Introduction

1.1 The Murray-Darling Basin (the Basin) is a major water catchment area that includes parts of Queensland, New South Wales, Victoria, South Australia and the Australian Capital Territory. These are known as the Basin states. Figure 1.1 shows the Basin area.

Figure 1.1: The Murray-Darling Basin catchments

 

 

Source: Murray-Darling Basin Authority, available from https://www.mdba.gov.au/discover-basin/catchments [accessed 10 March 2020].

1.2 Water in the Basin is used for drinking water, supplying water for irrigated agriculture and industry, recreational and cultural purposes and maintaining freshwater ecosystems.⁸

1.3 Water entitlements are rights to an ongoing share of water within a particular area of the Basin. An entitlement to water in the Basin can be bought or sold, either permanently or temporarily.

1.4 Water allocations are the amount of water entitlement holders are allocated in a given year, and can change based on factors such as rainfall, inflows into storages and how much water is already stored. Allocating water to entitlement holders is the responsibility of the Basin states, and each has its own processes and rules for allocating water.

1.5 Water is traded on markets: within catchments, between catchments (where possible) or along river systems. This allows water users to buy and sell water according to their individual needs. The financial value of a water entitlement is determined by the water market.⁹

1.6 In recent years, the Australian Government has purchased water entitlements for environmental purposes. Water for the environment is used to improve the health of rivers, wetlands and floodplains.

History and development of water policy

1.7 An Intergovernmental Agreement (the Agreement) outlines arrangements between the Australian Government and states to implement the Basin Plan 2012 (the Basin Plan).¹⁰ Under the Agreement, the Australian Government and Basin states agreed to cooperate in the implementation of the Sustainable Diversion Limits (SDL) in the Basin Plan. SDLs limit how much water, on average, can be used in the Basin by towns, communities, industry and farmers.¹¹

1.8 To support implementation of the Basin Plan, the Basin states are:

• developing supply measures for SDL adjustment and proposals to address physical or administrative restrictions on the flow of water;
• identifying ways to maximise water savings through infrastructure;
• preparing water resource plans and long-term environmental watering plans; and
• implementing state water trading rules consistent with the Basin Plan rules.¹²

1.9 Key milestones and changes to the governance of the Basin are shown in Figure 1.2.

Figure 1.2: Key milestones and changes to the governance of the Murray-Darling Basin

 

 

Source: ANAO analysis.

1.10 The Water Act 2007 (Water Act) and the Basin Plan are intended to provide a coordinated approach to water use and management across the Basin states.¹³ The Water Act provides the legislative framework for ensuring the Basin is managed in the national interest and establishes the Murray-Darling Basin Authority (MDBA).¹⁴ The MDBA’s role includes developing and implementing the Basin Plan, managing the water resources of the Basin, and undertaking compliance, enforcement, monitoring and evaluation work.

1.11 The Basin Plan sets out the regulatory framework for the Basin. Chapter 5 of the Basin Plan sets out the overarching objectives:

• to give effect to relevant international agreements through the integrated management of water resources;
• to establish a sustainable and long-term adaptive management framework for water resources that takes into account the broader management of natural resources;
• to optimise social, economic and environmental outcomes arising from the use of water resources in the national interest; and
• to improve water security for all users of Basin water resources.

1.12 The Basin Plan sets limits on the amount of water available for urban, industrial and agricultural use to ensure the ongoing health and resilience of the environment. These limits are known as the SDLs.

Commonwealth water recovery

1.13 The aim of the Basin Plan is to return the Basin to a healthier and sustainable level while continuing to support farming and other industries.¹⁵ The Commonwealth undertakes water purchasing to recover water from communities, industries and irrigators to ensure enough water remains in the Basin for environmental purposes.¹⁶ The Department of Agriculture, Water and the Environment (the department) undertakes water procurements to achieve these objectives.

1.14 Water recovery by the Australian Government can occur through investments in water-saving infrastructure, procurement of water entitlements (including surface and ground water¹⁷), or other water recovery programs.¹⁸

1.15 The 2014 Water Recovery Strategy for the Murray-Darling Basin (the Water Recovery Strategy) outlines how the Australian Government intends to meet the commitment to ‘bridge the gap’ to achieving the SDL identified by the Basin Plan.¹⁹ While the strategy states that the Australian Government will prioritise water recovery for environmental purposes through infrastructure investment over procurement of water entitlements, it also emphasises that:

… water buybacks will no longer be the main focus for water recovery. Purchasing will progress at a significantly slower and more predictable pace with Government’s focus on strategic and targeted initiatives [ANAO emphasis added].

… The Australian Government will focus on strategically important water purchases, which will occur either in areas where there is a remaining gap to be bridged to the SDLs, or where aligned with irrigation delivery system reconfiguration or rationalisation [ANAO emphasis added].

… The Australian Government may also consider other small and orderly water purchase opportunities from 2014 to 2016 where they are consistent with the Government’s stated priorities, clearly contribute to bridging the gap and represent value for money [ANAO emphasis added].²⁰

1.16 The recovery target (known as ‘the gap’) for surface water recovery under the Basin Plan was initially set at 2750 gigalitres.²¹

1.17 In October 2015, the Water Amendment Act 2015 introduced a limit of 1500 gigalitres on Commonwealth procurements of surface water. The 1500 gigalitre limit was intended to provide confidence to the basin irrigation industry and communities on the availability of surface water.²²

1.18 Amendments to the Basin Plan following the Northern Basin Review in November 2016 and introduction of the SDL adjustment mechanism in January 2018 has seen the recovery target reduced. The current recovery target is 2075 gigalitres.²³

1.19 Under the current recovery target and with the limit placed on surface water recovery, 575 gigalitres is to be recovered primarily by investment in water-saving infrastructure, efficiency projects, or environmental works and measures.²⁴

1.20 Enforcement of the SDLs commenced on 1 July 2019.²⁵ However, water purchasing has been extended to 30 June 2020 as the SDLs have not yet been met. As at 31 December 2019, 2028.3 gigalitres has been recovered under the Basin Plan, with 46.7 gigalitres total water recovery remaining against the target.²⁶

Procurement of strategic water entitlements

1.21 In February 2008, the department commenced purchasing water entitlements to return water to the environment under the Restoring the Balance in the Basin program. Between 2008 and 2015, water purchasing occurred primarily through a series of open tenders.²⁷

1.22 As part of the 2014 Water Recovery Strategy, the government stated it would focus on strategically important water recoveries. These were defined as those in areas where there is a remaining gap to be bridged to the SDLs, or where aligned with irrigation delivery system reconfiguration or rationalisation. The strategy also allowed for consideration of other small and orderly water purchase opportunities from 2014 to 2016 where they were consistent with priorities, clearly contribute to bridging the gap and represented value for money.

1.23 In 2015, the department also identified that the number of offers of water entitlements were declining in open tender rounds. As part of the Water Purchasing Plan, presented to the Water Project Board, the department noted that over the previous 18 month period the department had received ‘almost no applications to sell at or below the benchmark prices during open competitive tenders’.²⁸

1.24 Figure 1.3 shows the number of appliations received and pursued through open tenders.

Figure 1.3: Applications received and pursued through open tender rounds 2008–2016

Source: ANAO analysis of Department of Agriculture, Water and the Environment information.

1.25 In 2016, the department implemented arrangements to undertake water entitlement procurements through limited tenders on strategically important water recoveries. Table 1.1 provides an overview of strategic water procurements conducted through limited tender arrangements.

Table 1.1: Strategic water procurements through limited tender 2016–2019

Note a: The Lower Darling purchase included 19,361 megalitres of general security entitlements at $1356 per megalitre and 2540 megalitres of high security entitlements at $3253 per megalitre. The purchase also included $40 million (plus GST) in compensation for the transformation of the property to dryland farming, cancellation of works approvals and the decommissioning of irrigation infrastructure.

Note b: The department conducted the Queensland — Upper Condamine Alluvium limited tender procurement following six open tender rounds held between February 2014 and July 2018. The department sought approval from the Minister to pursue a number of procurements within the unspent budget utilising the maximum price and evaluation criteria published under Round 6 of the open tender. More detail on these procurements is in Appendix 2.

