table 2.3.

Table 2.3: Value for money benchmarks for PNG procurements

Note a: The Paladin pricing assessment team aggregated and averaged benchmarks one and two and applied an adjustment of 7.68 per cent for inflation to provide a single benchmark, referred to as the ‘indicative comparable fee’, and used this to assess Paladin’s RFQ response.

Source: ANAO analysis of departmental documentation.

2.60 Benchmark #1 was a comparison to the existing contract rates for garrison support and welfare services being provided by BRS. Whilst this was relevant, the 2014 BRS bid on which these contract rates were based exceeded historical costs by between $200 million and $300 million; and ‘…require[d] the Commonwealth to pay a significant premium over and above the historical costs of services’.⁶³

2.61 Benchmark #2 was based on the daily fees quoted by four of the six respondents to the 2015 open market procurement (see paragraph 2.30). Whilst this benchmark was relevant given similarities in the scope of services tendered for, the 2015 procurement process was cancelled by the department on the grounds that it did not result ‘in any submissions that represented value for money.’

2.62 The appropriateness of benchmarks #1 and #2 were further impacted by changes in population and service costs in PNG since 2014 (Figure 2.3). The PNG regional processing population decreased by almost 50 per cent between January 2014 and October 2017, from 1353 to 690.

Figure 2.3: Changes in population and service costs in PNG, 2013 to 2019

 

 

Source: ANAO analysis of departmental documentation.

2.63 While the population steadily decreased from early-2014 onwards, services costs have fluctuated significantly, peaking in October 2017, and the cost per month has gradually increased over the same period. Benchmark #3 was the actual cost of settlement support services being provided by Connect, a subcontractor to BRS in Nauru. This benchmark was applied only to the analysis of JDA’s pricing given that its scope of services was limited to settlement support, and that it was the incumbent provider for these services on Manus Island. This benchmark was therefore appropriate.

2.64 Benchmark #4 was Paladin’s response to the RFQ for the provision of garrison support and welfare services in August 2017. As NKW was tendering to provide similar services to Paladin at separate sites on Manus Island, this benchmark was applied only to the analysis of NKW’s pricing. This benchmark was therefore appropriate.

2.65 For the procurement of garrison services specifically (Paladin), the department also benchmarked a proposed 40 per cent margin on services against the Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA) margins of two similar organisations in the sector.⁶⁴ Departmental documentation stated that these benchmarks were used as there was ‘no readily available information in respect of the contracts for services in regional processing countries’. However, the available record indicated that the department did not consider the following margin based benchmarks:

• the arrangement used by the department when RPCs were first established⁶⁵; and
• the profit margin used for the Nauru procurement — the department estimated that Canstruct’s profit margin would be between $33 million and $50 million based on a service industry average profit margin of between 10 per cent and 15 per cent.

2.66 Whilst the department benchmarked against the existing contract rates for garrison support and welfare services being provided by BRS (refer paragraph 2.59), it did not benchmark against BRS’ actual costs for the provision of services on PNG (as it had for Nauru). While the department had changed the statement of requirement to include different sites and services, a comparison to actual costs would have presented a relevant benchmark, particularly given the limited options for comparing tenderer costs.

2.67 The department did not estimate the cost per person. This would have enabled the department to benchmark against the Mid-Year Economic and Fiscal Outlook 2015–16 (December 2015) estimate of $573,111 per person per annum.

Impact of negotiations — PNG

2.68 The department conducted negotiations with each of the three tenderers. Table 2.4 compares BRS’ actual costs in 2016–17 for garrison and welfare services in PNG with departmental contract value estimates at key steps in the negotiation process for the three PNG tenderers. It also includes the actual cost of these services for 2018–19.

Table 2.4: Contract value estimates/outcomes at key steps in the PNG procurement

Note a: Estimated cost of services from procurement spending proposals.

Note b: JDA had requested that all invoices be paid in PNG Kina (PGK). This would add 10 per cent for PNG goods and services tax to each invoice, increasing the RFQ response to $20.1 million.

Note c: The contract between the department and NKW was executed on 21 September 2018. There was no contract with NKW to provide site management and related services before this.

Note d: The department expanded the scope of services after it issued the RFQ.

Source. ANAO analysis of departmental documentation.

2.69 The department only assessed value for money on an individual procurement basis. It did not evaluate value for money based on the combined estimated contract values. Whilst a number of factors had changed in relation to the nature of services required and in the operational environment since the previous provider (BRS) were engaged⁶⁶, given BRS was responsible for all three combined services, an examination of the combined estimated contract values would have allowed a level of benchmarking.

JDA

2.70 The department concluded that the cost ‘was reasonable and less than expected’ and JDA’s response represented value for money. In relation to the lower than expected price, the department acknowledged that this may have reflected JDA not fully understanding some contract requirements, such as reporting.

