Summary

Australia's food industry makes a substantial contribution to the national economy. In 2004–05, the gross value of farm and fisheries food production was $31.4 billion, with exports of $24 billion. As well, 194 000 people were employed directly in food and beverage manufacturing. This represents 18 per cent of Australia's manufacturing workforce.¹

A report for the Prime Minister's Supermarket to Asia (STA) Council² in November 2000 identified globalisation of food processing and retailing as the key force exerting pressure on the industry. It considered that the emergence of global retail chains would result in major changes to the structure and operation of the food industry.³

The Australian Government decided on a food industry action agenda4, as the vehicle for establishing a National Food Industry Strategy (the Strategy) to succeed the STA Strategy. The purpose of the action agenda process was to engage stakeholders in the development of the Strategy, with industry identifying the actions and tasks that needed to be taken to realise its full potential.

The Strategy envisaged that, by 2007, the Australian food industry would be a significant global player with a sustainable and profitable role in the global food product system. It was to commence on 1 July 2002 and included:

• the establishment of a high-level industry council to oversight the development of the industry and the implementation of the Strategy;
• a product and service innovation strategy, which would build on Research and Development (R&D) activities and infrastructure, and establish a Food Innovation Grants (FIG) programme;
• a food trade initiative to develop and implement an international food market entry strategy with a focus on market access, trade development and promotion; and
• a strategy to build more competitive supply chains and improve national food safety and quality systems.

The Strategy is intended to provide the framework for developing and implementing a partnership between the food industry and the Government. It is to deliver their shared vision of increased output, profitability, investment, innovation, export sales and employment in the Australian food industry. The Government budgeted $114.4 million⁵ to deliver the Strategy over a five year period (1 July 2002 to 30 June 2007). Funds are channelled through the Department of Agriculture, Fisheries and Forestry (DAFF), for industry-led programmes, delivered by National Food Industry Strategy Limited (NFIS Ltd).⁶ The partnership for delivering the Strategy was formalised in a contract between NFIS Ltd and DAFF (the Contract) in October 2002. The Contract was designed to manage the risks associated with the outsourcing arrangements and to achieving the Strategy's outcomes. NFIS Ltd received $88.5 million to provide Secretariat services to the National Food Industry Council and to deliver the following four key programmes⁷:

• Food Innovation Grants: match dollar for dollar funding for Australian-based food processing firms to undertake R&D projects;
• Food Centres of Excellence: provide grants to Australian food R&D centres to attract and develop world-class capability;
• Food Market Development: undertake collaborative market development projects, between the food industry, State food agencies and the Australian Government, to facilitate an integrated food market strategy; and
• Food Chain: provide funding for food industry demonstration projects, which assist to disseminate chain knowledge and experience to the wider industry, and to support activities aimed at building and strengthening chain management capabilities in the Australian food industry.

These programmes are overseen by a number of advisory committees.⁸ As at 1 September 2006, the Strategy has provided funding for: 72 FIG projects; two food centres of excellence; eight food market development projects; and 13 major food chain projects.

Audit objective and scope

The objective of this audit was to assess DAFF's management of the contractual arrangements in place to deliver the National Food Industry Strategy. The audit assessed:

• implementation of the Strategy;
• financial management;
• assessment and selection of grants and projects;
• management of grants and projects;
• monitoring and verification of contract services; and
• performance management.

The Australian National Audit Office (ANAO) examined a number of FIG applications and projects, one food centre of excellence and a major project under the Food Market Development programme. The audit did not examine the Food Chain programme or DAFF's administration of the Strategy's government-to-government activities.

Overall conclusion

The ANAO considers that, overall, DAFF's management of the contractual arrangements in place to deliver the National Food Industry Strategy was effective. DAFF has developed and implemented sound financial management arrangements for managing the funds provided to NFIS Ltd under the Contract. The processes for assessing, selecting and managing grants and projects for the Food Innovation Grants and Food Centres of Excellence programmes were also effective.

However, the core principles used to assess projects under the Food Market Development programme did not meet Contract requirements. As a consequence, key aspects of the projects that DAFF considered necessary to achieve the Strategy's outcomes may not have been assessed. The projects selected under this programme were reasonably well managed by NFIS Ltd.

There were a number of areas where the ANAO considers that DAFF's management could have been strengthened and where improvements could be made should the Strategy continue beyond June 2007 or for any future programme. These include:

• improving programme planning processes, including assessing the risks involved;
• putting in place adequate processes, including guidelines, to assist staff in managing contracts;
• documenting all variations to the contract by either a contract amendment or letter of agreement between the parties involved; and
• developing an information plan for collecting and analysing the performance information needed to assess the success of the Strategy.