Note: This audit focused on completed strategic water procurements undertaken through limited tender arrangements between January 2016 and December 2019. Two procurements which commenced but were not completed during audit fieldwork have not been included in this audit. These were the purchase of 13,506 megalitres in New South Wales — Murrumbidgee and the purchase of 1159 megalitres in New South Wales — Lower Darling.

Source: ANAO analysis of Department of Agriculture, Water and the Environment information.

Administrative arrangements and reviews of Basin management

1.26 Purchasing water to assist with bridging the gap to the SDLs in the Basin Plan is undertaken through the Sustainable Rural Water Use Infrastructure Program (SRWUIP) managed by the department.²⁹ This includes those strategic water procurements undertaken through a limited tender approach which are the focus of this audit.

1.27 Water entitlements procured by the department are subsequently managed by the Commonwealth Environmental Water Holder (CEWH). The role of the CEWH is established by the Water Act.

1.28 There have been a number of reviews of the management of the Basin in recent years, including by the Australian Bureau of Agricultural and Resource Economics and Sciences, the MDBA, the Productivity Commission, and prior Australian National Audit Office (ANAO) audits.³⁰ In addition, on 1 October 2019, the government appointed an Inspector-General of Murray-Darling Basin Water Resources to provide oversight and monitoring of progress of water resource management in the Basin.³¹

1.29 These reviews highlighted:

• the importance of water recovery strategies including explicit consideration of socio-economic impacts;
• the importance of appropriately documenting decisions relating to assessment and selection of applications for grants supporting water-saving initiatives;
• the increased likelihood of higher water prices under buyback arrangements than where no buyback arrangements are in place; and
• that prioritising infrastructure investment over water purchasing may minimise negative social and economic impacts.

Rationale for undertaking the audit

1.30 Water regulation is a topic of parliamentary and public interest. The audit examines $190 million of strategic water procurements conducted through limited tender arrangements, to provide assurance to the Parliament and the public that these procurements were planned for and executed appropriately and achieved value for money. This audit was also undertaken as part of the Auditor-General’s continued focus on water regulation within the Commonwealth.³²

1.31 This audit topic was included the ANAO’s 2018–19 Annual Audit Work Program. The Auditor-General also received requests from a number of members of Parliament for a performance audit on this topic, including the responsible Minister.³³

Audit approach

Audit objective, criteria and scope

1.32 The objective of the audit was to examine whether strategic water procurements by the department were conducted consistent with government policy, supported by appropriate program design, were planned and executed appropriately and achieved value for money.

1.33 To form a conclusion against the audit objective, the following criteria were adopted:

• Did the department have appropriate program design, planning and guidance in place to support strategic water procurements?
• Did the department execute the program consistent with approved policy, planning and guidance?
• Did the department achieve value for money?

1.34 This audit focused on completed strategic water procurements undertaken through limited tender arrangements between January 2016 and December 2019. A total of 27 transactions were considered (See Table 1.1).

Audit methodology

1.35 The audit methodology included:

• examining design and approval documentation related to the development of the limited tender procurement approach;
• review of advice provided to the Minster and departmental delegate;
• examining procurements and related policy documentation maintained by the department; and
• interviews with departmental staff involved in water purchasing.

1.36 The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of approximately $698,700.

1.37 The team members for this audit were Tara Rutter, Jacqueline Hedditch, Taela Edwards, Yvonne Buresch, Jason Depasquale and Michael White.

2.1 To assess whether the department undertook appropriate program design, planning and guidance, the following matters were examined:

• if program design was thorough and generated appropriate competitive opportunities;
• whether the department established an appropriate purchasing framework; and
• whether the department developed clear policy and guidance to support officials in making decisions.

Was program design thorough and were appropriate competitive opportunities generated?

2.2 In 2015, the department identified a decreasing number of applications received through open tender. This included ‘almost no applications to sell at or below the benchmark prices during open competitive tenders’. However, the department received a number of unsolicited offers.³⁴ The department did not formally consider why sellers were approaching the department directly.

Developing options for undertaking strategic water procurements

2.3 In April 2015, the department commissioned the Commonwealth Scientific and Industrial Research Organisation (CSIRO) to prepare a report to:

• provide insights into the current rolling open tender and pay as bid process³⁵;
• provide advice as to whether revealing the department’s benchmark price would stimulate competition in the market; and
• identify new options to engage with the water market.

2.4 A report titled Motivating the Market was provided to the department in May 2015.³⁶ The report noted that:

• to ensure bids are competitive, sellers should not be afforded repeated opportunities to submit bids (through rolling tenders or repeated tender rounds), as it facilitates strategic bidding and inflated prices and the format essentially positions the department as the price maker in the wider market when purchases occur;
• for regions and/or entitlements of which the government requires small amounts of water relative to the volumes traded on the open market, making opportunistic purchases on the existing market is likely to be the best strategy with lower administrative costs and greater flexibility; and
• for regions and/or entitlements where there are few potential sellers relative to the volume sought, a tender is not likely to be effective; and direct negotiation may be the most viable option (including bundled land and water purchases with the land sold on).

2.5 The report recommended that benchmark prices should not be applied as a ‘reserve price’ to future water tender rounds, particularly where prices are rising, as it risks not achieving the objective as the price is too low.

2.6 In August 2015, the department established a register of unsolicited offers to record contact from prospective sellers.³⁷ Prior to the establishment of the register, unsolicited offers were received but not recorded. It is unclear whether the department responded to all approaches prior to the establishment of the register.

2.7 In addition to being incomplete, for more than half of the offers captured in the register there is no detail as to why an offer was accepted, rejected, or not pursued, or why the offer has not been formally closed off in the register. While further detail for individual offers is recorded within tender administration documentation, the lack of a single source of complete information limits the department’s ability to quickly and easily compare offers and key decisions.

2.8 Figure 2.1 shows the number of unsolicited offers recorded in the register.

Figure 2.1: Unsolicited offers recorded in the department’s Limited Tender register

Source: ANAO analysis of departmental information.

Water Purchasing Plan 2015–2019

2.9 The Water Purchasing Plan (the Plan) sets out the department’s framework and parameters for assessing strategic water procurements. On 8 December 2015, the Plan was submitted to and endorsed by the Water Project Board. The purpose of the Plan was to establish:

… a range of methods that may be used to acquire water to meet the SDLs³⁸ set out in the Basin Plan through to 2019. It expands on the current approaches to include some additional options which increase the Department’s flexibility and responsiveness in purchasing water. These approaches are consistent with the Commonwealth Procurement Rules (CPRs). Water purchasing to date has mainly been done in accordance with Division 1 of the CPRs to purchase water through open competitive tenders. The WPP proposed greater application of Division 2 of the CPRs to purchase water through Limited Tender.³⁹

2.10 The Plan included six proposed methods of procurement. These were:

• open water purchase tenders, where the department determined to continue open tenders with a variable pricing strategy⁴⁰;
• ‘unsolicited’ offers, where the department proposed to assess all unsolicited offers received;
• partial purchases, where the department could seek to enter into transactions where water entitlements are transferred under contracted milestones over a number of years;
• align with grant programs, where the department flagged programs where greater alignment could occur with the water purchasing program;
• sector-specific purchasing, where the department could explore means for purchasing from specific sectors of the water market, such as non-agricultural investment businesses; and
• using intermediaries: the department considered a number of approaches in which third parties could be utilised in the sourcing of water.

2.11 For unsolicited offers, the following assessment criteria were to apply:

(a) in an area where further water is required to bridge the gap to the SDL after taking into account all the possible adjustments (i.e. based on the best possible scenarios for supply measure offsets, infrastructure recoveries and expected NBR outcomes);

(b) represent value for money, or may achieve value for money through negotiations;

(c) would contribute to attaining a triple bottom line outcome, including that there would not be significant adverse social or economic impacts;

(d) that the relevant state government is not opposed to the transaction; and

(e) can be executed under the CPRs.

Should the offer meet these criteria, the program sponsor will brief the Minister on the evaluation including social and economic impact concerns. The Department would consult with the relevant state government senior officials in confidence on proposals, to identify any particular concerns the state may have, prior to settling any purchase transaction. The seller will be contacted and the offer pursued through the legal due diligence process until a contract is executed.⁴¹

2.12 The Plan did not include:

• preferred or priority approaches, or an approach to maximise competitive opportunities;
• expectations of water purchases from particular catchment/s or timeframes;
• key performance indicators through which progress could be tracked;
• expectations of senior officers charged with achieving specific objectives; or
• consideration of risk for oversight by the Board.

