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Direct Source Procurement
The objective of the audit was to assess how well agencies had implemented the CPGs and relevant FMA legislation when undertaking Direct Source procurement.
The audit examined whether selected agencies had developed a sound procurement framework; appropriately classified procurement methods when meeting external reporting requirements; implemented the CPGs and relevant legislation when Direct Sourcing; and established effective procurement monitoring and review arrangements.
The ANAO selected four FMA Act agencies to provide a cross-section of the 104 agencies that reported procurement activity in AusTender in
2008–09. The agencies selected for audit were:
- the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA);
- the Department of Innovation, Industry, Science and Research (Innovation);
- the Department of Veterans' Affairs (DVA); and
- the Australian Crime Commission (ACC).
The ANAO examined a stratified random sample of 645 procurements valued at $10 000 and over, across the four agencies. More detailed testing was undertaken for the 285 Direct Source procurements in the sample.
Legislative and policy framework
1. Effective procurement of property and services underpins the delivery of programs by Australian Government agencies. In 2009, the Australian Government purchased over $23.5 billion in property and services using relatively straightforward or short-term procurement, through to more complex and longer term procurement. Agencies purchased a wide variety of goods and services, including enabling assets such as buildings, printers and information and communications technology; and services such as consultancy advice on program management, and provision of government services to the public by external suppliers.
2. Chief Executives of departments and agencies subject to the Financial Management and Accountability Act 1997 (FMA Act) must promote the proper use of Commonwealth resources. To help achieve this, under the Financial Management and Accountability Regulations 1997 (FMA Regulations), the Finance Minister issues Commonwealth Procurement Guidelines (CPGs) for officials to follow when performing duties in relation to procurement (Regulation 7). FMA Regulation 9 also requires that approvers of spending proposals be satisfied, after undertaking reasonable inquiries, that the spending proposal provides for the proper use of Commonwealth resources.
3. The CPGs establish the core policy framework and articulate the Government's expectations for procurement. The last substantial revision of the CPGs occurred in January 2005, and gave effect to the Australian Government's procurement obligations under the Australia-United States Free Trade Agreement. Among the changes was a general presumption of open tendering for higher value procurements, which meant that selective and limited tendering was only available in specific and appropriately justified circumstances. It was anticipated that the dominant impact of the revised CPGs would be to increase the number and scope of procurement opportunities offered to the full market by Australian Government agencies.
4. The current CPGs establish procurement principles that apply to all procurement processes, and promote value for money as the core principle of the Government's procurement policy framework. Value for money is enhanced and complemented by other key principles—encouraging competition; efficient, effective and ethical use of resources; and accountability and transparency in decision-making. Applying these procurement principles is a requirement of the CPGs, and necessitates that agencies take a considered approach when establishing arrangements for individual procurements.
5. For higher value procurements (known as covered procurements, and generally valued at more than $80 000), the CPGs also establish Mandatory Procurement Procedures. The Mandatory Procurement Procedures establish a range of prescriptive obligations that must be complied with when selecting a procurement method and managing the resultant procurement process.
6. Under the CPGs, agencies are obliged to maintain appropriate documentation for each procurement. The appropriate mix and level of documentation depends on the nature and risk profile of procurement being undertaken. Agencies need to ensure there is to sufficient documentation to provide an understanding of the reasons for the procurement, the process that was followed and all relevant decisions, including approvals and authorisations, and the basis of those decisions.
7. The CPGs guide agencies to establish Chief Executive Instructions (CEIs) and operational guidelines outlining their own approach to procurement, while at the same time encouraging agencies to adopt processes that are commensurate with the scale and risk profile of the procurement. This sentiment was also supported by Management Advisory Committee (MAC) Report No.7, which outlined the minimum requirements to meet the Government's legislative and policy framework applicable to procurement. The MAC suggested that agencies only adopt processes in addition to the CPGs in specific circumstances, where the benefits of doing so outweigh the associated costs. More recently, the Advisory Group on Reform of Australian Government Administration reiterated that agencies need to reduce internal red tape to promote efficiency, including streamlining administrative and legislative compliance in areas such as financial management.
Direct Source procurement
8. The CPGs and related Department of Finance and Deregulation (Finance) guidance define three procurement methods: Open Tender, Select Tender and Direct Source procurement. Direct Source procurement is a process in which an agency may invite a potential supplier or suppliers of its choice to make submissions such as quotes or tenders. By its nature, Direct Sourcing is less competitive than Open and Select Tendering as it does not provide the opportunity for all or, in many instances, a number of potential suppliers to compete for the provision of property and services.
9. For covered procurement, the CPGs require that Direct Sourcing only be undertaken in a limited number of specified circumstances, such as when an approach to the market has failed. For non-covered procurement, agencies should conduct an appropriately competitive procurement process commensurate with the scale, scope and relative risk of the procurement. In all cases, agencies need to be mindful that it is generally more difficult to adhere to the procurement principles such as value for money, encouraging competition and ethical use of resources when Direct Sourcing, but under the CPGs the onus is on them to do so.
