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Monday, 11 May 2015
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Government Response to Report

The following documents were tabled pursuant to standing order 61(1)(b):

[Documents presented since the last sitting of the Senate, pursuant to standing order 166, were authorised for publication on the dates indicated.]

Economics References Committee—Report—Future of Australia's naval shipbuilding industry: Tender process for the navy's new supply ships (part 1)—Government response, dated April 2015. [Received 7 May 2015]

Finance and Public Administration References Committee—Report—Commonwealth procurement procedures—Government response, dated April 2015. [Received 30 April 2015]

Rural and Regional Affairs and Transport References Committee—Reports

Auditor-General's reports on Tasmanian forestry grants programs—Government response, dated March 2015. [Received 22 April 2015]

Operational issues in export grain networks—Government response. [Received 8 May 2015]

The documents read as follows—

Australian Government response to the Senate Rural and Regional Affairs and Transport

References Committee report:

Auditor-General ' s reports on Tasmanian Forestry Grants Programs

MARCH 2015

Introduction

Audit of Tasmanian Forests Intergovernmental Agreement Contractors Voluntary Exit Grants Program 2011-12 (IGACEP)

In 2012, the Australian National Audit Office (ANAO) conducted a performance audit of IGACEP.

The report of the audit was tabled in Parliament on 21 February 2013. The response of the Department of Agriculture agreeing to the three recommendations of the report was included in the tabled report. The report's recommendations were:

Recommendation 1

To improve the quality and transparency of grant assessment processes for future grants programs, the ANAO recommends that DAFF reinforce the:

obligations to manage programs in accordance with approved program guidelines and the Commonwealth Grant Guidelines; and

importance of retaining documentation to appropriately evidence the assessment of grant applications and decisions made.

Recommendation 2

To enhance the transparency of future grants programs, the ANAO recommends that the Department of Agriculture advise applicants of any significant changes to the:

method used to determine grant funding offers; and

assessment process outlined in the program guidelines.

Recommendation 3

To enable the Department of Agriculture, Fisheries and Forestry to monitor compliance with the terms and conditions of funding, the ANAO recommends that the department reinforce the importance of:

preparing compliance strategies and determining the basis for funding ongoing compliance activities early in the design phase of grants programs; and

incorporating compliance obligations into program guidelines and funding agreements.

Following the release of the report, Senator Milne notified the Senate on 14 March 2013 that she would move to refer the Auditor-General's reports on IGACEP and on an earlier Tasmanian forestry grants program to a Senate Committee.

Terms of Reference for the Committee

On 19 March 2013, the Senate agreed to the following motion:

"That the findings of the Auditor-General's audit report No. 26 of 2007-08, Tasmanian forest industry development and assistance programs, and the Auditor-General's audit report No. 22 of 2012-13, Administration of the Tasmanian Forests Intergovernmental Agreement Contractors Voluntary Exit Grants Program, be referred to the Rural and Regional Affairs and Transport References Committee for inquiry and report by 6 May 2013."

The Senate subsequently agreed to motions to extend the time for reporting until 11 June 2013 and then to 19 June 2013.

Following a request for submissions by 9 April 2013, the Senate Committee held hearings on 7 May and 15 May 2013.

On 19 June 2013, the Senate Committee tabled a final report, which made three recommendations with a further six recommendations made in additional comments by the Australian Greens.

Government Response to Recommendations of the Committee

The government has considered the recommendations of the Senate Committee report and this response addresses each recommendation individually.

Recommendation 1

3.41 The committee recommends that DAFF thoroughly investigate all alleged cases of fraud and all alleged cases of non-compliance resulting from the two programs. The committee further recommends that DAFF resolve these matters as soon as possible.

The Australian Government agrees with this recommendation.

The Department of Agriculture (the department) assesses, and investigates where appropriate, all the allegations of fraud and non-compliance that it receives. The department has a documented process against the Australian Government Investigations Standards. All allegations, whether true or false, are documented from the time they are received.

The department will retain overall responsibility for compliance activities relating to the Tasmanian Forestry Contractor Exit Assistance Program (TFCEAP) and the Tasmanian Forests Intergovernmental Agreement Contractors Voluntary Exit Grants Program (IGACEP).

The department has implemented a structured monitoring and compliance program for the TFCEAP and IGACEP. The monitoring and compliance program aims to ensure that the terms and conditions of both exit programs are met. The monitoring and compliance program will run for the life of the funding deeds of the two exit programs. Funding deeds for the TFCEAP expire in 2016 and funding deeds for the IGACEP expire in 2022.

There are two elements to the TFCEAP and IGACEP monitoring and compliance program. Annual declarations are requested from grantees confirming that they have exited and have remained out of the industry. In addition, on-ground compliance visits to grantee business premises are undertaken to monitor grantees' compliance.

It is important to note the difference between fraud and non-compliance in relation to Commonwealth grants programs. Fraud occurs when people misrepresent themselves to get benefits inappropriately from the Commonwealth government. Non-compliance is when a person or business receives a grant but then does not comply with the conditions of that grant.

The department has received fraud allegations in relation to the TFCEAP and the IGACEP. No allegations of fraud have been reported in relation to the Tasmanian Community Forest Agreement Industry Development Program (TCFA IDP).

The department has thoroughly assessed and investigated each allegation of fraud in relation to the TFCEAP and the IGACEP. The department is currently considering an appropriate course of action in relation to one fraud allegation. If an assessment of an allegation identifies that a receiver of a grant may not be complying with the terms of the funding deed, the matter is referred for consideration and appropriate action under the TFCEAP and IGACEP monitoring and compliance program.