2.71 On 20 December 2017, the delegate’s approval of negotiation outcomes was sought. The delegate directed the department enter into a Letter of Intent with JDA.⁶⁷

NKW

2.72 The department determined at the tender evaluation stage that NKW’s RFQ response was not value for money. It identified a number of matters for negotiation, including removing out of scope items, and seeking pricing reductions in three priority areas — the profit margin applied to staff rates, the personnel costings (assumed work days and hours), and removal of duplication in the overhead rate.

2.73 As a result of negotiations, the parties agreed to a revised contract value of $65.9 million, representing an overall reduction of $35.8 million (see Table 2.5).⁶⁸

Table 2.5: Negotiated pricing outcomes — NKW

Source: ANAO analysis of departmental documentation.

2.74 Notwithstanding the discounted pricing achieved by the department, total actual expenditure for site management services was $102.7 million in 2018–19 which was slightly more than NKW’s original pricing response.).

Paladin

2.75 While the department determined at the tender evaluation stage that Paladin’s RFQ response represented value for money, it assessed the response as at the ‘higher end of the range’ when compared against agreed benchmarks (Table 2.3).⁶⁹ It also identified a number of matters for negotiation, including Paladin’s proposed 40 per cent margin on services⁷⁰ and its organisational structure.⁷¹ It was identified that some concerns would be mitigated by Paladin’s ‘proposed efficiency measures and potential reduction in price following Transition-In (through an appropriate mechanism agreed during negotiations)’.

2.76 Following the completion of negotiations, the parties agreed to a revised contract value of $229.5 million, representing an overall increase of $77.4 million (see Table 2.6).

Table 2.6: Negotiated pricing outcomes — Paladin

Source: ANAO analysis of departmental documentation.

2.77 Key outcomes of the negotiation process were that:

• the department increased the scope of services from that contained in the RFQ to include services at additional locations — West Lorengau Haus and Hillside Haus;
• in addition to the costs of these additional services, overhead fees increased as a result this change and additional categories of fixed costs were included, including some previously treated as pass-through costs;
• transition-in fees were reduced; and
• the proposed profit margin was reduced from 40 per cent to 22.5 per cent, noting that this outcome was still more than the service industry average profit margin of between 10 per cent and 15 per cent identified by the department during the Nauru procurement (paragraph 2.64).

2.78 Paladin removed proposed efficiencies during negotiations. The department’s negotiation log noted its intention to negotiate an efficiency measure for any contract extension.

2.79 During negotiations, the parties also agreed that the department would provide Paladin with working capital via a ‘mobilisation fee’, (which was not part of the department’s RFQ documentation or Paladin’s RFQ response), to address departmental concerns about Paladin’s access to working capital. This fee was not reflected in the negotiation outcomes report, but was incorporated into the approved letter of intent for Paladin on 8 November 2017 to the value of $13,985,991 (GST exclusive), to be paid in three instalments.

Did the department conduct due diligence inquiries on potential contractors?

2.80 In a commercial context, the term ‘due diligence’ can encompass assessment of a potential provider’s policies on issues such as quality control, recruitment and environmental compliance as well as financial viability. Whilst some of these elements were addressed as part of the tender evaluation process, the department concentrated on an examination of financial viability and commissioned KPMG to undertake a financial strength assessment on each of the four providers. Table 2.7 summarises the key points of the strength assessments for each provider.

Table 2.7: Summary of financial strength assessments

Note a: Any result higher than 1 indicates that an entity is generating sufficient cash flow to maintain itself without acquiring additional debt or equity funding.

Source: Financial Strength Assessments for Canstruct; Paladin Solutions PNG Ltd; NKW; and JDA (Department of Home Affairs).

2.81 The department initially engaged each of the contractors under a Letter of Intent (LOI), which provided a basic framework for initial services to commence while contractual negotiations occur. In the case of Paladin, the LOI was signed with Paladin Solutions PNG Ltd, a PNG-registered company, but the final contract was signed with Paladin Holdings PTE Ltd, a Singaporean company.⁷² The financial strength assessment was undertaken on Paladin Solutions PNG Ltd, which means that for the entity which held the actual contract, an assessment was not carried out.

2.82 Commenting on the financial strength assessment (for Paladin Solutions PNG Ltd), the department’s CFO observed:

This contract represents a significant step up in size for Paladin which represents a high risk for the Commonwealth. The financial strength assessment raises a number of concerns; Paladin’s largest recorded revenue is less than $6 million AUD pa highlighting the significance of the upscale required to fulfil a $152 million AUD contract; and the cash sufficiency ratios indicate that Paladin will be very reliant on access to capital to establish. The line of credit reported ($2m) looks to be insufficient in the circumstances.