10. The objective of the audit was to assess how well agencies had implemented the CPGs and relevant FMA legislation when undertaking Direct Source procurement.
11. The audit examined whether selected agencies had developed a sound procurement framework; appropriately classified procurement methods when meeting external reporting requirements; implemented the CPGs and relevant legislation when Direct Sourcing; and established effective procurement monitoring and review arrangements.
12. The ANAO selected four FMA Act agencies to provide a cross-section of the 104 agencies that reported procurement activity in AusTender in 2008–09. The agencies selected for audit were:
- the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA);
- the Department of Innovation, Industry, Science and Research (Innovation);
- the Department of Veterans' Affairs (DVA); and
- the Australian Crime Commission (ACC).
13. The ANAO examined a stratified random sample of 645 procurements valued at $10 000 and over, across the four agencies. More detailed testing was undertaken for the 285 Direct Source procurements in the sample.
14. Procuring appropriate property and services, and being able to demonstrate value for money in such activities, is a prime consideration in the administration of Australian Government programs. Within the legislative and policy framework for government procurement, officials must be satisfied that decisions to procure property and services are proper and defensible. In this context, the Commonwealth Procurement Guidelines (CPGs) facilitate sound decisions by establishing procurement policy, including the principles that apply to all procurement processes. The CPGs promote value for money as the core principle in all procurements. The other key principles—encouraging competition, efficient, effective and ethical use of resources, and accountability and transparency in decision-making—underpin the achievement of value for money. Agencies are required to have regard to all such considerations in their procurement activities. As the scale and risk profile of the procurement increases, the transparency and defensibility of procurement activities becomes increasingly important.
15. For covered procurements (generally those above $80 000), the CPGs establish Mandatory Procurement Procedures that agencies are obliged to comply with when procuring property and services. The prescriptive nature of these procedures means that agencies do not have discretion in their application. The Mandatory Procurement Procedures limit the use of non-open approaches to the market (including Direct Source procurement) to a small number of specified circumstances, thereby encouraging competition. In addition, for covered procurements, the rigour required in documenting the key processes, decisions, and the basis for those decisions, becomes more important given the increased scale and risk profile of procurement.
16. Where procurements are non-covered (generally less than $80 000), there will be situations where the cost of participating in an open approach to the market is not commensurate with the scale or risk of the task. In such situations it is the responsibility of agencies to determine an appropriate process that will provide value for money without causing undue costs to the industry or the agency, or reducing program effectiveness. These processes may include establishing panels for the provision of common property and services, accessing another agency's panel where possible, or seeking quotes from one or more potential suppliers.
17. Covered and non-covered procurements can be undertaken through either an Open Tender, Select Tender or Direct Source procurement process. Direct Source procurement involves an agency selecting one or more suppliers of its choice to make submissions, such as quotes or tenders, to provide property or services. While Direct Source procurement is, in practice, undertaken for procurements of all scales and risk profiles, it should not be the default procurement approach as it is not conducive to open and effective competition and it is generally more difficult to demonstrate value for money. The procurement principles reflected in the CPGs are expected to guide all Australian Government procurement activities. Where Direct Source procurement is overused, or perceived as the default method, agencies need to consider the implications this can have for reputational risks, not only for their agency but also for the wider public sector.
18. In the 2009 calendar year, 48 per cent of all contracts entered into by the Government and reported on AusTender were Direct Sourced. In addition, Direct Source procurement accounted for 43 per cent (or $10.2 billion) of the total reported value of all of these contracts. These results are comparable to those of prior periods and, when considered in conjunction with other audit findings, suggest greater emphasis should be given to encouraging more open competition and access in Australian Government procurement, in balancing the range of requirements agencies are required to meet under the CPGs.
19. Overall, agencies were reasonably familiar with the Government's procurement framework and the CPGs. However, in practice, key elements of the CPGs were not consistently followed across the four audited agencies when choosing and conducting Direct Source procurements. For the majority of Direct Source procurements examined, from the circumstances of the procurement and/or procurement documentation, it was not evident that one or more CPG obligations, requirements or specified sound practices had been met, including for higher valued procurements.
20. While the agencies had all developed guidance material to assist staff in implementing sound procurement practices, it lacked sufficient focus on attaining value for money and encouraging competition in their procurement activities. Beyond this, under the principles based framework of the CPGs, agencies need to take a considered approach to establishing arrangements for individual procurements. Improvements in agency guidance material and procurement practices would be beneficial in assisting agencies in achieving better performance and levels of transparency in their procurement activities. These matters are canvassed below.
Agency guidance material
21. All four audited agencies had Chief Executive Instructions (CEIs) and operational guidance for procurement that covered the requirements of the requisite legal and policy framework. Nevertheless, these need to more clearly address Direct Sourcing arrangements and achieving competitive procurement processes. The agencies' procedures and delegates' decision-making tended to favour Direct Source procurement, limiting opportunities for competitive procurement processes. Agencies also experienced difficulties in distinguishing Direct Sourcing from Select Tendering. In part, this reflected a lack of clarity in Finance's definitions of methods for non-covered procurements; an issue which Finance recognises and had advised it intends to address. Strengthening of agency operational guidelines, together with additional clarity in Finance's procurement definitions, should improve the level of support provided to officials to aid them in selecting appropriate procurement methods.
