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Finance and Public Administration Legislation Committee
22/05/2017
Estimates
PRIME MINISTER AND CABINET PORTFOLIO
Australian National Audit Office

Australian National Audit Office

[22:01]

CHAIR: I welcome Ms Rona Mellor PSM, Acting Auditor-General, and officers of the Australian National Audit Office. I thank officers for providing the committee with summaries of recent performance audit reports in advance of the hearing, and they have been circulated to the committee. Ms Mellor, do you wish to make an opening statement?

Ms Mellor : No, thank you, Chair.

CHAIR: We will go to Senator Xenophon.

Senator XENOPHON: Ms Mellor, in relation to the Future Submarine Program audit, your audit gave Defence a pretty broad tick of approval; however, your report stated the following:

The decision to select one design partner, as opposed to two, was made on the basis that Defence did not have the technical resources to retain two partners.

…   …   …

The approach taken by Defence for the Future Submarine program removes competition in the design phase, and removes incentives for the international partner (DCNS) to produce a more economical and efficient build. This places the onus on Defence to ensure that its approach to the Future Submarine’s design and build phases, where final costs and schedules will be determined, returns value-for-money to the Commonwealth in the absence of a competitive process.

Noting that this is the largest Defence program ever embarked on, how will this onus on Defence be discharged and what role does your office have in order to undertake this?

Ms Mellor : I will ask Dr Ioannou.

Dr Ioannou : Yes, those points were made in the recent performance audit of the Future Submarine Program. We looked specifically at the competitive evaluation at the evaluation process. I think your question is in two parts. First of all, there is an expectation, given the character of that evaluation—and we have tried to broadcast this in that audit—for Defence to be thinking through options to maintain competitive pressure in its future procurement of the submarines. In terms of the second part of your question, this is the first of a series of audits that the Auditor-General has flagged and foreshadowed. We have been in a conversation with Defence about what such a program would look like, but in a sense the second audit into the project has kicked off. We are currently looking at the mobilisation phase of the naval shipbuilding plan in the round, and there will be a particular focus on the industrial mobilisation of future submarines.

Senator XENOPHON: If we can just move on—and if you wanted to add other matters on notice, we can do that. You have accepted—it seems that the ANAO has accepted the reason given by Defence that they do not have the technical resource to retain two partners. Is that something that you have delved into—in other words, given it is a $50 billion project, if the cost of Defence, having that technical capacity to have that competitive process, would have been X million dollars but could potentially have saved many millions of dollars more, can you test the assertions made by Defence in respect of this?

Dr Ioannou : They were representations made to the Audit Office by Defence. We have reproduced them in the report. You will appreciate that the skills involved in building diesel-electric submarines of this type are fairly—rare is not the right word—limited. They are high-end skills, and we reported those representations in the audit but, again, the Auditor-General wanted to broadcast, as I said, that we would be looking for evidence of how Defence was maintaining competitive tension in the process.

Senator XENOPHON: I might put that on notice about: do you test these assertions? In terms of Australian industry content, where Australian companies can be eliminated from participation on the claim that it is to be costly or too much risk—because that has been an issue that I have had constituents approach me on, in particular, in relation to a periscope contract that has been in the media. How will you be looking into this in terms of examining the project and ensuring that there is maximum Australian industry participation rather than the excuse given that an Australian firm cannot do it: it is too risky or too costly?

Dr Ioannou : We audit against the promise, if you like. So, if the Department of Defence has been given government instruction to take into account Australian industry content or participation, we will audit against the expectation and the promises that are made and report accordingly.

Senator XENOPHON: I will put some questions on notice about industry participation, but that segues into not a Defence issue but a shipbuilding issue. The icebreaker audit, which came out on March 30 this year, seems to be a somewhat scathing audit. It says:

While the Department of the Environment and Energy has contracted for a vessel to meet its expected needs, the procurement process was largely non-competitive with an outcome that is higher than the cost benchmarks established by the department, and significantly greater than the current chartering costs. The department therefore cannot demonstrate that its procurement is providing value with public resources.

I find those findings very disturbing, and I think that there is a potential cost for that icebreaker contract of some, I think, $1.912 billion over the next 34 years. It is also quite critical in terms of RFP contract principles and the difference between RFP and RFT. In relation to that contract, has your office looked at whether the contract has a termination clause, because of the significant variations between the RFP and the RFT contracts; and has your office considered whether there is a breakpoint calculation that allows the Commonwealth to terminate the contract and take a different direction that represents a much cheaper option for the taxpayer and, with it, potentially, a much greater degree of local content?