2.13 The Plan as presented to the Water Project Board also included a commitment for review within 12 months of implementation to consider its effectiveness. The Plan stated that the next phase would set priorities for purchases, including a catchment by catchment approach assessing where ‘gap-bridging’ requirements remained. A formal review process for the Plan was not conducted.

Ministerial briefing and approval of approach

2.14 The department wrote to the Minister on 10 December 2015, seeking agreement to pursue unsolicited offers and utilise open tenders for surface water only in limited circumstances. This briefing outlined the following proposed approach:

Open tenders for surface water in the Murray-Darling Basin are subject to ongoing community concern. While water purchasing will be necessary to bridge the gap in some catchments, the smaller scale of the task means that a lesser focus on open tenders is feasible (at least in the short term) and the use of a slower, more low-key approach is appropriate, particularly up to June 2016 and the implementation of the Sustainable Diversion Limits (SDLs) Adjustment Mechanism.⁴²

2.15 The Minister was advised that as part of the proposed approach, the department would assess all unsolicited offers it received and seek the Minister’s review and decision on offers that met specific criteria. The department also advised that if approved, the department would continue to engage with the Minister on specific transactions:

While departmental delegations under the Public Governance, Performance and Accountability Act 2013 are sufficient to execute such transactions, we expect that you may wish to consider all potential purchases due to the high interest in the water purchasing program.

2.16 The briefing outlined that while infrastructure investment remained the priority means for water recovery, limited tenders and other forms of purchasing will be considered in certain circumstances.

2.17 The Minister agreed to the approach on 13 January 2016. Following ministerial approval, the department implemented arrangements to pursue unsolicited offers and focus water entitlement procurements through limited tenders on strategically important water recoveries.

2.18 The department did not develop a specific list to identify or prioritise strategically important recoveries. Rather, the department referred to the SDLs established by the Basin Plan to validate the need to purchase entitlements in any given resource unit area.

Maintaining competitive opportunities through limited tenders

2.19 Competition is a key element of the Australian Government’s procurement framework. The Commonwealth Procurement Rules (CPRs) outline that procurements should encourage competition to support the achievement of value for money.⁴³ By its nature, limited tender is less competitive than open tender as it does not provide an opportunity for all potential suppliers to compete for the provision of goods and services.⁴⁴ Entities may seek to encourage competition in limited tender approaches by ensuring all potential sellers are aware of the opportunity to sell.

2.20 The department publishes updates on its progress towards achieving the ‘bridging the gap’ targets on its website, making information publicly available to potential sellers in the locations or catchments where further water purchasing is still required. The website states that updates on progress against targets are provided monthly. However, the website is updated less frequently than this.

2.21 The department has also not updated its website to include information relating to all completed limited tender water procurements, although this information is available on AusTender.

2.22 The department published information on the limited tender approach to strategic water purchases on its website in July 2017, more than 18 months after the department implemented the limited tender approach.

The department can consider proposals to sell water directly to the government in limited circumstances. To consider any proposal, the department would need the following information: water license number, water licence location, water licence volume and proposed price per megalitre. For further information about water purchasing, email Water Purchasing or call the Water Information Line on 1800 218 478.

The department reports on all water purchased in the monthly report at progress of water recovery towards bridging the gap to SDLs. For contracts valued at or above the reporting threshold outlined in the Commonwealth Procurement Rules, a contract notice is published on AusTender within 42 days of entering into the contract. Disclosure of information in these notices must comply with the requirements set out in the Privacy Act 1988.

Pricing information is usually published at the conclusion of an open water purchase tender to help provide greater transparency and to assist water entitlement holders who may be considering placing an offer to sell water in the future.⁴⁵

2.23 Ministerial advice provided the basis for the department to communicate to stakeholders, including through its website. The department had also advised the Water Project Board on 8 December 2015 that ‘a communication strategy will be developed to support the implementation of the Water Purchasing Plan, if approved.’ A communication strategy was not developed.

2.24 The department had no mechanism in place to evaluate the reach of its communication and to make adjustments to ensure adequate awareness of the limited tender arrangements within the market of potential sellers.

2.25 The department did not actively generate competitive opportunities during the limited tender process. Some limited tenders were accepted prior to other offers in the same catchment being received. The department did not inform the market in a timely manner, nor develop rules or parameters to encourage price pressure.

Did the department establish an appropriate purchasing framework, specific to the purchase of water entitlements?

Commonwealth Procurement Rules

2.26 The CPRs govern the way in which government entities undertake their processes when conducting procurement activities.⁴⁶ In July 2015, the department sought advice from the Department of Finance (Finance) on its responsibilities under the CPRs. Finance advised that:

Division 1 provides the rules for all procurements, principally the achievement of value for money and non-discrimination; and Division 2 provides the rules for all procurements above the relevant threshold (currently $80,000 for general goods and services, and $7.5 million for construction services), principally the requirement to approach the open market. Only in certain circumstances can entities directly approach suppliers. These scenarios are laid out in paragraph 10.3 and Appendix A of the CPRs.⁴⁷

2.27 At the time, in order to pursue a limited tender, the CPRs required that the department only conduct a procurement through limited tender when:

• previous attempts to procure water through open tender had failed; or
• for reasons of extreme urgency, the goods and services could not be obtained in time under open tender or prequalified tender; or
• an opportunity to procure water in ‘exceptionally advantageous’ circumstances existed; or
• the goods and services can be supplied only by a particular business and there is no reasonable alternative or substitute; or
• additional deliveries of goods and services by an original supplied were intended as replacement parts, extensions, or continuing of services; or
• the procurement exists in a commodity market; or
• the procurement applies to a prototype or a first good or service intended for limited trial; or
• a contract is awarded to a winner of a design contest; or
• construction services are required for repetition of similar construction services.

2.28 On 20 August 2015, the department met with Finance to discuss the intended approach to water recovery via limited tenders. This discussion focused on using Division 2 subsection 10.3(a)(i) or Division 2 subsection 10.3(c) of the CPRs as the basis for the procurement approach.⁴⁸ Division 2 subsection 10.3(a)(i) allows for limited tenders when, in response to an open approach to market, no submissions or no submissions that represented value for money, were received. Division 2 subsection 10.3(c) allows for limited tenders for procurements under exceptionally advantageous conditions that arise only in the very short term. Finance advised:

To meet the ‘exceptionally advantageous’ precondition, an opportunity has to be truly exceptional.

2.29 Neither the department nor Finance defined what constituted ‘exceptionally advantageous’. The department assessed all strategic water procurements under Division 2 subsection 10.3(c) for the 2016 to 2017 procurements, using the requirement for procurements to be exceptionally advantageous.

2.30 Changes to exemptions in the CPRs came into effect on 1 March 2017.⁴⁹ On 13 April 2017, the department wrote to Finance seeking an exemption from Division 2.⁵⁰ This exemption would mean the department would no longer need to justify ‘exceptionally advantageous’ conditions in their pursuit of unsolicited offers. Finance advised:

After consideration of the scenarios presented, we are comfortable that for the purposes of the Commonwealth Procurement Rules (exemption No. 1 in Appendix A), ‘associated rights’ does capture tradeable water rights as described in your email.

2.31 The department used the exemption for the 2019 procurements.

Draft Framework for Strategic Surface Water Purchasing

2.32 In June 2016, the department developed a draft Framework for Strategic Surface Water Purchasing (the draft framework), limiting surface water purchasing to situations where it would achieve one or more identified social, economic or environmental objective. The draft framework states:

All purchase opportunities would be assessed against the principles and outcomes described in the framework, with the department generally pursuing solicited and unsolicited proposals that are consistent with one or more principles.

2.33 The draft framework describes two sets of principles the department will have regard to: ‘first principles’ that reflect current practices and mandatory legislative requirements for the water recovery program; and ’strategic principles’ that build on the government’s triple bottom line approach to Basin Plan implementation.⁵¹

2.34 The draft framework outlines the following strategic principles.

• Financial and non-financial costs to sellers, third parties and the department will be minimised relative to other water recovery methods.
• Transactions will result in benefits for the seller, third parties, broader community, the environment or state governments, noting that benefits may be immediate or delayed, direct or indirect.
• Priority will be given to unique or otherwise time-bound purchase opportunities.
• Consideration will be given to the possible impact of a transaction on water markets, including price and competition, with reference to alternative recovery scenarios.