Key findings

Implementing the Strategy (Chapter 2)

DAFF did not develop a plan for implementing the National Food Industry Strategy (the Strategy) that set out tasks, resources, timeframes, milestones, risks and responsibilities. This would have enabled DAFF to prioritise its tasks to achieve the implementation date of 1 July 2002. NFIS Ltd was not operational until 2 September 2002 and the Contract was formalised on 24 October 2002.

In addition, DAFF did not prepare a risk management plan for implementing the Strategy or for managing the Contract as required by its own guidelines. However, DAFF identified a number of high-level risks associated with the outsourced delivery of the Strategy, which were addressed through provisions in the Contract. While DAFF's early planning for the Contract included a provision for risk management by NFIS Ltd, the signed Contract did not include such a requirement. Accordingly, NFIS Ltd was under no contractual obligation to underpin its operations with a structured risk management framework. Risk management was also not addressed in later variations to the Contract.

Financial management (Chapter 3)

The ANAO found that DAFF established adequate controls over appropriations to fund the Strategy. The Contract contains provisions to facilitate sound financial management and these, with some minor exceptions, have been complied with.

Assessing and selecting grants and projects (Chapter 4)

Under the Contract, NFIS Ltd is responsible for managing the assessment and selection of grants and projects to be undertaken as part of the Strategy.

Selection criteria

The Contract defines the minimum requirements to be addressed when developing selection criteria for each programme. The ANAO found that the criteria developed for the FIG and Food Centres of Excellence programmes satisfied these requirements, including Ministerial approval of the guidelines. For the Food Market Development programme, NFIS Ltd developed core principles for selecting projects. However, these principles did not fully address the selection criteria outlined in the Contract. While there is a requirement for NFIS Ltd to develop selection criteria, there is no requirement these be approved by the Minister or DAFF.

Managing conflict of interest

A major risk identified by DAFF was the potential for conflict of interest, and provisions were built into the Contract to reflect this.⁹ NFIS Ltd developed processes to manage conflict of interest within the Food Innovation Committee, which oversees the FIG and Food Centres of Excellence programmes. Conflict of interest measures were followed when assessing and selecting applications for the two FIG funding rounds examined by the ANAO. However, these measures were not fully applied when assessing and selecting the two food centres of excellence. It was also difficult to determine from the available documentation how potential conflict of interest was addressed when the grant assessment group made its recommendations. The minutes of this meeting could not be provided by NFIS Ltd.

The Contract and the Food Trade Advisory Committee Charter specify the requirements for addressing potential conflict of interest for the Food Market Development programme. However, the ANAO found that the Committee did not implement these requirements. The Committee was replaced by the Market Development Advisory Committee in late 2005. DAFF advised that this new Committee has introduced confidentiality and conflict of interest procedures similar to those used by the Food Innovation Committee.

Assessing and selecting applications

The ANAO found that FIG selection processes operate transparently and equitably, and the appraisal process was consistent with FIG programme requirements. FIG applicants (both successful and unsuccessful) also expressed overall satisfaction with FIG selection processes in interviews with the ANAO.

The one-off process for selecting the two food centres of excellence followed the procedures outlined in the programme guidelines. The grant assessment group's recommendations were considered by the Food Innovation Committee and approved by the NFIS Ltd Board, as required. However, as previously noted, the minutes of the grant assessment group meeting could not be provided by NFIS Ltd.

The project examined by the ANAO under the Food Market Development programme was assessed against the core principles developed by NFIS Ltd (and approved by the National Food Industry Council). However, as these principles did not fully address contract requirements, the assessment process may not have included consideration of key aspects of the project that DAFF considered necessary for ensuring that the Strategy's outcomes were achieved.

DAFF and NFIS Ltd advised that, when selecting projects under the programme, consideration was given to the criteria outlined in the Contract. However, this assessment was not undertaken in a structured manner or formally documented.

Managing grants and projects (Chapter 5)

FIG programme

The ANAO found that NFIS Ltd had managed the FIG programme in accordance with the Contract. All projects reviewed by the ANAO had a deed of grant in place, variations were properly approved and project reports were provided. There is detailed reporting to the Food Innovation Committee, which includes details of completed projects and those that have undergone variations. Given the long FIG lead¬times, there has been limited opportunity to date for the Committee to consider the impact of completed projects.

Food Centres of Excellence programme

NFIS Ltd did not use the standard deed of grant for its agreement with the two food centres of excellence as required in the Contract. NFIS Ltd advised that this was because of complexities in programme arrangements.¹⁰ For the food centre of excellence examined by the ANAO, the lead partner also entered into a joint venture agreement with its consortium partners. There was an inconsistency between these two arrangements. The NFIS Ltd contract with the lead partner made provision for NFIS Ltd to be represented on the Industry Board. The joint venture agreement did not include this provision. As a result, stakeholders found the governance arrangements for the Centre for the first two years confusing. A change in governance structure in mid-2005, to include NFIS Ltd on the Centre's Management Committee and clarifying the role of the Industry Board, has largely resolved these governance issues.

