ACTING CHAIR (Senator Troeth) —Good morning, gentlemen. The chair has very little voice, so as acting chair I will be doing the formalities this morning. Thank you for your attendance. I declare open this public briefing on budget increases for the Christmas Island Immigration Detention Centre project.

Earlier this year the Department of Finance and Deregulation wrote to the committee regarding the increase in budget for the Christmas Island Immigration Detention Centre project. The budget for the works had increased from $276 million, at the time of the Public Works Committee report in 2003, to $395.5 million. Representatives from the Department of Finance and Deregulation and the Department of Immigration and Citizenship offered to brief the committee on the project. I welcome the departmental representatives to the hearing.

Although the committee does not require you to give evidence under oath, I should advise you that these hearings are formal proceedings of the parliament and consequently they warrant the same respect as proceedings of the houses themselves. I remind witnesses that giving false or misleading evidence is a serious matter and may be regarded as contempt of parliament. Do you wish to make an opening statement?

Mr Scott-Murphy —Yes, thank you.

ACTING CHAIR —Please proceed.

Mr Scott-Murphy —First of all, I would like to thank the Public Works Committee for providing us with this opportunity to respond to any questions you may have about the project and to give evidence as to the progress and the budget increases. We also have a number of observers here today, given that it is a public hearing. It is a good opportunity for people from within my division, especially the Project Inception Branch, to see how these proceedings are conducted.

Just by way of background, the Public Works Committee considered the proposal for this 800-place centre, consisting of 400 permanent places and a 400-place surge capacity, in mid-2003. In December 2003, the Public Works Committee tabled its report in parliament, supporting the cost of the project at that time, $197.7 million. We undertook the construction of the project, and it reached the stage of practical completion in October 2007, after which some deferred works and some communication and IT equipment were installed by Immigration. The project is currently in its defects liability period, which expires in October of this year.

The construction of the centre on Christmas Island presented numerous challenges and risks which both the departments of finance and immigration worked very hard to overcome. For those not familiar with the isolation of the location, it is approximately 1,500 kilometres from the nearest point on the Australian mainland, yet only 360 kilometres from Indonesia. Sixty-three per cent of the island’s area, which is 135 square kilometres, is national park. Apart from being home to about 1,300 people, on the island there are about 100 million red crabs that presented some challenges for us during construction.

The materials that were brought to the island were nearly all shipped to the island. Shipping is impacted by the swell season. Given the location, it is subjected to monsoonal conditions. The geomorphology of the island is such that it has very deep water right up to cliffs. The only port, at Flying Fish Cove, requires offloading from ships. They cannot pull up directly to the wharf. They transfer everything by barge, and that does present a number of problems for us.

We provided a briefing pack to the committee which provides a number of details that I will not go into in my opening statement. The scope of the work has been largely unchanged in the course of the delivery. In fact, there was an independent review that was conducted by Immigration, through Professor Stephen Frith, professor of architecture at the University of Canberra, to ascertain whether the full scope of the work had been delivered. So that was an independent review, and that found that indeed the scope of work had been completed.

To assist members of your committee we have brought a number of photographs along. They do help to give an idea of the scope and scale of the project. This one that I am holding in front of you—perhaps I can pass it around.

ACTING CHAIR —I think it is upside down.

Mr Scott-Murphy —It is indeed. It gives you a sense of the scale of the project. It is not simply a number of buildings; it is in many respects like a village in the middle of a national park, 1½ thousand kilometres from Australia. With that village comes everything by way of infrastructure that is required to support the people living there, including water supply, sewerage, power, communications and road access—all of which had to be provided.

As we advised in our letter to the Public Works Committee in January 2008, two budget increases had lifted the initial budget of $197.7 million. The first was an increase of $59.3 million and the second was an increase of $60 million. That left the construction budget for the project at $317 million. The project has been delivered within that $317 million. I have brought with me a table that explains the breakdown of the original budget and identifies the two increases. I am happy to table that and have it taken into the transcript.

