Introduction

1.1 Non-platform products are items and supplies that do not represent weapons platforms, but are required to maintain the capability and operation of the Australian Defence Force. These can include clothing items, small firearms, health and dental equipment, and other consumables. In 2017–18, the Department of Defence’s (Defence) total budget for its capability sustainment program (including platform and non-platform products) is $9 474 million.

1.2 The procurement, management and supply of these capabilities is conducted by Systems Program Offices. As at December 2017, there were 62 Systems Program Offices within the Capability Acquisition and Sustainment Group of Defence responsible for managing the sustainment² of 112 fleets of equipment, supplies or services, through a combination of internal work and commercial contracts. Systems Program Offices may be involved in acquiring new Defence capability, sustaining existing capability, disposing of or withdrawing capability, or all of these.

1.3 The Health Systems Program Office (Health SPO) is within the Integrated Soldier Systems Branch of Land Systems Division in Capability Acquisition and Sustainment Group. The Health SPO is responsible for the procurement and sustainment of pharmaceuticals, medical and dental equipment and consumables, and combat rations. The Health SPO is also responsible for the acquisition and through life support of the Australian Defence Force replacement Deployable Health Capability through Joint Project 2060 Phase 3.³

1.4 The Health SPO’s sustainment budget for 2017–18 is: $52.7 million for medical and dental equipment, pharmaceuticals, medical and dental consumables; and $25.3 million for combat rations packs. The Health SPO manages the sustainment of over 15 000 individual items of health materiel and combat rations (referred to as ‘line items’). The breakdown of the Health SPO’s budget for 2017–18 and line items is in Table 1.1.

Table 1.1: 2017–18 budget and number of line items for the Health SPO by sustainment product

Note a: This figure does not include any costs incurred by Defence in undertaking the management of sustainment, for example: staffing, accommodation, and other overhead costs.

Note b: This includes $6.6 million in funding for the Defence Services Agreement with Joint Logistics Command for equipment maintenance.

Note c: Total may differ due to rounding.

Source: ANAO analysis of Defence documentation.

1.5 The provision of health materiel and combat rations in Defence is managed primarily though Materiel Sustainment Agreements. These are contract‐like arrangements that set out the level of performance and support required by the Defence Capability Manager from the Capability Acquisition and Sustainment Group, within an agreed price, as well as the key performance indicators by which service delivery will be measured. Through the agreements, the Defence Capability Manager undertakes to supply funding and the Systems Program Office within the Capability Acquisition and Sustainment Group undertakes the sustainment of a specific platform, product, commodity or service.

1.6 The lead Capability Managers for health materiel and combat rations in Defence are Joint Health Command and Army Headquarters respectively.

Review and reform in Systems Program Offices

1.7 The 2015 First Principles Review^4,5 recommended that each of the Systems Program Offices be examined to determine the most appropriate procurement model for delivering capability and achieving value for money.

1.8 A review of the Health SPO was conducted by an external consultant in April 2017. The review made nine recommendations. Key recommendations related to: the SPO changing its supplier engagement model to a single prime vendor arrangement⁶ for combat rations and multiple prime vendors for health materiel; the SPO developing a workforce planning program to increase its contract management skills; investigating the opportunity to consolidate health services; and addressing issues with existing information technology systems. The Head of Land Systems Division agreed to two recommendations, and conditionally agreed with the remaining seven.⁷

1.9 The majority of the recommendations are due for implementation in 2019 and 2020. The Health SPO has begun to implement one of the agreed recommendations (which is due to be implemented by mid-2018) relating to moving supplier engagement models to a single prime vendor for combat rations and to multiple prime vendors for health materiel. The transition to a new supplier engagement model is reflected in two recent prime vendor contracts Health SPO has negotiated, which are for the supply and delivery of pharmaceuticals and medical and dental consumables (discussed in Chapter 3), and the supply of combat rations and ancillary items (discussed in Chapter 4).

Audit approach

1.10 The objective of the audit was to assess the effectiveness of Defence’s arrangements for delivering selected non-platform sustainment. To form a conclusion against the objective, the ANAO adopted the following high level audit criteria:

• Defence has implemented effective governance arrangements for the selected Systems Program Office; and
• Defence has appropriate procurement and contract management arrangements for the selected non-platform sustainment products.

1.11 In undertaking the audit, the ANAO:

• reviewed relevant Defence files and documentation;
• collected and analysed data relating to the contract for the provision and delivery of pharmaceuticals and medical and dental consumables, and the current retender for the combat rations pack contract; and
• interviewed key Defence personnel including: staff from the Health Systems Program Office; Joint Health Command; and Army Headquarters.

1.12 The scope of this audit includes the management of sustainment of health materiel and combat rations undertaken by Health SPO. The audit examined the following two procurements in greater detail:

• the contract for the provision and delivery of pharmaceuticals and medical and dental consumables (Chapter 3); and
• the retender for the combat rations packs and ancillaries (Chapter 4).

1.13  The audit was conducted in accordance with the ANAO auditing standards at a cost to the ANAO of approximately $353 898.

1.14 The team members for this audit were Natalie Whiteley, Megan Beven, Sophie Gan and David Brunoro.

Has Defence established effective reporting and accountability mechanisms to senior management?

2.1 The Health Systems Program Office (Health SPO) interacts with a number of key areas in the Department of Defence (Defence) including: Joint Health Command for the health systems fleet and deployed and garrison health support⁸; Army for the provision of combat ration packs; and all Services for delivery and support of specific single service health requirements (for example, the incorporation of medical facilities and equipment into ships and aircraft). Figure 2.1 outlines the key areas in Defence involved in the sustainment of pharmaceuticals and combat rations.

Figure 2.1: Key areas in sustainment of pharmaceuticals and combat rations in Defence

 

 

Source: ANAO analysis of Defence documentation.

2.2 The relationship between the Health SPO and the relevant capability manager is set out in Materiel Sustainment Agreements. The agreements outline the level of performance and support required by the capability manager in the sustainment of health materiel and combat rations. The Agreement includes an agreed price for the sustainment work and performance indicators by which the Health SPO’s service delivery is measured and reported.

2.3 Materiel Sustainment Agreements are divided into two sections: a Heads of Agreement which details the high level overarching agreement; and the product schedules that detail the specific agreement for the sustainment of various products. The product schedule sections of the Materiel Sustainment Agreements are reviewed annually by Defence.

2.4 To support the delivery of capability relating to health materiel and combat rations required under the Materiel Sustainment Agreements, there are a number of expert and coordinating committees in Defence (see Box 1).

2.5 The management of health materiel and combat rations is also considered in weekly Health SPO reports to Joint Health Command, Director General Senior Leadership Team meetings, and weekly briefing reports and talking points to the Head of Land Systems Division.⁹

2.6 The Health SPO provides representatives and contributes data to the above committees and reporting processes. The ANAO’s analysis of reporting by the Health SPO indicates that not all data requirements are being met, for example:

• The Pharmacy and Therapeutics Committee requested data from the Health SPO to inform decisions on the management of pharmaceuticals in the Australian Defence Force. The committee’s minutes indicate that Joint Health Command and the Health SPO have had ongoing discussions over the last two years on how the committee’s data requests can be met using available resources and IT systems.
• There is partial reporting against the performance measures specified in relevant Materiel Sustainment Agreements at the Health Materiel Working Group (see paragraphs 2.15 to 2.22 for further discussion on the adequacy of performance reporting and measures for health materiel and combat rations).

2.7 Further to the above reporting, following a projected overspend in the health materiel budget (see Box 2), Health SPO began providing additional weekly reports to Joint Health Command on financial information by commodity (pharmaceuticals, consumables, medical and dental equipment) in June 2017.

Has Defence implemented appropriate policies and systems within the Health SPO?

2.8 The Health SPO is required to manage the sustainment of health materiel and combat rations in accordance with key Defence manuals, namely:

• The Electronic Supply Chain Manual—this manual provides an overview of the Defence supply chain including inventory management, supply purchasing, financial management and performance reporting; and
• The Defence Logistics Manual, Part 2, Volume 5—Defence Inventory and Assets—this manual outlines key roles and responsibilities in the management of Defence inventory including around logistics, funding agreements, performance management and stocktaking.

2.9 In addition, the Health Materiel Manual outlines the roles and responsibilities, processes and procedures for the management of health materiel in Defence. This comprehensive manual is reviewed every three years and includes references to relevant legislation, standards and practices for the management of health materiel.

2.10 The key IT systems used by the Health SPO in the management of health materiel and combat rations are:

• Military Integrated Logistics Information System (MILIS)—As the primary Defence logistics system, MILIS is intended to provide visibility and management of every catalogued item of supply. Deployable and deployed health facilities use MILIS to order all health materiel.
• Advanced Inventory Management System (AIMS)—AIMS is used to forecast the demand for products based on historical data from MILIS.
• Army Capability Management System (ACMS)—Army uses this system for forecasting requirements for its product schedules including combat rations.
• Pharmacy Integrated Logistics System (PILS)—Garrison pharmacy staff and authorised deployed elements use PILS to order non-exclusion list health materiel from a prime vendor. PILS can be used to: demand and receipt health materiel; support clinical functions; and provide patient medication profiles.
• Resource and Output Management and Accounting Network (ROMAN)—ROMAN is Defence’s core financial transaction system.

2.11 The prime vendor for the provision and delivery of pharmaceuticals also has an online portal, allowing Defence staff to view available stock and place online orders with the prime vendor.

2.12 The key limitations with IT systems identified during the course of the audit relate to:

• The multiple IT systems used in the sustainment of health materiel and combat rations are often not linked, creating data duplication, complex workarounds and redundant and out of date data.
• Frequent oversight is required to ensure the accuracy of data used to forecast requirements when manually transferring data from Defence’s logistic management system (MILIS) to Defence’s forecasting system (AIMS). For example, data from MILIS that is used to forecast requirements in AIMS needs to be reviewed for spikes in usage, otherwise a single order could become an annual order.
• The prime vendor’s online portal does not interface with Defence’s other system for managing pharmaceutical inventory—PILS. As a result, pharmacists at Garrison Health Centres are manually entering data from the portal to PILS. This issue is discussed further in Chapter 3 of this audit report.