The TFCEAP and IGACEP monitoring and compliance program will be re-examined and renewed after July 2014 to take into account the results of the program.

Recommendation 2

3.48 The committee recommends that the Department of Finance and Deregulation implement the Auditor-General ' s proposal to develop guidelines on the impact of government programs. The guidelines should ensure that the Parliament is able to assess whether programs are achieving the objectives set by government.

The Australian Government agrees this recommendation.

The Department of Finance will shortly be releasing a range of guidance material to assist Commonwealth entities and companies improve the quality of their performance information and reporting.

This guidance will support the introduction of the Enhanced Commonwealth Performance Framework, which is being implemented under the Public Governance, Performance and Accountability Act 2013 (PGPA Act). A draft copy of the proposed guidance material was included in a submission on the Enhanced Commonwealth Performance Framework made by the Department of Finance to the Joint Committee of Public Accounts and Audit (JCPAA) on 21 November 2014.

The performance framework seeks to improve the quality of planning, performance information and evaluation within government. Ministers, Parliament and the public will be able to better assess whether activities and initiatives undertaken by Commonwealth entities are contributing to the achievement of programme goals and other objectives set by government.

The performance framework will be introduced in stages through 2015 and 2016, and will include corporate plans and annual performance statements, the requirements for which will be outlined in the rule made for the PGPA Act, for each Commonwealth entity. The new elements will be supported by the release of a set of integrated guidance materials which will include new technical guidance for the development of performance measures and tools.

These documents will be public, and are intended to improve the standard of planning and reporting for Commonwealth entities, especially in relation to the management of their affairs and the achievement of their purpose and objectives.

The new guidance for Commonwealth entities will be issued in the first part of 2015. This work is being done in consultation with the JCPAA, the Australian National Audit Office and all Commonwealth entities.

Tabling the Australian Government Response to the Senate Report on the Tasmanian Forestry Exit Grants Ref MS15-000156

Response to questions from Senator Colbeck

(1 ) The TFCEAP and IGACEP monitoring compliance and program will be re- examined and renewed after July 2014 to take into account the results of the program.

Q: Has this occurred? What were the results?

The review

In February 2015, the department initiated a desk-top review of the monitoring and compliance actions to date that have occurred under the monitoring and compliance program.

Once this desk-top review has been completed, a broader assessment of the current monitoring and compliance program will follow. This may result in alterations to the existing monitoring and compliance program, including the possibility of bolstering the requirement for further on-ground compliance checks of individuals and/or businesses likely to be considered at risk of non- compliance.

This work is expected to be completed by July 2015.

The results

To date, the desk top review has resulted in two funding deed non compliance notices being issued to individuals across both the TFCEAP and the IGACEP and is also likely to result in more non compliance notices being sent to grantees in coming weeks.

Over March and April 2015, the department will also be sending letters to all grantees (from both programs) requesting the completion of a statutory declaration stating that they are in compliance with the terms of their funding deed.

As detailed in the response, the department is still in the process of considering an appropriate course of action relating to one serious fraud allegation. External lawyers with specific expertise in this area are being consulted on the matter.

(2 ) The new guidance for Commonwealth entities will be issued in the first part of 2015. This work is being done in consultation with the JCPAA, the ANAO and all Commonwealth entities.

Q: How far off are these guidelines?

The Department of Finance has advised that the timing of the release of the guidance is dependent on the approval of the Joint Committee of Public Accounts and Audit (JCPAA). Ideally this will occur before 1 July 2015 when the enhanced performance framework is expected to commence.

Recommendation 3

3.76 The committee recommends that the ANAO continue to include DAFF ' s administration of its grants programs in its future work programs.

The Australian Government notes this recommendation.

The ANAO adopts an ongoing and integrated approach to planning its audit coverage. In this context, the ANAO endeavours to maintain a balance between planning and delivering audits that address the key risks and challenges facing the Australian Government public sector while also producing contemporary reports that cover matters of significant public interest. The ANAO gives consideration to the changing Australian Government public sector environment and seeks to be responsive to stakeholder requests where priorities and resources permit.

The ANAO undertakes approximately 50 performance audits on an annual basis. The program of audits seeks to achieve coverage across a wide range of entities and portfolios, either as agency-specific audits or as part of broader cross-agency audits. As core elements of government activity, procurement and grants management have featured strongly in the ANAO's work programme over recent years. While ANAO audits have highlighted examples of effective procurement and grants management approaches, they have also identified opportunities for entities to undertake these activities more efficiently and effectively and to achieve more consistent compliance with relevant guidelines and government policies.

Accordingly, the program continues to focus on procurement and grants management, either as individual topics, or as part of audits examining broader program management. The ANAO's 2014 Audit Work Program includes coverage of grant administration by the Department of Agriculture.

Government Response to Additional Recommendations of the Australian Greens

1. The Department of Agriculture, Fisheries and Forestry appoint an independent auditor to its internal audit committee.

No further Australian Government action is required.

The Department of Agriculture has two independent members on the department's audit committee. Also, an audit service provider provides a representative to attend the meetings of the audit committee.

This meets with better practice recommended by the ANAO in its Better Practice Guide

Public Sector Audit Committees Independent assurance and advice for Chief Executives and Boards.

The department's audit structure is compliant with Government requirements.

2. The department be restructured to remove forestry from the Department of Agriculture, Fisheries and Forestry and its current responsibilities be re-allocated to the departments of Environment, Climate Change and Industry.

The Australian Government does not agree with this recommendation.