The logistical difficulties associated with working in a remote location and within a pristine natural environment really cannot be fully understood without a trip to that location. By way of example, in the course of the delivery of the project, we have experienced two cyclones, a tsunami and an earthquake at a significant level on the Richter scale only 150 kilometres from the island. The swell season can delay shipping by as much as four months. In fact, earlier this year the island came very perilously close to having no food because they were unable to discharge cargo from the ships during that four-month period. Emergency supplies were flown in to meet the needs of the population.

We also had significant failures of infrastructure. The port crane is a key element in the infrastructure, needed to handle materials and equipment on and off the island. I have brought with me some further photographs. You will see from those photographs that the port crane sits on a vertical column adjacent to the cliff and tied back into the cliff. It is a Favco crane that lifts out-of-gauge material from barges that transfer the material from the ship to the shore and then swings the material onto the land-backed wharf. That is essential for the project, and we had a number of failures of that crane during the delivery of the project. It caused significant delays and we needed to respond to that in the most cost-effective way that we could.

As an example, during that period of crane outage, we commissioned barges to travel from Indonesia to Christmas Island to transfer the out-of-gauge material and package it in such a way that it could be lifted by a 100-tonne crawler crane that we had on the site. We had to move that 100-tonne crawler crane from the site to the wharf on—I think I am right in saying three occasions, Campbell?

Mr Mackie —Yes.

Mr Scott-Murphy —Each time, that required a major dismantling of the crane, trucking it to the portside and reassembling it under the direction of a specialist engineer who was flown in from Singapore. That crane then could lift the out-of-gauge material. If you can imagine materials like aggregate and sand for concrete that we could not bring in in any way other than by putting them in two-cubic-metre bags that were then loaded onto this barge in Indonesia, motored across the strait and then discharged by the 100-tonne crane, it will give you a sense of how that extends the period of the contract and incurs additional costs.

The other significant cause of delay and cost to the project was the enormity of the detailed design phase of the project. There are more than 50 buildings, as well as all the associated infrastructure, and the design team had to produce something in excess of 5,000 drawings. It was a challenge of doing that when the industry was under significant resource stress. We are all familiar with the boom in the extractive industries in Western Australia, and the competing demand for resources and materials during that period was a significant factor in our management of this project.

Both of those factors brought about delay claims from the main works contractor, the Baulderstone Hornibrook group. We negotiated the terms of settlement with the main works contractor, and, while the details of that settlement are commercially confidential, between us we are satisfied that the settlement represented efficient and effective use of Commonwealth funding to produce the best value outcome.

In conclusion, delivering a project of this complexity in that environment—given the logistical challenges and the sensitivity of the national park status—I feel was nothing short of remarkable. We have delivered the project within the approved budget, and it is fully operational to meet requirements. Is there anything you would like to add to that, Bob?

Mr FORREST —I am a little confused. If you tell us you delivered the project within the budget, what are we here to talk about?

ACTING CHAIR —No, within the extended budget.

Mr FORREST —Not the budget that this committee ticked off on?

Mr Scott-Murphy —No, the budget that was approved by government to meet the needs of the project.

Mr FORREST —Yes, but it is not one that this committee ticked off on?

Mr Scott-Murphy —No.

ACTING CHAIR —Thank you very much for that. We can see that there certainly were some difficulties associated with the project, to put it mildly. Mr Forrest, do you want to start with questions?

Mr FORREST —Who owns the crane? For 60 million bucks you could have bought a new one. Why was this not foreseen, this dependence on a single crane?

Mr Scott-Murphy —The crane is owned by the Commonwealth and managed through the Department of Infrastructure, Transport, Regional Development and Local Government. We had a backup facility at a site further around the island, at Nui Nui, which also had a Favco crane. The series of crane failures meant that we cannibalised the crane at Nui Nui to bring parts across to the crane at Flying Fish Cove. There were a series of problems with the crane, from the slewing motor drive to the contactors. The base that supports the crane developed significant cracks, and we had to commission studies to find out what had caused the cracking in the base of the crane. I think there is a photograph there of how the crane sits on a column adjacent to the cliff.