2.35 The department did not finalise or endorse the framework. Despite this, the framework is referred to on several occasions in the detailed guidance documentation.

Did the department have clear policy and guidance to support decisions to procure strategic water entitlements?

The Guidelines for Limited Tenders

2.36 The Guidelines for Limited Tenders (the Guidelines) were approved on 23 June 2016 and updated on 12 December 2016. This was the primary guidance document for assessing limited tenders. The Guidelines were not approved until after the first limited tender purchase was completed.

2.37 The Guidelines provide a set of general principles, which includes links to the CPRs and the draft framework as well as a step by step guide from receipt of an offer through to completion of a purchase where the offer is accepted.

2.38 The Tender Administration File is the key supplementary document to the Guidelines. This form is intended to capture the key information and decisions relevant to the assessment. Application of the Guidelines and the Tender Administration File for the water purchases examined in this audit are covered in Chapter 3 at paragraphs 3.2 to 3.11.

2.39 The department’s process for limited tenders requires that as part of the pre-assessment phase, the department must ‘determine whether the proposal represents value for money, or could attain value for money through further negotiations with a proponent’. The Guidelines also state that the department should determine the environmental value of the offer.

2.40 The Commonwealth Environmental Water Holder (CEWH) provided the department with acquisitions advice intended to guide the department to achieve a portfolio of water holdings that maximised environmental utility.⁵² The advice provided general principles for Commonwealth water recovery, Northern Basin-specific principles and further criteria regarding bundled entitlements and groundwater entitlements.

2.41 The document also included specific advice on individual catchment areas within the Murray-Darling Basin. The detail of advice varied based on the catchment area.

Departmental oversight and governance

2.42 The department’s draft Framework for Strategic Surface Water Purchasing and resulting purchases were overseen by senior officers within the Water Division and the Water Project Board.

2.43 For the strategic water purchases considered in this audit, the Board received updates or provided endorsement for some purchases. This did not occur consistently for all purchases. The Board received regular Water Project Status Reports for the Restoring the Balance in the Murray-Darling project and reviewed two limited tender procurements.⁵³

3.1 To assess whether the department executed procurements of strategic water entitlements consistent with approved policy, planning and guidance, the following matters were examined:

• whether the department followed guidelines for limited tender procurements;
• whether appropriate information was provided to decision-makers to enable informed decisions;
• whether the department appropriately recognised and managed risks; and
• whether appropriate due diligence was conducted prior to entering into contracts.

Did the department follow guidelines for limited tender procurements?

3.2 The department’s Guidelines for Limited Tenders (the Guidelines) were approved on 23 June 2016. The Guidelines outline the approach to assess a procurement of strategic water entitlements as part of a limited tender process. The Guidelines include four stages that must be completed prior to commencing a limited tender procurement, each of which includes several actions that must be completed.

• Proposal — record the proposal a potential seller makes to the department in the register.
• Pre-assessment — assess the proposal’s eligibility for limited tender. The factors required to be considered in the pre-assessment phase include whether:
  • it contributes to bridging the gap to the Sustainable Diversion Limits (SDLs);
  • the proposal represents value for money;
  • proceeding with the proposal via limited tender would be consistent with the Commonwealth Procurement Rules (CPRs); and
  • the proposal is consistent with the ‘Strategic Principles’ of the draft framework.⁵⁴
• State consultation — seek agreement to the proposed procurement from the relevant state government, providing ‘minimum amount of information necessary’.
• Delegate decision — brief the delegate on the outcomes of the above and provide contextual information on the location and community, any non-standard terms of the proposed contract and maximum price.

Application of the Guidelines to strategic water procurements

2016 and 2017 procurements

3.3 In 2016 and 2017, eight strategic water procurements were conducted by limited tender. Three of the eight procurements were conducted under the Guidelines. Four offers were assessed and provided to the Minister for approval prior to the department fully developing and approving guidance documents to support the assessment of limited tender procurements.

3.4 The department advised that these procurements were conducted consistent with the Guidelines despite the Guidelines not being approved. The Lower Darling procurement was managed by a different team within the department. The Guidelines were not used for this procurement.

3.5 The ANAO examined procurement documentation against the assessment process outlined in the Guidelines. The application of the Guidelines varied between procurements including the extent to which the actions within each stage were completed or documented. Table 3.1 outlines the ANAO’s assessment of the deparment’s application of elements of the Guidelines which were key policy requirements or specifically identified in the department’s commitment to the Minister.

Table 3.1: ANAO’s assessment of the application of the Guidelines to strategic water procurements conducted in 2016 and 2017

Note a: These procurements used Division 2 subsection 10.3(a)(i) of the CPRs which allows for limited tenders when, in response to an open approach to market, no submissions or no submissions that represented value for money, were received.

Source: ANAO analysis of Department of Agriculture, Water and the Environment information.

3.6 As outlined in paragraph 1.15, the Commonwealth committed to prioritising water recovery for environmental purposes through infrastructure investment. The department could not demonstrate that the assessment of strategic water procurements consistently took into consideration infrastructure investment.

3.7 Neither the Guidelines nor the Tender Administration File provide clear guidance for assessors to consider infrastructure investments or the impact water procurements may have on these investments. Further, the department did not provide details of current or future infrastructure projects to assist informing the Minister of water recovery within that catchment.

3.8 For five of the eight 2016 and 2017 procurements, the Murray-Darling Basin Authority’s (MDBA) advice was sought on whether strategic water entitlements would be ‘gap-bridging’. The department advised the ANAO that it only sought advice on whether an entitlement is ‘gap-bridging’ for instances where it considered the entitlement was not standard or not usually traded. It is unclear whether the department defined ‘not standard’.

2019 procurements (Upper Condamine Alluvium)

3.9 In 2019, a further 19 procurements were conducted via limited tender in the Upper Condamine Alluvium.⁵⁵ These limited tenders were conducted following six open tender rounds which were unsuccessful in recovering the required amount of water.

3.10 At the closure of the sixth open tender, the department advised the Minister that water recovery was still required in the catchment and $29.75 million remained unspent. In August 2018, the Minister approved pursuit of the remaining volume with the unspent budget by limited tender.⁵⁶

3.11 The department assessed these limited tender procurements against criteria similar to the open tender round rather than against the Guidelines. The Minister also approved the department to utilise the maximum prices and evaluation criteria published under Round 6 of the open tender rather than the Guidelines.⁵⁷ The evaluation criteria set out in the procurement plan includes two phases as outlined in Table 3.2.

Table 3.2: Limited tenders conducted in 2016 and 2017, and 2019

Note a: The minimum content and format requirements require the tender to be written in English and measurements be expressed in Australian legal units of measurement. The conditions for participation require that: the tenderer exists as a legal entity; the price per megalitre for the licence provided in a tender must not exceed the Maximum Price per megalitre for the relevant sub-area as specified in the tender documentation; and the volume of the licence offered must not be less than one megalitre.

Source: ANAO analysis of Department of Agriculture, Water and the Environment documentation.

3.12 As part of the value for money assessment, the procurement plan states that the maximum prices for each groundwater management sub-area, as set out in the open tender round, would be relied upon for the limited tender procurements.

3.13 Assessments of individual procurements were limited to whether the price offered was at or below the maximum price set. Under the approach used for the 2019 procurements, it is not clear to what extent triple bottom line outcomes were considered as per the commitment to the Minister in the original proposal to pursue limited tender water procurements.

3.14 While the brief seeking approval to undertake limited tenders in the Upper Condamine Alluvium indicated a need to procure further water to reach the SDL, there is no evidence that that the department provided the delegate with updated advice on the remaining gap as procurements were made.

3.15 In 2015, the department sought advice from the Commonwealth Environment Water Holder (CEWH) and MDBA relating to the open tender approach to procurements in the Upper Condamine Alluvium. The department utilised this advice in the subsequent limited tender approach. The department did not seek to confirm the advice remained current and appropriate when commencing the limited tender in 2018.

3.16 The department sought advice from the MDBA in July 2017. The advice indirectly discussed the role of water recovery in the catchment in bridging the gap.