22. The ANAO examined procurements valued between $10 000 and $305 million, for property ranging from stationery to buildings, and services such as research and development, information and communications technology support and management consultancies. Irrespective of the value or type of Direct Source procurements, there was often limited evidence to demonstrate that agencies' practices for individual procurements provided value for money. This does not necessarily mean that value for money was not achieved; rather that, in many cases, procurement practices applied to the particular circumstances, including the supporting documentation, did not engender confidence that value for money requirements of the CPGs were satisfied. The audit also highlighted issues in agencies' application of the other principles set out in the CPGs such as accountability and transparency in procurement decision-making.
23. Examination of Direct Source procurements across all four agencies provided evidence that, in 85 per cent of instances, agencies approached only one supplier and either did not seek, or only sought one quote prior to procurement. The practical application of the CPGs can justify Direct Sourcing in certain instances, for example, for simple low cost items where market forces readily determine product price.
24. For complex procurements, there may not be an obvious competitive market. In these cases, where Direct Sourcing can be justified, it is prudent for agencies to obtain a small number of quotes from suppliers with a history of proven performance, and to increase the rigour applied to documenting key procurement decisions and the reasons for those decisions.
25. For covered Direct Source procurements, agencies could not consistently assure that their procurements complied with the Mandatory Procurement Procedures. That is, from the circumstances of the procurement and/or procurement documentation, it was not evident that a valid condition for Direct Sourcing had applied to their higher valued procurements (covered procurements), as required by the CPGs. When CPUs were involved in decisions to Direct Source covered procurements, this generally had a positive impact on compliance.
26. In general, to improve the alignment of agency procurement practices with the requirements of the CPGs, agencies should give more consideration to the procurement need and risk level, how it may be met through an appropriately competitive procurement process (one that has regard to the current procurement market) and be able to clearly demonstrate that these considerations have taken place.
Improving procurement approaches
27. As previously indicated, the intent of the CPGs is that procurement opportunities for higher value procurements are offered to the full market except in selective circumstances. To achieve this, the 2005 revision of the CPGs introduced more prescriptive conditions for Direct Sourcing covered procurements. It also maintained the requirement for all procurement to achieve value for money. This has required agencies to implement better planning in their approach to procurement, through more disciplined agency guidelines and strategies that accommodate market conditions without compromising value for money, efficiency and ethics, or creating unnecessary red tape.
28. Having regard to the underpinning expectations of the CPGs and the scale of Australian Government procurement, agencies should strive to better balance the broader benefit of competitive tendering and streamlined procurement practices. Such a balance would see agencies giving greater consideration to the scope of the potential procurement need at the outset of a procurement; more often seeking opportunities to approach the market to enhance the potential to achieve value for money; and adopting more strategic approaches to procurement, such as greater use of panels and other standing offer arrangements. In general, a greater emphasis on earlier planning for procurement activities would improve the procurement outcomes. The ANAO has made four recommendations to improve agency procurement practices in this regard, and to bring greater clarity to the requirements of the CPGs.
Procurement Management and Support (Chapter 2)
29. All four agencies had in place CEIs and supporting operational guidance applying to procurement that reflected the suggestions outlined in Finance guidance. Importantly, the CEIs and guidance covered the requirements of the legal and policy framework applicable to procurement, and established the respective agency arrangements for both covered and non-covered procurement. These documents had been subject to recent review and were available on each agency's Intranet.
30. Nevertheless, the agency guidance did not always lead to selection of an appropriate procurement method and sound Direct Source procurement practices. There was scope for agencies to provide simple templates to guide staff through the procurement process and improve guidance in relation to:
- early consideration of the procurement need and approach, including estimating the value of a procurement and selecting the appropriate procurement method; and
- the procedures that must be followed when Direct Sourcing, including establishing practices that better support the achievement of value for money, adequately assess risks and manage conflicts of interest.
31. All four agencies had a Central Procurement Unit (CPU), in which most staff had an appropriate qualification and/or extensive experience in procurement. The involvement of CPU staff in individual procurements varied, depending on factors such as the procurement value and method. The timely involvement of CPU staff in decisions to Direct Source, generally had a positive impact on compliance with the Mandatory Procurement Procedures. In this regard, a good practice implemented by FaHCSIA required clearance by the CPU Branch Head of decisions to Direct Source procurements in excess of $80 000.
Classifying and Reporting Procurement (Chapter 3)
32. To facilitate the accountability and transparency of procurement activities, agencies are required to publish a range of procurement information on AusTender. This includes timely publication of contracts awarded and reporting the procurement method for each contract. Accurate reporting of the procurement methods employed provides transparency on the form of the procurement processes used by agencies, and guides potential suppliers on available procurement opportunities.