ACTING CHAIR —Yes.

Mr Scott-Murphy —The base it is seated on was the point of significant failure, and it was not just a matter of replacing the mechanical components but the structural element that held the crane, and that was the cause of the major delay. There was a six-month delay while all those problems were resolved.

Mr FORREST —Are the costs to repair the crane included? Has this project had to pay for that, or has that funding come from somewhere else?

Mr Scott-Murphy —The repairs to the crane, I think, were managed by the then Department of Transport and Regional Services, but there was a component within the original budget that provided for infrastructure upgrades on the island. The maintenance issues are managed by the Department of Infrastructure, Transport, Regional Development and Local Government and were not capitalised into the cost of the project.

Mr FORREST —Having served on the committee previously and participated in the inquiry into this, it really galls me that we are here with major cost blow-outs on something that I would have thought was foreseeable. We knew that Christmas Island was 1,200 kilometres away in the middle of the ocean. We knew all that. I would like to know how the quantity surveyor could get it so wrong—unless you are telling me that the major proportion of the cost blow-out is a result of the crane. That is perhaps unforeseeable. But the other excuses given in your submission to us are all foreseeable, including the competition with the mining sector. We knew all that. If you go to the record, you will see that questions were asked with regard to that. The committee sought assurance that the project could be done within the budget and we were assured of that. Yet here we are all this time later. I am a bit annoyed. How much of these cost extensions are caused by the crane and how much is caused by circumstances which should have been foreseen and taken into account?

Mr Scott-Murphy —That is quite right. The location of the island was known, of course, as was the swell season and the challenges presented by competing pressures. Making an estimate of how many of those risks are going to be realised is a forecast and you make your best estimate at the time with the knowledge you have in front of you. At best, the provision for those contingencies is what you would expect as an average. My understanding is that we have experienced—

Senator MARK BISHOP —An average of what?

Mr Scott-Murphy —The average of the incidence of risk. If it is like a bell curve, you provide for the average risk. If you were to provide for every eventuality, the forecast would be many times higher—up to three times the capital budget—to ensure that there was no risk uncovered by contingency.

Senator MARK BISHOP —But this is an extraordinarily atypical project. It is on an island that is remote from Australia with difficult weather and all the material has to be shipped in. So each component of risk is quite different to a project in Adelaide, Melbourne, or Sydney. When you say the average cost of risk for all the components, is that the average of all costs in construction projects that you are engaged in, or is it the average of costs in extraordinary and atypical projects that you are engaged in?

Mr Scott-Murphy —It is at best an estimate at the time. At the time the budget was brought to this committee in its first form, the project had not been fully defined. It had not been fully scoped. We had our best estimate of what was required and the risks that were attendant in delivering that.

Senator MARK BISHOP —The answer to my question is one of two things. Is it that the risk costing is the average of a range of projects that you do around Australia, or was the costing applied to this as an atypical and difficult project essentially in the middle of nowhere?

Mr Scott-Murphy —It was the latter. We were making our best estimate of that project, not just taking an across-the-board average of contingencies that might apply within the mainland. Of course we recognise the contingent risks attendant to this project. But it is an estimate based on the knowledge you have at the time and it does not forecast such things as the failure of the port crane. We make some provision for delay and we attempt to have the managing contractor price the risks of those things. But when you move into the area of force majeure in a contract then we have to recognise that the principal and the contractor share the risks. These major cost increases moved to that area and that is why we then had to negotiate with the main works contractor to reach agreement on a settled sum.

Senator MARK BISHOP —So what I am hearing you say is that the major unanticipated costs in a very difficult project were anticipated and, as best as could be done, costed in at the time that recommendations were brought either here or to government. But the breakdown of the crane could not reasonably have been anticipated and hence could not have been costed in terms of risk, and that is the principle cause of the blow-out in costs over time. Is that your proposition to us, Mr Scott-Murphy?

Mr Scott-Murphy —Yes, there are two broad elements to that cost increase, as I have produced in evidence. The crane was undoubtedly a significant contributor to the realisation of risk. The problem that we were faced with is that it was seen as a Commonwealth crane even though it was not part of the project and, therefore, the risk needed to be addressed by the Commonwealth rather than the main works contractor taking ownership of that risk.

Senator MARK BISHOP —Does that then mean that neither the Commonwealth nor the main works contractor did a utility assessment of the crane prior to signing off on the contract? You accepted that the crane was there, it could lift to a certain tonnage and you presumed that it would be in normal working mode for the duration of the project?

Mr Scott-Murphy —That is correct.

Senator MARK BISHOP —Do you understand the point I am making?

—Yes.

Mr FORREST —Can I go back to my original question? You have said that the crane and the problems associated with it was a significant cause of the blow-out, but my question was: what proportion?

Mr Scott-Murphy —If you will bear with me for one moment I will get you some detail.

Mr FORREST —You can take it on notice if you want.

Mr Scott-Murphy —Yes—I am conscious of the time. We are happy to provide some detailed breakdown of that in response if that would help.

Mr FORREST —But if you even look at the fees—the original estimate was $12 million and the final budget $27 million so that has more than doubled. The design was $8.79 million and it has ended up at $15.5 million. Presumably a quantity surveyor has been paid out of that—was he asleep at the wheel? There are costs associated with the design that are part of the blow-out as well. This is always a question of mine about consultants’ fees: how come we are paying more than double the fees for professional support? I can imagine why the project management costs have increased—it would be related to the total value of the project—but why have design costs doubled?

Mr Scott-Murphy —We may need to provide further detail of the break down of how the increments of the design fees increased during the course of the project. It was significantly driven by the detailing of the shop drawings to get from the concept to the detail of it and accommodating the nature of the environment that we were working in to ensure that we were getting the most efficient out-turn cost. When the project was brought to this committee in its first stage, we did not have a concept design for the project. We just had a very broadbrush view of what we were seeking to deliver. Of course in the intervening period, we now have a much more rigorous process—the two-stage approval process for capital works—that provides this committee with detailed cost estimates based on schematic design. This project preceded that process so at the point that the $197.7 million budget was brought to this committee we had no such detailed design available. The fees for developing the design from concept to schematic, to detailed design and to shop drawings, were significantly underestimated in the original budget submission. However, if we look at the total fees that were paid for the project compared to the out-turn cost, we think that it does fall within a normal percentage of the out-turn cost. The error, if you like, was at the front end of the project, and not at the back end.

ACTING CHAIR —Nevertheless, would you give us a detailed breakdown of each of those headings under ‘fees’. Even sundry fees and costs went from $500,000 to $5 million. The committee would be interested to know the breakdown under project management, design, and sundry fees and costs.

Mr Scott-Murphy —I would be happy to respond to that.

Mr LINDSAY —Going back to the start of all of this, you have given evidence that when you came to the committee originally you did not really know what the project was going to end up costing. Is that right?

Mr Scott-Murphy —We had a very dim, obscure view of what was entailed in the project.

Mr LINDSAY —So your answer is yes, you did not know.

Mr Scott-Murphy —We did not know accurately; that is right.

Mr LINDSAY —The committee is charged with determining if projects are value for the Commonwealth of Australia in its expenditure of money. How could the committee have done that without knowing what it was that they were actually approving? The answer is that they could not; is that right?

Mr Scott-Murphy —I think at the time they could not, with accuracy, know that. In the intervening period, we have introduced the two-stage approval process that does provide that clarity. Future projects will have scope definition at a functional design brief quality. They will have a schematic design that defines what it is that is being delivered, and a cost estimate based on that definition of scope and schematic design. The order of accuracy that is presented now in the two-stage approval process is roughly an 80 per cent certainty of out-turn cost. We then provide the contingency in the budget to give greater certainty that the costs will not blow out.

Mr LINDSAY —Defence is another customer of ours who suffer the same difficulties as you, but they always manage to bring in their projects under the out-turn cost. In fact, often they will have some savings, which they will then apply to further works on that particular project. Have you looked at their model of delivering infrastructure development?

—Indeed, we have. The Kinnaird review of Defence, which led to the two-stage approval process that is embedded in the capital works program in Defence, was a model that we turned to in the cabinet submission that has led to the two-stage approval process.

Mr LINDSAY —Who was responsible for the estimate that came to the Public Works Committee? Who takes responsibility for that?

Mr Scott-Murphy —The Department of Finance and Administration, as it was then, was persuaded, with the information available at the time, that that was the right budget for the project.

Mr LINDSAY —Were there external professional people who collated that initial estimate?

Mr Scott-Murphy —We engaged quantity surveyors to give the overview of what the project was likely to cost, based on the information at that time.

Mr LINDSAY —Was that one group, or a range of groups?

Mr Mackie —WT Partnership was the quantity surveyor for the project. There was only one adviser on cost, and that was that company.

Mr LINDSAY —Are they a Canberra based firm?

Mr Mackie —They are a national company.

Mr LINDSAY —Turning now to the delay claims, it is my memory that at the time a number of subcontractors raised serious concerns that they were not involved in the settlement of the delays that went with the head contractor. The head contractor came to some arrangement with you, as you have given evidence, but that did not seem to filter down then to the subcontractors. Did you get a level of complaint from subcontractors that they were not being paid for the delays?

Mr Scott-Murphy —The answer to that is no. We made it a condition of the settlement agreement with the head contractor that the flowthrough would be assured, and we get declarations from the main works contractor to that effect. That is not to say that there will not be disputes that emerge between subcontractors and the main works contractor.

Mr LINDSAY —You are not involved in any of those disputes?

Mr Scott-Murphy —No, we are not.

Mr LINDSAY —You talked today about the costs of construction in a pristine environment. I read that as a kind of emotional statement, and I found myself thinking that every environment these days is a pristine environment. Yes, Christmas Island is a beautiful place, but surely there is no difference between constructing something on Christmas Island and constructing something on mainland Australia—is that right?

Mr Scott-Murphy —With respect, it is quite different. The national park status of the land that surrounds the site meant that we had to go to quite extraordinary lengths to protect and preserve the native environment, including creating bridges and tunnels for crab crossings, and little deflector fences. We commissioned a biodiversity report, and that has been quite a significant body of work that actually identified a number of new species. But we were working in a national park with very strict controls, even over the transport of diesel.

Mr LINDSAY —My point is that if you were working in a national park in Australia, the same would apply.

Mr Scott-Murphy —To a degree that is correct.

ACTING CHAIR —But it is still different to working on a normal commercial site, obviously.

Mr Scott-Murphy —Absolutely, yes.

Mr LINDSAY —I accept that. Who takes overall responsibility for what has happened, and what has been done about it for the future?

Mr Scott-Murphy —The Department of Finance and Deregulation does take responsibility for the accuracy of our estimates and programs. That is our core business, and what we have done to avoid these situations occurring in the future is to introduce the two-pass approval process so that there is scope definition, schematic design and an accurate cost estimate, with appropriate contingency, presented at the point this committee reviews the project.

Mr LINDSAY —Thank you.

Mr FORREST —I want to go back to the original contingencies. Effectively, we were allowing a 3.5 per cent contingency in the original project figures, and an escalation of about 2.5 per cent. I have just done the arithmetic on those figures. That works out as $7.5 million of contingency and $4.5 million of escalation, which works out to be 3.5 per cent and 2.5 per cent of the project cost. This was a project which we knew was in a national park in the middle of the Indian Ocean. We knew we had to protect the crabs—we knew all that. Clearly, that contingency was grossly underdone.

Mr Scott-Murphy —In the event, that is quite accurate. At that point, however, we did not have the schematic design, so there was an element of contingency also embedded in the estimate for the construction works. There are multiple layers of contingency—the items that you are referring to in contingency—

Mr FORREST —I would have thought that 3.5 per cent would be a contingency allowance you might allow in the middle of Sydney, but not in the middle of the Indian Ocean.

