This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide.
In its September 2016 report entitled Offshore Processing Centres in Nauru and Papua New Guinea: Procurement of Garrison Support and Welfare Services, Australia’s Auditor-General’s Office (ANAO) found that the government engaged in inappropriate out-of-scope negotiations in the award of an offshore processing centre services contract. The audit also found a series of other irregularities that undermined the probity of the procurement process and attributed these failings to a lack of proper procurement training and capacity across all levels of the relevant department.
The Australian National Audit Office (ANAO) found that the government failed to obtain value-for-money and follow required tendering procedures, failures that ultimately led to the cancellation of the contracts:
The Department of Immigration and Border Protection’s (DIBP) management of procurement activity for garrison support and welfare services at the offshore processing centres in Nauru and Papua New Guinea (Manus Island) has fallen well short of effective procurement practice. This audit has identified serious and persistent deficiencies in the three phases of procurement activity undertaken since 2012 to: establish the centres; consolidate contracts; and achieve savings through an open tender process.
Of most concern is the department’s management of processes for contract consolidation and the open tender. The Australian Government intended that these procurement processes would rein in the growing expense associated with managing the centres. In both cases, the approach adopted by the department did not facilitate such an outcome. The department used approaches which reduced competitive pressure and significantly increased the price of the services without Government authority to do so. The open tender process was cancelled by the department on 29 July 2016 and consequently had no outcome.
The ANAO noted that these flaws could be attributed to the widespread lack of appropriate skills and training of government procurement staff, who failed to properly execute the project:
The conduct and outcomes of the tender processes reviewed highlight procurement skill and capability gaps amongst departmental personnel at all levels. Procurement is core business for Commonwealth entities and the deficiencies have resulted in higher than necessary expense for taxpayers and significant reputational risks for the Australian Government and DIBP. The audit’s two recommendations are intended to address:
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the significant skill and capability gaps identified amongst personnel at all levels in the department, including within the central procurement and budget units; and
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persistent shortcomings in the planning and conduct of the procurements, including in relation to record keeping, consistency and fairness in the treatment of suppliers, and the assessment of value for money.
As the ANAO observed, this lack of appropriate training resulted in a flawed negotiation process that compromised the integrity of the procurement process, which ultimately resulted in the cancellation of the Request for Proposals (RFP) process and triggered the need for an ad hoc extension of the existing contracts as a stop-gap measure:
A steering committee and independent probity adviser were key oversight mechanisms for the open tender process. Both were consulted after the negotiation team had reached agreement on a final negotiated outcome with Transfield and prior to the anticipated contract signing. The probity adviser identified that the department’s negotiation report appeared to include substantial modifications to the statement of requirement from that released to the market and that Transfield appeared to have been permitted to make material changes to its original tender, including significant overall price increases. The probity adviser considered that these developments raised significant probity and process risks, including the risk that the department was not in a position to determine whether the changes continued to represent best overall value for money compared with other tenderers.
After considering this advice the steering committee decided it was unable to determine whether the final negotiated outcome with Transfield demonstrated best value for money. The effective operation of these oversight mechanisms contributed to the department initiating an amended tender process. The Minister was advised of the amended tender process prior to it commencing, and that approvals for funding would need to be reassessed. The amended process only involved the preferred and reserve tenderers and was in effect a limited tender process. On 29 July 2016, in the course of this audit, the department cancelled the initial and amended request for tender. DIBP extended its contract with Transfield until 31 October 2017 and the department advised the ANAO on 29 August 2016 that it was conducting market testing to determine its next steps.