2.83 The department could not provide evidence on how, or if, the CFO’s concerns were addressed.

3.1 The department’s contract management practices in relation to garrison support and welfare services contracts were the subject of Auditor-General Report No. 32 2016–17 Offshore Processing Centres in Nauru and Papua New Guinea — Contract Management of Garrison Support and Welfare Services. The report concluded:

The department did not put in place effective mechanisms to manage the [G4S, Transfield and Salvation Army] contracts. Other than the contracts, there was no documentation of the means by which the contract objectives would be achieved. In the absence of a plan, assurance processes such as the inspection and audit of services delivered, has not occurred in a systematic way and risks were not effectively managed. In addition, the department has not maintained appropriate records of decisions and actions taken in the course of its contract management. As a consequence, the department has not been well placed to assess whether its service strategies were adequate or fully met government objectives.

The department developed a comprehensive and risk based performance framework for the contracts to help it assess provider performance. However, development of the framework was delayed and in applying the framework the department was not consistent in its treatment of different providers. Performance measurement under the framework relied heavily on self-assessments by providers and the department performed limited independent checks. Delays in the department’s review of self-assessments and the provision of feedback on contractor performance eroded the link between actual performance and contract payments. …⁷³

3.2 Given these previous findings, the ANAO focused in this audit on whether each contract had appropriate performance reporting and monitoring arrangements.

Did contractors meet reporting requirements?

The department’s contractor reporting processes

3.3 The department’s 2017 Contract Management Manual states:

Performance management is a vital element of successful contract management. It must be undertaken at regular intervals throughout the life of the contract, and in accordance with any Service Level Agreement or Key Performance Indicators included in the contract.

3.4 The Contract Management Manual specifies a Contract Management Framework (see Appendix 4) which, in turn, requires the development of a Contract Management Plan⁷⁴ which must be ‘commensurate with the value, complexity and perceived risk involved in the contract’ and, among other elements, include:

• details of key performance indicators including key timeframes and deliverables;
• regular reviews of contract risk;
• arrangements for regular progress meetings;
• clear lines of authority and responsibility to ensure that key performance indicators are met; and
• timeframes and method of internal management review and evaluation.

Application of contractor reporting processes to the garrison support and welfare contracts

3.5 Consistent with the Contract Management Manual, a Contract Management Plan was established for each of the four contractors. A Performance Management Framework was also established for each contractor, (comprising a schedule to the contract) which specified the detailed performance measures which would constitute the basis for the department’s assessment of the contractors’ performance — these are set out at Appendix 5. However, reporting for each respective contractor under this framework did not commence until:

• the contract had been negotiated, agreed and signed; and
• the contract management plan was agreed and settled.

3.6 The department used Letters of Intent (LOIs) to cover the period between its decision to engage a contractor and the execution of a formal contract.⁷⁵ The use of LOIs provides a basic framework for initial services to commence while contractual negotiations occur. Longer than anticipated contract negotiations led to delays of varying length between when providers began providing services and their reporting obligations began.

3.7 Table 3.1 summarises the timeframes between the commencement of operations by a contractor under the first LOI, through to when they were required to produce their first performance report⁷⁶, and indicates that these periods averaged more than eight months.

Table 3.1: Dates of Letters of Intent, contracts and contract management plans

Note a: The letter of intent for NKW Holdings related to the ‘Camp 70 refurbishment and Camp 300 establishment works’; whilst the executed contract related to Site Management Services in PNG.

Note b: Although Canstruct was not required by the department to submit its first report until 1 March 2018, it did so on 9 December 2017, 72 days after the date of the LOI. In November and December 2017, Canstruct reported on 36 of the 40 performance measures which ultimately formed part of the formal PMF.

Source: ANAO analysis of departmental documentation.

3.8 Given that the relevant contractors commenced the provision of services upon the execution of the first LOI, and that three of these services⁷⁷ involved the exercise of responsibilities associated with the welfare of individuals, the absence of an initial reporting framework to cover the period during the LOI/contract negotiation process and the transition-in period meant that key risks associated with the performance of services were not effectively monitored.

3.9 While the Contract Management Manual does not specifically deal with the issue of performance reporting during LOI periods, it does refer to reporting during transition-in periods. It states:

Special performance monitoring and reporting requirements may need to be established for the transition phases. These may be to ensure specific tasks related to the implementation of the new arrangements are properly performed and/or to ensure service delivery is running smoothly.

Early and frequent performance monitoring and reporting can assist in the prompt detection and resolution of any unforeseen problems.

3.10 Where LOIs are in place for extended periods, the department should develop interim or abbreviated reporting frameworks to allow the early identification of issues which may become more difficult to rectify later in the contract period.

Timeliness of contractor reports

3.13 The timeliness of contractors’ reports was noted as an issue in Auditor-General Report No. 32 2016–17. Some reports were provided by contractors several months later than required and, in some cases, not at all. The service providers in Report No. 32 2016–17 are no longer contracted, and therefore this audit examined the timeliness of the four subsequently engaged providers in the submission of monthly performance reports (once the formal reporting requirements commenced).

3.14 The contracts for Canstruct and Paladin required monthly reports to be submitted to the department by the tenth business day of the following month. The JDA and NKW contracts did not contain an explicit deadline, however internal departmental work instructions refer to the same deadline and the audit has used ten days as a measure to assess the timeliness of all four contractors’ reports. The result of this analysis is shown in Appendix 6.