2.13 The box below provides an example of the impact of IT system limitations.

Has Defence implemented an effective performance reporting and monitoring framework within the Health SPO?

2.14 The performance reporting and monitoring framework stems from the Materiel Sustainment Agreements for health materiel and combat rations. These agreements outline the key performance indicators as well as a number of other performance measures for each area.

2.15 The key performance indicators are reported on through the Sustainment Performance Management System (SPMS) and are outlined in Table 2.1.

Table 2.1: Key performance indicators for health materiel and combat rations

Note a: The Land Sustainment Management Directorate within the Capability Acquisition and Sustainment Group provides all Systems Program Offices across Land Systems Division with monthly reports from the Inventory Measurement and Analysis Tool (IMAT). The IMAT reports are a suite of AIMS inventory key health indicators including: demand satisfaction rate, inventory balance trend, requirements determination workload trend, stock on hand and excess stock trends, AIMS replenishment recommendation trend, recommended orders, purchase orders profile, and overdue redistributions.

Note b: This key performance indicator has been removed from the 2018–19 of the Materiel Sustainment Agreement following the annual review in late April 2018.

Note c: Prior to July 2017, the target for this key performance indicator was 95 per cent.

Note d: Prior to July 2017, the target for this key performance indicator was 100 per cent.

Source: Materiel Sustainment Agreement JHC01 Sustainment of Health Capability 2017–18, Module B–Capability Requirements and Measures of Success, pp. 3–4; Materiel Sustainment Agreement CA50 2017–18, Module B—Capability Requirements and Performance Indicators, p. 6.

2.16 The other, non-key performance indicator, performance measures outlined in the Materiel Sustainment Agreement are largely reported on in a variety of other forums rather than through the Sustainment Performance Management System. These forums include the monthly meeting between Joint Health Command and Health SPO, and the Health Materiel Working Group. The performance measures include:

• achievement against planned and unplanned maintenance of medical equipment managed by Joint Logistics Command under the Defence Supplier Agreement;
• planned and phased commitment and expenditure of health materiel funding for the current financial year;
• codification of health equipment¹⁰;
• timely approval, publishing, amendments and review of key documents including for end users of medical equipment, equipment schedules, engineering and maintenance plans;
• planned and phased execution of health materiel procurement plan for the current financial year; and
• the delivery of health materiel on time, in full, and in serviceable condition in response to valid demands placed by customer units, organisations and agencies.¹¹

2.17 In addition, the Business Plan for Land Systems Division 2016–18 identifies the measures of effectiveness for the Materiel Sustainment Agreements. These measures include:

• Achieving green traffic lights against key performance indicators on the Sustainment Performance Management System.¹²
• Achieving within a five per cent variance on the expenditure versus the budget for the product schedule.
• Delivering 100 per cent availability for all critical platforms in accordance with the Materiel Sustainment Agreement.

2.18 Figure 2.2 provides a summary of performance against key performance indicators as recorded in the Sustainment Performance Management System over a twelve month period.

Figure 2.2: Performance against key performance indicators as recorded in the Sustainment Performance Management System November 2016 to October 2017

 

 

Note a: Performance data for demand satisfaction rate for operations, maintaining contingency stock and complying with delivery schedules was not recorded in the Sustainment Performance Management System for combat rations for the month of December 2016.

Source: Sustainment Performance Management System.

2.19 The ANAO’s assessment of the appropriateness of key performance indicators for health materiel and combat rations found that they were relevant and reliable but not complete—as summarised in Table 2.2.

Table 2.2: ANAO assessment of key performance indicatorsa for health materiel and combat rations against key characteristics

Note a: The assessment relates to the key performance indicators in Figure 2.2.

Note b: These characteristics are based on the criteria developed to evaluate the appropriateness of an entity’s key performance indicators contained in Audit Report No.58, 2015–16, Implementation of the Annual Performance Statement Requirements 2015–16.

Source: ANAO analysis.

2.20 The key performance indicators identified in the Materiel Sustainment Agreements, and reported on in the Sustainment Performance Management System (listed in Table 2.1), are not aligned with the performance indicators included in the prime vendor contracts for pharmaceuticals and combat rations. For example:

• Both the pharmaceuticals contract and the Sustainment Performance Management System reporting on health materiel have key performance indicators relating to satisfying demands for inventory. However, they have different targets. The key performance indicator reported on in the Sustainment Performance Management System has a demand satisfaction target of greater than or equal to 90 per cent, while the key performance indicator in the pharmaceuticals contract has a target of 100 per cent. In addition, the key performance indicator in the Materiel Sustainment Agreement does not specify the need for ‘delivery in full’—which means the product meets specific quality standards (see Table 3.2 in Chapter 3).
• The pharmaceuticals contract includes a strategic performance measure of cost effectiveness which is a measure of the prime vendor’s ability to provide services at the best possible cost. A performance indicator for cost is not included in the health materiel key performance indicators in the Sustainment Performance Management System (see Table 3.2 in Chapter 3).
• There are no key performance indicators in the combat rations contract. There is also no explicit section in the contract regarding performance management (see paragraph 4.87 in Chapter 4).

2.21 As indicated in Figure 2.2, Health SPO has reported in the Sustainment Performance Management System that the key performance indicators for combat rations are, with one exception in the 12 month reporting period, consistently met. In contrast, the two key performance indicators regarding operational items for the Health SPO are either consistently reported as ‘red’ or ‘amber’ in the Sustainment Performance Management System. The reported underperformance is due to an inability to procure certain operational items at the 100 per cent stock level required under the key performance indicator. Defence advised that some of these items are subject to a worldwide supply shortage.

2.22 Defence informed the ANAO that there are ongoing discussions between Joint Health Command, Health SPO, and the Services regarding the key performance indicators, and how they impact on the Australian Defence Force’s ability to meet training, operational requirements, and current threat protection rules. Defence informed the ANAO in February 2018 that key performance indicators for Health Materiel will be discussed at the February 2018 Health Materiel Working Group meeting with the aim of incorporating any agreed amendments into the 2018–19 Materiel Sustainment Agreement. Defence’s review process for the 2018–19 Materiel Sustainment Agreement was completed in April 2018. ANAO’s review of the 2018–19 Materiel Sustainment Agreement found one key performance indicator—percentage inside lead time for operational items—had been removed.

Defence’s use of the Sustainment Performance Management System

2.23 The Sustainment Performance Management System is Defence’s primary sustainment reporting and performance management system.¹³ It is a web-based system designed to provide performance reports for Capability Acquisition and Sustainment Group and Capability Managers. Data is entered monthly, usually by officers in the relevant Systems Program Office. The Systems Program Office Director reviews the data and comments for each measure and provides additional comments. Further comments can be added up the hierarchy to the relevant Capability Acquisition and Sustainment Group division head.

2.24 The System can include key performance indicators and key health indicators (as defined by the Services), and also strategic sustainment analytics, or high level health indicators used for cross-platform performance analysis.

2.25 The ANAO found that the Sustainment Performance Management System was viewed favourably by Health SPO and Army and Joint Health Command as capability managers.

2.26 However, the ANAO also found that the Health SPO and relevant capability managers were not making use of the full reporting functionality of the System and that ongoing review was needed. For example:

• The System has been used inconsistently across the Systems Program Offices and across the Services. While the System allows for performance monitoring, trend analysis and cross-product comparison, some of the Services only use a limited range of the System’s functions. For example, Maritime Division (Navy) undertakes more detailed reporting than Land Systems Division, which does not report on indicators that monitor ongoing trends or allow comparison across products.
• There has been an instance where information recorded in the System was not reviewed and necessary action not taken. A contributing factor to the budget overspend noted in Box 2 was that advice to the capability manager on the System regarding the management of the budget for medical hardware was not reviewed and investigated.

Has Defence undertaken appropriate risk assessment and management within Health SPO?

2.28 Health SPO manages two types of risks:

• risks pertaining to the sustainment of health materiel and combat rations; and
• operational risks associated with conducting its business, including changes to the Supplier Engagement Model, workforce planning and meeting Defence policy requirements.

2.29 The Materiel Sustainment Agreement product schedules identify the risks and constraints¹⁴ for health materiel and combat rations, as shown in Table 2.3.

Table 2.3: Risks and constraints for Health Materiel and Combat Rations as identified in the Materiel Sustainment Agreements

Source: Materiel Sustainment Agreement JHC01 2017–18, Module E—Product Issues, Risks and Constraints; and Materiel Sustainment Agreement CA50 2017–18, Module E—Product Issues, Risks and Constraints

2.30 These risks and mitigation strategies are discussed regularly at key committees and meetings including the Health Materiel Working Group and Health SPO Monthly Performance Meeting.

2.31 The significant change occurring across all Systems Program Offices in the Capability Acquisition and Sustainment Group raises some potential operational challenges and risks for Health SPO. These primarily relate to: changes to the Supplier Engagement Model—with an increase in the use of prime vendor contracts; and workforce planning—including ensuring staff are reskilled to move from transactional based work to undertaking more complex contract management roles.¹⁵ In addition, the Health SPO has also concurrently undertaken a number of large procurements, including for pharmaceuticals and medical consumables (Chapter 3), medical and dental equipment (paragraph 3.12), and combat rations (Chapter 4).

2.32 Health SPO does not have its own risk management or business plans to document and help manage its specific operational risks, as risk management in the Capability Acquisition and Sustainment Group is undertaken at the divisional level.¹⁶ However, the specific key Health SPO risks such as those in paragraph 2.31 are not documented in the Land Systems Division Risk Management Implementation Plan.

2.33 The management of risk relating to the procurement process for the health materiel and combat rations contracts is discussed in Chapters 3 and 4 respectively.

Overview of the Health Systems Fleet

3.1 The Health Systems Fleet supports medical, dental, veterinary and ancillary health care in the Department of Defence (Defence) for both garrison and deployable environments.¹⁷ The fleet has three broad commodity groupings:

• pharmaceuticals¹⁸—items which require specialised management and handling to maximise product security, efficacy and shelf-life (for example, paracetamol, adrenaline, vaccines and anti-venoms);
• medical and dental consumables—items which are expendable and consumable (for example, surgical dressing materials, syringes and needles, diagnostic kits); and
• medical and dental equipment—items used for the diagnosis, prevention, monitoring and/or treatment of a medical condition (for example, aeromedical evacuation equipment and radiology diagnostic equipment).