Dr Ioannou : I do not think I have the answer to the specifics at my fingertips. We will probably have to take the more specific question on notice.

Senator XENOPHON: I will put that on notice. But, is it within your power to make a recommendation saying, 'The cost here has blown out so much that maybe they need to start again' whatever the break costs would be at this stage? Can you undertake that assessment—is it within your power to say, 'This is such a mess. They should start afresh,' given that the $1.9 billion cost, the fact that there was a lack of competitive tension and there is a 20 per cent difference between the RFP and the RFT?

Dr Ioannou : I think what you see before you are the Auditor-General's conclusions in that report, so I am not going to add to them.

Senator XENOPHON: That goes a bit further. Finally, in the remaining two minutes, in terms of confidentiality in government contracting, I refer you to the 2001 Senate procedural order for continuing effect in terms of entity contracts where your office has a formal auditing role in relation to the Senate standing order—that is correct?

Dr Ioannou : Yes.

Senator XENOPHON: When you do an audit, you look to the confidentiality provisions and make an assessment as to whether the confidentiality claims are in order—I think that is the case. I will not go into details of Senate standing order 9, but an order for production was made with respect to the submarine design and mobilisation contract. In response, the minister tabled a heavily redacted contract. Can you please, on notice, check the tabled document to see if the redactions made by the minister are wholly and exclusively consistent with the agreed confidentiality clauses and provide your determination to the committee, or has that already been done?

Ms Mellor : I am going to take that on notice, if you do not mind, because we will be planning another confidentiality audit. We have one left in the current standing. We have not done it in relation to that contract, but it may be something that we do.

Senator XENOPHON: Obviously, your work program is your work program but, given this is $50 billion, that the minister has made a number of assertions and this is something that I jointly co-sponsored with Senator Carr, the opposition shadow industry minister, it concerns me that it was heavily redacted. I wonder whether you had a role in determining whether those redactions were in accordance with the Senate procedural order for entity contracts. Could you take that on notice, please.

Dr Ioannou : Yes.

Senator WONG: Can I please ask, because we have not been advised, are you the Acting Auditor-General?

Ms Mellor : I am acting while the Auditor-General, Grant Hehir, is on annual leave.

Senator WONG: Are you the only Acting Auditor-General who tweets?

Ms Mellor : I do not think he does tweet.

Senator WONG: No, you do.

Ms Mellor : I do; I tweet about my children, as you do.

Senator WONG: I do not tweet about my kids much. I have got some questions about the audit done in respect of the payment to the North East Vocational College, which was former Senator Bob Day's college, and your audit report on that. Do I ask those questions of you?

Ms Mellor : Yes, you may and of Dr Ioannou.

Senator WONG: This is in relation to $1.84 million grant which Senator Simon Birmingham decided to keep directly to any CV, not in any competitive process, and after there was a recommendation from an advisory group not to fund it—correct?

Ms Mellor : There was an advisory group that did make a recommendation, although its terms of reference did not include that that was our finding in the audit.

Senator WONG: That is not correct:

The Advisory Group agreed not to support the Student Builder proposal—

page 13.

Ms Mellor : Yes, I understand that. The terms of reference in setting up that advisory group did not include making recommendations.

Senator WONG: That is convenient. Mr Dreyfus, the shadow Attorney-General, wrote to the Auditor-General—to the office—requesting that you look at the audit of this particular grant. You responded—was that you?

Ms Mellor : That is right.

Senator WONG: In your deputy role. You responded to him advising that the Auditor-General had decided to conduct an audit of DETS—shall we call them DETS or is it DET?

Ms Mellor : DET.

Senator WONG: DET's establishment of the apprenticeship training alternative delivery pilots program—when was a decision made that the Auditor-General would conduct that audit?

Ms Mellor : If I recall, the letter requesting the audit came in later late in 2016. The decision was made in January, and then I wrote to the parliamentarian.

Senator WONG: So there wasn't an independent decision—so you were prompted to consider auditing that particular set of decisions as a result of Mr Dreyfus's letter or by some other means?