3.15 The four contractors largely met the timeframe required of them, with only three of a total of 61 reports submitted late (and then only marginally so, except for one report which was 15 days late). This contrasts substantially with the performance of contractors in Auditor-General Report No. 32 2016–17 where delays of up to two and a half months occurred.⁷⁸

Did the department monitor contractor reports?

3.16 In Auditor-General Report No. 32 2016–17, the ANAO observed:

Performance measurement relied on the service providers conducting self-assessments (individual service provider reports, known as ISPRs) and providing those assessments to DIBP on a monthly basis. The department did not establish minimum expectations regarding the reports or supporting documentation. In addition, DIBP did not consistently apply audit or other review processes to gain independent assurance over providers’ self-assessments.

…

Self-assessment can be a useful and appropriate tool when supported by independent observations focusing on key risks and exposures.

3.17 As stated at paragraph 3.5, the department established clear expectations in relation to the content and frequency of performance reporting, however the framework relies on elements of contractor self-assessment. This section therefore examined the extent to which the department addressed the risks associated with such a framework.

The department’s performance monitoring and review framework

3.18 In relation to performance monitoring and performance assessment, the Contract Management Manual states:

Systematic monitoring underpins performance assessment. Monitoring focuses on collecting and analysing information to provide assurance that progress is being made in line with agreed timeframes and towards providing the contract deliverables.

…

Information collected during the monitoring process is used to assess contractor performance. Feedback should be provided to the contractor in relation to good or poor performance, and any performance problems should be addressed promptly. In some cases, remedial action may need to be undertaken, while in other cases, more formal action for under-performance may need to be taken.

3.19 The department has ‘in country’ staff⁷⁹ in both PNG and Nauru. In Nauru, these staff are located within the RPCs, whereas in PNG, they are located in Port Moresby, although they planned to visit Manus Island monthly. The ANAO asked the department to comment on how it manages the risk of misleading or inaccurate self-assessment reporting by contractors. It responded:

It is important to note that self-assessment reports are only the first step in a lengthy performance management process. The contract does not advise the Service Provider [SP] of the Department’s additional processes. The Department has a specialised team of performance management officers who then take the self-assessment reports and scrutinise it in detail. Scrutiny will include matching other contract documents that were obtained during the reporting month against the self-assessment reports. For example – If an incident report was submitted during the month; details within that report would be cross checked against the self-assessment report. All complaints reporting by another Service Provider will be cross checked against the self-assessment report. The performance management team will request all supporting data of the self-assessment report and cross check accuracy including electronic date stamping. The performance management team will also initiate random audits. Another example would be where the Performance management team will use the minutes of all stakeholder meetings to cross check self-assessment. Ie. if the minutes stated that one SP brought up an issue of the bus being late; the performance management team will then cross check that Paladin had self-reported a failure for that specific date.

After the Performance management team have completed their scrutiny, additional scrutiny is then applied by the national office contract management team where the Performance management team may be asked to do further audit work before the delegate approves the final results.

For Nauru – the performance management team are also on the ground and observe performance.

3.20 The department’s monitoring and review process for the four contractors is summarised at Figure 3.1.

Figure 3.1: Contractor reporting and departmental review process

 

 

Source: Adapted from departmental documentation.

3.21 This performance reporting process was largely followed in practice. In summary, there was evidence that:

• the in-country departmental officials liaised with the service providers to assess that performance reports were completed correctly on the agreed reporting template; that all applicable performance measures were reported against; cross checked reporting against incident reports, complaints, input from other contractors and associated data; and requested additional reporting evidence where required;
• Site visits were conducted by in-country departmental officials to verify self-assessment reporting on a sample basis — for Manus Island, the department established a schedule of monthly site visits to commence from December 2018, however site visits for ‘the specific purpose of performance management activity’⁸⁰ did not occur in all instances. For Nauru, the permanent presence of departmental officials enabled ongoing observation of performance;
• the in-country departmental officials and the department’s national office liaised to reconcile and confirm the initial assessment;
• officials informed the delegate of the service providers’ performance under the performance management framework and sought endorsement to advise the service provider of the reporting outcomes;
• where appropriate, the reports to the delegate contained trend analysis and highlighted any emerging issues and corrective action to be undertaken; and
• the department provided formal correspondence to the service providers detailing the outcomes of the monthly performance report.⁸¹

Meetings with contractors

3.22 The Contract Management Manual states:

Good communication is a key component of successful contract management and appropriate communication strategies and protocols must be established.

3.23 The Contract Management Plan for each contractor (on both Manus Island and Nauru) established a range of forums and meetings. The key meetings are listed in Appendix 7.

3.24 Evidence confirmed that these meetings were undertaken consistent with Contract Management Plans.

Abatements and performance improvement notices

3.25 In addition to regular reporting against pre-determined performance indicators, where a contractor has not met a performance indicator (referred to by the department as a ‘performance failure’) penalties (known as abatements) and performance improvement notices (PINs) may be imposed.