The structure and portfolio responsibilities of government departments are matters for the executive government of the day.

3. No government program be permitted to proceed unless compliance and risk management plans are finished before applications open, regardless of any political time limits that may be imposed and any prior approval from the Minister.

The Australian Government does not support this recommendation.

The Tasmanian Forests Intergovernmental Agreement Contractors Voluntary Exit Grants Programme was undertaken under the original Commonwealth Grant Guidelines (CGGs). The CGGs establish the overarching grants policy framework under which government agencies undertook their grants administration activities.

The CGGs were updated on 1 June 2013 to address concerns raised by the Australian National Audit Office and the Joint Committee of Public Accounts and Audit, stakeholder feedback and policy and legislative changes which have occurred since their introduction in 2009. The CGGs were updated a second time on 1 July 2014 to reflect the implementation of the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and became the Commonwealth Grants Rules and Guidelines 2014 (CGRGs). As a result of the recent updates, the CGRGs contain a greater emphasis on appropriate risk management and proportionality, particularly when planning and designing granting activities. For example, the updated CGRGs state that: "Officials should ensure that the party best placed to manage a specific risk is

identified, the risks are assigned to that party, and that they manage those risks. Identifying the party best able to manage a risk and assigning that risk is an active process that should occur through all phases of grants administration" (Commonwealth Grants Rules and Guidelines, July 2014, p. 23).

Three broad categories of risk are now identified in the CGRGs: grant programme risk; grantee/recipient risk; and project/task/services risk. The CGRGs propose that officials ensure that risk identification and engagement is supported by performance information, procedures and systems that continuously identify and treat emerging risks throughout the grants administration processes. This renewed focus on risk is supported by the Commonwealth Risk Management Policy which has been developed as part of the implementation of the PGPA Act.

The updated CGRGs also mandate that officials must develop grant guidelines for all new granting activities, including grant programmes. The CGRGs provide guidance on what should be included in grant guidelines, for example, officials should ensure that grant guidelines clearly inform potential grant recipients of terms and conditions that the recipient will need to meet during the life of the grant, such as financial and performance reporting. Commonwealth entities may not publish their grant programme guidelines or seek applications before the Departments of Finance and Prime Minister and Cabinet agree the risk rating for a grant programme and the respective approval process being undertaken.

Further, the CGRGs continue to emphasise the need for clear accountability, transparency and probity. For example, the CGRGs state that officials should develop policies, procedures and documentation necessary for the effective and efficient governance and accountability of granting activities. The CGRGs further note that accountable authorities should establish internal control mechanisms for grants and guard against fraudulent use of grant payments.

Guidelines and operational guidance should clearly set out who are the decision makers for different activities involving grants administration.

Given the recent review and changes to the CGRGs, new guidance issued by the Department of Finance (see Resource Management Guides RMG 411 and RMG 412) and the commencement of the PGPA Act, the addition of a further prescriptive and ad hoc requirement in relation to grants administration, is not justified at this stage.

4. The Tasmanian Parliament Select Committee established to investigate the contractor payments also probe the process within Forestry Tasmania for deciding which contractors were to be supported and which contractors were to be allocated extra volume and the extent to which that opportunity to access extra volume was known to the contracting community.

No further Australian Government action is required.

5. The new federally-funded $20 million contractor exit program to be administered by the Tasmanian Government to consider these contractors in the new round of applications.

No further Australian Government action is required.

6. Exit means exit. The new federally-funded $20 million contractor exit program to be administered by the Tasmanian Government will be transparent and include clear compliance criteria before being issued and will ensure:

(a) contractors leave the industry and grants received not be used for investment in the industry in any circumstances

(b) compliance criteria includes surprise visits to contractors

(c) a focus on retiring contracts permanently rather than shifting volume to other contractors

(d) contractors are prevented from working in the industry anywhere in Australia

(e) the amount of any grants previously received for purchase of equipment be deducted from the exit grant.

The Australian Government notes this recommendation.

The Senate Inquiry Report has been passed to the Tasmanian Government for it to consider and address as appropriate the findings in both the development and implementation of the workers and contractors program.

 

Australian Government response to the Senate Finance and Public Administration References Committee Report:

Commonwealth procurement procedures

April 2015

Senate Finance and Public Administration References Committee Report on Commonwealth procurement procedures

The Government is committed to building a stronger, more prosperous and resilient economy where Australian businesses can be competitive on a domestic and international level. With this in mind, the Government is focussed on reducing the cost of doing business with the Commonwealth.

Procurement is a mechanism that allows Commonwealth entities to deliver the Government's policies, programmes and services. Commonwealth entities are responsible for achieving value for money in their procurement activities through consideration of both the financial and non-financial costs and benefits of each submission.This requires Australian businesses to be successful on the basis of genuine competitiveness.

The Government is focused on reducing red tape, improving the operating environment, and enhancing government engagement with business, especially small business, to build capability. It is by establishing the policy settings that remove the impediments to efficient business operation that the Government can most effectively encourage businesses to build competitive advantage and help position them to be successful in accessing government contracts.

The Commonwealth Procurement Rules (CPRs) are not intended to target specific categories of goods or services, nor specific industries. A core principle for the Government is to ensure that it provides full, fair and reasonable opportunities to businesses to bid for Commonwealth contracts. The CPRs specifically require Government entities to apply procurement practices that do not unfairly discriminate against small and medium size enterprises (SMEs) and provide appropriate opportunities for them to compete. The CPRs also outline the Government's commitment to source at least 10 per cent of procurement by value from SMEs. This benchmark has consistently been met—in 2013-14, 34.4 per cent of contracts valued at or above $10,000 were awarded to SMEs to the value of $16.8 billion (55.2 per cent of the 66,047 contracts by volume). Further, small businesses were awarded 11.6 per cent of contracts by value ($5.7 billion) and 30.1 per cent of contracts by volume (19,887 contracts).