Ms Mellor : That is correct. We receive many letters from members of parliament, and the Auditor-General determines whether to follow through with audits on each one.

Senator WONG: Did you examine the specific circumstances around awarding the grant to the North East Vocational College.

Ms Mellor : The Audit Office undertook an audit against criteria that the Auditor-General determined to assess whether the department had established the program in accordance with the Commonwealth Grant Rules and Guidelines.

Senator WONG: Who made the decision? There are a number of other criteria that could have been included—value for money.

Ms Mellor : It was a grant, so it was done under the grant guidelines to see whether or not the department—

Senator WONG: What other criteria could have been included?

Ms Mellor : I do not know. These were the ones that the Auditor-General chose.

Senator WONG: I am asking you; I would like to understand what he chose not to include as criteria.

Ms Mellor : All I can speak to is what he chose to include as criteria.

Senator WONG: That is not so helpful.

Ms Mellor : Well, it is in his discretion to so do.

Senator WONG: Exactly. So I would like to understand what he chose to exclude and why.

Ms Mellor : I am not sure that he chooses to exclude. I think he looks at the broad question that is being asked: whether there is a standard to audit against. The one he chose to do so was the Commonwealth Grant Rules and Guidelines.

Senator WONG: Right. I am asking: what other criteria can one audit against—can one audit against value for money?

Ms Mellor : We cannot audit against procurement guidelines, if it was a procurement.

Dr Ioannou : If I can help: this is the starting point for all grants audits, of course.

Senator WONG: Yes, I am aware of that, but it is not the only criterion that you have used in the past.

Dr Ioannou : It is the bedrock of all of our grants audits.

Ms Mellor : In this case, it is a non-competitive grant.

Senator WONG: Yes, I understand that. But are there not other audits that I could go through in relation to grants where I would find more than one criteria against which you have audited?

Dr Ioannou : I think what you will find is almost universally that the audit objective and subcriteria focus in almost every case that I can think of around the Commonwealth grant guidelines, or various iterations of those, over time when it comes to grants audits.

Senator WONG: Yes. Senator Day was a director of that college.

Ms Mellor : That is correct.

Senator WONG: Was his relationship with the college taken into account in the context of the audit?

Ms Mellor : It was a fact in contention, yes, in the audit. It is just a fact that he was a director.

Senator WONG: It is just a fact.

Ms Mellor : Well, it is a fact that he was a director.

Senator WONG: Only a fact; it has no other potential applications?

Ms Mellor : On the evidence, it was a fact.

Senator WONG: Was the fact that he had lobbied the minister on behalf of the college for funding prior to the college being granted funding taken into account?

Ms Mellor : It was a fact that was in front of the audit, yes.

Senator WONG: What do we call the CPRs now—grants rules and guidelines?

Dr Ioannou : Yes.

Senator WONG: They also underscore the importance of avoiding actual perceived conflicts of interest—don't they?

Dr Ioannou : Yes. They are in two parts, of course: there are the rules at the front end and then there are the various grants principles.

Senator WONG: The principles also include avoiding actual or perceived conflict of interest.

Dr Ioannou : The principles have for a long time discussed the need to have proper regard to issues of probity and conflict of interest, yes.

Senator WONG: Did you assess the facts of this case against that principle?

Dr Ioannou : The audit effectively assessed against the mandatory requirements—the rules—and in this case the rules do actually make provision for, as you will appreciate, non-competitive grants processes, yes.

Senator WONG: I understand that. He is a bloke whose vote was needed, and he got a grant in these circumstances. Did you turn your mind to how that might have looked?

Probity and transparency, I think it is now described as—yes?

Dr Ioannou : Yes.

Senator WONG: That includes ensuring that granting activities are impartial. Did you consider how these facts looked in the light of these principles?

Ms Mellor : I am not sure that 'look' is what we are looking for. We are looking for evidence as to whether or not the process followed the guidelines. It was quite open in the advice that was going from the department that this person, Senator Day, was a director. It was open to the minister to make the grant, if he was advised around the grant as required under the guidelines.

Senator WONG: Did the audit consider, given the requirements as to probity or transparency, whether there was an actual or perceived conflict of interest?

Ms Mellor : By the minister?

Senator WONG: Yes; he wanted his vote.