Although the contract between NFIS Ltd and the lead partner does not clearly define reporting mechanisms, the ANAO found that, in practice, there is detailed reporting to the Food Innovation Committee and monitoring of the food centre of excellence by NFIS Ltd.

Food Market Development programme

Projects under the Food Market Development programme involve external partners, including State Governments, the private sector and a partner in the target country. For the project examined by the ANAO, the South Australian Government was responsible for project management, with NFIS Ltd providing oversight. Memorandums of Understanding (MOUs) were used to define the relationship between partners. Contract requirements for reporting and monitoring Food Market Development projects were met, although more explicit reporting by NFIS Ltd against milestones in the project plan would have allowed the Food Trade Advisory Committee greater oversight of the project.

Monitoring and verification (Chapter 6)

The Contract specifies the services to be provided by NFIS Ltd and outlines quality requirements. It also contains a range of provisions that are designed to facilitate DAFF oversight of NFIS Ltd's performance of its obligations under the Contract. On two occasions the Contract was varied but these variations were not formalised by DAFF in a letter of agreement or contract amendment. In addition, at the time of the audit, DAFF had not published guidelines to assist its staff in managing the NFIS Ltd Contract.

NFIS Ltd is to provide services in accordance with the standards set out in the DAFF Client Service Charter. Although NFIS Ltd implemented a Client Service Charter, which is consistent with the DAFF Charter, NFIS Ltd does not report to DAFF on its client services.

The Contract requires NFIS Ltd to develop an annual business plan and budget, for Ministerial approval. These plans were approved by the Minister for Agriculture, Fisheries and Forestry, on advice from DAFF. NFIS Ltd is also required to report quarterly to DAFF on progress against activities in the approved plan. The quarterly reports are provided in a timely manner and, overall, met Contract requirements. DAFF reviews all quarterly reports and provides a written response to NFIS Ltd.

Measuring performance (Chapter 7)

NFIS Ltd reports annually to DAFF against the Key Performance Indicators (KPIs) outlined in the Contract for each programme. The KPIs do not include specific targets and some are difficult to measure. For example, given its long lead-times and the fact that the final applications are only now being considered, the FIG programme's contribution will only be fully evident after June 2007. The Contract has no KPIs to assess NFIS Ltd's performance. If the Strategy continues, reporting would be strengthened if DAFF and NFIS Ltd developed an information plan that identifies, for each performance indicator, the information to be collected and the methods that will be used to collect it.

DAFF response

The Department of Agriculture, Fisheries and Forestry welcomes the ANAO's conclusions that overall, the Department's management of the contractual arrangements in place to deliver the NFIS was effective and that it had developed and implemented sound financial management arrangements for managing the NFIS funds. The recommendations put forward by the ANAO are constructive and the Department agrees to all three recommendations.

Footnotes

1 Department of Agriculture, Fisheries and Forestry, 2005, Australian Food Statistics 2005, Commonwealth of Australia, Canberra, pp. 1-3.

2 The STA Council included senior representatives of Government and industry and was established as part of the STA Strategy to meet the challenges of growing Australia's food sales to Asia.

3 Department of Agriculture, Fisheries and Forestry, 2002, National Food Industry Strategy: An Action Agenda for the Australian Food Industry, Commonwealth of Australia, Canberra, pp. 5, 34.

4 Action agendas comprise a key part of the Australian Government's industry strategy. Their primary purpose is to foster industry leadership. The Department of Industry, Tourism and Resources coordinates the whole-of-government action agenda process.

5 Originally, $102.4 million was provided to deliver the Strategy. However, this was increased in late 2005 by an additional $12 million for the FIG programme.

6 STA Ltd, which had been responsible for implementing the STA strategy, was renamed NFIS Ltd in September 2002 and its constitution amended.

7 NFIS Ltd also provided seed funding for a fifth programme, the Food Graduate Management Development programme, to support the establishment of a national food industry management development course.

8 The Food Innovation Committee oversees the FIG and Food Centres of Excellence programmes. The Food Market Development and Food Chain programmes were overseen by the Food Trade Advisory Committee and the Food Chain Advisory Committee respectively. In late 2005, these Committees were amalgamated to become the Market Development Advisory Committee.

9 The risk arose from the fact that an industry-based council would advise on the delivery of funds by an industry-owned Secretariat to members of the (same) food industry.

10 DAFF advised the contract with the food centres of excellence was developed by the Australian Government Solicitor and approved by the Food Innovation Committee.