Politics

Scott Morrison’s subs deal trashed all the rules of ethical procurement

As any public servant who has undertaken procurement knows, there are rules about how the Australian government buys things — from paper clips to consultancies to jet fighters and everything in between. The Commonwealth Procurement Rules (CPR), to be precise.

What’s the point of such rules? In case you were in any doubt, Finance Minister Simon Birmingham’s foreword to the current edition spells it out. 

Achieving value for money is the core rule of the Commonwealth Procurement Rules as it is critical to ensuring that public resources are used in the most efficient, effective, ethical and economic manner… The Australian government considers it is important to understand the economic implications of major contracts and therefore requires agencies to examine the value offered by different suppliers. Suppliers are encouraged to demonstrate the economic benefits of their proposals in procurements valued above $4 million (or $7.5 million for construction services).

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Note the word ethical, which the CPRs later explain encompasses “honesty, integrity, probity, diligence, fairness and consistency”.

How does the Morrison government’s recent submarines decision — the biggest procurement decision since, well, the last submarines decision in 2016 — hold up to the CPRs?

Well, no contract has been signed yet. The existing contract has been abandoned in exchange for a commitment to have an 18-month study into a British or American nuclear submarine. But we’re committed to acquiring some sort of submarines at some point in the next 30 years from our two Anglophone friends, so a procurement this most definitely is. So whether it’s the letter or the spirit of the CPRs, how does it compare?

The core rule of value for money will be clearly honoured in the breach. Indeed the decision fascinatingly makes an already terrible procurement deal even worse. The 2016 decision to use a French nuclear-powered submarine design, refit it with a conventional power system and make 60% of it in Australia, dramatically escalated an already major procurement decision to what was looking like a $90+ billion construction bill, reflecting that building major defence projects in Australia costs about one-third more than having them manufactured overseas.

Bearing in mind that “suppliers are encouraged to demonstrate the economic benefits of their proposals”, we should remember that this massive additional cost — up to $30 billion — would have provided Australian jobs. How many? The employment benefit of the Turnbull government’s entire naval construction program — not just the subs, but the Future Frigates project — was 5200 jobs. So we were spending about $5.7 million each job.

But the new decision gets even worse: it’s widely accepted that the nuclear-powered boats we end up with will cost considerably more than the Naval Group contract — well over $100 billion for perhaps eight submarines. While these have some performance characteristics that are prized by some advocates over and above conventional submarines, value for money certainly isn’t one.

These boats will be about 40% locally constructed, Crikey revealed on the day of the announcement, meaning that fewer local jobs will be created (indeed a fearless prediction: virtually all the construction will be done overseas, with some minimal final finishing done locally — if the contract ever happens). We’re now looking at closer to $8 million each job — and above — for whatever few jobs are created. 

What about “examining the value offered by different suppliers” and those requirements of “honesty, integrity, probity, diligence, fairness and consistency”?

What’s most bizarre is the complete indifference to the virtue of competitive tension. The CPRs include an entire section on “encouraging competition”: “Competition is a key element of the Australian government’s procurement framework. Effective competition requires non-discrimination and the use of competitive procurement processes.”

Yet Prime Minister Scott Morrison has gone out of his way to kill off any competitive tension by tearing up the Naval Group contract first and then announcing he was going back to square one with a study of a different design.

It not merely would have been trivially easy, but in Australia’s interests, to keep Naval Group engaged at the same time as proceeding with the nebulous “study” with the Americans and the British. Naval Group could have been invited to develop a nuclear-powered boat in competition with the Anglophones — indeed the French had offered to do exactly that, given the original Barracuda design is nuclear-powered, but were ignored by Australia.

The two processes could have proceeded in tandem, keeping the French engaged and offering Australia genuine choice and innovation, with the Anglophones aware that they needed to offer something distinctly better than the French.

Instead Australia is now in a take-it-or-leave it position with the results of the “study”, with no chance of re-engaging the French, or any other country, if the “study” concludes there is some fundamental impediment to nuclear submarines in the RAN (which must be a live possibility, otherwise the study has no credibility).

There was, in short, no risk management around the decision, which is section eight of the CPRs: “Relevant entities must establish processes to identify, analyse, allocate and treat risk when conducting a procurement. The effort directed to risk assessment and management should be commensurate with the scale, scope and risk of the procurement.”

The only risk management undertaken by the Morrison government appears to have been to identify the biggest possible risks and rush toward all of them.

Quite clearly the government didn’t conduct itself with any honesty or fairness in relation to the existing contract, let alone probity. It actively misled the French, from the prime minister — who assured the president of France in June that all was well with the contract — on down, and right up to the day of the announcement.

In doing so, Australia has stored up future problems for itself on major projects. Can any foreign tenderer actually trust Australia now? We break our word casually, and without warning. The result will be tighter contractual demands and significantly higher break fees to address the risk created by Morrison.

The CPRs exist for good reason. Conducting procurement in a way that maximises competitiveness and minimises risk protects the taxpayer while offering certainty for potential suppliers of fair treatment. You can trash the CPRs, and give yourself exemptions from their requirements, but each time you increase the risk to taxpayers. And the risk from the submarines deal is truly colossal.

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Peter Fray

Peter Fray
Editor-in-chief of Crikey

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