3.17 The ANAO did not identify any quality assurance or moderation mechanisms in place to provide assurance around the consistency of assessments for any of the 2019 limited tender purchases.

Did the department provide appropriate information to decision-makers to enable informed decisions?

3.18 Following the pre-assessment for each of the 2016 and 2017 limited tenders, the department first sought Ministerial approval for the procurement and then sought final approval from the departmental delegate to enter into contractual arrangements as per the process outlined in the Guidelines.

3.19 In the 2019 Upper Condamine Alluvium procurements, the Minister approved the use of limited tenders to purchase additional water using the remaining budget allocation. The individual procurements were then provided directly to the departmental delegate for approval.

Advice provided to the Minister

3.20 As outlined in paragraph 2.15, the Minister was advised that all unsolicited offers would be assessed and his decision sought on offers that:

• were gap-bridging after taking into account all the possible adjustments;
• represented value for money or may achieve value for money through negotiations;
• would contribute to attaining a triple bottom line outcome⁵⁸, including that there would not be significant adverse social or economic impacts;
• that the relevant state government is not opposed to the transaction; and
• can be executed under the CPRs.

2016 and 2017 procurements

3.21 For the limited tender procurements during 2016 and 2017, the Minister was presented with 10 decisions briefs.⁵⁹ Four offers were presented with the December 2015 request for approval of the procurement approach.

3.22 Of these four offers, three were approved by the Minister, and one required the department to undertake further consultation with the relevant state and re-brief the Minster before proceeding with the purchase.⁶⁰ The department re-briefed the Minister as required. The content of this briefing is discussed at paragraphs 3.38 to 3.42.

3.23 The briefs for procurements in 2016 and 2017 had the characteristics detailed below.

• All briefs clearly informed the Minister that the water proposed for procurement was in an area where further recovery was required.
• Three briefs did not provide a clear statement of whether the procurement could be executed under the CPRs.⁶¹
• Four briefs advised that the department was yet to consult relevant state governments and one brief stated that consultation had occurred but the state government officials were not authorised to specifically endorse the purchase.⁶² Two briefs did not outline whether the relevant state government had been consulted or the outcome of any consultation. The remaining briefs confirmed that the state government supported the procurement.
• Two briefs clearly described how the procurement would contribute to attaining a triple bottom line outcome.⁶³ The remaining briefs commonly described the profile of the relevant community including details such as the rate of unemployment and the dominant industry in that area, but did not articulate what impact the procurement would have. In particular, there were only three instances where the environmental benefits of obtaining the entitlements were clearly articulated.

2019 Upper Condamine Alluvium procurements

3.24 The Minister was not provided with the same level of information for the 2019 Upper Condamine Alluvium procurements. When the department sought approval to pursue, via limited tender, the remaining volume within the agreed budget from the preceding open tender, the brief advised that the portion of the water recovery target outstanding in the area, and that the approach was consistent with the CPRs.

3.25 The brief provided limited information relating to:

• value for money;
• attaining triple bottom line outcomes; and
• whether the relevant state government (Queensland) supported or opposed the procurement.

3.26 There is scope for the department to improve advice provided to the Minister by ensuring that consistent advice is provided for related activities, and that the advice addresses all elements outlined in the original commitment.

Advice provided to the departmental delegate

3.27 The 2016 and 2017 procurements were approved by the Minister under section 71 of the Public Governance, Performance and Accountability 2013 (PGPA Act). The departmental delegate provided approval for the department to enter into a contract under subsection 23(1) of the PGPA Act.⁶⁴

3.28 As outlined in paragraph 3.24, the 2019 Upper Condamine Alluvium procurements were provided to the delegate for approval for expenditure and to enter into a contract under section 32B of the Financial Framework (Supplementary Powers) Act 1997.

3.29 Across all procurements, the briefs to the departmental delegate did not consistently outline under what delegation that individual was authorised to provide approval. In particular, seven of the 2016 and 2017 procurements did not include a statement about the individual’s delegation, and 14 of 2019 Upper Condamine Alluvium procurements included an incorrect statement about who was the appropriate delegate.⁶⁵

3.30 For the 2016 and 2017 procurements, all contracts were signed by the appropriate delegate however two issues identified by the ANAO were:

• The two 2016 Condamine Alluvium offers ($620,400 and $950,000 respectively) were accepted by a Senior Executive Service (SES) Band 1. An SES Band 1 at that time had a maximum PGPA Act section 23(1) delegation of $250,000.⁶⁶ The final contracts for both procurements were signed by the correct delegate.
• The 2017 Lower Darling contract ($78 million) was signed by an SES Band 2. An SES Band 2 at that time had a maximum PGPA Act section 23(1) delegation of the limit of the division’s budget. The department’s delegations were unclear in relation to the separation of departmental and administered expenditure. The department has advised the ANAO that current delegations have been made clearer.

3.31 For all 2019 Upper Condamine Alluvium procurements, the appropriate departmental delegate was engaged. The departmental delegate was:

• provided with an assessment of the proposed procurement;
• assured of ministerial approval to proceed⁶⁷; and
• informed that the procurement could be executed under the CPRs.

3.32 Across all purchases, the delegate was not always provided with an update on the status of water recovery within the catchment. All except two of the 2016 and 2017 briefs informed the delegate that the water proposed for procurement was in an area where further recovery was still required. Fourteen of the 2019 Upper Condamine Alluvium briefs did not provide an update on status of water recovery within the catchment.⁶⁸

3.33 The briefs did not consistently provide a statement regarding whether the procurement represented value for money.

• All eight 2016 and 2017 briefs included a statement that the procurement represented value for money and provided a range of rationales.
• Briefs relating to the 2019 Upper Condamine Alluvium procurements included a statement that the price did not exceed the maximum price set for the area; the price was always equal to the maximum price.
• The majority of briefs did not clearly outline how the procurement would attain a triple bottom line outcome or how these elements influenced the overall assessment of value for money.⁶⁹

3.34 The department’s assessment of value for money is discussed further in Chapter 4 at paragraph 4.5.

Did the department execute the Minister’s instructions?

3.37 In response to briefs related to the approval of limited tender strategic water procurements, the Minister gave the department seven individual directions. There are two instances where it is not clear whether the actions undertaken by department and subsequent advice to the Minister fully addressed the intent of the original instruction. These are detailed below.

Ministerial instruction to seek NSW agreement for the NSW Murrumbidgee purchase

3.38 Internal correspondence between department officials⁷⁰ and the Minister’s Office dated 10 September 2015 noted that a New South Wales Government official advised the department that:

… as his [NSW official’s] Minister has made clear that NSW did not support any further purchases, it would be best to inform him ‘after the event’ but before the outcome became public. This approach would mean he and NSW could not be seen to be consenting to the transaction, which NSW would not do if asked, but would mean he could ensure his Minister was not blindsided by any leaking of the transaction.⁷¹

3.39 On 10 December 2015, the department sought Ministerial approval for the procurement of 10,000 megalitres of New South Wales Murrumbidgee Supplementary (Lowbidgee) entitlements as a limited tender procurement. The Minister declined to make a decision at that time, and provided the following instruction to the department:

Please consult with the NSW Government over the Murrumbidgee purchase to seek agreement. The NSW Minister’s Office has agreed for this conversation to take place. Please provide further consideration on any third party impacts resulting from the purchase and likely responses from the community. Please consult with my office again before proceeding with the purchase.⁷²

3.40 On 15 March 2016, the department wrote to the Minister’s Office and advised that in response to this instruction, the department had consulted with New South Wales Government officials and were advised that ‘NSW opposes any non-strategic purchases, and would not regard this offer, being unsolicited, as ‘strategic’.’⁷³

3.41 On 7 October 2016, the department briefed the Minister stating that the ‘NSW Government has been consulted and has no specific objections to the proposed procurement of NSW Murrumbidgee Supplementary (Lowbidgee) entitlements’. Further detail in the brief caveated that statement with the following:

The department has consulted with the NSW Government regarding the proposal to sell 10,000 ML of NSW Murrumbidgee Supplementary entitlements. NSW officials have not raised any objections to the proposed transaction but have also not been authorised to specifically endorse it.⁷⁴

3.42 In response to the briefing, on 26 October 2016, the Minister approved the procurement of 10,000 megalitres of New South Wales Murrumbidgee entitlements via limited tender.