33. There is a need for agencies to improve the accuracy and timeliness of contract notice reporting, as:
- around five per cent of the procurement audit sample was made up of grants, sponsorships and other agency contracts, which do not fit the definition of a contract notice for AusTender reporting purposes. FaHCSIA was responsible for almost all of these reporting errors;
- there was a range of instances of agencies reporting purchase orders, invoices and amendments under a contract as separate contract notices, in part reflecting difficulties in the automatic transfer of contract variations or extensions to AusTender; and
- the proportion of agency procurements reported as required on AusTender within six weeks of entering into the arrangement ranged between 85 per cent (at FaHCSIA) and 15 per cent (at ACC, due to problems encountered with its new financial management information system).
34. For non covered procurements, the inaccuracy of reporting may, in part, be due to the subtle differences in definitions of the procurement methods contained in the CPGs. For non-covered procurement, the definitions of Select Tender and Direct Source procurement contained in the CPGs and related guidance imply that there is little or no difference between the two methods of procurement. Agencies may approach more than one supplier of their choice and could classify the procurement as Select Tender or Direct Source.
35. However, for covered procurement, the CPGs provide definitions that clearly differentiate between the two methods of procurement. Specifically, the Mandatory Procurement Procedures permit three methods for a Select Tender—the first two require an initial open approach to market, and the third involves restricted supplier markets. The Mandatory Procurement Procedures also limit the circumstances when Direct Sourcing may be undertaken for covered procurement. When the procurement process is not an Open Tender or Select Tender process in accordance with the Mandatory Procurement Procedures, it is considered to be Direct Sourcing.
36. Partly reflecting this situation, agency definitions of the various procurement methods were not always clear or consistent with those contained in the CPGs and related guidance. For the sample of procurements, all four agencies had instances of incorrect or inconsistent reporting of their procurement methods in AusTender, ranging from 6 per cent (at Innovation) to around 28 per cent (at FaHCSIA). The main areas of misclassification related to reporting procurements from a panel as Direct Source rather than Open Tender, and reporting procurements as Select Tender when they are more appropriately considered Direct Source procurement.
37. Finance has recognised that the policy intention relating to procurement methods may not be clear from the current guidance documents. Finance advised that only procurements that follow one of the three Select Tender procedures outlined in the Mandatory Procurement Procedures should be regarded as Select Tenders, regardless of whether or not the procurement is covered. Finance intends to review the relevant guidance to clarify and simplify the procurement method classifications, which will support the accuracy of AusTender reporting and the transparency of Government procurement.
Compliance of Direct Source Procurement Decisions and Processes (Chapter 4)
Value for money and encouraging competition when undertaking Direct Source procurement
38. When procuring property and services, the Australian Government has an objective of achieving value for money. This requires a comparative analysis of all the relevant costs and benefits of each supplier's proposal throughout the procurement cycle. Determining value for money involves a range of considerations, including: fitness for purpose; the performance history of each prospective supplier; the relative risk of each proposal; the flexibility to adapt to possible change over the lifecycle of the property or service; financial considerations; and the evaluation of contract options.
39. For 74 per cent of the Direct Source procurements in the ANAO sample, agencies were unable to demonstrate whether the procurement gave them value for money. In the majority of cases there was a lack of evidence of any comparative analysis of the relevant costs and benefits of different procurement options to support the procurement decision.
40. Obtaining multiple quotes assists with achieving value for money and introduces competition into a Direct Source procurement process. However, from available evidence multiple quotes were sought in only 15 per cent of the Direct Source procurements examined. Where agency procedures required more than one quote, ANAO sampling identified that this was not generally occurring. Where procedures did not specify a minimum number of quotes it was commonplace for officials to obtain only one quote. Overall, agencies' quotation practices did not support competitive procurement.
Efficiency and effectiveness when undertaking Direct Source procurement
41. Efficiency and effectiveness are established as requirements of the CPGs. Efficiency in procurement includes the selection of a procurement process that is consistent with government policy and is the most appropriate to the procurement objective under the prevailing circumstances. Effectiveness in procurement can be achieved by ensuring that the property or service being sought will make the maximum possible contribution to the relevant outcome.34 To achieve efficiency and effectiveness in procurement, it is important that prior to commencing the procurement the agency gives due consideration to the procurement need and process, including the value of the procurement, the level of risk and prevailing market circumstances. This assists the selection of an appropriate procurement method.The consideration may take the form of a business case, procurement planning or equivalent, or can be built into established working arrangements.
42. In all cases, the approach taken to efficiency and effectiveness considerations should be fit for purpose, that is, commensurate with the scale and risk profile of the procurement. For low value, basic purchases, these considerations would normally be built into established working arrangements, and therefore would not need to be specifically documented. As the scale and risk profile of the procurement increases, appropriate documentation of efficiency and effectiveness considerations would generally need to be maintained to demonstrate adherence to the CPGs.
43. Agency guidance for FaHCSIA, Innovation and DVA generally required documentation of the aforementioned efficiency and effectiveness considerations for all Direct Source procurements, whereas ACC generally only required documentation of the reasons for Direct Sourcing.