New support contract for the provision of pharmaceuticals

3.2 In early 2016, Health Systems Program Office (Health SPO) undertook a procurement process for a single prime vendor to supply and deliver pharmaceuticals, medical and dental consumables and selected medical and dental equipment.

3.3 Prior to this, Defence procured pharmaceuticals and medical and dental consumables through two separate prime vendor contracts (both contracts were with the same supplier); and procured the selected medical and dental equipment as required through either a Standing Offer Panel or Request for Quotes. Warehousing, distribution and maintenance of the selected medical and dental equipment were managed through a Defence Services Agreement between Joint Logistics Command and Capability Acquisition and Sustainment Group worth $6.6 million.

3.4 The extant contracts and/or standing offers for the three commodity groupings (pharmaceuticals, medical and dental consumables, medical and dental equipment) had different expiry dates. Consequently, Defence planned a staged approach to the implementation of the three separate work packages, as shown in Figure 3.1.

Figure 3.1: Key dates in the new prime vendor contract

 

 

Source: ANAO analysis of Defence documentation.

3.5 On 16 June 2017, Defence entered into a contract with a new prime vendor, Central Healthcare Services, to manage the supply, warehousing and distribution of pharmaceuticals.¹⁹

3.6 The inclusion of medical and dental consumables was scheduled for introduction under the new contract for November 2017, but has been delayed until May 2018. In the interim the extant provider will continue to deliver medical and dental consumables to Defence.

3.7 The approved estimated expenditure under the contract was $120.64 million across the initial five year period for the pharmaceutical component only. A significant proportion of the approved estimated expenditure under the contract is for non-fixed pricing and task-based services.²⁰

Did Defence comply with the Commonwealth Procurement Rules and relevant Defence policies?

3.8 The Commonwealth Procurement Rules²¹ are the basic rule set for Australian Government procurements and govern the way in which entities undertake their procurement processes.²² To support the application of procurement related legislation and policy, Defence has established a single overarching procurement policy framework, managed by Capability Acquisition and Sustainment Group.²³ This includes a number of compulsory activities Defence officials were required to carry out when undertaking procurement.

Planning the procurement

3.9 Defence undertook key planning activities. These included: engagement with the capability manager on key requirements; development of a procurement schedule; endorsements to proceed; and a tender evaluation plan.

Procurement strategy

3.10 Defence’s procurement strategy consisted of the Endorsement to Proceed²⁴ which provided a high-level overview of Defence’s consideration of whether the procurement would deliver value for money. In August 2015 two work packages—pharmaceuticals (Work Package One), and medical and dental consumables (Work Package Two)—were endorsed for inclusion in the procurement. In March 2016, several days prior to the release of the request for tender, an additional work package for selected medical and dental equipment (Work Package Three) was included in the tender.²⁵ The selected medical and dental equipment is only a small proportion of the overall medical and dental equipment procured by Defence.

3.11 The inclusion of the third work package was to allow Defence to:

assess the option to utilise the resultant contract, with the existing contractor, without the need to conduct a separate open approach to market for all or any of the products described in [Work Package Three].²⁶

3.12 There is a separate concurrent tender activity underway by Health SPO for the procurement of the remainder of the medical and dental equipment and services Defence requires. The introduction of Work Package Three will be dependent on the outcome of this activity and decisions regarding Defence’s Randwick facility (see paragraphs 3.75 to 3.76). The relevant Endorsement to Proceed and other planning documentation (such as the Tender Evaluation Plan) contained limited information on how these two procurement processes would interact.

Risk management

3.13 The Commonwealth Procurement Rules state that:

Relevant entities must establish processes for the identification, analysis, allocation and treatment of risk when conducting a procurement. The effort directed to risk assessment and management should be commensurate with the scale, scope and risk of the procurement. Relevant entities should consider risks and their potential impact when making decisions relating to value for money assessments, approvals of proposals to spend relevant money and the terms of the contract.²⁷

3.14 Defence’s internal Project Risk Management Manual also requires that all project risks be documented in a risk register and that staff are to update the risk assessment for a project at key decision points and milestones.

3.15 There was no documented risk management register for the procurement and Defence was unable to provide evidence to the ANAO that it established processes for the identification, analysis, allocation and treatment of risk when conducting the procurement.

Probity and conflict of interest

3.16 The Commonwealth Procurement Rules require that ‘officials undertaking procurement must act ethically throughout the procurement’, including ‘recognising and dealing with actual, potential and perceived conflicts of interest’ and the equitable treatment of participants.²⁸

3.17 Defence also has specific instructions on managing potential conflicts of interest, which apply to Defence personnel and external service providers under contract to Defence.

3.18 In the absence of a risk management plan for the procurement, there is no evidence of specific consideration of or actions taken to ensure officials undertaking the procurement acted ethically. Defence was unable to demonstrate to the ANAO that it established processes to recognise and deal with actual, potential or perceived conflicts of interest. For example, staff involved in the procurement process, including the tender evaluation, were not required to complete conflict of interest declarations.

3.19 Additionally, Defence was unable to demonstrate to the ANAO that it established processes to ensure the equitable treatment of participants. For example, Defence did not develop a probity plan for the procurement which addressed arrangements for the provision of probity advice.²⁹ In April 2018, Defence advised the ANAO that:

Probity advice was available throughout the procurement process from the Integrated Soldier Systems Branch Chief Contracting Officer. Ultimately, no formal request for probity advice was required. The validity of using an internal source of probity advice was confirmed orally by the Branch Chief Contracting Office in 2016, and is consistent with Defence procurement policy that states ‘there is no requirement for Defence officials to engage an external probity or process adviser’ and that ‘internal personnel (for example, contracting officers or Defence Legal officers) can potentially perform the role of a probity adviser for a Defence procurement’.

Security of tender information

3.20 The Commonwealth Procurement Rules provide that: ‘when conducting a procurement … entities should take appropriate steps to protect the Commonwealth’s confidential information’.³⁰ The Tender Evaluation Plan stated that all tendered material should be kept secure.

3.21 Defence records indicate that tender information was removed from Defence’s secure system, and information was sent from Defence email accounts to personal email accounts of Defence staff.³¹ Documents potentially containing information of a sensitive nature relating to the tender and Health SPO activities that were emailed to personal accounts included:

• internal briefing material on certain vaccines;
• internal briefing material on health materiel budget concerns; and
• internal briefing material on the closure of a Defence facility responsible for warehousing, delivering and maintaining pharmaceuticals, medical and dental consumables, and medical and dental equipment (see paragraph 3.76).

3.22 In the course of the audit the ANAO advised Defence of this issue. Defence informed the ANAO in March 2018 that it had undertaken an independent³² assessment of the issue. The security incident was documented in a security report and individuals involved received formal correspondence from their senior executive officer as well as a verbal debriefing on the outcomes of the investigation.³³ Defence advised the ANAO in April 2018 that: ‘the issues regarding security of tender information did not affect the conduct or outcome of the tender assessments. Tenders were not altered, as the tender had been closed.’

Approach to market

3.23 Defence adopted an open request for tender process for the procurement. The ANAO’s review of the Request for Tender documentation found that it met the requirements of the Commonwealth Procurement Rules.³⁴

3.24 Tenderers were required to tender for Work Packages One and Two, and provide a response to demonstrate their capacity and capability to provide Work Package Three.

3.25 The tender was open for applications for 13 weeks (from March 2016) to ensure ‘tenderers had adequate time to address the tender requirements and form any business arrangements that they require to ensure the submission of one tender to address all requirements sought’.³⁵ This was compliant with the minimum time limits of the Commonwealth Procurement Rules.³⁶ Defence held an industry briefing for potential suppliers in April 2016, with the opportunity for organisations to request individual meetings with Defence.

Evaluation

3.26 Defence developed a Tender Evaluation Plan outlining the evaluation process for the procurement.

3.27 A Tender Evaluation Board was formed to conduct the evaluation of the tenders received. The Board consisted solely of Defence officials from within Health SPO, including those staff involved in the management of the extant contract. As discussed earlier in paragraphs 3.17 to 3.19, Defence was unable to provide evidence that there were probity plans or conflict of interest arrangements in place for the procurement.

3.28 The evaluation process and outcomes are summarised in Table 3.1 below. The Tender Evaluation Board considered only two of the seven tenders received to be competitive. Of the five tenders considered to be non-competitive³⁷:

• one was not accepted due to late submission;
• one was excluded for not containing sufficient information to enable a competitive assessment and did not contain a number of key deliverables; and
• three were considered non-competitive or not exhibiting value for money and were set aside by the Tender Evaluation Board.³⁸

Table 3.1: Tender evaluation process and outcomes

Note a: The Commonwealth Procurement Rules specify late tender submissions must not be accepted, unless the submission was late as a consequence of mishandling by the relevant entity.

Source: ANAO analysis of Defence documentation.

3.29 The detailed evaluation against the evaluation criteria³⁹ was performed by each of the Tender Evaluation Working Groups and reported to the Tender Evaluation Board. The Tender Evaluation Board then assessed the tenderers’ overall compliance and the level of risk of each tender against the requirements and ranked them accordingly.⁴⁰ Tenders were provided with an overall ranking based on these assessments.

3.30 According to the Tender Evaluation Plan the evaluation of tenders was anticipated to have been completed by 15 August 2016 and approved by the delegate by 1 September 2016. The evaluation of tenders was completed on 30 November 2016 and approved by the delegate in December 2016.

Evaluating prices and pricing structure

3.31 As a requirement of the tender, in addition to providing recurring service fee costs, tenderers were asked to provide information on how they would price product and delivery costs for both Work Package One and Work Package Two. Defence did not require a tendered price for Work Package Three, as noted in the Endorsement to Proceed:

Due to the limited information that will be provided in the release documentation on [Work Package Three] content, the Commonwealth will not seek or evaluate tenderers’ offers regarding price or delivery rates. Detailed evaluation will be limited to an assessment of tenderers ability and managerial capability to supply products within the categories identified in [Work Package Three] and associated risk assessment.