Ms Mellor : There was no audit evidence that said anything other than: here was an alternative pilot that the minister was interested in funding. There was no audit evidence that said the sorts of things that you are suggesting. We have to audit on the evidence against the standard.

Senator WONG: So the fact that they are lobbying him for his vote—did you take that into account?

Ms Mellor : It was—

Senator WONG: Is that a fact?

Ms Mellor : I do not know.

Senator WONG: Really?

Ms Mellor : We did not audit whether he was being lobbied for a vote. We audited whether or not a $1.84 million grant, non-competitive, was made under the guidelines with the appropriate advice of the department.

Senator WONG: I will come to that. The apprentice reform advisory committee that the minister established included two government members of parliament—sorry, it included a current government member of the parliament and former government senator: Mr Laundy and Senator Lindgren. Is that right?

Ms Mellor : I do not recall the names—I actually do not have the detail of the audit; I only have the summary in front of me, but it was made up of a range of people.

Senator WONG: Well, it is not a range, is it, because you have two Liberals, no other parliamentarians—

Ms Mellor : Industry bodies.

Senator WONG: But two demonstrably party-political people, like a serving parliamentarian and a recently departed former Liberal senator.

Ms Mellor : And industry bodies.

Senator WONG: So that is okay, is it?

Ms Mellor : We do not set a standard for advisory bodies.

Senator WONG: No, you do not, but you do audit against those guidelines, which include probity and transparency. I would suggest to you that having a body, which has two partisan-political people which is making recommendations in terms of the assessment of the merits or otherwise of a grant, is problematic.

Ms Mellor : The body was not assessing the merits or otherwise of the grant; it was asked to come up with alternative delivery pilots for the government to consider, and then the government made its own mind up about to whom it paid the grant.

Senator WONG: I am going to go to appendix 2, the time line of key events. I just want to make sure in terms of the facts that we are agreed. It was a fact that—I am sorry; I think I have misspoken. Senator Lindgren, I think, was still a Liberal senator when the advisory group was established, so the minister set up an advisory group with two serving Liberal parliamentarians; is that correct?

Ms Mellor : The names are not ringing a bell for me, and Dr Ioannou has just said that we do not think we have covered that—

Dr Ioannou : I do not think the membership of the committee has been recorded in the audit, from my recollection.

Senator WONG: So you didn't look?

Dr Ioannou : No, I do not think I said that. It is just a factual statement that the names have not been reproduced in the audit.

Senator WONG: And you don't think it was relevant that the advisory group had two serving Liberal parliamentarians on it?

Ms Mellor : The purpose of the advisory group, as I recall—if you can just find it in the beginning of the audit—was to provide advice on ideas about alternate apprenticeship training pilots. It was not to decide who received grants. Insofar as what its purpose was, we looked at that aspect of its purpose. We were not looking at who the members were for any other purpose.

Dr Ioannou : Paragraph 2.2 of the audit—this is the ARAG, I think, that we are talking about?

Senator WONG: Yes.

Dr Ioannou : ARAG's terms of reference—

Senator WONG: Yes, I can read that. I think that out there people might think—

Dr Ioannou : did not include assessing proposals or making specific recommendations.

Senator WONG: Let us just get the time line. I think these are all facts. First, Senator Birmingham met with Senator Day on 1 June 2015.

Dr Ioannou : Are you reading from appendix 2?

Senator WONG: Appendix 2—I thought I said that. Shall we go back? On appendix 2, can we agree this: first, in June 2015, Minister Birmingham meets with Senator Day—correct?

Ms Mellor : Correct.

Senator WONG: Second, Minister Birmingham sets up the ARAG on 3 September 2015. It includes, although you do not think it is relevant, two Liberals but no other parliamentarians.

CHAIR: I do not think their evidence was that it was not relevant, Senator Wong.

Senator WONG: I think it was.

CHAIR: I did not hear them say that.

Senator WONG: They do not think the entity is relevant to the audit. Third, the ARAG reviewed the proposal for the North East Vocational College and Senator Day.

Ms Mellor : There were presentations made.

Senator WONG: Fourth, the group delivers the report to Minister Birmingham. In that, as you identified at 2.2, even that group agreed not to support the student builder proposal from the North East Vocational College.

Ms Mellor : The ARAG made recommendations outside its terms of reference—that is what we note.