Ministerial direction to explore work to address flooding in southern St George Basin

3.43 In March 2017, the department wrote to the Minister to seek approval for the procurement of 14,202 megalitres of entitlements in the Condamine Balonne catchment. The Minister approved the purchase with a number of conditions, including that the department ‘explore the possibility to incorporate works to address flooding in southern St George as part of the transaction.’

3.44 In May 2017, the department wrote to the Minister to again request approval for the entitlements at a revised quantity and cost, noting that:

The department has also explored the possibility of incorporating decommissioning works to address flooding in St George as part of the transaction. A report, which has been verified by the Department of Natural Resources and Mines, indicates that the removal of sections of levee bank at six locations would re-open old flood channels and lessen the potential for local flooding in St George. The company has agreed to undertake these works at no cost as a component of the transaction. The Commonwealth Environmental Water Office has advised that on the information provided they consider the proposed works would enhance floodplain and river connectivity.⁷⁵

3.45 There is no evidence that the department obtained verification of the report from the Queensland Department of Natural Resources and Mines.

3.46 The report cited in the ministerial brief consisted of a single page, including one satellite image of the location with red ink annotations and the following text:

In the 2010, 2011 and 2012 floods, the levees on the eastern side of “Kia-Ora” raised floodwater levels. Removal of sections of the embankments at 6 locations would re-open the old flood channels. The entire length of embankments don’t need to be removed, as a large percentage has minimal depth of water ponded against it, or the embankment is running parallel to the flow direction. Marked with red ink in the figure below are the sections to be removed.⁷⁶

3.47 The advice provided by the CEWH cited in the brief consisted of the following email:

In brief we think it’s OK on the basis of the limited information available. It would provide better connectivity between floodplain and river which is generally a good thing. Other impacts are harder to predict without more work.

3.48 The CEWH confirmed in March 2020 that the decommissioning had occurred and subsequently allowed water to return to the floodplain.⁷⁷

Did the department appropriately recognise and manage procurement risks?

Program and project level risks

3.49 To implement the SDLs as required by the Basin Plan, Basin state governments may decide to reduce water allocations for the purpose of meeting the SDLs. Under the risk assignment framework established by the Water Act 2007 (the Water Act), if entitlement holders meet the qualification criteria in section 77, the reduction in water allocations for the purpose of meeting the SDL may create financial liability for the Commonwealth.⁷⁸

3.50 As a result, if the Commonwealth fails to acquire sufficient water to bridge the gap to the SDLs and a Basin state makes consequential reductions in water allocations, the Commonwealth may be required to make payments to affected entitlement holders. As outlined in successive budget papers, the department considers the risk to be an unquantifiable financial liability:

If water recovery is insufficient to bridge the gap, the Water Act 2007 provides a risk assignment framework whereby entitlement holders with reductions in water allocations, or changes in the reliability of water allocations, may be eligible for payment from the Commonwealth.⁷⁹

3.51 This risk is captured in the department’s risk plan for the Sustainable Rural Water Use and Infrastructure Program (Restoring the Balance) dated September 2014, identifying the following risks:

• required volumes to ‘bridge the gap’ are not met through the Restoring the Balance in the Murray-Darling Basin water purchasing program;
• program funding is insufficient to recover the required volumes to meet environmental needs in line with the Basin Plan, up to the 1500 gigalitre limit on surface water and groundwater requirements through purchasing; and
• poor program administration.

3.52 The risk plan outlines several potential treatment strategies, including:

• ensuring procurements take into account the gap-bridging nature of entitlements;
• ongoing communication through states on progress through infrastructure and supply measures projects as well as consultation with states prior to any tender;
• continuing to explore purchasing options with reference to the CPRs (such as developing policy to conduct purchases through limited tenders and unsolicited offers); and
• improving pricing and tender strategies in anticipation of changing market expectations, including limited tenders.

3.53 Regular status reporting to the Water Project Board during the period from December 2016 to December 2018 for the Restoring the Balance in the Murray-Darling Basin project included updates to risks with a high or extreme rating. These risks included:

• compressed period for water purchasing resulting from lower than expected participation in infrastructure programs, adjustment of cap factors in revised water resource plans, or a shortfall in the supply measure ‘offsets’⁸⁰;
• no or limited value for money applications submitted under the tenders; and
• some state governments and irrigator groups not supporting further water purchases.

3.54 Remedial actions outlined in these reports provide an update on water recovery against targets.

Introduction of the limited tender approach

3.55 The department did not conduct a specific risk assessment relating to the change in procurement approach from open tender to limited tender. When seeking approval from the Minister to procure water through a limited tender approach, the only risk outlined in the brief was that the risk of over recovery was low.

3.56 The department also gave consideration to the risk that the limited tender approach would not be valid under the requirements of the CPRs. The department consulted with the Department of Finance to address this risk.

3.57 Neither the Guidelines nor supporting templates require departmental staff to:

• give specific consideration to either project level risks or broader program risks when assessing individual offers;
• make a statement on risk within the assessment; or
• make a statement to the delegate of risks identified or a positive statement on the absence of risk.

3.58 As such, it is not clear whether the department has given adequate consideration to ensuring that individual project risks align with the broader program.

3.59 The department did not provide adequate detail on risk management in Ministerial or delegate briefings. Only one brief included any statement on risk, other than a standard statement that the offer will not increase the risk of over-recovery in the Murray-Darling Basin.

3.60 Specifically, the briefing for the Lower Darling procurement included a statement in regard to advice from the Australian Government Solicitor (AGS) on constitutional and legal risk. The advice obtained from the AGS on 21 April 2017 stated there was a low level of both constitutional and legislative risk.⁸¹

Did the department conduct appropriate due diligence before entering into the contracts?

3.61 Prior to entering into all except one of the contracts, the department undertook due diligence processes and briefed the delegate on the outcome. The department did not undertake due diligence for the Murray catchment procurement from the South Australian Government. The department advised the ANAO that they considered water transferred from a state government to be of low risk of being encumbered.

3.62 A standardised due diligence process is designed to verify the:

• registered owner of the water entitlement;
• water entitlement type and reference number;
• whether the volume offered is available and able to be transferred; and
• if there are any mortgages or encumbrances registered against the water allocation.

3.63 Except for the South Australian procurement, the delegate was provided with a minute informing them of the outcome of the final due diligence report. In one instance, the 2017 Lower Darling procurement, the final due diligence report was not completed until five weeks after the contract to procure the water was executed.

3.64 For most procurements, there is a contract between the seller and the Commonwealth that is signed, dated and witnessed by both parties. In two instances, the contract between the government and the seller was signed and dated by the department on behalf of the Commonwealth, and was signed but not dated by the seller or their witness.⁸²

4.1 To assess whether the department established appropriate arrangements for considering and achieving value for money, the following matters were examined:

• whether the department documented how value for money was considered and achieved; and
• whether the department evaluated the effectiveness of the limited tender procurement approach.

Did the department document how value for money was considered and achieved?

4.2 The Commonwealth Procurement Rules (CPRs) outline that price is not the sole factor to be considered when assessing value for money. When conducting a procurement, officials must consider the relevant financial and non-financial costs and benefits.⁸³ A clearly defined value for money methodology enables entities to undertake a consistent approach across procurements and ensure that procurements meet their intended objectives.

4.3 The department advised the Minister that it would present offers for approval which met specific criteria, including that such offers would:

• represent value for money or may achieve value for money through negotiations; and
• contribute to attaining a triple bottom line outcome, including that there would not be significant adverse social or economic impacts.

4.4 The Water Purchasing Plan 2015–2019 also requires that surface water procurements demonstrate value for money and a contribution to triple bottom line (social, economic or environmental) outcomes. In addition, the Water Recovery Strategy requires that an appropriate level of regard is given to value for money.

Value for money

4.5 The department did not use a value for money approach for procurement of strategic water entitlements. The department commenced work on two value for money approaches, however neither were endorsed nor implemented. In September 2015 and July 2016, the department developed draft Value for Money Considerations and Framework for Assessing Value for Money documents.

4.6 These documents detail factors which could be taken into account when undertaking a value for money assessment of procurements. The Framework for Assessing Value for Money also provided weighting factors applicable to assessments where the department places additional value against certain criteria.⁸⁴ A documented and approved value for money approach would have assisted the department to more clearly demonstrate its achievement of value for money.