The ANAO also raised concerns over the government’s decision not to proceed with concurrent negotiations and the government’s failure to document the reasons behind that decision. The report also detailed how the government’s improper scope change compromised the process after negotiations were initiated with the single selected proponent:
It was open to the department to enter into negotiations with both the preferred and reserve tenderers. The department decided to only enter into negotiations with the preferred tenderer. There is no available record of the basis for this decision. In recommending to the delegate that the department proceed to negotiations, the Evaluation Committee noted that: a number of unquantifiable pricing issues required clarification; and changes to the department’s requirement (since the RFT was issued) would require agreement during negotiations with the preferred Tenderer. Available documentation indicates that the changed requirements were not communicated to other tenderers and the department did not seek clarification or repricing from any other tenderers. In contrast, paragraph 10.12 of the 2014 CPRs requires that:
When, during the course of a procurement, a relevant entity modifies the evaluation criteria or specifications set out in an approach to market or in request documentation, or amends or reissues an approach to market or request documentation, it must transmit all modifications or amended or reissued documents:
a. to all the potential suppliers that are participating at the time the information is amended, if known, and, in all other cases, in the same manner as the original information; and
b. in adequate time to allow potential suppliers to modify and re-lodge their submissions, if required.
The ANAO also found that, in addition to resulting in procedural irregularities arising from out-of-scope post-bid changes, the contract award negotiations also failed to adequately address value-for-money concerns in the proposed pricing structures:
While the department based the negotiated contract price on a high capacity scenario, there was a steady drop off in new asylum seeker arrivals from a high of 1 647 in August 2013 to zero in March 2014. On this basis it was increasingly unlikely that the high capacity levels would eventuate. The resulting contract was volume driven, with significant economies of scale expected at high capacity levels. This contract exposed the Commonwealth to the risk of locking-in a high price for services delivered at lower capacity levels.
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The centres in Nauru and on Manus Island had never reached their full combined capacity of 5600 persons, and there were few new arrivals after December 2013. While the department based costings on a high capacity scenario, there was a steady drop off in new boat arrivals during the contract negotiation period. On this basis it became increasingly unlikely that the high capacity levels would be achieved. The department did not consider the price impact of a volume driven contract with significant built-in economies of scale. Advice to the departmental delegate did not consider whether constructing a price based on these capacity levels, to achieve economies of scale, might lock the Commonwealth into paying a premium for services delivered at lower capacity levels.
The report found that these issues were exacerbated by the government’s failure to maintain proper records regarding the approval process for the contract awards:
The department determined to only enter into negotiations with the preferred tenderer (Transfield). During the course of negotiations the department amended its requirements and accepted enhancements and adjustments to services which flowed through to a $1.1 billion increase in Transfield’s overall price. The department did not seek clarification or repricing from any other tenderers and instead set out to determine value for money by comparing the negotiated price with a benchmark. The benchmark was the cost of services provided in Nauru and on Manus Island, which had been procured via a non-competitive limited tender process in 2013–14. The approach adopted was not consistent with an open tender which requires that eligible tender bids are compared on a like for like basis.
The delegate had determined to finalise the procurement process and sign the contract. There are no available records to demonstrate that the delegate: considered if sufficient funds were available to enter into the commitment; considered if additional policy authority was required to accommodate the service enhancements negotiated; or questioned the increased cost of the bid.
Furthermore, the ANAO found that the government evaluators failed to perform appropriate due diligence checks of the proponent prior to proceeding with the flawed contract award negotiations:
No evidence was found of the department having conducted due diligence checks in relation to the engagement of Transfield or Save the Children. The ANAO found that had due diligence checks been undertaken at the time of consolidation (January 2014), the department would have identified that Transfield’s subcontractor (Wilson Parking Australia, trading as Wilson Security) had a Director who had been charged with bribery in Hong Kong in 2012 and that these charges were pending. The person was acquitted of all charges in December 2014. Had DIBP performed due diligence checks it may not have changed the outcome of the procurement, however DIBP would have made an informed decision and would be better positioned to mitigate any associated risk.
As this audit report illustrates, a lack of procurement capacity within a public institution can result in the improper execution of an RFP process and require the cancellation of any resulting contract award. These failures can result in significant delays in achieving the government’s operational objectives. Institutions that are serious about successful project execution should ensure that they prioritize capacity building within their procurement operations. In fact, in its May 2020 follow-up audit entitled Procurement of Garrison Support and Welfare Services, the ANAO determined that the government had subsequently addressed the areas of concern raised in prior audits, noting that the relevant department “has substantially implemented the recommendations of previous ANAO and Parliamentary reports” and concluding that the program was now being run in a compliant manner, and showing that gaps in procurement capacity are not insurmountable if governments prioritize procurement capacity building within their institutions.