3.32 To ‘obtain consistency across responses to facilitate evaluation’, tenderers provided cost information for 605 pharmaceutical items and 670 medical and dental consumable items against Defence’s estimated requirements.⁴¹

3.33 In evaluating prices and pricing structure, Defence undertook a compliance and risk rating for each tender. Defence also assessed and compared each tender on:

• the pricing structure and tendered prices for a sample of 475 pharmaceutical items⁴²;
• the pricing structure for medical and dental consumables;
• recurring service fee costs; and
• delivery costs.

3.34 There was no assessment or comparison between tenderers for the tendered prices for medical and dental consumables (Work Package Two), with the Tender Evaluation Working Group advising that, whilst ‘the evaluation of pharmaceuticals was achievable due to the use of industry based identification numbers’, there were ‘significant levels of complexity to the evaluation of the [medical and dental consumables] items due to the inability to match like-for-like items due to varying descriptions’.

3.35 In the assessment of the pricing structures, Defence assessed that pricing structures which fixed prices annually and were required to be re-negotiated each year presented limited flexibility and increased risk to the Department. This is because pricing reductions or increases would not be passed on in real time, and imposed ‘an administrative task on the parties which is unlikely to provide the Commonwealth with cost comparative saving’. Defence instead opted for the preferred tenderer’s cost mark-up model, which Defence assessed as ‘consistent with the [Request for Tender] pricing model, which seeks to take advantage of market fluctuating pricing’.

3.36 The preferred tenderer did not have the lowest tendered price compared to other tenderers. The preferred tenderer was ranked higher as it was considered to have a lower risk pricing structure as well as lower recurring service fees. Additionally, advice to the delegate noted that a comparison with the preferred tenderer’s tendered prices and the current general product price list with Defence offered an average cost saving of 1.5 per cent.

Australian Industry Capability Plans

3.37 Consistent with Defence policy, Australian Industry Capability⁴³ plans were required to be submitted as part of tender responses.

3.38 In evaluating tenders responses the Tender Evaluation Board found all responses were ‘deficient to various degrees’ with the relevant Tender Evaluation Working Group, noting that ‘they will take a lot of work to reach compliance, even the marginal ones’.

3.39 The Tender Evaluation Board agreed that ‘no tender response would be ranked’ and that ‘every tender was assessed as similar … due to the restrictions placed by legislation and the tender process did not identify any significant [Australian Industry Capability] within any offer’. The Tender Evaluation Board noted ‘that the [Australian Industry Capability Plan] would need to be developed as part of the negotiation stage with the preferred tenderer’.

3.40 During negotiations Defence and the preferred tenderer reached agreement that the preferred tenderer would amend its plan by the contract effective date and that it would continue to evolve for the duration of the contract. An Australian Industry Capability Plan was included in the resultant contract.

Records management

3.41 The Commonwealth Procurement Rules require that ‘officials must maintain for each procurement a level of documentation commensurate with the scale, scope and risk of the procurement’.⁴⁴ The Commonwealth Procurement Rules note this should include, for example, the process that was followed, how value for money was achieved and relevant decisions and the basis for those decisions.

3.42 Defence maintained records of key documentation for the procurement; however, there are instances where there was insufficient documentation to assess some of the processes that were followed, some of the relevant decisions made, and/or the basis for some of the decisions, namely:

• correspondence and/or communication with potential suppliers, tenderers and suppliers;
• no record of any directive from the delegate on the inclusion of the medical and dental equipment in the procurement; and
• minutes, directives and working documents for meetings of the Tender Evaluation Board and some relevant Tender Evaluation Working Group reports.

Were Defence’s procurement arrangements designed to achieve value for money for the Commonwealth?

3.43 Achieving value for money is the core rule of the Commonwealth Procurement Rules.⁴⁵

3.44 Defence adopted an open tender process for the procurement, as a basis for introducing competition and contributing to value for money outcomes.

3.45 In advice to the ANAO, Defence commented that ‘despite the large annual budget, Defence is considered by industry to be a relatively small customer with a consumption rate for health products similar to a large city based hospital.’ Defence considered that the option to consolidate the services and items contained in the three work packages under one contract would increase the commercial attractiveness of supplying these services and items, ‘potentially increasing cost savings and streamlining the requirement’. Defence advised the ANAO that, as a result of the consolidation, ‘a number of major providers to the healthcare industry responded [to the request for tender], which has not been the case for previous [tenders] of this nature’.

3.46 Consistent with the First Principles Review, Defence also aimed to reduce transactional and administrative overheads by reducing its involvement in the supply process. For example, Defence sought direct order placement by its pharmacists with the prime vendor. Defence did not estimate or undertake analysis of the potential savings that may be delivered to government as a result of these changes.

3.47 Defence also sought a value for money solution by broadening the pharmaceuticals that the prime vendor would be required to supply to a ‘full range of pharmaceutical[s] and medicines’.⁴⁶ The previous contract was limited to the current, approved formulary list⁴⁷ which Defence identified as contributing to ‘large administrative overheads’ when changes to the formulary were made.⁴⁸

3.48 As noted in paragraph 3.35, Defence considered the tenderers’ pricing structures in the tender evaluation. Consistent with broadening the items to be supplied, for task-based services, Defence gave preference to a formula based costing method applied across the full range of requested items, over a fixed-price model negotiated annually.

3.49 In evaluating price tenders, Defence did not explicitly consider the pricing model for the supply of Pharmaceutical Benefits Scheme items. Defence informed the ANAO in February 2018 that the open tender ensured the best price possible and that a ‘desktop scan only of [Pharmaceutical Benefits Scheme] pricing was taken from the Department of Health [Pharmaceutical Benefits Scheme] Website … to provide a high level comparison’.

3.50 The resultant contract includes arrangements for the pricing of Pharmaceutical Benefits Scheme items. Items with a cost price to the provider of $930 or greater will have a flat rate mark-up of $69.94 (before applying any supplier funded discounts).⁴⁹ Defence informed the ANAO in February 2018 that the $930 threshold resulted from the preferred tenderer’s offer and contract negotiation. These amounts are set under the Pharmaceuticals Benefits Scheme as listed on the Department of Human Services website.⁵⁰

Contract negotiations

3.51 In January 2017, around four months behind the original schedule, Defence commenced negotiations with the preferred tenderer. Defence’s negotiation strategy identified several issues to be resolved during negotiations, but Defence did not plan to negotiate a reduction in tendered prices during negotiations phase. Even relatively small price savings achieved through negotiation could have delivered overall savings to the Commonwealth.⁵¹

3.52 Advice to the delegate noted that, in all issues negotiated, Defence achieved its preferred or minimum fall-back position.

3.53 The delegate approved the provision of the contract to the preferred tenderer in May 2017. The contract was signed on 16 June 2017, approximately six months after the original planned date. As a result of the delay, the extant provider—whose contract expired in December 2016—continued to supply pharmaceuticals to Defence as per their contractual requirements.⁵²

3.54 The contract notice was published on AusTender on 1 August 2017 (46 days after contract signature), which is above the Commonwealth Procurement Rules requirement of 42 days.⁵³

3.55 Regarding possible savings from the contract, advice to the delegate noted that:

Compared to the extant Contract costs of $18.3 [million] annually, subsequent information provided through the tender evaluation and negotiation process has borne possible savings of $2.9 [million] equating to a potential 15.94 [per cent] savings of contracted costs.

3.56 Defence documentation indicates that the calculation of the $2.9 million in savings was based on a comparison of the extant contractor’s fixed-price contract costs (such as management fees, delivery charges, progress meetings, and warehousing costs) and that proposed by the preferred tenderer for the first year only.

Are Defence’s contract deliverables provided to the required standard, within the agreed budget and timeframes?

Management of transition arrangements

3.57 The contract was phased in with around two weeks between contract signature and the contract’s operative date, 3 July 2017. The contract with the new prime vendor, Central Healthcare Services, included information on the requirements and responsibilities of the transition as well as the implementation of subsequent work packages. Defence did not seek or receive a documented phase out plan as required under the extant contract. Additionally, Defence did not develop its own broader plan to manage the transition to the new contract, nor did it conduct a risk assessment to identify and mitigate risk.⁵⁴

3.58 Defence pharmacists received three working days’ notice of the transition to the new contract, receiving advice from Health SPO on Thursday 29 June 2017 that the ‘go live’ date for the new contract and online ordering was Monday 3 July 2017.⁵⁵ In addition, limited information was provided to pharmacists on the arrangement for placing orders (pharmacists were required to have additional software installed on their computers to enable them to order stock through the new prime vendor’s portal).

3.59 There were several issues identified by Defence with the phase in of the contract⁵⁶, including:

• the duplication of processes for ordering pharmaceuticals as relevant IT systems were not integrated⁵⁷;
• insufficient stocks of common medication (for example, paracetamol);
• problems with the delivery of medication (for example, couriers not having access to closed Defence bases);
• unclear procedures on returning medication supplied by the previous prime vendor; and
• problems with the ordering of pharmaceuticals by generic names rather than brand names and consequently receiving unintended products (for example, variations in the number of items per packet; different expiry dates; constantly switching the brands of pharmaceuticals a single patient uses, potentially introducing the risk of reduced medication compliance).

3.60 Defence advised the ANAO in November 2017 that:

Defence is meeting with (the prime vendor) on a weekly basis to resolve minor teething issues identified in the implementation. Defence is expected to meet with (the prime vendor) and [Joint Health Command] in (early 2018) to go over a lessons learnt activity to ensure we have a smooth transition of medical and dental consumables in May (2018).

Transition to subsequent Work Packages

3.61 As specified in the contract, the planned commencement date for Work Package Two—the medical and dental consumables component—was 14 November 2017 when the extant provider’s contract expired. In late 2017, Defence delayed the introduction of the work package until May 2018. This was to ensure the new prime vendor is ‘able to deliver [Work Package Two] without compromising [Work Package One]’.

3.62 In the interim, the extant prime vendor will continue to deliver medical and dental consumables through a six month contract extension worth up to $7.39 million.⁵⁸ There is an additional cost to Defence for this extension, as the fixed-price component under the extant provider is higher than under the new contractual arrangements. This extension was approved by the relevant delegate.