3.26 Abatements represent the refund the department is owed if a contractor does not meet the service requirements agreed through the Performance Management Framework.

3.27 PINs are issued where a contractor repeatedly fails to deliver a service. Where this occurs, the service provider is required to submit a detailed Rectification Plan. If the contractor then fails to implement the Rectification Plan within an agreed timeframe, a monetary penalty is deducted from the monthly service fee until such time as the contractor implements the Rectification Plan. The value of the deduction will not exceed 15 per cent of the monthly service fee (excluding pass-through costs) in accordance with the relevant contract.

3.28 The inclusion of clauses enabling the use of abatements and PINs varied between the four contracts, as shown in Table 3.2.

Table 3.2: Inclusion of clauses in contracts enabling abatements and PINs

Source: ANAO analysis of Service Provider contracts/departmental documentation.

3.29 Other than the department advising that ‘each contract was established independently’, the department was not able to provide any rationale as to why it did not establish abatement and PIN clauses consistently across the four contracts given the commonality in the nature of services to be provided under each.⁸²

3.30 In addition to inconsistencies in the presence of these clauses between the four contracts, there are inconsistencies between the Canstruct and Paladin contracts in relation to the circumstances under which an abatement is imposed. For Paladin, any performance failure against specified service requirements⁸³ would result in an abatement, whereas for Canstruct, provided the department considered that its overall performance for a specific ‘contract responsibility’ in a particular month was assessed as three or above⁸⁴ on a five point scale, no abatement would be imposed, regardless of the number of performance failures.

3.31 The contracts for Canstruct and Paladin also provide for ‘excusable performance failures’ which are a recognition by the department that a contractor’s failure to meet a key performance indicator might have been due to circumstances beyond the contractor’s control.

3.32 Between May 2018 and October 2019, Paladin incurred 5,484⁸⁵ abatements totalling $5,813,448 in penalties.⁸⁶ Canstruct had some performance failures, but no abatements were applied due to its overall performance rating. As noted at Table 3.2, the JDA and NKW contracts did not include provision for abatements.

3.33 The department advised that:

Canstruct have not, during the term of the contract failed to deliver services to the extent that the abatement regime in the contract has come into effect. The abatement regime in the Contract, by necessity, is very strict as to what comprises a failure sufficient to trigger an abatement, Canstruct, as a mature entity, and with significant input from ex-BRS staff, were able to avoid performance failures that triggered abatements.

Paladin’s abatements often related to administrative requirements such as record keeping, reporting timeframe requirements not met and quality improvement requirements. Paladin have progressively refined their operating processes and improved service delivery outcomes.

Were payments to contractors made in accordance with Letters of Intent?

3.34 The Commonwealth Resource Management Framework (see Figure 1.3) governs the use and management of public resources. The PGPA Act is the cornerstone of this framework and encourages entities to establish Accountable Authority Instructions (AAIs) to assist officials to meet their responsibilities under the PGPA Act.

3.35 The department’s AAIs provide instructions for spending money, including that ‘money cannot be spent without the approval of a delegate’⁸⁷ and departmental staff must be satisfied that:

• invoices are in accordance with the terms and conditions of the arrangement;
• a valid tax invoice is received;
• the decision to authorise payment is documented in writing; and
• the evidence is maintained in TRIM.

3.36 In addition, the department’s Contract Management Manual states ‘Payments should be aligned with contract deliverables, performance and outcomes’.

3.37 As noted at paragraphs 3.6–3.10, the department initially engaged each of the contractors under LOIs. These documents are often general in nature when compared to formal contractual frameworks and hence have a higher inherent risk of payments being inappropriately processed. This audit therefore examined whether payments to contractors were made in accordance with the LOIs (Table 3.3) in place prior to the establishment of formal contracts.

Table 3.3: Payments under Letters of Intent

Note a: Total value of invoices have been rounded up.

Source: ANAO analysis of departmental documentation.

Canstruct

3.38 All payments to Canstruct were made in accordance with the relevant LOI deliverables and agreed funding. However, the department did not enforce the conditions of payment. Under the relevant LOI, Canstruct was required to:

• submit invoices monthly in arrears;
• provide full substantiation of transition costs; and
• submit and have approved a new transition plan.

3.39 The Canstruct LOI was signed on 28 September 2017 and Canstruct submitted a single invoice for transition costs on the following day (that is, not in arrears). The department approved payment on 10 October 2017. Based on the available record, Canstruct did not fully substantiate transition costs. While it revised its transition plan on 8 October 2017, there is no evidence that the revised plan was approved by the department.⁸⁸

JDA

3.40 The department and JDA first signed an LOI on 29 December 2017 with retrospective effect from 4 December 2017. However, between October and November 2017 the department paid JDA a total of $0.3 million for settlement support services. The department was unable to provide an LOI or invoices and related approvals for these payments. While approved payments for LOI deliverables did not exceed LOI funding approvals, the department was unable to provide invoices to support approved payments for transition-in costs.⁸⁹

NKW

3.41 The LOI between the department and NKW for the refurbishment of Camp 70 and construction of Camp 300 provided for approximately $2.94 million.⁹⁰ Payments made for LOI deliverables exceeded the approved LOI funding amount by approximately $1.6 million, and the department was unable to provide evidence of any authorisation for payments above the approved amount.

