This edition of audit insights covers performance audit reports tabled in the Parliament during the third quarter of 2017-18. The focus is on the key learning that value for money can be significantly enhanced through officials engaged in a procurement ensuring they gain a full understanding of what is being purchased, for what outcome and the market they're operating in.

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Introduction

This edition of audit insights covers those performance audit reports tabled in the Parliament during the third quarter of 2017-18, with a focus on the key learning that value for money can be significantly enhanced through officials engaged in a procurement ensuring they gain a full understanding of what is being purchased, for what outcome and the market they are operating in. Value for money should be considered on a whole of life basis, not just purchase cost. Other audit reports from the 2017-18 program that had relevant insights have also been drawn on.

Understanding the market to deliver value in the procurement life cycle

Understanding the market, the options available and its ability to satisfy the procurement need over the product or service life cycle is necessary to ensure that value for taxpayers’ money is maximised. The Commonwealth Procurement Rules outline that when a business need arises, officials should consider whether the procurement will deliver the best value for money – and the basis for this assessment. A factor which may impact on this consideration is the market’s capacity to competitively respond to a procurement, as competition is a key element of the Australian Government’s procurement framework.

An informed Government buyer:

  • understands the supply market conditions, characteristics, capacity and capability for a planned procurement, including the types of services and products available, industry-pricing structures and any future changes in the industry or related technologies that could reasonably be anticipated
  • has the capacity and technical knowledge to describe the entity’s requirements to potential suppliers and evaluate, independently of suppliers, whether they can meet the requirement
  • can appropriately assess, on behalf of the Commonwealth, whether what was delivered as a result of the procurement process has demonstrably achieved value for money given the objectives of not only the procurement, but the policy or service it contributes to the term over which the service or good(s) will be provided.

This understanding contributes to the selection of a procurement method and sourcing strategy that is the most appropriate for the procurement activity, the risk involved and the value of the procurement.

These issues were considered in the audit of Defence’s Management of Materiel Sustainment which discussed the concept of being a “smart buyer”, which arose through the First Principles Review. The Review cites a US Government Accountability Office report:

‘A smart buyer is one who retains an in-house staff who understands the organization’s mission, its requirements, and its customer needs, and who can translate those needs and requirements into corporate direction. A smart buyer also retains the requisite capabilities and technical knowledge to lead and conduct teaming activities, accurately define the technical services needed, recognize value during the acquisition of such technical services, and evaluate the quality of services ultimately provided. As long as the owner retains the in-house capabilities to operate as a smart buyer of facilities, there does not appear to be any greater risk from contracting out a broad range of design review-related functions, so long as such functions are widely available from a competitive commercial marketplace. If the owner does not have the capacity to operate as a smart buyer, the owner risks project schedule and cost overruns and facilities that do not meet performance objectives’.

ANAO audits have found that entities can generate significant value from having an understanding of the market, the industry providing the goods or services and the product being purchased. The ANAO observed that entities that understood their market were better able to scope their service or product needs, were more aware of the options available and could better provide assurance of best value for money being delivered.

Where timeframes are tight for delivery of a product or service, spending time up front understanding the market can save time later as the product or service is better understood, can be more clearly scoped and therefore assessed, and a successful value for money outcome can be more clearly measured and reported on.

Illustrative audit examples from Quarter 3 2017-18:

Our audit of Defence’s procurement of fuels and lubricants found that Defence had designed and implemented an effective competitive tender process, which was informed by a detailed understanding of both the business need and how best to articulate this to the market in tender documentation, and in assessment of responses, including through the use of specialist expertise. However, Defence did not to fully capitalise on its understanding of the market as it did not develop a negotiation strategy to maximise value for money.

The fuels tender and evaluation process completed by Defence in 2015 was designed to produce a value for money outcome. Defence ran an open tender process, conducted detailed evaluation of tenders, considered price and non-price value, and applied an industry standard fuel pricing methodology. Defence did not have in place a strategy to negotiate certain cost components despite having potentially valuable information to negotiate lower prices, including external expert advice about the elements in the pricing methodology that had the greatest capacity for negotiation. As a consequence, Defence did not seek to negotiate a reduction in tendered prices at the negotiation phase. This compromised Defence’s ability to demonstrate that value for money was maximised. Given the volumes of fuel consumed, even relatively small price reductions, which could potentially have been achieved through negotiation, would have delivered additional savings to the Commonwealth.

The audit of the Australian Electoral Commission’s (AEC) procurement of services for the 2016 Federal Election found that insufficient emphasis was given to open and effective competition as a means of demonstrably achieving value for money. Specialist expertise was not utilised and therefore knowledge of the industry and potential options available were not sufficiently considered.

The audit found that the AEC had:

  • sought to encourage competition amongst transport providers but at times struggled to achieve value for money
    • the lack of specialist logistics expertise and transport industry knowledge resulted in an approach to market that did not sufficiently reflect transport industry standard practices and potential savings and efficiencies that could be delivered
    • the transport panel arrangement, to manage the transport of ballot papers and election day equipment, was established and managed centrally by a generalist procurement team. Prior to its establishment, each State Office provided detailed input on their transport needs and challenges.
    • while centralising this procurement and contract management activity achieved the aim of national consistency of contractual terms and conditions, it did not deliver efficiency or cost savings and did not fully utilise State-specific knowledge nor transport industry standards. Specialist transport and logistics knowledge may have assisted in driving improvement in outcomes.
  • not demonstrably achieved value for money in its procurement of services to scan ballot papers and record voter preferences
    • competitive pressure was not used to drive value and the entity did not otherwise appropriately benchmark the quoted fee

Illustrative audit examples from earlier in the 2017-18 program

The audit of the Management of the Contract for Telephone Universal Service Obligations found that proper consideration of known or foreseeable changes in market demand, resulted in the fixed fee element of the contract not reflecting the market.

The contract term of 20 years with a fixed annual fee based on 2009–10 costs did not reflect the likely decline in demand for standard telephone and payphone services over the relevant period.

The administering Department had been a passive contract manager and it had not utilised the flexibility mechanisms within the contract which had the potential to reduce the annual payment amounts. The contract included mechanisms allowing either party to submit a proposal for cost savings or a change in the scope of services at any time. This mechanism provided an opportunity for the Department to explore the achievement of value for money in the context of changing technology, market competition and consumer preferences.

Key learnings

Key learnings that related to the achievement of value for money through an understanding of the market from the illustrative audit examples include: