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Tuesday, 19 November 2002
Page: 6788


Senator LUNDY (7:57 PM) —The Australian National Audit Office report tabled very recently in the chamber entitled Health Group IT outsourcing tender process was undertaken at the request of the Senate Finance and Public Administration References Committee. This request was made following a Senate Finance and Public Administration References Committee inquiry into the coalition's IT outsourcing program. During this inquiry, serious questions were raised about the probity of the Health Group tender. In June 2001, the Auditor-General began a performance audit into the Health Group tender process. The auditor's report concluded:

On the basis of the available evidence, ANAO—

that is the Audit Office—

is not able to provide an assurance that no tenderer unfairly gained a competitive advantage in the Health Group process.

... ... ...

There was a lack of transparency of the manner in which probity issues were considered by OASITO—

that is the Office of Asset Sales and IT Outsourcing. This is a very serious finding. It is an adverse finding that invites questions about whether or not there was corruption involved in the process. The auditor also found that the successful bidder, IBM GSA, had access to the detailed bids of the other two tenderers; may have substantially reduced its own bid after this access; lodged this revised offer after the stipulated deadline; and was awarded the Health Group contract without all of the relevant tender oversight committees being informed of these irregularities. Possible corruption by OASITO, the Office of Asset Sales and IT Outsourcing, of the tender process involving a major IT outsourcing contract is a very serious matter indeed. Yet, in respect of this Health Group tender, the Auditor-General found maladministration and raised the possibility of corruption of the tender process.

This tender goes back to 1999, when IBM GSA was one of three tenderers for the IT outsourcing contract for the Department of Health and Aged Care, the Health Insurance Commission and Medibank Private Ltd. This group was known as the Health Group. The other tenderers involved in this process were CSC and EDS. The request for tender was issued in November 1998, and closed on 15 February 1999. IBM GSA was announced as the successful bidder in September 1999, and on 6 December 1999 contracts were exchanged to the value of $351 million.

It is important to note that the CEO of the Office of Asset Sales and IT Outsourcing at this time was Mr Mike Hutchinson. He oversaw the Health Group tender process. Also at that time, Mr Greg Barns was advising the then Minister for Finance and Administration, Mr John Fahey, on IT outsourcing. In relation to the Audit Office report, one of the main issues of the Auditor-General's inquiry was that, during the tender process, OASITO gave IBM GSA a computer disk containing critical information relating to the final pricing of their rival tenderers. This has come to be known as the `disclosure event'. OASITO, the agency then responsible for overseeing the tender process, claimed that they inadvertently sent IBM GSA the computer disk containing information about their competitors' bids. OASITO accepted IBM GSA's assurance that they did not examine or copy their rivals' bid information contained on the disk. However, the Audit Office found that, after receiving this computer disk, IBM GSA were not able to prove that they did not revise their tender bid. IBM GSA then lodged their revised bid after the due deadline. At the time, OASITO described giving IBM GSA details of their rivals' bids as an inadvertent error and the then Minister for Finance and Administration, Mr John Fahey, dismissed my repeated calls for an immediate halt to the tender process.

On 8 February 2000, during Senate estimates, which was the first available opportunity to ask questions, I questioned officers from OASITO, including Mr Ross Smith, about the probity of the tender process. OASITO representatives made the following statements about the tender:

The management of the event ... was conducted in accordance with the advice from both the probity auditor and our legal advisers engaged for the initiative. All parties concurred at the time that the process could continue unchanged.

They said that OASITO briefed the probity auditor in person and that the probit auditor:

... immediately came back to us with a proposed course of action ...

... ... ...

... we engaged the probity auditor to participate in all of our discussions with us, to make sure that he fully witnessed the nature of the discussions ... and he was happy that we had delivered the messages in accordance with his proposed course of action.

... ... ...

The management of the event, including the consultation with the agency heads and other tenderers in the process, was conducted in accordance with the advice from both the probity auditor and our legal advisers engaged for the initiative. All parties concurred at the time that the process could continue unchanged.

... ... ...

The following day OASITO officials briefed the probity auditor in person. The probity auditor wrote to OASITO proposing a course of action to address the situation, on the same day, and initial statutory declarations were received from the tenderer employee that opened the disk.

In sharp contrast to this statement, the ANAO's findings that a probity auditor report did not exist expose the misleading evidence provided to me by OASITO at Senate estimates. The Audit Office report concluded:

... all requests by OASITO for advice from both the Legal Adviser and the Probity Auditor regarding the disclosure event were oral.

... ... ...

There was no record retained by OASITO of its conversations with either the Legal Adviser or the Probity Auditor in relation to the disclosure event, the instructions provided about the event and the nature of the advice sought by OASITO, nor of the options discussed with either party.

... ... ...

There is no written advice from the Probity Auditor (who was overseas at the time), nor from his representatives, regarding the probity aspects of accepting the late offer from IBM GSA following the disclosure event; either before or after the decision to accept it had been made.

That is from page 10 of the Audit Office report. This means, firstly, that OASITO appear to have misled the Senate by saying that a probity auditor had provided advice that the tender could proceed. The Audit Office found that this had not happened. Only on request, through estimates, for this probity report did the Department of Finance and Administration begin to prepare such a report. Secondly, the legal adviser was not empowered by OASITO to advise that the tender process could cease, thus compromising the status of their advice. Thirdly, IBM GSA may have altered their price and included as yet unknown `out of scope' industry development commitments between the disclosure event and the late lodgment of their final offer, as they were unable to prove otherwise. Finally, the relevant Health Group departments and agencies were not informed of the disclosure event at the time, the subsequent changes in final bids, or the late lodgment of the IBM GSA bid.

It is interesting to note that, following this period, Ross Smith was awarded a Public Service Medal. It is hard for me not to draw the conclusion that the government was rewarding Mr Smith for his protection of the minister's political interests. Almost three years later and no longer accountable to the parliament or taxpayers, former minister John Fahey told the Audit Office in September 2002:

When the disc containing all three bids was delivered to IBM GSA in error my reaction on being informed directly by OASITO was to cancel the tender. I could not see that a tender process with integrity could continue. At the conclusion of the tender, I was both disappointed and annoyed at the limited role of the Probity Auditor and the absence of a separate report on the issue.

But, as we know, the tender did continue and IBM GSA was awarded the Health Group contract. Having originally raised concerns about the Health Group bid in 1999, and having carefully followed this debacle over the course of a number of Senate inquiries and estimates questions, I can only conclude that OASITO officers deliberately misinformed the Senate to cover up possible corruption of the Health Group tender process and that this was designed to ensure that IBM GSA won that bid. The government must immediately take action to satisfy all the parties involved, and Australian taxpayers, that this tender process was not corrupted in any way. If they cannot demonstrate this, they must accept responsibility for this debacle. I will continue to pursue the government in the appropriate forums about their culpability to ensure that this shambles of a tender process does not ever happen again.