The Government strongly supports the committee ' s recommendation that the Department of Finance (Finance) work with Commonwealth entities to raise the general awareness of good procurement processes and improve the capability of officers that provide procurement advice to line areas. The Government supports auditing practices and regularly reviewing initiatives implemented as well as learning from best practice of other jurisdictions. In addition, the Government is committed to stakeholder engagement and regularly engages with external stakeholders via various forums such as the Australian Government Procurement Coordinator's blog available at www.finance.gov.au/category/procurement-coordinator/.

The Government also supports in-principle the committee ' s recommendation that Finance work with the lead agencies for procurement-connected policies and the Department of the Prime Minister and Cabinet to develop a whole of government annual reporting framework for monitoring of and compliance with these policies. The Government is currently reviewing all procurement-connected policies to test their currency and suitability to remain linked to the procurement framework. PCPs are government policies which Commonwealth entities must take into account when undertaking certain procurement activities. They are specific policies for which procurement has been identified as a means of delivering broad social commitments and other objectives indirectly related to procurement. Further, a robust framework will be established for the approval of any new procurement-connected policies with a focus on minimising the impost to business and the not-for-profit sector and ensuring effective monitoring of and compliance with these policies.

The Government cannot support the committee ' s recommendations to implement initiatives that preference local suppliers when procuring goods and services valued above the procurement thresholds ($80,000 for general goods and services and $7.5 million for construction services). Any recommendation to treat suppliers inequitably through schemes that preference local suppliers, beyond those that are specifically included in the 17 exemptions listed at Appendix A of the CPRs, would be inconsistent with Australia's international obligations.

Senate Finance and Public Administration References Committee Report on Commonwealth procurement procedures

No.

Recommendation

Government Response

1.

2.34—The committee recommends that the Department of Finance (Australian Government Procurement Coordinator) consult with Australian industry, and in particular Australian manufacturers, to develop an alternate test which can provide more meaningful information on the quantity of Australian content in goods and services procured by the Commonwealth government, and how to build this information into data collected in AusTender.

Not supported. From a practical perspective, any alternate test for capturing data on the quantity of Australian goods and services procured would be impractical to implement and impose significant compliance costs. In particular, a consensus definition of what is 'Australian' is difficult to achieve. For example, 'Australian' businesses may be resellers of goods manufactured entirely or partially overseas; equally, non-Australian businesses may deliver services that are developed and delivered within Australia, by Australians.

In addition, the creation and maintenance of a supplier register, along with the associated authorisation and data quality controls, would impose significant red tape on suppliers for limited benefit.

2.

3.19—The committee recommends that the Department of Finance provide a detailed explanation of the barriers to developing a preferencing scheme, which takes into account Australia's free trade obligations.

Not supported. The Department of Finance (Finance) has previously advised that international agreements limit the extent to which the Government can preference local suppliers. Finance has also advised that the CPRs incorporate relevant provisions from the Australia and New Zealand Government Procurement Agreement, Australia Chile Free Trade Agreement, Australia United States Free Trade Agreement, and Singapore Australia Free Trade Agreement. The texts of these agreements are publicly available and detail the commitments entered into by Australia.

Free trade agreements (FTAs) give Australian producers and manufacturers access to a market of billions of consumers rather than just Australia's 23 million. To achieve the full potential of our trade, we must overcome any barriers that face our exporters, whether tariffs or other impediments, which are attached to our goods and services. Reduced tariffs give Australian companies greater opportunities for expansion into previously protected markets.

3.

3.56—The committee recommends that the government review the application of the non-discrimination principle to ensure that it does not inadvertently discriminate against Australian manufacturers.

Not supported. Paragraph 5.3 of the CPRs states that all potential suppliers to government must be treated equitably. If a supplier has concerns regarding the application of this requirement during a tender process, they should advise the procuring entity of their concerns.

It is important that objective, rules-based criteria are used in all government procurement processes, which are required to achieve value for money through non-discriminatory, competitive, open, transparent, efficient and publicly-accountable processes.However, as a general rule procurements under the procurement thresholds ($80,000 for general goods and services and $7.5 million for construction) can be contracted via direct approaches to suppliers without the need to openly approach the market as long as value for money is achieved.

4.

3.61—The committee recommends that the government continue to fund the Australian Industry Participation policies and programs and reinstitute funding for the Enterprise Solutions Program.

Not supported. The Government is simplifying and streamlining industry support to improve productivity and competitiveness. The new Entrepreneurs' Infrastructure Programme aims to improve the capabilities of small and medium enterprises (SMEs) to become more productive, competitive and growth focused. In addition, the Government has commissioned an independent review into costs, benefits, and effectiveness of Australian Industry Participation policies and programmes.

Further, the Australian Small Business Advisory Services (ASBAS) programme funds not-for-profit registered business organisations to improve their capacity to deliver low-cost advice and information services to new and established small businesses. The Business Solutions 2014 round focuses on five streams of assistance. Of those five, the Building your business and Management capabilities streams may assist small businesses to improve their capability to bid for government work.

5.

3.64—The committee recommends that the Commonwealth Procurement Rules be redrafted to provide an explicit exemption for practices to benefit or preference small and medium businesses.