44. For 60 per cent of the Direct Source procurements examined, there was limited evidence of the aforementioned efficiency and effectiveness considerations prior to commencing the procurement. Innovation was able to demonstrate some consideration of the procurement need and process, for 84 per cent of the Direct Source procurements examined.
45. FaHCSIA, DVA and the ACC were only able to demonstrate adequate consideration of the procurement need and process for 33 per cent, 15 per cent and 7 per cent, respectively, of their Direct Source procurements in the audit sample. For the 100 instances where there was evidence of the considerations:
- only 43 included an estimate (rather than quotes) of the value of the procurement, and in nine of these instances the estimates were significantly over or undervalued. As indicated above, estimating the value of a procurement is necessary to determine whether or not it should be treated as covered, and is particularly important as procurements approach the procurement thresholds in value. At present, there is a risk that many procurements are being inappropriately treated as non covered—with the ANAO finding evidence of behaviour that sought to avoid the procurement thresholds in some instances. This behaviour included treating procurements as non-covered procurements when their value could not be reliably estimated and splitting the cost of services between more than one contract; and
- the rationale provided for Direct Sourcing non-covered procurements tended to be limited, often only suggesting that it was an appropriate method, rather than having regard to established working arrangements of the agency, and the scale and risk profile of the procurement. Similarly, the rationales for Direct Sourcing covered procurements generally only referenced the relevant circumstance that was considered to apply, rather than outlining why it applied.
Risk management when undertaking Direct Source procurement
46. Risk management is a sound practice to be applied to all elements of public administration. The CPGs state that risk management should be built into an agency's procurement processes, and agencies should ensure that appropriate procedures are in place to identify and consider all risks throughout the procurement cycle. In practice, agencies may adopt different approaches to risk management when undertaking individual procurements. For low risk procurements this may simply involve following routine procurement processes; whereas for procurements of medium and high risk, agencies should, at a minimum, acknowledge the level of risk, and mitigation strategies, in procurement documentation. The benefit of such an approach is that it signals to those with formal roles in procurement approval that there is a heightened risk to the procurement, and prompts officials to both understand and manage any significant procurement risks.
47. For the sample of Direct Source procurements, it was not evident from procurement documentation that risk had been specifically considered by FaHCSIA, DVA and ACC in relation to individual procurements. Meanwhile, Innovation was able to demonstrate specific consideration of risk in a limited number of cases. While for many low risk procurements these findings reflect the application of routine procurement processes, the scale and nature of procurements examined by the ANAO suggested some of these procurements were likely to be of medium to high risk. Sound practice in such instances would be to more explicitly consider risk.
Ethical considerations when undertaking Direct Source procurement
48. Adopting ethical practices, behaviour and approvals when undertaking procurement is a requirement of the CPGs. Ethical behaviour identifies and avoids conflicts of interest, and does not make improper use of an individual's position. A specific aspect of ethical behaviour relevant to procurement is an overarching obligation to treat potential suppliers as equitably as possible. Agencies reduce the risk of unethical dealings, and the associated consequences for an agency's reputation, by setting expectations for staff behaviour, such as through values and a code of conduct. As the scale and/or risk profile of particular procurements increase, more formal requirements should be applied to protect the integrity of the procurement processes. Recent reviews have highlighted particular risks in relation to Direct Source procurements.
49. For the sample of Direct Source procurements, it was only evident from procurement documentation for two procurements that conflicts of interest had been considered, and for all agencies documentation of probity matters such as dealings with suppliers, was limited. The agencies' arrangements for dealing with ethical matters tended to be more formalised for Select and Open Tender procurements, instead of relating the degree of formality to the scale and risk profile of the procurement. Under such an approach, ethical matters would have been given more formal consideration for some of the Direct Source procurements examined.
Delegate approval of procurement
50. It is commonplace for agency Chief Executives to delegate their authority to approve spending proposals to individuals within their agency. Delegates are responsible for being satisfied, after reasonable inquiries, that the spending of public money is efficient, effective and ethical, and is not inconsistent with the policies of the Commonwealth. Agencies must document the key elements of a delegate's approval, such as the items, cost, parties and timeframes. However, there is no requirement to document delegates' inquiries.
51. FaHCSIA was able to demonstrate approval for all of its Direct Source procurements in the audit sample because it employed a suitable workflow system in its financial management information system. Innovation, ACC and DVA were able to provide evidence of delegate approval for 81 per cent, 90 per cent and 57 per cent, respectively, of Direct Source procurements in the sample. These agencies had scope for improvement in their documentation of the spending proposal approvals.
52. For the sample of Direct Source procurements, documentation forming procurement approvals was of varying standards, and often did not clearly set out the basis for delegates' decisions. This does not mean that delegates did not undertake reasonable inquiries prior to approving spending, as there is no specific requirement to document delegates' inquiries under in the FMA Regulations. Nevertheless, under the CPGs agencies need to ensure there is sufficient documentation to provide an understanding of approvals and authorisations, and the basis of these decisions.