Management of budget

3.64 The new support contract had an estimated average annual expenditure of $24.13 million per year. Only 1.7 per cent of this estimated expenditure is classified by Defence as having certainty in terms of scope and cost. For example, while monthly administrative fees are known, the consumption of health items can only be estimated.

3.65 Following recent issues with the management of the budget for health materiel (discussed in Box 2) Defence has implemented additional weekly reporting by Health SPO to Joint Health Command to monitor actual expenditure against the allocated budget.

3.66 Defence documentation indicates that the delay in the introduction of medical and dental consumables (Work Package Two) component of the contract has increased pressure on the annual budget and will reduce the funds available for task-based services. Defence advised the ANAO that ‘any pressure on the annual budget is being managed within the governance framework established for [health materiel]’.

Management of contract deliverables

3.67 Health SPO is responsible for contract management and ensuring that the provider meets the contractual obligations, including ensuring that contract deliverables are provided to the required standard, within the agreed budget and timeframes.

3.68 Defence developed a statement of work which set out the requirements of the work to be carried out under the contract and the allocation of responsibilities between the Commonwealth and the new prime vendor. The statement of work was included in both the request for tender documentation and in the resultant contract with the new prime vendor.

Contract deliverables

3.69 The contract set out the requirements and standards of the products to be delivered. There were some inconsistencies with the requirements outlined in the contract and Defence policy, as discussed below.

3.70 The conditions of contract outlined the process for managing products which failed to meet: the specified requirements and standards; the specified timeframes; and/or delivery to the appropriate delivery points. The management process would be at Defence’s discretion according to the extent and type of failure and could include, for example: the prime vendor providing replacement products; correcting rejected products; and/or repossessing the rejected products. Defence can determine a reduction in payment or refuse payment if the contractor does not meet required standards.

Management and accounting for Health Materiel in Defence

3.71 The Defence Health Manual outlines how pharmaceuticals are to be managed and accounted for in Defence. These procedures include:

• Accounting for pharmaceuticals, including for controlled drugs, on Defence’s inventory management systems, in accordance with the Electronic Supply Chain Manual and the Defence Health Manual.⁵⁹
• Undertaking a number of stocktake and assurance activities for scheduled substances including quarterly stocktakes and independent yearly checks of all Schedule 8 substances.
• Having in place controls for the process of disposal of pharmaceuticals, including: using clinical waste bins; and ensuring disposals are recorded in accordance with the Electronic Supply Chain Manual. Additionally, controlled drugs must be destroyed by pharmacists in the presence of an authorised officer⁶⁰ or a Member of the Service Police.

3.72 Joint Health Command also has in place an audit program at health facilities. Information on the management and accounting procedures for health materiel in Defence is included at Appendix 2. An examination of these procedures was not included as part of the audit scope.

Defence policy requirements for management of health materiel

3.73 Defence policy has a number of key requirements for the management of health materiel, which sometimes exceed what is required in a commercial environment.

3.74 The cold chain requirements⁶¹ specified in the contract were not compliant with Defence policy. Defence advised the ANAO in February 2018 that ‘temperature data loggers have been procured and provided to the contractor. The contractor is amending its internal procedures to maintain compliance with the relevant standard’.⁶² Defence also advised the ANAO that a Contract Change Proposal has been drafted to enact the cold chain requirements and is expected to be implemented in the first quarter of 2018.

Closure of Defence’s Randwick facility

3.75 Defence’s Randwick facility provides warehousing, equipment maintenance and distribution services of medical and dental equipment, pharmaceuticals and medical and dental consumables (referred to as Class 8 Support).⁶³

3.76 Defence is planning to close the Randwick facility in June 2018 and move to new arrangements in July 2018. Prior to this, Defence is reviewing the requirements currently undertaken at the facility, with some potentially to be included in the new support contract, namely the assembly and refill of first aid kits. There is no evidence the potential inclusion of these requirements in the support contract was appropriately planned for in the procurement and may have cost implications for Defence.

Management plans

3.77 The contract includes a management plan, known as the Support Services Management Plan, which is used to specify how a range of deliverables and requirements under the contract would be delivered. This is the primary plan for the contract and includes information on, for example, the prime vendor’s: risk management processes; quality management; and health, safety and environmental management.

3.78 To assist in the management of contract deliverables during the contract term, the prime vendor is also required under the contract to develop and deliver several plans and reports (for example, contract status reports) to Defence.

Performance measures

3.79 Defence set out to implement an ‘outcomes focussed performance based contract’. Table 3.2 outlines the one key performance indicator and the three strategic performance measures under the contract. As at February 2018, no performance reporting had occurred.

Table 3.2: Contract performance measures

Note a: A delivery is considered satisfied if: the correct product is delivered; the product is delivered to the correct location; the product is delivered on or before the specified delivery date; and the product meets the quality standards (if applicable). All of the conditions must be met, otherwise the delivery will be considered unsatisfied.

Note b: Defence is entitled to a refund based on an agreed formula for each review period if the prime vendor’s performance does not achieve the required level.

Note c: The Contract Performance Review is to be conducted at intervals no greater than 12 months and Service Performance Reviews at intervals no greater than six months.

Note d: The contract status reports are to be provided to Defence by the prime vendor ahead of contract performance reviews. For the new support contract, contract performance reviews occur every 12 months.

Note e: Defence advised the ANAO that the generic product report is provided to Defence by the contractor and is annually aligned with the contract status report.

Source: Defence documentation.

3.80 The key performance indicator used in the previous contract did not accurately measure the quality of the products being delivered (for example, whether upon receipt they have the required shelf-life and are in the right condition). The new key performance indicator focuses on performance and provides a basis for seeking a refund under the contract.

3.81 The cost-effectiveness strategic performance measure was introduced as a key means for the Commonwealth to ‘drive the Contractor to focus on realising cost savings for the Commonwealth by effectively aligning stock turnover rate with the perishability of the items and by purchasing generic products when they become available’. Defence estimated that effectively aligning stock management and moving to generic brands would provide a saving to the Commonwealth over the life of the contract. However there was no analysis underpinning this or dollar value estimated to help assess performance. The first review of the prime vendor’s performance is due in early 2018.⁶⁴

Overview of combat rations

4.1 Combat rations are required to sustain Australian Defence Force personnel during operational conditions where suitable fresh rations are unavailable.⁶⁵ Combat rations are used by the Australian Defence Force for both training and operations within Australia and overseas.

4.2 The Department of Defence (Defence) has specified requirements in regards to: nutritional content; number of personnel to be sustained; packaging; weight; ancillaries; and shelf-life. Defence has several types of combat rations, varying in size and menus⁶⁶, to meet different operational requirements.⁶⁷

4.3 In addition to food components, combat ration packs contain ancillary items, including: foot powder; hexamine fuel; compressed hexamine stoves; insect repellent; and water purification tablets.

4.4 The combat rations are made to military specifications and are a combination of Military off the Shelf and Commercial off the Shelf items.

4.5 As noted in Chapter 2, the Health Systems Program Office (Health SPO) is responsible for the sustainment of combat rations. The capability manager is Army.⁶⁸

4.6 In 2016–17, the combat rations sustainment activity included the procurement of 90 different line items, worth around $30.5 million. Defence procures approximately 400 000 combat ration packs per year. This figure does vary, with over 706 000 procured in 2015–16. Army is the main consumer in the Australian Defence Force, using over 80 per cent of all combat ration packs.

4.7 Combat ration packs may also include Government Furnished Material.⁶⁹ This included, for example, freeze-dried meal and rice components manufactured and supplied by the Defence Science and Technology Group and some ancillary items.⁷⁰

4.8 In support of preparedness requirements, contingency holdings are in place for combat rations. Contingency holdings are managed by Joint Logistics Command, ‘ensuring holdings remain within life, fully functional and serviceable to meet…requirements’.⁷¹ Health SPO is responsible for ‘verify[ing] stock on hand correlates with directed holdings’ and reporting to the capability manager.

New support contract for the provision of combat rations

4.9 In late 2015, Defence undertook a procurement process to ‘source, construct, distribute, and provide continual design and development of the combat ration packs and ancillaries’. Defence intended to incorporate in the new contract those items which were previously Government Furnished Material.

4.10 Prior to this, Defence procured combat rations and ancillary items through two contractual arrangements and, for most of the ancillary items, through an annual Request for Quote process from a variety of suppliers. The extant contract for combat rations expired in October 2017.

4.11 The original timeframe for the combat rations retender was for the new contract to be signed in mid-2017, with the prime vendor providing combat rations for 2018–19. Defence advised the ANAO that sufficient combat rations were ordered under the extant contract to meet requirements in 2017–18. The new contract was signed with the new prime vendor, Prepack Ltd, on the 29 January 2018.⁷²

4.12 Figure 4.1 provides an overview of the key dates for the combat rations retender.

Figure 4.1: Key dates for the combat rations retender

 

 

Source: ANAO analysis of Defence documentation.

4.13 Under the contract, the approved estimated annual expenditure across the initial five year period was $26.66 million (GST included), totalling $133.24 million (GST included).⁷³

Management and accounting for combat rations

4.14 Combat rations are considered ‘mission critical items for combat arms and combat support personnel’.⁷⁴ The appropriate management and accounting for combat rations ensures: current preparedness obligations are met; future capability needs are realised as planned; realisation of economic benefits⁷⁵; and Defence works effectively with, and supports, a sustainable Defence industry.

4.15 In addition to managing the procurement arrangements for combat rations, Health SPO is responsible for in-service management.⁷⁶ Health SPO’s in-service support of combat rations and ancillary items is focussed on: correct storage; periodic inspection and classification; management of stock rotation to ensure consumption before the use-by date; and bulk procurement of replacement combat rations. Defence advised the ANAO that wastage rates for combat rations and ancillaries from 1 January 2017 to 31 December 2017 included over 15 000 items, worth over $1.13 million. Defence advised the ANAO in April 2018 that ‘there is no targeted wastage rate for combat rations’.