3.42 Separately, the department made approximately $96 million in payments to NKW for site management fees in relation to Camp 70 and 300 between October 2017 and September 2018. There was no contract in place with NKW until 21 September 2018. The department advised that these payments were supported by the 2013 Australia/PNG MOU during the period while contract negotiations were finalised.⁹¹ The MOU is a country-to-country agreement and does not provide a basis for transactions with a commercial service provider.

3.43 The department conducted a review of NKW invoices in March 2018 that resulted in:

• costs being renegotiated in some cases and substantial refunds to the department (of around $5 million); and
• the department developing a process with NKW for invoicing and reporting protocols.

Paladin

3.44 All payments to Paladin were made in accordance with the relevant LOI deliverables and agreed funding.

4.1 Auditor-General Report No. 16 2016–17 was tabled in September 2016.⁹² Following examination of a number of ANAO reports relating to procurement, in September 2017, the JCPAA tabled Report 465: Commonwealth Procurement (the 2017 JCPAA report), which included a recommendation for the department. The recommendations of both reports are listed at Appendix 8.

Did the department implement the recommendations of Auditor-General Report No. 16 2016–17?

4.2 Auditor-General Report No. 16 2016–17 found that the department’s management of procurement activity for garrison support and welfare services at the offshore processing centres in Nauru and Papua New Guinea (Manus Island) had ‘fallen well short of effective procurement practice’. The audit’s two recommendations were intended to address:

• the significant skill and capability gaps identified amongst personnel at all levels in the department, including within the central procurement and budget units; and
• persistent shortcomings in the planning and conduct of the procurements, including in relation to record keeping, consistency and fairness in the treatment of suppliers, and the assessment of value for money.

4.3 The wording of these recommendations is reproduced in full at Table A.9 in Appendix 8. The focus of the recommendations was that the department needed, as a priority, to address deficiencies in the following areas as they relate to procurement:

• training and staff selection;
• procurement guidance; and
• information management and record keeping.

4.4 In assessing whether the department has implemented the recommendations of Auditor-General Report No. 16 2016–17, the ANAO reviewed:

• the evidence collected in this audit;
• material located on the department’s intranet (such as guidance and training material); and
• evaluation of the department’s own assessment of its implementation of the recommendations.⁹³

Training and staff selection

4.5 After the tabling of Auditor-General Report No. 16 2016–17, the department engaged a consultant to review the department’s procurement and contract management capability and identify options for ‘upskilling and professionalisation’. A subsequent internal review found that while the department had a range of training options, ‘there remains a scattered skill base’.

4.6 In June 2017, the CFO agreed to a proposal to consolidate and rationalise training in both procurement and contract management to ensure a more systematic and strategic approach to ensuring the right people have the right training, ranging from staff who occasionally are required to arrange a simple procurement or purchase through to large complex procurements (such as the garrison support and welfare contracts). The available training is listed on the departmental intranet and includes:

• Procurement (one day, internal and e-learning);
• Contract management 101 (one day, external);
• Certificate IV in Government (Procurement and Contracting) (external, eight days over eight weeks); and
• Diploma and Advanced Diploma in Government (Procurement and Contracting) (external, 10–15 days over 8–15 weeks).

4.7 Figure 4.1 shows the relationship between the various courses on offer and the level of complexity of the procurement. The figure is taken from a procurement education and accreditation ‘rubric’ which is available to supervisors to assist them in making decisions about staff selection and deployment of existing resources. The intention is that the rubric will assist supervisors to determine whether their staff possess appropriate skills and qualifications.

Figure 4.1: Procurement and accreditation rubric

 

 

Source: Department of Home Affairs.

4.8 Within the department, responsibility for more complex procurements and contract management rests with the Procurement, Property, and Contracts division, which is headed by a First Assistant Secretary (SES Band 2) who is also the department’s Chief Procurement Officer. Within that division, the Procurement and Contract Policy and Procurement Support and Assistance branches are responsible for procurement support, assurance and advice to line areas.

4.9 As at August 2019, 11 of 12 Executive Level staff (92 per cent) in the branch had completed at least one of the Certificate IV, Diploma or Advanced Diploma in Procurement and Contracting referred to, at paragraph 4.6.

Procurement guidance

4.10 Auditor-General Report No. 16 2016–17 highlighted the lack of guidance material for staff engaged in procurement activity. The department has developed a suite of guidance material aimed at addressing this issue which is now available to all staff via the intranet. A document entitled Introduction to procurement in Home Affairs provides a useful overview of the process and includes the process summary shown in Figure 4.2.