Not supported. The Government is committed to making it easier for businesses to access the Commonwealth procurement market. A key principle of the Commonwealth procurement framework is to provide full, fair and reasonable opportunities to businesses to bid for Commonwealth work. The CPRs require officials to apply procurement practices that do not unfairly discriminate against SMEs, as well as a commitment for non-corporate Commonwealth entities to source at least 10% of procurement by value from SMEs. This target has consistently been met—SME participation in 2013-14 was 34.4% by total contract value and 55.2% by total number of contracts.

The Government's productivity agenda encompasses a specific small business policy agenda, focused on reducing red tape burdens, improving the operating environment, and enhancing government engagement with small business to build capability. It is by establishing the policy settings that remove the impediments to efficient business operation that the Government can most effectively assist small businesses build competitive advantage and help position them to bid for government work.

6.

3.67—The committee recommends the Department of Finance provide education and training to agencies and their staff regarding the inclusion of Australian standards, or the equivalent, in tender documentation.

Supported. Finance has included a specific requirement in the Commonwealth Contracting Suite to include relevant standards in any approach to market.

Finance will also include information on the use of standards in procurement in any future training programmes developed by the Department.

7.

4.36—The committee recommends that the government develop a methodology to quantify the factors used to assess whole-of-life costs.

Not supported. Achieving value for money is the core rule in the CPRs requiring Commonwealth entities to consider the relevant financial and non-financial costs and benefits of each submission and document how value for money was considered and achieved.

Due to the large range of goods and services procured by Commonwealth entities, a one-size fits all cost benefit analysis methodology would not be feasible to implement.

Further, the CPRs require Commonwealth entities to include in request documentation a complete description of the evaluation criteria to be considered in assessing submissions.

The CPRs (paragraph 4.6) detail the types of whole-of-life costs to be considered as part of the value for money assessment when undertaking a procurement. Whole of life costs include:

a. the initial purchase price of goods and services;

b. maintenance costs;

c. transition out costs;

d. licencing costs (when applicable);

e. the cost of additional features procured after the initial procurement;

f. consumable costs; and

g. disposal costs.

8.

4.39—The committee recommends that during its next procurement-related audit, the Australian National Audit Office review the operation of the revised Commonwealth Procurement Rules, particularly the revisions relating to the assessment of financial and non-financial costs and benefits, and provide an evaluation.

The Auditor General has responded directly to the committee indicating his support of this recommendation.

9.

5.23—The committee recommends that during the early implementation stages of the new suite of contract documents for procurements under $200,000, the Department of Finance will address the concerns about complexity of documentation raised during the inquiry and make any necessary adjustments.

Supported. Finance is constantly seeking input from non-corporate Commonwealth entities as they implement the Commonwealth Contracting Suite. Finance is also working with the Australian Small Business Commissioner to take into account issues raised by small business relating to tender processes and with other industry bodies to reduce complexity and reduce red tape.

The Government has committed to transform and enhance the existing Australian Small Business Commissioner role into a Small Business and Family Enterprise Ombudsman (Ombudsman) with real power. A key role of the Ombudsman is to be a Commonwealth-wide advocate for small business. The Ombudsman will be well positioned to advise the Government on procurement practices that reduce complexity and assist businesses to find opportunities and competitively bid for work.

The Government is committed to making it easier for business to access the Commonwealth procurement market and engage with the Government. The introduction of the Commonwealth Contracting Suite is one example of how contract documentation and insurance requirements have been significantly simplified. The use of colour-coding in contract documentation makes it easier for businesses to understand their rights and obligations, saving businesses time and money.

10.

5.25—The committee recommends that, as part of its longer term process to review and reform the procurement framework, the government consider best practice examples from other jurisdictions to further simplify the tender process.

Supported. Finance constantly reviews better practice examples from other jurisdictions and from international organisations such as the OECD and the IMF to assess their applicability to the Australian environment, particularly in relation to simplifying the tender process.

11.

5.52—The committee recommends that, following consultation with stakeholders, the Department of Finance establish an independent and effective complaints mechanism for procurement processes.

Not supported. There is an existing framework for suppliers to raise complaints regarding procurement processes. The CPRs require Commonwealth entities to apply equitable and non-discriminatory complaints-handling procedures. Entities should aim to manage the complaint process internally, when possible, through communication and conciliation.

Suppliers should, in the first instance, take their concerns to the procurement officer undertaking the tender process. If a supplier's concerns are not resolved, the supplier can put their concerns in writing to the entity's Chief Executive Officer for a formal review. If the complaint is still not resolved, the supplier can refer the complaint to the Australian Government Procurement Coordinator who can act as an intermediary between the supplier and the entity. Information on how to lodge a complaint is provided on the Finance website (refer http://www.finance.gov.au/procurement/procurement-coordinator/complaints-handling-charter.html).

If a supplier is not satisfied with the outcome, they can approach the Commonwealth Ombudsman, who has extensive powers to investigate procurement related complaints.

Additionally, the Australian Small Business Commissioner offers information and advice to small businesses, including referral to dispute resolution services. Once established, the Small Business and Family Enterprise Ombudsman will be a concierge to help smaller businesses with issues, complaints and disputes, find the best organisation to deal with their complaint, and will offer its own alternative dispute resolution service in limited circumstances.

12.

5.54—The committee recommends that the government provide an explanation as to whether there are any reasons why the operation of the Competition and Consumer Act 2010 should not apply to Commonwealth procurement.