4.16 Combat rations are accounted for on Defence’s inventory management systems, in accordance with Defence’s Electronic Supply Chain Manual. The Military Integrated Logistics Information System (see Chapter 2) is the logistics information system used for managing demand and utilisation of combat rations and ancillaries.

4.17 There are a number of audits and compliance activities undertaken in this area by those external to Health SPO, including:

• Army’s compliance and assurance section undertakes compliance activities in units on safety, finance, security, supply chain and technical integrity and maintenance;
• Capability Acquisition and Sustainment Group’s annual assurance program focuses on the identification of systemic issues to drive continuous improvement; and
• Business Process Testing, undertaken by Defence Logistics Compliance and Assurance Network Teams, reviews financial and logistics controls for business units that use the Military Integrated Logistics Information System (MILIS).

4.18 Information on the management and accounting procedures for combat rations in Defence is included at Appendix 3. An examination of these procedures was not included as part of the audit scope.

Did Defence comply with the Commonwealth Procurement Rules and relevant Defence policies?

4.19 The Commonwealth Procurement Rules⁷⁷ are the basic rule set for Australian Government procurements and govern the way in which entities undertake their procurement processes.⁷⁸ To support the application of procurement related legislation and policy, Defence has established a single overarching procurement policy framework, managed by Capability Acquisition and Sustainment Group.⁷⁹ This included a number of compulsory activities Defence officials were required to carry out when undertaking procurement.

Planning the procurement

4.20 Defence undertook a number of planning activities, which included: engagement with the capability manager on key requirements; development of a procurement schedule; endorsements to proceed; and a tender evaluation plan.

Procurement strategy

4.21 In November 2015 Defence released a Request for Information via AusTender, seeking information from industry to help inform the development of the Request for Tender and provide awareness to industry of the upcoming tender release.⁸⁰

4.22 As noted in the Endorsement to Proceed⁸¹, the Request for Tender tested if the market was able to provide freeze-dried products:

ability for the market to provide [freeze-dried meal products] has not been tested since the last open tender process in 2008. It is intended to incorporate the freeze-dried products as contractor sourced product and establish whether the market is currently able to provide this product.

4.23 Seven responses were received by the 18 December 2015 closure date. Defence concluded that the Request for Information had provided ‘assurance that there are a number of companies who are interested and capable of providing the service we are seeking’.

4.24 The Defence Science and Technology Group supplied freeze-dried meals as Government Furnished Material to the previous extant contractor. There was limited information included in the Endorsement to Proceed on whether this would continue if industry was found not to be able to provide freeze-dried meals.⁸²

Risk management

4.25 The Commonwealth Procurement Rules state that:

Relevant entities must establish processes for the identification, analysis, allocation and treatment of risk when conducting a procurement. The effort directed to risk assessment and management should be commensurate with the scale, scope and risk of the procurement. Relevant entities should consider risks and their potential impact when making decisions relating to value for money assessments, approvals of proposals to spend relevant money and the terms of the contract.⁸³

4.26 Defence’s internal Project Risk Management Manual also requires that all project risks be documented in a risk register and that staff are to update the risk assessment for a project at key decision points and milestones.

4.27 There was no documented risk management register for the procurement and Defence was unable to provide evidence to the ANAO that it established processes for the identification, analysis, allocation and treatment of risk when conducting the procurement.

4.28 The ANAO identified similar shortcomings in the Health SPO’s procurement of Health Systems Fleet items (see paragraph 3.15). Defence should have established processes for the identification, analysis, allocation and treatment of risk when conducting the procurement. This would have also assisted in the Health SPO’s broader planning and management, noting that the combat rations procurement was one of several major procurements⁸⁴—most estimated to be worth over $100 million—underway within Health SPO during the same time period.

Probity and conflict of interest

4.29 The Commonwealth Procurement Rules require that ‘officials undertaking procurement must act ethically throughout the procurement’, including ‘recognising and dealing with actual, potential and perceived conflicts of interest’ and the equitable treatment of participants.⁸⁵

4.30 Defence also has specific instructions on managing potential conflicts of interest, which apply to Defence personnel and external service providers under contract to Defence.

4.31 Defence was unable to demonstrate to the ANAO that it established processes to recognise and deal with actual, potential or perceived conflicts of interest. For example, staff involved in the procurement process, including the tender evaluation, were not required to complete conflict of interest declarations.

4.32 Additionally, Defence was unable to demonstrate to the ANAO that it established processes to ensure the equitable treatment of participants. For example, Defence did not develop a probity plan for the procurement nor engage a probity advisor.

4.33 The ANAO identified the same shortcomings in Health SPO’s procurement of Health Systems Fleet items (see paragraphs 3.18 to 3.19).

Security of tender information

4.34 The Commonwealth Procurement Rules provide that: ‘when conducting a procurement … entities should take appropriate steps to protect the Commonwealth’s confidential information’.⁸⁶ The Tender Evaluation Plan stated that all tendered material should be kept secure.

4.35 Defence records indicate that tender information was removed from Defence’s secure system, and information was sent from Defence email accounts to personal email accounts of Defence staff. Documents potentially containing information of a sensitive nature relevant to the combat rations tender that were emailed to personal accounts included:

• reports from each Tender Evaluation Working Group;
• the Source Evaluation Report; and
• information on Defence’s Scottsdale facility which produces ration pack components.

4.36 In the course of the audit the ANAO advised Defence of this issue. As noted in paragraph 3.22 of this audit report, Defence undertook an investigation, documented the incident in a security report, and debriefed the individuals involved.

Approach to market

4.37 As noted earlier, Defence conducted a Request for Information stage as part of the procurement. Internal advice noted that ‘the Request for Information undertaken in November 2015 has provided assurance that the current industry market is well positioned both within Australia and overseas to meet Defence requirements’.

4.38 Defence adopted an open tender process for the procurement. The ANAO’s review of the Request for Tender documentation found that it met the requirements of the Commonwealth Procurement Rules.⁸⁷

4.39 The tender was originally open for applications from 14 September 2016 to 21 February 2017; however, this was extended to 28 February 2017.⁸⁸ Defence had a four month open period to ensure ‘tenderers have adequate time to address the tender requirements’. This was compliant with the minimum time limits of the Commonwealth Procurement Rules.⁸⁹

Evaluation

4.40 Defence developed a Tender Evaluation Plan outlining the evaluation process for the procurement, and conducted the evaluation in accordance with this plan.

4.41 A Tender Evaluation Board was formed to conduct the evaluation of the tenders received. The Board only included Defence officials from within Health SPO, including those staff involved in the management of the extant contract.

4.42 As noted in Table 4.1 below, the Tender Evaluation Board considered that two of the five tenders received were competitive. The remaining three tenders were considered non-competitive⁹⁰ and were set aside as they were assessed as high or extreme risk and not exhibiting value for money.

Table 4.1: Tender evaluation process and outcomes

Source: ANAO analysis of Defence documentation.

4.43 An evaluation against the evaluation criteria⁹¹ was performed by each of the Tender Evaluation Working Groups⁹² and reported to the Tender Evaluation Board. Each tender was assessed against the seven evaluation criteria. Tenderers were provided rankings for six of the seven criteria. Though financial viability was assessed, tenders were not provided a ranking.

4.44 According to the Tender Evaluation Plan the evaluation of tenders was anticipated to have been approved by the delegate by 26 May 2017. The delegate approved tender evaluation outcomes on 28 September 2017.

Evaluating prices and pricing structures

4.45 In the Request for Tender documentation, tenderers were required to provide pricing information for several components, namely recurring services and task-based services (that is, combat rations, ancillaries and transport costs). In evaluating prices and pricing structure, Defence assessed and compared each tender on:

• pricing structure and tendered prices for recurring services;
• pricing structure and tendered prices for task-based services (including for each of the five types combat ration pack, ancillary items, and delivery); and
• mark-up on prices for materials, subcontracts and associated survey and quote services.

4.46 In its advice to the delegate the Tender Evaluation Board noted the differences in pricing structures, for example that some: tenderers had no recurring service fees; transport costs were a significant proportion of the tendered price; and recurring service fees were not linked to delivery of combat ration packs.

4.47 Tenders were compared on their cost competitiveness, with some tenders considered ‘not price competitive’ based on their overall tendered price. Whilst the preferred tender was considered price competitive—delivering savings of $1.7 million per annum compared to the 2016–17 expenditure—it did not have the lowest tendered price compared to other tenderers.

Consideration of economic benefit

4.48 In November 2016, the government announced changes to the Commonwealth Procurement Rules, which included that ‘for a procurement above $4 million, there will be a requirement to consider the economic benefit of the procurement to the Australian economy’.⁹³ This requirement was effective from 1 March 2017.

4.49 The Tender Evaluation Board commented in advice to the delegate that ‘economic benefit against each of the bids has not formed any part of the assessment due to the tender being released under the previous Commonwealth Procurement Rules’. Noting the timing of the tender and evaluation period⁹⁴, Defence should have sought advice from the Department of Finance on the application of the new requirements.

Australian Industry Capability Plans

4.50 Consistent with Defence policy, Australian Industry Capability Plans were required to be submitted as part of tender responses. In evaluating the tender responses, the Tender Evaluation Board assessed all five tenders as having significant or critical deficiencies in their Australian Industry Capability Plans. Defence advised the ANAO that the ‘Deficiencies in the preferred tenderer’s Australian Industry Capability plan were addressed in contract negotiations in accordance with Contract Negotiation Directive.’

4.51 As noted in Chapter 3, the quality of the Australian Industry Capability plans submitted was also an issue in the recent procurement for Health Fleet items. There would be benefit in Defence reviewing the information and guidance provided to industry in these procurements to help establish the reasons for the identified deficiencies.

Records management

4.52 The Commonwealth Procurement Rules require entities to maintain a level of documentation commensurate with the scale, scope and risk of the procurement.⁹⁵ The Rules note this should include, for example, the process that was followed, how value for money was achieved, relevant decisions and the basis for those decisions.

4.53 Defence maintained records of key documentation for the procurement; however, there were instances where there was insufficient documentation to assess some of the processes that were followed, some of the relevant decisions made, and/or the basis for some of the decisions, namely:

• correspondence and/or communication with potential suppliers, tenderers and suppliers; and
• minutes, directives and working documents for meetings of the Tender Evaluation Board and some relevant Tender Evaluation Working Groups.