Figure 4.2: Procurement in the Department of Home Affairs: process summary

 

 

Source: Department of Home Affairs.

4.11 The steps outlined in Figure 4.2 apply to both the procurement of goods and services. A Procurement classification tool uses a number of ‘yes/no’ questions to assist staff to determine whether a particular procurement is considered under departmental policy to be:

• simple (less than $200,000);
• complex (between $200,000 and $10 million and of low risk); or
• strategic (greater than $10 million or complex procurements which are high risk).⁹⁴

4.12 There is a range of further guidance material which is summarised in Table 4.1.

Table 4.1: Procurement guidance

Source: ANAO analysis of departmental documentation.

4.13 Where relevant, the guidance notes include hyperlinks to other relevant material (such the CPRs and the department’s AAIs). A Procurement Help Desk email account has also been established and the guidance material referred to above encourages staff to use this to seek expert assistance at any stage of a procurement.

Information management and record keeping

4.14 Deficiencies in information management and record keeping in the department have been a consistent theme in ANAO audits since 2011.⁹⁵ Auditor-General Report No. 32 2016–17⁹⁶ stated:

The ANAO’s review indicates that DIBP contract management records were held by a variety of parties, across a variety of systems, in both paper and electronic format. Some records were only held in paper form or in shared electronic folders in Nauru and on Manus Island, by DIBP or contractor staff. DIBP (National Office) staff maintained records in shared folders in National Office, in individual and group email records, as loose papers, and as paper or electronic files in the department’s record keeping system. In addition, there was no systematic approach or minimum expectations applied by the Contract Authority or Administrator or contract management staff, in relation to records creation and maintenance, including the systems in which they were to be maintained. This ad hoc approach meant that key records could not be found, were duplicated or were incomplete.

4.15 Following the tabling of the ANAO offshore procurement⁹⁷ and contract management⁹⁸ reports respectively in 2016–17, the department developed a Records Management Action Plan (Action Plan). The Action Plan (see Table A.10 in Appendix 8) included a five year remediation strategy as well as immediate practical steps such as the mandating of the inclusion of a TRIM reference in all departmental templates, and that documents ‘are not to be signed off without a TRIM reference inserted’.

4.16 The Action Plan notes:

Record keeping behaviours, particularly the use of shared drives and email accounts for storage, have become habitual. Significant change management, underpinned by a targeted education program, will be required to modify behaviours.

4.17 Evidence identified throughout this audit indicates an improvement in record keeping: the majority of documents collected as evidence were filed in TRIM, and contained a TRIM reference, improving the ability to identify related records, and that staff recognise their obligation under the department’s Records Management policy that:

… evidence of the Department’s business activities and decision-making processes must be captured within approved records management systems.

4.18 Notwithstanding these procedural improvements, while covering documents such as minutes submitted for senior executive approval were scanned in and filed, often the attachments to the minute and key emails were not captured. It is important for the purposes of accountability that the entirety of submissions and documents for decision as they were presented, including attachments, are captured in the approved records management system.

4.19 Future audits of other areas of the department will be able to assess whether the improvement observed in this area of the department’s activity is consistent across the department.

Has the department implemented the recommendations of JCPAA Report 465: Commonwealth Procurement?

4.20 In 2017, the JCPAA conducted an inquiry into Commonwealth procurement. The inquiry was based on three ANAO reports:

• Auditor-General Report No. 1 2016–17 Procurement of the International Centre for Complex Project Management to Assist on the OneSKY Australia Program (Airservices Australia);
• Auditor-General Report No. 13 2016–17 Delivery of Health Services in Onshore Immigration Detention (Department of Immigration and Border Protection); and
• Auditor-General Report No. 16 2016–17 Offshore Processing Centres in Nauru and Papua New Guinea: Procurement of Garrison Support and Welfare Services (Department of Immigration and Border Protection).

4.21 In its September 2017 report, the JCPAA made nine recommendations, of which two were relevant to Auditor-General Report No. 16 2016–17. These recommendations are shown at Table A.11 in Appendix 8.

4.22 Recommendation No. 8 of the JCPAA report was that the department report back to the Committee on its implementation of the recommendations in Auditor-General Report No. 16 2016–17. The department complied with this recommendation by an Executive Minute provided to the Committee on 18 March 2018.

4.23 Recommendation No. 9 of the JCPAA report was aimed at the ANAO, not the department, but has been included here for completeness. It recommended that the ANAO consider conducting an audit of the department’s next procurement of garrison support and welfare. This report fulfils that recommendation.

Appendix 1 Department of Home Affairs’ response

 

 

 

 

 

 

Appendix 2 Relevant paragraphs of the Commonwealth Procurement Rules

Paragraph 2.6

Nothing in any part of these CPRs prevents an official from applying measures determined by their Accountable Authority to be necessary for the maintenance or restoration of international peace and security, to protect human health, for the protection of essential security interests, or to protect national treasures of artistic, historic or archaeological value.