Supported. A schedule to the Competition and Consumer Act 2010 (CCA), the Australian Consumer Law (ACL), prohibits certain conduct, such as engaging in conduct that is misleading and deceptive, which may be relevant in the procurement context. However, the courts have held that the Commonwealth is not ordinarily 'carrying on business' when procuring goods and services (JS McMillan Pty Ltd v Commonwealth (1997) 77 FCR 337). Accordingly, the CCA would not generally apply to the Commonwealth in its procurement activities (see section 2A of the CCA).

Although not bound by the Act, Commonwealth officials are still prevented from engaging in misleading and deceptive conduct when undertaking procurement. The CPRs require officials to act ethically and for procuring entities to apply equitable and non-discriminatory complaint-handling procedures if a complaint is received about the conduct of a procurement.

The Competition Policy Review Final Report was released on 31 March 2015 and discussed similar issues. The Government will consider this recommendation alongside recommendations and views contained in the Competition Review Final Report, after which time the Government will assess its response.

13.

5.73—The committee recommends that the Australian National Audit Office, in the course of its next procurement-related audit, undertake an assessment of the application and implementation of relevant procurement-connected policies.

The Auditor General has responded directly to the committee indicating his support of this recommendation.

14.

5.76—The committee recommends that the Department of Finance work with the lead agencies for procurement-connected policies and the Department of Prime Minister and Cabinet to develop a whole of government annual reporting framework for monitoring of and compliance with these policies.

Supported in-principle. As part of the Government's Spring red tape repeal day initiatives announced on 22 October 2014, all procurement-connected policies are actively being reviewed to test their currency and suitability to remain linked to the procurement framework. Further, a robust framework will be established for the approval of any new procurement-connected policies with a focus on minimising the impost to business and the not-for-profit sector and ensuring effective monitoring of and compliance with these policies.

15.

5.89—The committee recommends that the procurement-related audit by the Australian National Audit Office to assess the application and implementation of procurement-connected polices also include an assessment of the competencies of agencies' procurement officers.

The Auditor General has responded directly to the committee indicating his support of this recommendation.

 

Additional recommendations from Senators Xenophon and Madigan

No.

Recommendation

Government Response

1.

That the Government urgently redraw the CPRs specifying a range of 'whole-of-life' factors that must be addressed in a procurement, including the social and economic benefits of locally sourced procurement.

Not supported. Refer response to recommendation 7 above.

The CPRs are not intended to target specific categories of goods or services, nor specific industries. The CPRs require procuring officials to treat suppliers equitably and not discriminate in relation to the degree of foreign affiliation or ownership, location, or the origin of the goods and services being procured.

Achieving value for money is the core principle of the CPRs, however price is not the sole determining factor in assessing value for money. A comparative analysis of the relevant financial and non-financial costs and benefits inform a value for money assessment. These factors include quality of goods and services, fitness for purpose, innovation and adaptability over the life of lifecycle of the procurement, environmental impact and whole of life costs.

From a practical perspective, any proposal to include social and economic benefits of locally sourced procurement would require procuring officials to consider many uncertain variables in each procurement evaluation which would demand very specific expertise and impose significant compliance costs.

2.

That the Government, as an appendix to the CPRs, specify a methodology as to how a procurer must quantify or 'score' these 'whole-of-life' factors in procurement decisions and how they are to be assessed in comparison to quality and cost measures as part of the overall procurement decision.

Not supported. Refer response to recommendation 7 above.

3.

That the Government consider the adoption or integration into the methodology from recommendation 2 a 'holistic, whole of life, cost benefit analysis'. This form of analysis is used commonly in the mining, resources, energy and infrastructure sectors.

Not supported. Refer response to recommendation 7 above.

4.

That the Department of Finance introduce a simple check with suppliers to track the true number and percentage of Australian suppliers to government.

Not supported. Self declaration by suppliers is a less robust and accurate mechanism than current processes (using ABN, if available, of each supplier and their business address) to estimate Australian content in Government procurement contracts. Further, a consensus definition of what is 'Australian' is difficult to achieve. For example, 'Australian' businesses may be resellers of goods manufactured entirely or partially overseas; equally, non-Australian businesses may deliver services that are developed and delivered within Australia, by Australians.

In addition, the creation and maintenance of a supplier register, along with the associated authorisation and data quality controls, would impose significant red tape on suppliers.

In 2012-131, Australian Government entities reported 67,854 procurement contracts valued at $39.3 billion on AusTender. Analysis of AusTender data indicates that Australian suppliers are competitive on their own merits in winning contracts and are well represented in Commonwealth procurement:

92.0% of services are likely to have been sourced from Australian suppliers;

70.1% of goods are likely to have been sourced from Australian suppliers; and

Of the 11,460 suppliers contracted, 10,212 (89.1%) were SMEs.

5.

That the Government make it a rule that overseas suppliers must comply with Australian product standards without exception.

Not supported. Under the CPRs, which incorporate Australia's international free trade obligations, request documentation must include a complete description of the procurement, including the nature, scope and (where known), the quantity of the goods and services to be procured, and any requirements to be fulfilled, including any technical specification, conformity certification, plans, drawings or instructional materials. When prescribing specifications for goods and services a relevant entity must base technical specifications on international standards, when they exist and apply to the relevant procurement, except when the use of international standards would fail to the meet the relevant entity's requirements or would impose greater burdens than the use of recognised Australian standards.

When specifications are included in the tender documentation, all suppliers regardless of their origin, must comply with these specifications.