Exempt Direct Source procurement
53. Procurements that are in excess of the covered procurement thresholds of $80 000, or $9 million for construction services, may be exempt from the Mandatory Procurement Procedures if an exemption listed in the CPGs applies. This includes the procurement of research and development services, and procurement from another government entity in accordance with legislative requirements. There were 164 Direct Source procurements that exceeded the relevant covered procurement threshold. Of these 164, the ANAO considered that 59 procurements (36 per cent) were exempt from the Mandatory Procurement Procedures and, therefore, did not need to be treated as covered procurements.
54. To satisfy obligations and requirements in relation to accountability and transparency in procurement decision-making, agencies need to maintain sufficient documentation on such matters as the procurement process that was followed and all relevant decisions, and the basis of those decisions. Notwithstanding these requirements, 47 (80 per cent) of the exempt procurements, with a total reported value in excess of $44.6 million, did not document the basis of the procurement decision and the specific exemption that supported the exemption decision.
Covered Direct Source procurement
55. For covered procurement, Direct Sourcing may only be undertaken in specified circumstances as outlined in paragraph 8.33 of the CPGs, such as when an approach to market has failed. For the audit sample, the most commonly claimed circumstances (whether appropriate or otherwise) were the provision of additional services or property by the original supplier for compatibility reasons; there was no reasonable alternative supplier due to an absence of competition for technical reasons; and for reasons of extreme urgency brought about by events unforseen by the agency. When an agency uses a circumstance under paragraph 8.33, it must also, under paragraph 8.34 of the CPGs, prepare a written report including a statement indicating the circumstances or conditions that justify the use of a procedure other than an Open or Select Tender process. However:
- from the circumstances of the procurement and/or procurement documentation it was not evident that 54 (51 per cent) of the covered Direct Source procurements in the audit sample complied with paragraph 8.33; and
- where relevant circumstances applied, they were only documented in accordance with paragraph 8.34 on 63 per cent of occasions. Further, documentation supporting decisions to Direct Source often lacked adequate reference to the range of factors relevant to making the decision. In this regard, Finance advised the ANAO that agencies cannot claim compatibility or an absence of competition as the reason for Direct Sourcing, without factual evidence of these situations.
56. The extent to which compliance with paragraph 8.33 of the CPGs was not evident (based on the circumstances of the procurement and/or the procurement documentation) for covered Direct Source procurements ranged between 24 per cent at FaHCSIA, 42 per cent at DVA, and 67 and 70 per cent respectively at Innovation and ACC. The decisions taken by the agencies to Direct Source covered procurements in circumstances other than those allowed by the CPGs, in large part occurred when they were seeking to continue supplier relationships, including where the existing contract and any extension options had been exhausted. The regularity of such instances suggests the presumption of Open Tendering has not been well embedded at an agency level.
Procurement Monitoring and Review (Chapter 5)
57. Effective monitoring and review of procurement activity helps agencies to comply with the CPGs, and to increase the efficiency and effectiveness of their procurement processes.
58. The agencies generally did not use their contract registers and/or financial management information system to prepare reports on procurement information. This constrained their ability to undertake systematic analysis or a review of procurement activities, including as a means to help assess compliance with the CPGs. Aside from ACC's CPU, the review role of CPUs tended to be limited to their involvement in individual procurements.
59. Each of the agencies had completed audits of procurement in recent years, and where similar ground was covered, the findings of these audits were generally consistent with the ANAO findings. However, the agencies' Certificates of Compliance, through which they report compliance with the FMA Act and regulations, reported lower levels of non-compliance (than identified by this audit) for 2008–09. The differences may be attributed to delegates' level of awareness of the relevant FMA requirements and, in some cases, a lack of understanding of the procurement method undertaken (highlighting the need for Finance to clarify the CPGs in relation to procurement methods). Agencies need to improve the identification of non compliance, and to take action to reduce its occurrence for future procurement activities. As mentioned earlier, strengthening of agency procurement guidelines would assist by raising awareness of the government's procurement requirements under the CPGs.
60. The agencies all used panel arrangements as a means to increase the efficiency of their procurement processes, and the ANAO noted examples of use of whole-of-government panels and intra-agency cooperative procurement arrangements. Nevertheless, there was an opportunity for the agencies to better appreciate their overall procurement requirements, as a basis for adopting more strategic approaches to procurement and assisting with the preparation of annual procurement plans. Doing so would help to achieve more efficient procurement processes, for example, by identifying situations where a standing offer arrangement may be more appropriate than separate procurement arrangements.
61. FaHCSIA, Innovation, DVA, ACC and Finance agreed with the recommendations in the report.
1. The value of purchased property and services was sourced from AusTender data for the 2009 calendar year. This data includes contracts valued at $10 000 and over, based on a contract start date in 2009. Data was supplied by the Department of Finance and Deregulation on 7 January 2010, and includes agencies subject to the Financial Management and Accountability Act (FMA Act) 1997 and bodies subject to the Commonwealth Companies and Authorities Act (CAC Act) 1997.
2. Proper use of Commonwealth resources means efficient, effective and ethical use that is not inconsistent with the policies of the Commonwealth. FMA Act, section 44(3).