Mr Scott-Murphy —My response is that there were other contingencies than those identified at that point. These are, if you like, client contingencies for minor variations to scope—not construction contingencies. The construction contingencies would have been embedded in the items for building works, external works, works off site et cetera.

Senator MARK BISHOP —Can you tell me why the settlement detail with the main contractor at the end, when you had to resolve the issues of outstanding blow-out costs and payments, is commercial-in-confidence and not capable of discussion here? I say that for the following reason. I understand the concept of commercial-in-confidence; it normally applies to the pre-tender stage, the tender stage and the awarding of contracts, and it is done on the basis that companies are not entitled to know the cost basis of competitors who have tendered or received contracts, their margins and all that sort of stuff—that is the traditional proposition. Here we have a contract awarded and complied with. Costs blow out, and there is resolution of items to finish off. Why is it commercial-in-confidence at that stage?

Mr Scott-Murphy —We signed a confidentiality agreement between the main works contractor and the Commonwealth to protect both parties. It is to protect the main works contractor from what they might not wish to have known by their competitors as to what they accepted. Similarly, with the Commonwealth we took legal advice as to any exposure that the Commonwealth may be open to if the details of that settlement were on the public record. On the basis of that advice, we agreed that we should enter into a confidentiality agreement.

Senator MARK BISHOP —So it was done for two reasons: so that the competitors were not aware of what the main contractor conceded in final negotiations and, secondly, to protect the interests of the Commonwealth.

Mr Scott-Murphy —That is correct.

Senator MARK BISHOP —Are they the only reasons?

Mr Scott-Murphy —Yes.

Senator MARK BISHOP —That being the case, how do bodies like this do an effective review, when blow-out costs are over $120 million, I think, in a relatively confined period and when the principals have agreed between themselves that the detail is not to be disclosed? You have asserted things this morning, and I have no doubt that what you have asserted is correct, but how do we know that?

Mr Scott-Murphy —It is a difficult area; I acknowledge that. I would be happy to provide further details in camera. The public nature of this hearing and the confidentiality agreement that would expose the Commonwealth and the contractor mean I am unable to provide that level of detail today.

Mr BUTLER —Can I counterquestion in the middle of that?

ACTING CHAIR —Yes.

Mr BUTLER —Have the details of this agreement been provided to the ANAO?

Mr Scott-Murphy —They are available to the ANAO, who are conducting a performance audit of the project at the moment.

ACTING CHAIR —Would it be possible for you to provide a written breakdown of that to the committee in confidence, in line with committee procedures?

Mr Scott-Murphy —Yes.

ACTING CHAIR —We would appreciate that.

Mr Scott-Murphy —Yes, okay.

Mr LINDSAY —My memory is that there was a component of this project which was an upgrade of the airfield. Is that right?

Mr Scott-Murphy —No, I do not believe so. There was a component of the project relating to infrastructure that was a budget allocation to the Department of Transport and Regional Services, but I do not believe it relates to the airfield.

Mr LINDSAY —Could that have been the upgrade of the airfield?

Mr Scott-Murphy —No.

Mr FORREST —This is an opportunity to ask the question that I ask every time. What are the consequences if this committee does not approve this cost blow-out? The last time I asked you this question, you said you had had prime ministerial approval. But what are the consequences if this committee does its job and says this is gross mismanagement of the taxpayers’ money and does not tick off on it, with you having already entered into an agreement with the contractors and all of that?

Mr Scott-Murphy —Yes, the money has been expended.

Mr FORREST —I get really annoyed when this committee is cheated of its opportunity to do its job properly when it is not given the right information. What are the consequences?

Mr Scott-Murphy —I would hope that the opportunity for this to occur again has been largely curtailed through the two-pass approval process that we have introduced. A large reason for introducing the two-pass approval process was the experience on the Christmas Island project.

Mr FORREST —I have been on this committee for my whole career in this place and I have had those assurances before, but regularly we get to this situation, and it is regrettable. I hope you are right.

ACTING CHAIR —Thank you very much for your appearance here today.

Resolved (on motion by Mr Lindsay):