4.54 Similar record keeping issues were identified by the ANAO in respect to the procurement of Health Fleet items (see paragraph 3.42).

Were Defence’s procurement arrangements designed to achieve value for money for the Commonwealth?

4.55 Achieving value for money is the core rule of the Commonwealth Procurement Rules.⁹⁶ Defence’s procurement process and arrangements under the new contract aimed to enhance value for money to the Commonwealth.

4.56 Defence adopted a two-staged, open tender process for the procurement as a basis for introducing competition and contributing to value for money outcomes.

4.57 Consistent with the First Principles Review, Defence also aimed ‘to continue to reduce the involvement of Defence in the supply process of [Combat Ration Packs] therefore reducing transactional and administrative overheads’.⁹⁷ Defence advised the ANAO in February 2018 that this approach included, for example, increased contractor responsibility for warehousing and ancillaries. Defence further advised the ANAO in February 2018 that it ‘has not yet undertaken analysis of potential savings’.

4.58 As noted in paragraphs 4.45 to 4.47, the Tender Evaluation Board’s advice to the delegate noted the differences in pricing structures and also compared tenders on their cost competitiveness—with some tenders considered ‘not price competitive’ based on their overall tendered price.

4.59 The Tender Evaluation Board estimated, and advised the delegate, that the three lowest tendered prices represented a real cost saving against the 2016–17 spend of between $1.7 million and $4.4 million per annum. Defence advised the ANAO that these estimated savings were ‘based on the tender submission from [the preferred tenderer] and the current price sourced through [Military Integrated Logistics Information System] for the same pack menus’.⁹⁸ Defence could not provide the ANAO with the supporting analysis which underpinned these savings.

4.60 Defence did not only consider the price in its value for money assessment, but also considered the risks and quality of the solutions offered by the tenderers.

Contract Negotiations and Government Furnished Material

4.61 Defence commenced negotiations with the preferred tenderer in December 2017.

4.62 Defence’s negotiation strategy identified several issues to be resolved during negotiations. This included negotiating a reduction in the tendered distribution costs. Advice to the delegate noted that ‘the reassessment of the transportation component will produce possible savings of approximately $200 [000] per annum.’⁹⁹

4.63 Defence also negotiated for quarterly meetings to discuss opportunities for innovation and increased Australian industry content, and for the preferred tenderer to hold a minimum number of samples for quality control purposes.

4.64 The delegate approved the provision of the contract to the preferred tenderer in January 2018. Defence signed a contract with the preferred tenderer on 29 January 2018. As the extant contract had expired in October 2017, ‘to ensure continuity of supply purchase orders were raised before contract expiration’.

Government Furnished Material

4.65 As noted in the Endorsement to Proceed, Defence intended to incorporate in the new contract those items which were previously Government Furnished Material. Defence advised this to potential suppliers in an addendum to the Request for Tender (released on AusTender in November 2017), as well as in responses to individual potential supplier’s questions.

4.66 The resultant contract noted that the Commonwealth would continue to provide Government Furnished Material as part of the contract and ‘will advise in advance the cessation of Commonwealth Supply’. The Government Furnished Material included:

• freeze-dried meals (estimated quantity 40 000 items);
• emergency flying tins (estimated quantity 3000 items); and
• water purification tablets (estimated quantity 3000 items).¹⁰⁰

4.67 Defence advised the ANAO in March 2018 that the supply of emergency flying tins and water purification tablets as Government Furnished Material was temporary and would transition to the prime vendor following the drawdown of existing stock held by Defence. Freeze-dried meals, however, will continue to be supplied as Government Furnished Material. Defence advised this was because the Defence freeze-dried meals manufactured by the Defence Science and Technology Group are of a higher standard than industry freeze-dried meals.

4.68 The decision to retain freeze-dried meals as Government Furnished Material is not recorded in key tender evaluation documents or in advice to the delegate. The tender was conducted on the basis that industry would furnish certain items previously supplied by government. This may have limited the market. Had the market been informed that government would continue to supply certain items, additional tenders may have been received.

4.69 Government Furnished Material in the form of freeze-dried meal components is included in one of the five types of ration packs procured by Defence.¹⁰¹ The new contract sets out the price for each type of combat ration pack, by menu option, and the price of the individual components which make up each type of combat ration pack. ANAO analysis indicates that approximately 45 per cent of the contracted price for the ration pack containing Government Furnished Material is for the freeze-dried components.¹⁰² Based on the estimated quantities of this type of ration pack to be procured, as identified in the contract, estimated expenditure for the Government Furnished Material under the contract equates to approximately $850 000 per year or $4.26 million¹⁰³ over the initial five year contract term.

4.70 The contract does not explicitly make provision for the cost of rations packs containing Government Furnished Material to be reduced by an amount equivalent to the cost of the Government Furnished Material.¹⁰⁴ In the absence of such a contract provision or other Defence documentation specifically addressing this issue (such as a Defence contract management plan), the ANAO asked Defence how it would manage the risk that the Commonwealth may pay twice for Government Furnished Material if it continues to be manufactured and supplied (to the contractor, Prepack) by the Defence Science and Technology Group.

4.71 Defence advised the ANAO in May 2018 that it is ‘unable to identify any specific clause in the contract that specifies that Defence will only pay for those components we order’. Defence further advised that:

There is no risk that the Commonwealth will pay twice. Government Furnished Material is provided to PrePack (against the provisions detailed in the Statement of Work) in order to assemble complete Ration Packs as ordered. Any payment will only be for those components procured from PrePack. The Purchase Order will not include any purchase line for Government Furnished Material. The payment will only be made when proof of goods received is provided and the Invoice matches the Purchase Order and Goods Received.

The concept of a contract is that the payment is only made for those goods ordered via a Purchase Order for the price specified in the contract. There is no obligation to order all or any components specified in a contract. The Statement of Work makes provision for variations to menu build components including such clauses as “Defence define the requirements of each CRP [Combat Ration Pack] variant and require the flexibility to change the composition of the CRP as operational demands change. For the purposes of this section Products includes any whole CRP (e.g. one man CRP, etc.), each CRP menu variant (e.g. one man CRP menu A or B etc.), and each menu build component within each CRP menu variant.”

4.72 Defence also advised that to date it has not ordered any of the relevant combat ration packs under the new contract.

Are Defence’s contract deliverables provided to the required standard, within the agreed budget and timeframes?

Management of the budget

4.73 As noted earlier, the new support contract involves an estimated average annual expenditure of around $26 million per annum. As there are no fixed fees included in the contract, all of this estimated expenditure is classified by Defence as having certainty in terms of scope and cost.

4.74 Health SPO, in consultation with the capability manager, forecasts annually the quantity of combat rations and ancillary items to be procured.¹⁰⁵ Where requirements are greater than those approved, Health SPO is required to seek additional financial resources from the capability manager. Variations to the combat ration quantities procured need to be negotiated with the prime vendor.

Contract management

4.75 Health SPO is responsible for the management of the contract and ensuring that the resultant prime vendor meets the contractual obligations, including ensuring that contract deliverables are provided to the required standard, within the agreed budget and timeframes.

4.76 Defence’s Request for Tender documentation¹⁰⁶ sets out: the scope, standards and requirements of the work to be carried out under the contract; management plans; and performance arrangements. The documentation also allocated responsibilities between Defence and the resultant prime vendor.

Contract deliverables

4.77 The resultant contract sets out the specified requirements and standards of the products to be delivered. In developing the contract, Health SPO consulted with the capability manager to ensure the specified requirements and standards were consistent with Defence policy. The delivery timeframes were also articulated.

4.78 The contract also outlines the process for the managing instances of non-delivery under the contract relating to: the specified requirements and standards; the specified timeframes; and/or to the appropriate delivery points. The management process can include, for example: Defence withholding payment for individual deliveries; the prime vendor providing replacement products; correcting rejected products; and/or repossessing the rejected products.

4.79 As outlined in the contract, every six months Defence and the resultant prime vendor will meet to review the combat ration packs menu items and composition, including incorporating new or replacement items, and/or changes to Defence’s combat ration requirements and standards.

Management plans

4.80 As outlined in the Request for Tender documentation, the resultant prime vendor would be required to develop a management plan, known as the Support Services Management Plan, which would be used to specify how a range of deliverables and requirements under the contract would be delivered. This would be the primary plan for the contract and would include information on, for example, the resultant prime vendor’s: risk management processes; quality management; and health, safety and environmental management.

4.81 To assist in the management of contract deliverables during the contract term, the prime vendor is also required under the contract to develop and deliver several plans and reports to Defence. For example, contract status reports and the Australian Industry Capability Plan.

Performance-based contracting

4.82 Performance-based contracts are structured to motivate the supplier to achieve the required outcomes. Performance-based contracting has been underway in Defence sustainment for over a decade, with Defence defining performance-based contracting as ‘an outcomes-oriented contracting method that ties a range of monetary and non-monetary consequences to the contractor based on their accomplishment of performance requirements’.¹⁰⁷ Defence contracts can use both key performance measures and key performance indicators to assist with performance based contracting.

4.83 As outlined in Defence internal guidance, strategic performance measures are annually assessed performance measures typically used to reflect long term behaviours against key result areas (for example: reliability and quality; safety; cost; supportability; and behaviours).

4.84 As outlined in guidance from the Capability Acquisition and Sustainment Group’s Performance Based Contracting Centre of Excellence, key performance indicators are a critical element in performance management as they:

• communicate the requirements (that is, sets performance expectations); and
• communicate the performance to be delivered (that is, feedback on actual performance).

4.85 Key performance indicators are commonly linked to performance payments as they are able to be objectively measured.¹⁰⁸

4.86 The combat rations contract specifies requirements and standards of the products to be delivered (see paragraph 4.77) and outlines the process for the management of products which the contractor has failed to meet (see paragraph 4.78). Three strategic performance measures are included in the contract (see Appendix 5), two of which will be self-assessed by the prime vendor.

4.87 The strategic performance measures included in the combat rations contract are not linked to performance payments. There is no explicit section in the contract regarding performance management. Additionally, there are no key performance indicators.