3. The CPGs are known as Department of Finance and Deregulation (Finance), Financial Management Guidance (FMG) No.1 Commonwealth Procurement Guidelines, December 2008. The CPGs may also apply, following a direction by the Minister for Finance, to Commonwealth entities subject to the Commonwealth Authorities and Companies Act 1997 (CAC Act) listed in Schedule 1 of the Commonwealth Authorities and Companies Regulations 1997 as being subject to Section 47A of the CAC Act. This audit did not include an examination of entities subject to the CAC Act.
4. Finance, CPGs, 2008, p. 2.
5. As outlined in footnote 3, the current version of the CPGs was issued in December 2008.
6. The Hon Dr Sharman Stone MP (the then Parliamentary Secretary to the Minister for Finance and Administration, Federal Member for Murray), Media Release 04/2004, $200 billion US procurement market open to Australian suppliers from January 1, 2005, 31 December 2004.
7. Finance, CPGs, 2008, p. 9.
8. Covered procurements are generally procurements in excess of the procurement thresholds of $80 000, or $9 million for construction services, except where the property or services are exempted by Appendix A of the CPGs.
9. Finance, CPGs, 2008, p. 18, paragraph 7.9. Refer also to Appendix 6 of the audit report.
10. MAC, Report No.7, Reducing Red Tape in the Australian Public Service, 2007, pp. 25–26 and 30.
11. MAC, Report No.7, Reducing Red Tape in the Australian Public Service, 2007, p. 26.
12. Advisory Group on Reform of Australian Government Administration, Ahead of the Game—Blueprint for Reform of the Australian Government Administration, March 2010, p. 66.
13. The circumstances are outlined in paragraph 8.33 of the CPGs. A full list of the circumstances is provided in Appendix 4 of the audit report.
14. Finance, CPGs, 2008, p. 12, paragraph 5.7.
15. Finance, CPGs, 2008, p. 18. The CPGs require that agencies must maintain appropriate documentation for each procurement based on the nature and risk profile of the procurement being undertaken. Transparency provides assurance that the procurement processes undertaken by agencies are appropriate and that policy and legislative obligations are being met. Transparency involves agencies taking steps to support appropriate scrutiny of their procurement activity.
16. For the purposes of the audit an extract was taken from the AusTender database on 29 September 2009. The audit sample is based on contract notices reported by the audited agencies in AusTender with a contract start date between 1 July 2008 and 13 August 2009. The audit scope and approach are outlined in Chapter 1 of the audit report.
17. Value for money, and efficiency, effectiveness and ethical tests were performed on 248 of these Direct Source procurements. For the other 37 Direct Source procurements, these principles were established through agency arrangements (rather than for each procurement) and it was not within the scope of the audit to test these arrangements.
18. Finance, CPGs, 2008, p. 12, paragraph 5.8 refers to these mandatory procedures further encouraging competition. 19. Finance, CPGs, 2008, p. 12. In determining a procurement process, the CPGs refer to the selection of Direct Source, Select Tender or Open Tender procurement methods, as well as designing an appropriately competitive process when Direct Sourcing or Select Tendering. 20. The CPGs explain that effective competition requires non-discrimination in procurement and the use of competitive procurement processes. Finance, CPGs, 2008, p. 11. , 2005, p. 12. Ethical behaviour and good probity practices enhance an agency's reputation in the marketplace, thereby increasing business confidence in procurement processes, and in turn are likely to maximise the number of suitable responses for future agency work. Guidance on Ethics and Probity in Government Procurement21. Finance, FMG No.14, 22. For the ANAO audit sample, the level of Direct Sourcing reported by the audited agencies in AusTender was generally consistent with the actual level of Direct Sourcing. Misclassifications of Direct Source procurements (as Select Tenders) and panel procurements (as Direct Sourcing) had a net offsetting effect. 23. The CPGs specify obligations, requirements and sound practices, and variously use terms including ‘must', ‘need to' and ‘should'' to denote them, respectively. 24. The ANAO examined a stratified random sample of 645 procurements valued at $10 000 and over, across the four agencies. More detailed testing was undertaken for the 285 Direct Source procurements in the sample. Value for money (and the number of quotes sought), and efficiency, effectiveness and ethical tests were performed on 248 of these Direct Source procurements. 25. In the sample of 285 Direct Source procurements, the ANAO examined 105 covered Direct Sourced procurements. These procurements exceeded the threshold value of $80 000, or $9 million for construction services, and were not exempt procurements (see Appendix 5 of the audit report for details of exempt procurements).
26. In this respect, Innovation provided staff with a two page guide (and simple templates) summarising key procurement steps.
27. A procurement pre-approval mechanism is one of the measures the Department of Environment, Water, the Heritage and the Arts (DEWHA) and the Department of Climate Change and Energy Efficiency (DCCEE) are using to address findings of non-compliance with the CPGs and agency requirements in relation to the Green Loans program. DEWHA has outlined these arrangements in Doing our Business Better, Response to the Review of the Administration of the Home Insulation Program (the Hawke review) and the Independent Inquiry into the Green Loans Program (the Faulkner review), July 2010, pp. 2 and 3. DCCEE has outlined these arrangements in the Department of Climate Change and Energy Efficiency's Response to the Hawke Report on the Home Insulation Program and the Faulkner Inquiry in the Green Loans Program, 8 July 2010, p. 6.