Under Australia's current system, standards are voluntary until mandated by law. While voluntary standards are a type of quality assurance and self-regulation that suppliers may use to ensure product safety, mandatory standards are made for products that are likely to be especially hazardous. It would be difficult to make Australian product standards mandatory for all suppliers and this would greatly increase costs for business and the Government. Furthermore, regulation in certain sectors, including the extent to which they mandate Australian Standards, is a matter for state and territory authorities.

6.

That potential overseas suppliers are required to bear a reverse onus of proof, making them responsible to prove to Australian procurement officials that the claims made about their product are correct.

Not supported. Under the CPRs, procuring Commonwealth entities must include in request documentations any technical specifications which are required for the procurement. When specifications are included in tender documentation, all suppliers regardless of their origin, must comply with these specifications. The onus of proof of the required specifications applies to all potential suppliers regardless if they are Australian or overseas suppliers.

7.

That the Government apply a comprehensive and transparent system of efficacy testing and quality assurance to verify the claims made by overseas suppliers about their products' quality, environmental sustainability and fitness for purpose.

Not supported. Australia's system works on the basis of post-market surveillance and not all products (either imported or domestically produced) are tested before they enter the Australian marketplace. The Australian Consumer Law (ACL—a schedule to the Competition and Consumer Act 2010) provides a system of guarantees for consumers who acquire goods and services from Australian suppliers, importers or manufacturers. This includes a guarantee that goods will be of acceptable quality, fit for a particular purpose and match their description. In addition, it is illegal under the ACL for a supplier to make a false or misleading claim, including stating that their products meet a standard if they do not.

8.

That the Government appoint an Australian Industry Participation Advocate, and an office to support him or her, to work with Australian businesses to better position them for bidding for procurement work and with governments to constantly revise procurement rules so as to maximise Australian involvement.

Not supported. Establishment of a new position is unnecessary. The new Entrepreneurs' Infrastructure Programme aims to improve the capabilities of SMEs to become more productive, competitive and growth focused.

Also refer to the response to the Committee's main Recommendations 4 and 15 above.

1 The most recent analysis undertaken regarding Australian versus overseas sourced contracts was conducted using 2012-13 data.

 

Australian Government response to the Senate Economic References Committee report:

Part I Inquiry into the Future of Australia ' s Naval Shipbuilding Industry Tender Process for the Navy ' s New Supply Ships

April 2015

Recommendation 1

The committee recommends that the tender process for the two replacement replenishment ships:

be opened up to allow all companies, including Australian companies, to compete in the process; and

make clear that a high value will be placed on Australian content in the project.

Government Response Disagree

Part 1 " be opened up to allow all companies, including Australian companies, to compete in the process "

The key determinants in reaching the decision to go off-shore were the schedule and cost impact of an Australian build and the imperative to replace HMAS Success in the 2021-22 timeframe.

The replacement of both HMA Ships Success (in particular) and Sirius is Navy's highest priority because they are essential enablers of operational capability.

It is important to note that Defence has commenced a program to improve Success's materiel state, allocating around $365 million to sustain the ship to financial year 2021-22 (forecast Initial Operational Capability of the first replacement ship). This work is being undertaken by companies in Australia. Activities to sustain Success even further past its planned withdrawal from service, to accommodate an open tender process, are yet to be assessed. However, due to the obsolescence of equipment fitted to HMAS Success, these activities are likely to come at a considerable cost above what has already been committed.

The Government's decision regarding a limited tender for the replacement replenishment ships was announced simultaneously with its decisions to bring forward work to keep open the option of building the Future Frigates in Australia; an open competition with Australian industry to construct the replacement Pacific Patrol Boats; and the development of an enterprise-level Naval Shipbuilding Plan as part of the White Paper 2015 process.

Defence is continuing to pursue all three of these activities to allow the Government to consider competitive Australian business to participate in future naval shipbuilding, sustainment and upgrade projects.

Schedule Impact

Defence has advised that the extended schedule associated with the construction of a supply ship in Australia is highly unlikely to meet the required in-service date for Success's replacement leading to the risk of a gap in the Royal Australian Navy's capability to deploy combat power.

It is also assessed that, given the lead time to commence construction of an Australian build, a decision to conduct an open tender would have no impact on impending job losses in Australian shipyards.

Experience with AWD and the ANZAC Ship Projects and more recently the Canadian Joint Support Ship (JSS) Project (two supply ships for the Canadian Navy) suggests five to six years is required from the initial approach to industry for a design through to the contract award and "cut steel". For example:

The initial Risk Reduction studies for AWD were commenced in early 2004, yet construction did not start until Jan 2010.

Designs for the ANZAC Ship Project were tendered in 1986, with Defence selecting Blohm+Voss (Germany) as the designer. Work (cut steel) started approximately six years later in March 1992 (Note: production started well before the detailed design was completed in September 1993, resulting in significant rework). Although delivered in March 1996, HMAS ANZAC was not accepted into naval service until mid-2000.

In November 2010, Canada announced a decision to commence design studies through release of a Request for Proposal to Navantia and TKMS for the JSS Project. The JSS specification is closely aligned with that produced for SEA1654-3. The JSS build contract is currently scheduled for December 2016.

These extended schedules for construction of a supply ships are associated with the requirement to adapt the design and where appropriate the shipyard facilities to achieve productivity gains associated with larger block construction.

Based on this, Australian industry would be unable to deliver the capability sought by SEA1654-3 prior to 2022-23; whereas unsolicited proposals from Navantia and DSME for an offshore design and build suggest 2019-20 delivery is achievable.