4.7 Examination of departmental documentation found that two key elements were the most influential in the department’s assessment of a proposal and whether the department would pursue the offer: whether the purchase was considered ‘gap-bridging’ and whether the price offered was equal to or less than the maximum price identified by valuation. A summary of this analysis is set out in Table 4.1.

Social, economic and environmental considerations

4.8 As outlined in paragraph 4.3, the department committed to assessing and providing advice on any social, economic and environmental impacts of potential procurements. Advice on these impacts provided to the Minister and the departmental delegate was limited, and there is limited evidence of the department undertaking appropriate assessments to inform these statements.

Socio-economic assessment

4.9 As part of the initial briefing to the Minister, the department advised that it would:

provide advice on the likely economic and social impacts of any recommended purchase. At a minimum, this advice will have regard for the location of the offer and the size of the offer relative to the local consumptive pool. We will also draw on independent reports and information from state government agencies to identify any particular local impacts that can be anticipated.

4.10 Only three procurements included detail relating to socio-economic impacts of proposed procurements. These were the Lower Darling, Warrego and the Condamine Balonne procurements.

New South Wales — Lower Darling

4.11 When seeking Ministerial approval to commence negotiations, the department provided advice relating to the expected savings from a reduced requirement to store water to service the entitlements being considered for purchase.

4.12 When seeking approval to enter into an agreement, the department advised the Minister that it considered that the Lower Darling procurement would be ‘unlikely to have a significant socio-economic impact.’ This advice was informed by information provided by the seller.

4.13 In both briefings, the department outlined concerns held by Broken Hill and Lower Darling communities that the acquisition of water entitlements by the Commonwealth would allow greater changes to the Menindee Lakes, potentially causing a loss of recreational amenity and a reduction in agriculture and tourism activity in the region. There is no evidence of any further information relating to the above concerns for Broken Hill and Lower Darling communities within the procurement documentation.

Queensland — Warrego

4.14 The department advised the Minister that the Warrego procurement would have ‘less socio-economic impact than acquiring an equivalent volume in other catchments’. Additionally, the department advised that Murray-Darling Basin Authority (MDBA) advice was that ‘the consequences of the purchase on employment in the area would be fairly neutral relative to pre Basin Plan conditions’, and the seller had indicated that they expected to continue to employ a similar number of people. The brief also included a summary of socio-economic advice and regional profiles that contained the department’s analysis of the socio-economic impact of the proposed purchase.

Queensland — Condamine Balonne

4.15 The department referred to an existing MDBA review of socioeconomic analysis in the Northern Basin from November 2016 to outline the socio-economic impacts of the Condamine-Balonne procurement on the local economy. This review noted that achieving the required Sustainable Diversion Limits (SDLs) for the area would have a substantive effect on the region’s economy, with modelling predicting reductions in irrigation, agricultural and non-agricultural employment. As the procurement progressed, the department provided advice to the Minister in several briefs relating to potential socio-economic impacts and options to minimise impacts.

2019 Upper Condamine Alluvium procurements

4.16 The department sought advice from MDBA regarding the potential socio-economic impacts of water recovery in the Upper Condamine Alluvium to inform an open tender approach. The department advised the Minister that this advice was positive. The advice used to inform the open tender rounds was also used to inform the subsequent 2019 limited tender approach.

Environmental

4.17 The department advised the Minister it would consider procurements ‘in an area where further water is required to bridge the gap to the SDLs after taking into account all the possible adjustments’.⁸⁵ Possible adjustments included scenarios for supply measure offsets, infrastructure recoveries and the expected Northern Basin review outcomes.⁸⁶

4.18 For the majority of procurements, the advice provided to the Minister and the departmental delegate was limited to whether the purchase was gap-bridging. The advice did not provide any information about other adjustments, such as infrastructure investment recoveries. The exceptions to this are the Lower Darling, Warrego and Condamine Balonne procurements.

the purchase would allow us to reallocate infrastructure funds currently earmarked for the Border Rivers to the Condamine Balonne, where there would still be a large gap to bridge and high stakeholder interested in mitigating socio-economic impacts of water recovery.⁸⁸

• The New South Wales — Lower Darling procurement included advice which indicated that by acquiring these entitlements the department would avoid the requirement for the Menindee project to include infrastructure works to update the Pennellco channel.⁸⁷
• The advice to the Minister related to the Queensland — Warrego procurement stated that:
• Advice to the Minister related to the Queensland — Condamine Balonne procurement provided a summary of the progress of the infrastructure program including the expected yield from investments and the remaining gap.

4.19 While all the 2016 and 2017 procurements were considered to be ‘gap-bridging’, not all were considered priority purchases by the Commonwealth Environmental Water Holder (CEWH). In particular, there were three procurements where advice from the CEWH indicated that the water being purchased was not considered a priority at the time.

• The Queensland — Border Rivers and New South Wales — Murrumbidgee procurements were not a priority given the class of entitlement for each procurement.
• The Queensland — Warrego procurement did not have a strong environmental basis, as it was difficult to demonstrate water flows and the environmental benefits.

4.20 The CEWH stated that despite not being a priority, the entitlements were considered acceptable at the time.

4.21 The above information was not included in the advice to the Minister when seeking approval for the purchase. Advice to the departmental delegate stated of the Queensland — Border Rivers procurement that ‘the entitlement tendered is acceptable for the CEWH environmental water portfolio’.

4.22 The department relied on CEWH advice provided in 2013 (and confirmed in 2014 and 2015) for the open tender procurement rounds in the Upper Condamine Alluvium for the subsequent 2019 limited tender procurements.

Valuations

4.23 The Methodology for valuation of water entitlement was used to determine the price the department was willing to pay for water entitlements in particular catchments, as well as whether an internal or external valuation was required. The methodology was endorsed by the Water Project Board in November 2015.

4.24 The methodology outlines the department’s approach to:

• valuing entitlements to be acquired through infrastructure investments (active market)⁸⁹;
• setting benchmark prices for direct water purchases (active market);
• valuing water entitlements in non-active markets, either for direct water purchases or acquisitions through infrastructure; and
• establishing book values (undertaking internal valuations).

4.25 For active markets, the Water Market Policy Section within the department provides internal advice on market activity and observed trends sourced from the state register of sales to the relevant line area, including:

• the highest market transaction, preferably in the six months prior to the assessment;
• the highest price paid three-month extrapolation using the Volume Weighted Average Price (VWAP) trend;
• monthly average prices, trend and three-month extrapolation on trend; and
• quarterly average prices, trend and three-month extrapolation on trend.

4.26 Additionally, the methodology notes that the Water Market Policy Section will also provide information from other sources such as short-term views from water brokers, consultants, major market participants and short-term weather outlooks.

4.27 The methodology provides scope for the line area to select and justify the most appropriate approach and make additional allowances to account for other factors that may make it more advantageous to purchase a specific entitlement such as enhanced environmental benefits. The methodology also notes that the department should not set an upper limit on willingness to pay and should negotiate openly on a case by case basis.

4.28 For non-active water markets, the department is required to seek expert advice from a registered valuer. The methodology allows for the department to make additional upward adjustments if it considers it suitable and defensible. The relevant line area will then make recommendations to the Valuations Committee or Water Project Board. The department did not develop Terms of Reference for the Valuations Committee or record meeting minutes.

4.29 The department obtained external valuations for all procurements examined in this audit, with two exceptions. The New South Wales — Murrumbidgee and South Australia — Murray purchases valuations were conducted internally.

4.30 For the 2016 and 2017 procurements, financial valuations were obtained for each procurement. For the 2019 Upper Condamine Alluvium procurements, the department sought one financial valuation for the entire catchment as part of the open tender held prior to the acceptance of limited tender offers, which was then used for the limited tender approach. The department defined and published the maximum values for each catchment sub-area.

4.31 Within procurement documentation the department stated that procurements were considered value for money. However, the assessment was almost always limited to a pricing assessment, specifically a statement that the offered price is less than the valuation.

4.32 The value for money assessment summary does not clearly articulate how the triple bottom line outcomes influenced the price the department is willing to pay. As a result, the information that is provided to the Minister and departmental delegate is also price focussed.

4.33 Valuations provided by external valuers note they are valid for 90 days. The department’s valuation methodology states that the department considers valuations to be valid for six months. For the 2016 and 2017 procurements, all procurements were approved within the 90 day validity period set by the valuer.