Senator WONG: Right, but they agreed not to support it. You do not think that is relevant? You have underlined it in the audit report, so you must think it is a bit relevant.

Ms Mellor : We thought it was worth noting in the sense that they provided advice to the minister and the minister has chosen to act in a different way, which he is entitled to do.

Senator WONG: He chose to act contrary to that advice.

Ms Mellor : He was entitled to make his own decision, which he did.

Senator WONG: The minister's office then requests the department, notwithstanding the position of the group, to develop an option for funding pilots.

Ms Mellor : Correct.

Senator WONG: And then the government awards $1.84 million to North East Vocational College, of which Senator Day was the chief proponent.

Ms Mellor : And to others.

Senator WONG: No, the $1.84 million is to—

Ms Mellor : No, $1.84 million to that organisation, and there were grants made to others.

Senator WONG: I put to you that, notwithstanding the sort of legalistic answer you gave previously, that series of facts would give rise to concerns in a reasonable observer about this grant.

Dr Ioannou : Senator, if I can help: I think this is more a comment on the rule set. You will see in—

Senator WONG: I would like that question answered.

Dr Ioannou : If I may—

Senator WONG: No, I would like that question answered. You are answering a different question. I would like my question answered, please.

Dr Ioannou : I am trying to assist.

Senator WONG: Well, you are not. You are answering a different question. I would like my question answered, please.

Ms Mellor : You asked about the reasonable observer.

Senator WONG: Perhaps I will rephrase it. What I put to you is that a reasonable observer looking at that time line and that result would have concerns about this process and about the grant of public moneys to this entity.

Ms Mellor : The Auditor-General was requested to undertake an audit and chose to and in doing so found that, even in the context of that time line, the minister was entitled to make the grant in the way that he did.

Senator WONG: Which was contrary to the advice of the group.

Ms Mellor : As can happen.

Senator WONG: As can happen. Okay. Did you consider it was unusual that in fact they gave Senator Day's entity more than he asked for?

Ms Mellor : No. That is asking us to get into the mind of the minister at the time he made the call. All we have in front of us is the evidence.

Senator WONG: Did you inquire as to why they got nearly half a million dollars more than they asked for?

Ms Mellor : No. It is open to the minister to make the call under the guidelines. I think that goes to where Dr Ioannou was going, but the guidelines enable the minister to make that call.

Dr Ioannou : Basically, paragraph 2.4 of the audit notes that the proposal was agreed by the government on 30 November. I will refer you to paragraph 13.10 of the Commonwealth Grants Rules and Guidelines.

Senator WONG: I have a lot of familiarity with those. As the office of the Auditor-General, can you hand on heart tell taxpayers that this is a good use of taxpayer money?

Ms Mellor : What we can tell people is that it was open to the minister within the framework to make the call.

Senator WONG: On page 17 of the report you also drew attention to the fact that the final payment for all five projects funded under both streams occurred up to two years prior to the project being completed. You have previously as an office raised concerns. Is it frontloading? Is that how one describes that colloquially? Hasn't the Audit Office previously raised concerns about frontloading?

Dr Ioannou : What we look for, obviously, is payments against milestones.

Senator WONG: What are the milestones in relation to Senator Day's project, given that they were paid two years prior to completion?

Ms Mellor : I am not sure where you are reading from, Senator. As I read table 2.2, there are 10 milestones required, only one was met and only a payment of—

Senator WONG: I am reading from 2.21, which says:

The department’s internal legal area was requested to review the grant agreements before they were signed. The legal area drew attention to the fact that for all five projects, the final payment was due to occur in July 2017 even though the projects were not due to be completed until 2018 (NECA, MBA and PwC) or 2019 (NEVC and Ai Group) …

The 2019 relates to Ai Group and to Senator Day's entity. I am asking: did the Audit Office have any concerns with payments that were provided to entities so far in advance of projects being completed?

Ms Mellor : Obviously we have commented on that before. I think we raised the issue with the department, as per paragraph 2.22, which says 'the department has not sought to reallocate the funds.' We certainly raised it with the department and we certainly raised the matter generally in a number of audits recently about prepayments, frontloading and pre-milestone payments. So generally the answer is, yes, it is a concern.

Senator WONG: Thank you.

CHAIR: I thank the ANAO for their time and their evidence. We will move now to the Inspector-General of Intelligence and Security.