Cost Impact

In 2007 Defence commissioned a report by Appledore International from the UK to undertake an assessment of Australia's capacity to build the forward section of the LHD. In 2013 Defence commissioned a further report (by leading internationally recognised consultancy within Royal Haskoning DHV, First Marine International (FMI)) to undertake an assessment of the Australian shipyards' capacity to support construction of the supply ships.

The conclusions of both the Appledore and FMI reports was that "Australian Shipyards currently do not have the capacity to build these ships at similar productivity levels to those achieved during the construction of the Spanish Supply Ship Cantabria without making a significant investment in infrastructure, which is unlikely to be amortized over a two ship build".

Defence SA has previously advised that upgrade options (to support construction of the supply ships) for the shiplift include a $20m upgrade for lift capacity increase, a $50m upgrade for lift and length capacity increase and up to a $175m upgrade for the shiplift to be useful for sustainment of any naval ship. It is acknowledged that there would be some return on investment in facilities for future sustainment of the ships; however experience on the ANZAC Ship Project suggests that productivity saving associated with learning curve effects including facilities upgrades will not be realised with a two-ship build.

Preliminary analysis of unsolicited proposals from Navantia/BAE, Navantia and DSME indicate an approximately 40 percent cost premium, compared with a full off-shore build, if 40 percent of the build was undertaken in Australia. Noting that the specific details of the unsolicited proposals remain commercial-in-confidence, Defence has not quantified the additional cost premium associated with fully building the supply ships in Australia.

Part 2 " make clear that a high value will be placed on Australian content in the project. "

Defence has sought to influence the designer's commitment to Australian content through the "commonality" requirements set out in the Risk Reduction Design Study statement of work:

The ship design shall investigate commonality with equipment currently in service, or planned to be in service in the Royal Australian Navy.

This may include areas of commonality leading to lower life-cycle costs, such as with training requirements, through life support (including sustainment) and other areas that would contribute to lowering the cost of ownership of the capability.

Prospects for Australian content include, but are not limited to:

design and installation of C4I systems,

specialist Integrated Logistics Support (ILS) Systems,

development and support of Royal Australian Navy-specific 'support products'.

Recommendation 2

The committee recommends further that the government require that an open tender process be used for any future naval acquisitions.

Government Response Disagree

The Government is supportive of open tendering whenever it is assessed as the best procurement method available to attain the core principle of achieving value for money for the Australian taxpayer.

However, in the case of the Future Submarine Program an open tender process which involves approaching all submarine producers is clearly not an option.

A formal request for tender to design and build the future submarine would be a lengthy process. It would involve extensive work to fully define submarine specifications against which competitors would then have to develop detailed designs that could be evaluated for performance and then priced with any degree of reliability.

All of this would take at least five years before reaching the point of selecting the international design partner. The competitive evaluation process for the Future Submarine Program as recently announced by the Government will run for at least 10 months after which the international partner will be selected. A competitive evaluation process is the only way forward that ensures that a submarine capability gap will not occur while at the same time delivering the best capability to the ADF and value for money to Australian taxpayers.

Moreover, to require that all future naval acquisitions occur via open tender would limit the ability of the Government to choose to go directly to Australian Industry as was the case with the Landing Helicopter Dock (LHD), Air Warfare Destroyer (AWD) and ANZAC Frigate procurements. In addition, this decision would also impact the current procurement activities in support of ANZAC Class and Future Frigates, which are specifically supporting Priority Industry Capabilities within Australia with studies such as the CEA Technologies Phased Array Radar.

Pacific Patrol Boat replacement is also planned to be a limited tender to Australian Industry which, as identified in Senator Edwards' Dissenting Report, would be impacted.

Without the ability to limit tenders through the use of the Commonwealth Procurement Rules there is a potential that the cost of tendering for industry will increase. This is a constant concern expressed by industry in relation to DMO procurement. Procurement strategies are developed on a case-by-case basis in consideration of the global market and the ability of industry to deliver the capability that is required on time and on budget. The ability to limit tenders is also paramount to Commonwealth National Security, with sensitive capability requirements and considerations being classified, and specifically quarantined from non-allied nations.

An inability to use limited tender will also impact interoperability and the ability for the Commonwealth to meet international obligations. Specifically, we would be unable to draw on Government to Government procurement arrangements for supply of naval weapons, and communications systems.

Recommendation 3

The committee notes that Defence has identified areas where potential exists for Australian industry to become involved as sub - contractors in the replenishment ship project. In this regard, the committee recommends that Defence become actively involved in encouraging and supporting Australian industry to explore such opportunities.

Government Response Agreed in principle

Prospects for Australian content include:

design and installation of C4I systems,

specialist Integrated Logistics Support (ILS) Systems,

development and support of RAN specific 'support products'.

Overall, decisions on industry options will consider Value for Money assessments and the trade off between enhancing local industry capability and the delivery of the required capability on time and within budget.

In accordance with Defence's Australian Industry Capability policy, Defence continues to encourage and support Australian industry. Prospects for Australian content in Project SEA1654-3 will be further developed during the preparations leading up to the release of Requests for Tender for both the Prime Acquisition and Sustainment contracts. It is expected that both designers will engage with Australian industry during the development of their responses to the Prime Acquisition and Sustainment RFT's.

Recommendation 4

The committee recommends that the government release the report of the independent review of the AWD program undertaken by Professor Don Winter and Dr John White.

Government Response Disagree

Release of the independent report (Winter/White Report) could damage the commercial interests of the Commonwealth, as its contents relate to a range of sensitive commercial negotiations that are currently underway. The Government considers the report is highly sensitive in relation to current and future shipbuilding tenders and negotiations.

Senate adjourned at 16:09