4.88 Defence’s internal guidance lists performance based contracting sections as ‘optional modules’ of ‘short’ contracts—as used for the both combat rations and heath materiel contracts. The choice not to include the performance based contracting module in the combat rations contract differs from the inclusion of this module in the health materiel contract of similar value.

Appendix 1 Entity response

 

 

 

 

Appendix 2 Defence’s procedures and policies for accounting and management for health materiel

Accounting for health materiel

1. Health materiel management occurs within a regulatory environment with control, authorisation and accountability requirements. The Defence Health Manual outlines how pharmaceuticals are to be managed and accounted for in Defence.

2. Pharmaceuticals are accounted for on Defence’s inventory management systems, in accordance with the Electronic Supply Chain Manual. Garrison pharmacy staff and authorised deployed elements can use the Military Integrated Logistics Information System (MILIS) and/or the Pharmacy Integrated Logistics System (PILS) (see Chapter 2) which includes recording the order, receipt and dispensing of health materiel.

3. A stock controller¹⁰⁹ or stock guardian¹¹⁰ of therapeutic substances is responsible for all therapeutic substances held in a garrison, deployable or deployed health facility.

4. Defence has established entitlements and approved stocking levels for health facilities. These, combined with consumption and usage, determine health materiel orders. There are procedures in place for the receipt of pharmaceuticals, including for restricted Schedule 8 substances.¹¹¹ An Authorised Officer—typically a medical officer or pharmacist—is required to accept custody of pharmaceuticals (in accordance with relevant State and Territory regulatory requirements) and record in the appropriate registers. The Authorised Officer must sign a Confirmation of Receipt of Controlled Substances and mail the original of the form to the supplier. The supplier holds the receipt forms for auditing. Defence also has facility requirements for the pharmacies, dedicated deployable health storage areas, and health facilities that hold pharmaceuticals. This includes, for example, access control, emergency protocols, supervisory and storage requirements.

5. Pharmaceuticals are to be dispensed to an individual Defence member, whether the substance is an over-the-counter or prescription medicine, in accordance with policy. PILS contains an electronic history of medicines dispensed to each Defence member. Defence policy requires stock controllers and stock guardians to record and retain physical copies of all transactions, with specific procedures in place for specific pharmaceuticals.¹¹²

6. There are a number of stocktake and assurance activities both stock controllers and stock guardians must undertake for scheduled substances. This varies depending on the facility and substance, and can include, for example:

• reporting of lost or stolen substances in accordance with Defence procedures;
• quarterly stocktake of all Schedule 8 drugs, reporting and investigating any discrepancies in accordance with Defence instructions;
• independent check of Schedule 8 drugs at least once every 12 months by a senior medical officer;
• stock controller change over checks;
• monthly stock balance check on Schedule 4 and 8 substances held on emergency trolleys and in kits;
• daily checks of substances held in wards and treatment rooms, with any discrepancies reported to the local therapeutics committee;
• change of shift checks for stock guardians for all Schedule 4 and Schedule 8 substances, recording the check according to relevant procedures, and confirm security seals on specific medial kits, reporting any issues in accordance with Defence procedures;
• pre- and post-deployment checks by stock guardians of first aid and emergency kits containing Schedule 8 substances.

7. Defence also has in place controls around the process of disposal for pharmaceuticals. These include: using clinical waste bins; ensuring disposals are recorded on the electronic register in accordance with the Electronic Supply Chain Manual; and that paper records are completed and retained. Additionally, controlled drugs must be destroyed by pharmacists in the presence of an authorised officer¹¹³ or a Member of the Service Police.

Fraud and compliance

8. Joint Health Command had implemented a ‘Governance Audit System’. Auditing and monitoring occurred at three levels: at the health facility level through the internal audit schedule; at the Joint Health Unit level; and at the Joint Health Unit strategic level through Clinical Governance Joint Health Command. Defence informed the ANAO in February 2018 that the internal audit system has been revised and will lead to a cycle of audits with the results consolidated and reported to the Garrison Health Clinical Governance Board.

9. Defence informed the ANAO in February 2018 that in addition to the auditing program, there is also regular ad hoc engagement between Health SPO and Joint Health Command to discuss issues relating to the management and accounting for pharmaceuticals.

Appendix 3 Defence’s procedures and policies for accounting and management for combat rations

Accounting for combat rations

1. Combat rations are accounted for on Defence’s inventory management systems, in accordance with the Department’s Electronic Supply Chain Manual. The Military Integrated Logistics Information System (MILIS) (see Chapter 2) is the logistics information system used for the demand and utilisation of the combat rations and ancillaries. The use of MILIS is subject to internal audit functions.

2. Defence establishes the planned usage for each quarter by unit and location. Combat rations are to be ordered for authorised activities based on this planned usage. Any orders for unauthorised activities or above the requested allocation require additional approvals by Army Headquarters and Command.

3. Defence has additional policies in place for the use of contingency stocks. These include specific authorisations for ordering and holding contingency stocks. Contingency stock is to be held by the supporting Joint Logistics Unit where possible and is subject to regular quality control inspections and rotated with new rations every six months.

4. There are procedures in place for the receipt of combat rations, including signing and approval of a supplies acceptance certificate.¹¹⁴ This certificate is provided to the Fleet Manager within Health SPO.

5. Once received into service, combat rations are managed individually by batch number and date. The shelf life for combat rations is around two years, with some variation depending on whether the stock is stored in temperate or tropical climates. Defence has policies and procedures in place for the storage of combat rations and a stock rotation policy. These are supported by periodic inspections of combat rations, namely:

• Non-technical inspections—surveillance inspections each fortnight in tropical climates or each month in temperate climates, of aspects such as cleanliness of the storage facility, infestation, correct stacking and marking of cartons, accounting documents and compliance with Standard Operating Procedures. These are conducted by Regional Fleet Managers and senior store persons. Results are kept as unit records.
• Technical Inspections—undertaken by Food Technologists and Inspectors Foodstuffs.¹¹⁵

6. Defence has policies in place for what type and number of combat rations can be issued. Once the combat rations have been issued to the individual Australian Defence Force personnel it is their responsibility to manage in accordance with relevant policies and instructions.

7. Defence has policies and procedures in place for: the recall of contaminated foodstuffs; return procedures (including from overseas); and for the disposal of combat rations, including when they are condemned by an Inspector Foodstuff or required to be disposed of overseas. Defence’s disposal policy is outlined in Defence Logistics Manual Part 2, Volume 5, Chapter 10.

Fraud and compliance

8. Army, the capability manager, has a compliance and assurance section which undertakes compliance activities in units on, for example: safety, finance, security, supply chain and technical integrity and maintenance. Some of these compliance activities include a review of those management and accounting activities outlined in Box 3. For instance, the supply chain compliance and assurance activity examines the unit’s application of the Electronic Supply Chain Manual (for example, the disposal register, completed stocktakes, discrepancy reports, and completed MILIS purchase orders). The most recent business process test conducted within Health SPO was in October 2017 (see paragraphs 20 to 22).

9. Capability Acquisition and Sustainment Group also has an annual assurance program in place, which includes: the provision of advice and data analysis to Senior Management and stakeholders; identification of systemic issues to drive continuous improvement; alignment of activities between Centre of Excellence and Functional Leads; and to ensure assurance activities and resources are optimised to provide efficiencies across the Capability Acquisition and Sustainment Group program.

10. This assurance program is supported by the Assurance Management Information System which is used to track and monitor audit and assurance activities and associated remedial actions. Defence informed the ANAO in February 2018 that the Assurance Management Information System was initially provided to quality management systems practitioners across Capability Acquisition and Sustainment Group in December 2017. Training is scheduled to occur in 2018. The Assurance Management Information System will be provided to other areas in Capability Acquisition and Sustainment Group.

Business Process Testing and Monitoring

11. Business Process Testing is an internal audit function, undertaken by Defence Logistics Compliance and Assurance Network Teams¹¹⁶, which reviews financial and logistics controls for business units that use MILIS. It is one of several controls Defence uses to ascertain ‘compliance and assurance with Defence supply chain policies and procedures’. At the minimum, testing is conducted on business units once every three years for units that operate one or more MILIS warehouses. Prior to 2017–18, a Business Process Test was conducted on Health SPO in 2014–15.

12. The results of the Business Process Test conducted on Health SPO in August 2017 scored the Health Systems Program Office with a level of compliance of 33 per cent. While the reviewer noted that the low score was partly due to a smaller number of controls assessed, it also indicated ‘poor adherence to process’, as a result of unfamiliarity with the supply chain process and issues with records management.

13. Health SPO also undertakes its own Business Process Monitoring to gain visibility over transactions that exceed the normal business process timeframes. Transactions are monitored against key performance indicators and reported monthly at the branch level using a traffic light dashboard report which indicates how transactions fare in complying with policy and agreed time frame.

Compliance and assurance meetings

14. Health SPO participates in compliance and assurance meetings relating to inventory assurance, in particular: supply chain Business Process Testing; Stocktaking and Security Assurance Stocktakes; Business Process Monitoring dashboard key performance indicators; price assurance; lessons learnt; and feedback relating to issues experienced by relevant Systems Program Offices or directorate. Meetings are held monthly and are attended by Materiel Compliance and Assurance, Land Engineering Agency, other Systems Program Office Directors (or a representative) from within Integrated Solider Systems Branch, and Land 121. These are coordinated through the Land Materiel Sustainment Directorate in Land Systems Division Headquarters.

Appendix 4 Defence’s definition of pharmaceuticals, medical and dental consumables, and medical and dental equipment for the purposes of the contract

1. Table A.1 provides Defence’s definition of pharmaceuticals, medical and dental consumables, and medical and dental equipment for the purposes of the contract.

Table A.1: Defence’s definition of pharmaceuticals, medical and dental consumables, and medical and dental equipment for the purposes of the contract

Source: Defence documentation.

Appendix 5 Strategic Performance measures included in the new combat rations contract.

1. Table A.2 outlines the Strategic Performance measures included in the new combat rations contract.

Table A.2: Strategic Performance measures included in the new combat rations contract

Source: Defence documentation.