4.34 For the 2019 Upper Condamine Alluvium procurements, at the time the individual procurements were approved, these valuations were between 174 and 372 days old. The department did not provide any assurance that the valuations remained appropriate once the validity period had passed either the period defined by the valuer or the period set by the department’s valuation methodology.

4.35 For future procurements, the department should provide appropriate assurance that, where the validity period for a valuation has been exceeded, the valuation remains appropriate, to ensure that advice provided to decision-makers is relevant and accurate.

Negotiation

4.36 Negotiation allows the buyer to seek to improve value for money outcomes, or confirm that value for money has been maximised. While all procurements were equal to or below the valuation amount⁹⁰, the department only negotiated against the price offered for one of the eight 2016 to 2017 procurements.⁹¹ Evidence of the department making a counter-offer to a seller is available for one purchase, the 2017 sale of water in the Condamine Balonne.

4.37 The 2017 Condamine Balonne purchase had two parts: the Kia-Ora entitlement, and the Clyde entitlement. The initial offer for the Clyde entitlement comprised both water and water storage infrastructure. After receiving advice that the Commonwealth Environmental Water Office (CEWO) was not seeking storage infrastructure, and that constitutional and legislative constraints could complicate an infrastructure purchase, the department negotiated with the seller to exclude the storage component from the sale. The seller agreed and offered the storage component to be included in the purchase at no cost. The storage component was not included in the final contract.

4.38 The department did not attempt to negotiate price for any of the 2019 Upper Condamine Alluvium procurements.

Probity management

4.39 Australian Government officials undertaking procurement activities are required to act in an ethical manner, including recognising and managing potential and perceived conflicts of interest.⁹² Additionally, the Australian Public Service Code of Conduct requires all employees to declare any interests that may be a conflict.⁹³ Appropriate arrangements to manage conflicts of interest are particularly important for building and maintaining public confidence.

4.40 For the assessment of limited tender procurements, the department relied on officials to self-declare any real or perceived conflicts of interest. This differs from the process set for open tender procurements where panel members assessing applications are required to complete a specific conflict of interest declaration.⁹⁴

4.41 Valuers undertaking water valuations on behalf of the department are required to self-disclose any potential or actual conflicts of interest. The ANAO reviewed the valuations for the purchases undertaken in 2016 and 2017 for the inclusion of probity management arrangements. For four of these purchases, the valuer declared in the valuation that there were no pecuniary interests that would conflict with them conducting a proper valuation of the property.

4.42 A further two valuers did not specifically declare that there were no real or perceived conflicts of interest but signed a standard Commonwealth contract with the department that included a clause that any real or perceived conflicts had been declared, or stated that no conflicts exist or are anticipated.⁹⁵ Neither contract noted any real or perceived conflicts. Valuations for the remaining two procurements were conducted internally by the department. No conflicts of interests were raised for any procurements.

Did the department conduct an evaluation of the effectiveness of the limited tender approach to strategic water procurements?

4.45 Good evaluation practice includes considering the evaluation approach during the design phase of a program.⁹⁶ Adequate resourcing including sufficient budget should be included within new policy proposals or implementation planning for all programs.⁹⁷

4.46 The department’s approach to procurement of strategic water entitlements was based on the 2014 Water Recovery Strategy for the Murray-Darling Basin (the Water Recovery Strategy):

This Water Recovery Strategy sets out the Australian Government’s approach to environmental water recovery in the Murray-Darling Basin. It outlines how the Australian Government will deliver its commitment to bridge the gap in a way that restores the basin environment to health, while delivering a positive outcome for the economy and for Basin communities.⁹⁸

4.47 The Water Recovery Strategy includes a commitment of an annual update to incorporate the latest information on the volume of environmental water recovered through various programs.⁹⁹ Additionally a major review and update of the Water Recovery Strategy was intended in 2016 following the operation of the SDL Adjustment Mechanisms.¹⁰⁰ The Water Recovery Strategy stated that:

By 2016, it will be possible to more precisely target remaining water recovery activities to meet all water recovery targets in the Basin Plan.¹⁰¹

4.48 As at January 2020, neither the annual updates nor the 2016 major review of the Water Recovery Strategy had occurred. As at April 2020, the department had not defined any evaluation criteria or measures.

Appendix 1 Entity response

The department acknowledges the ANAO’s overall findings and recommendations and appreciates the opportunity to comment on the audit report on the Procurement of Strategic Water Entitlements.

Under the Sustainable Rural Water Use and Infrastructure Program, the Australian Government has committed $3.1 billion to purchase water to assist with bridging the gap to the sustainable diversion limits in the Murray-Darling Basin Plan. The Government is committed to ensuring the water purchased continues to provide long-term benefits for the environment while maximising positive outcomes for farmers and communities in the Basin. Therefore, the Government is continuing to prioritise investment in water-saving infrastructure over water purchases, but where necessary, considers strategic purchases in circumstances where they provide significant benefit, while minimising negative social and economic impacts.^a

The department has conducted ten strategic water purchases since 2016 (and a further 19 limited tenders that formed part of a strategic water recovery approach in the Queensland Upper Condamine Alluvium). These purchases achieved value for money with the price paid being at or below the maximum price identified by independent market valuations. The department relied on market valuations and considers this to be appropriate given the nature of water markets and is confident it has achieved value for money for all purchases. The department carefully considered the unique terms and benefits of each proposal including their gap-bridging capacity, ability to deliver environmental outcomes, uniqueness in size or location or otherwise unique opportunity.^b

The department has received over 100 unsolicited offers for the sale of water entitlements from interested sellers since 2015. Due to circumstances changing over time, not all of these unsolicited offers have been closed off in the unsolicited offer database. For example, upon initial assessment some offers have been placed on hold until the water can be adequately protected from downstream extraction.^c

All instructions provided by the Minister have been executed appropriately. In two particular instances the department took further actions consistent with the intent of these instructions. Firstly, the Minister requested that the department seek agreement from the NSW government for the purchase of NSW Murrumbidgee water entitlements. The department engaged with the NSW government on the purchase. The department then briefed the Minister on this consultation and the Minister subsequently approved the purchase to proceed. Secondly, the Minister requested the department explore the possibility of incorporating works to address flooding in southern St George as part of the 2017 Condamine-Balonne purchase. The department explored this possibility through an independent report and consultation with the Commonwealth Environmental Water Office as requested. The department then re-briefed the Minister on its findings and the Minister subsequently approved the purchase to proceed.^d

It is pleasing that the ANAO have confirmed that the program design and planning to support strategic water procurements to date was largely appropriate. The department acknowledges the administrative process improvements identified by the ANAO and has already implemented most changes. The department is committed to ensuring its policies and processes for conducting strategic water purchases are fit-for-purpose, with the ability to evolve over time with continuous improvement as required.

ANAO comment on Department of Agriculture, Water and the Environment summary response

1. Paragraphs 4.2 to 4.4 outline the parameters on which the department is required to demonstrate value for money. Paragraphs 4.5 to 4.38 outline the department’s approach to assessing value for money for strategic water procurements.
2. As outlined in Chapter 3, briefings to the Minister did not provide a clear indication of how the procurements would obtain a triple bottom line outcome as in the original commitment. The department did not consistently provide complete information to enable departmental decision-makers to make informed decisions. Table 3.1 outlines the ANAO’s assessment of the application of the Guidelines to strategic water procurements conducted in 2016 and 2017.
3. As outlined in paragraphs 2.6 to 2.7, in August 2015, the register of unsolicited offers is incomplete and limits the department’s ability to quickly and easily compare offers and key decisions.
4. As outlined in Chapter 3, there are two instances where it is unclear whether the actions undertaken by the department and subsequent advice provided to the Minister fully addressed the intent of the instructions. As discussed in paragraphs 3.38 to 3.42 there is no evidence that the department obtained agreement from the NSW government for the purchase. As discussed in paragraphs 3.43 to 3.48, there is no evidence that the department obtained verification of the report from the Queensland Department of Natural Resources and Mines as advised to the Minister.

Appendix 2 2019 Upper Condamine Alluvium limited tenders

Table A.1: Strategic water procurements conducted through limited tender in the Upper Condamine Alluvium

Source: ANAO analysis of Department of Agriculture, Water and the Environment information.