Paragraph 10.3 – conditions for limited tender

A relevant entity must only conduct a procurement at or above the relevant procurement threshold through limited tender in the following circumstances:

a. when, in response to an approach to market

i. no submissions, or no submissions that represented value for money, were received,

ii. no submissions that met the minimum content and format requirements for submission as stated in the request documentation were received, or

iii. no tenderers satisfied the conditions for participation, and the relevant entity does not substantially modify the essential requirements of the procurement; or

b. when, for reasons of extreme urgency brought about by events unforeseen by the relevant entity, the goods and services could not be obtained in time under open tender or prequalified tender; or

c. for procurements made under exceptionally advantageous conditions that arise only in the very short term, such as from unusual disposals, unsolicited innovative proposals, liquidation, bankruptcy, or receivership, and which are not routine procurement from regular suppliers; or

d. when the goods and services can be supplied only by a particular business and there is no reasonable alternative or substitute for one of the following reasons

i. the requirement is for works of art,

ii. to protect patents, copyrights, or other exclusive rights, or proprietary information, or

iii. due to an absence of competition for technical reasons; or

e. for additional deliveries of goods and services by the original supplier or authorised representative that are intended either as replacement parts, extensions, or continuing services for existing equipment, software, services, or installations, when a change of supplier would compel the relevant entity to procure goods and services that do not meet requirements for compatibility with existing equipment or services; or

f. for procurements in a commodity market; or

g. when a relevant entity procures a prototype or a first good or service that is intended for limited trial or that is developed at the relevant entity’s request in the course of, and for, a particular contract for research, experiment, study, or original development; or

h. in the case of a contract awarded to the winner of a design contest, provided that

i. the contest has been organised in a manner that is consistent with these CPRs, and

ii. the contest is judged by an independent jury with a view to a design contract being awarded to the winner; or

i. for new construction services consisting of the repetition of similar construction services that conform to a basic project for which an initial contract was awarded through an open tender or prequalified tender, and when the initial approach to market indicated that limited tender might be used for those subsequent construction services.

 

Source: Commonwealth Procurement Rules, 1 March 2017, Department of Finance.

Appendix 3 High risk, high value governance arrangements

 

 

 

 

Source: Department of Home Affairs.

Appendix 4 Contract Management Framework

 

 

Source: Contract Management Manual, 13 July 2017, page 16.

Appendix 5 Garrison support and welfare contracts: performance measures

Table A.1: Performance measures: Canstruct

Source: Canstruct Individual Service Provider Reporting template.

Table A.2: Performance measures: JDA Wokman

Source: JDA Wokman reporting template.

Table A.3: Performance measures: NKW Holdings

Note a: HACCP is Hazard Analysis Critical Control Points, a preventative food safety system that takes stock of the hazards in food.

Source: NKW Holdings reporting template.

Table A.4: Performance measures: Paladin

Source: Paladin Holdings reporting template.

Appendix 6 Timeliness of reports by service providers to the department

Table A.5: Canstruct: timeliness of reports

Note: Negative number indicates report submitted before due date.

Note a: As at April 2019, the Government of Nauru had not agreed to extension of the Canstruct contract; and Canstruct and the department agreed to early submission of the report for that month.

Source: ANAO analysis of contractor reports and departmental documentation.

Table A.6: JDA Wokman: timeliness of reports

Note: Negative number indicates report submitted before due date.

Source: ANAO analysis of contractor reports and departmental documentation.

Table A.7: NKW Holdings: timeliness of reports

Note: Negative number indicates report submitted before due date.

Source: ANAO analysis of contractor reports and departmental documentation.

Table A.8: Paladin: timeliness of reports

Note: Negative number indicates report submitted before due date.

Source: ANAO analysis of contractor reports and departmental documentation.

Appendix 7 Key meetings between the contractors and the department

Source: ANAO from departmental documents.

Appendix 8 Recommendations of Auditor-General Report No. 16 2016–17 and JCPAA Report 465: Commonwealth Procurement

Table A.9: Recommendations of Auditor-General Report No. 16 2016–17 Offshore Processing Centres in Nauru and Papua New Guinea: Procurement of Garrison Support and Welfare Services

Source: Auditor-General Report No. 16 2016–17 Offshore Processing Centres in Nauru and Papua New Guinea: Procurement of Garrison Support and Welfare Services.

Table A.10: Action Plan

Note a: CRO = Chief Risk Officer.

Note b: CFO = Chief Finance Officer.

Note c: CAE = Chief Audit Executive.

Source: Auditor-General Report No. 16 2016–17 Offshore Processing Centres in Nauru and Papua New Guinea: Procurement of Garrison Support and Welfare Services.

Table A.11: Relevant recommendations of JCPAA Report 465: Commonwealth procurement

Source: JCPAA Report 465: Commonwealth Procurement, Joint Committee of Public Accounts and Audit, September 2017.