28. Similar findings were made in ANAO Audit Report No.6, 2009–10, Confidentiality in Government Contracts—Senate Order for Departmental and Agency Contracts (Calendar Year 2008 Compliance). Most of the agencies had taken steps to address the current practice of reporting contract amendments as separate contract notices by manually entering contract variations in AusTender so that they appear as amended records of the original contract notice. Finance is progressing solutions to linking contract variations that are automatically transferred.
29. Where a panel is established using an Open Tender process, procurements from the panel should be reported as Open Tender procurements. There were 41 misclassified panel procurements in the audit. These procurements had a total reported value of almost $19 million. Thirty of these procurements were covered procurements.
30. Thirty-nine procurements were misclassified as Select Tender when they were Direct Sourced. These procurements had a total reported value in excess of $4 million. Thirteen of these procurements were covered procurements.
31. Finance, CPGs, 2008, p. 10, paragraph 4.4.
32. The ANAO examined value for money assessments for 248 Direct Source procurements across the four agencies.
33. For Direct Source procurements valued at more than $80 000, more than one quote was sought for only 14 procurements (10 per cent). This means that 121 Direct Source procurements (that were each valued in excess of $80 000), with a total reported value of almost $183 million sought one or no quotes prior to procuring their property or services.
34. Finance, CPGs, 2008, p. 14, paragraph 6.6.
35. The value of a procurement determines whether it should be treated as covered. Accurate estimation of value is particularly important for procurements approaching or likely to exceed the covered procurement thresholds.
36. Finance, CPGs, 2008, p. 19. The CPGs identify, as part of the phase of identifying the procurement need, the preparation of documentation that outlines the business case, risk assessment and procurement method decision. Similar requirements are outlined in Finance, FMG No.13, Guidance on the Mandatory Procurement Procedures, January 2005, pp. 8 and 19. FMG No.13 is primarily directed at covered procurements. The practices outlined in this guidance are considered better practice. In this regard, it is considered that it could be to an agency's advantage to apply these practices to non-covered procurement as these practices would assist the agency to comply with the procurement policy framework. FMG No.13, 2005, p. 4. Procurement planning is addressed in FMG No.13 (Finance, FMG No.13, pp. 8–19).
37. For procurement valued in excess of $80 000, 85 (63 per cent) procurements did not demonstrate these considerations had taken place. In comparison 56 per cent of procurements valued at $80 000 or less did not demonstrate that these considerations had taken place.
38. Finance, CPGs, 2008, p. 14.
39. Finance, CPGs, 2008, p. 16, paragraphs 6.17 and 6.18.
40. For example, lower value procurements may be the result of splitting large procurements into smaller components to avoid CPG and/or agency thresholds so that agency officials can use Direct Source procurement. Recent reviews of the Green Loans program have highlighted a range of practices that do not meet CPG and/or agency requirements and reflect risks attached to lower value Direct Source procurements. In response to these risks the Department of Environment, Water, Heritage and the Arts has tightened control measures for Direct Source procurements. The following reviews were released on 8 July 2010, by the then Minister for Climate Change and Energy Efficiency and Water, Senator Penny Wong, on the Department of Climate Change and Energy Efficiency's website: Independent Inquiry into the Green Loans Program—Review of procurement processes and contractual arrangements by Ms Patricia Faulkner AO (pp. 15–23); and Review of the Green Loans Program produced by Resolution Consulting Services (pp. 4, 11–12).
41. While there were 285 Direct Source procurements in the audit, as outlined in footnote 17 it was only within scope to test conflict of interest for 248 of these procurements.
42. There was no documentation of Regulation 9 approval for 47 of the 285 Direct Source procurements examined across the agencies. The total reported value of these procurements was almost $16 million. Thirty-five of these procurements individually exceeded $80 000.
43. See Appendix 5 of the audit report for a full list of exemptions.
44. Finance, CPGs, 2008, p. 18, paragraph 7.9.
45. A full list of the circumstances outlined in paragraph 8.33 of the CPGs is provided in Appendix 4 of the audit report.
46. Fifty-four procurements were found to be non-compliant. The total reported value of these procurements was approximately of $10.2 million.
47. Similar expectations regarding the need to substantiate the circumstances that demonstrate how a condition for Direct Sourcing applies to the procurement were established in the Faulkner Inquiry of the Green Loans program. Independent Inquiry into the Green Loans Program – Review of procurement processes and contractual arrangements by Ms Patricia Faulkner AO, 8 July 2010, p. 22.
48. Innovation's result was influenced by eight procurements (representing 27 per cent of Innovation's covered Direct Source procurement in the audit sample) resulting from a single procurement decision, for which compliance with paragraph 8.33 was not evident. This procurement decision is discussed in Table 4.11 of the audit report.