Audit ambit: more scrutiny on federal contract deals

By Stephen Easton

Friday March 16, 2018

The federal audit committee is gearing up for round two of its inquiry into the messy world of contractors and consultants, as the auditor-general prepares for a yearly look at commercial confidentiality clauses. Despite all the sound and fury, it’s hard to see much changing.

The auditors will look into contracting last financial year by the Department of Infrastructure, Regional Development and Cities, Australian Electoral Commission and Great Barrier Reef Marine Park Authority.

Their annual examination of how confidentiality provisions are used and the accuracy of AusTender reporting might attract more attention than usual this year, since it ties in with the Joint Committee of Public Accounts and Audit’s high-profile inquiry.

While the inquiry has proved a magnet for opinions and perspectives on whether the public service’s work is being influenced or usurped by private-sector consultants, and whether the increasingly common practice of contracting labour rather than employing public servants is a costly fig leaf for staff cuts, it’s unlikely the JCPAA will force much change there.

The government’s default response is to assert that its departments are getting value for money and point to the ongoing decline in departmental running costs as a percentage of total federal spending — a continuation of a long-term trend that began well before the Coalition came to power.

The Department of the Prime Minister and Cabinet’s submission, however, faintly echoes concerns about the government’s policy of keeping staffing capped around the average level for 2006-07:

“With the implementation of staffing caps in the Australian Public Service, agencies have more frequently needed to engage external contractor and consultancy services to fill key roles. Through removing ASL caps, agencies may have greater flexibility to recruit specialist staff at a reduced cost.”

What looks more likely to lead to administrative reform is the fact that the JCPAA is talking a different language to the public service. Departments have struggled to give it the information it wants due to limitations of their record-keeping systems.

The Attorney-General’s Department complained it had to divert considerable resources and perform “a significant amount of manual work” to produce data using “the definitions provided by the JCPAA for consultancy, non-consultancy and on-hire labour contractors” — which don’t exist in the world of APS procurement.

By “non-consultancy” spending, the committee is referring to “contractors directly procured by the entity for labour (for provision of either long- or short term additional labour capacity)” as opposed to those brought in via labour-hire companies.

“Accordingly the data is based on our best endeavours,” writes AGD chief financial officer Stephen Lutze. The Department of Human Services, on the other hand, could not provide data on “non-consultancy” contractors at all.

The AGD’s view is that “additional clarity and guidance regarding the distinction between consultancy and non-consultancy would lead to more consistent reporting across the Commonwealth” but agency information systems would need updating to easily and accurately report on the types of contracts which interest the committee.

It adds that cutting down the number of categories on AusTender, which number more than 670, would also help improve the system’s transparency.

As the Department of Finance confirmed in the committee’s first hearing, agencies describe different kinds of consultancy using a multitude of more specific categories, making it hard to calculate an accurate total.

On contract-splitting and June spending spikes

Departments had some interesting explanations for why there appears to be a spike in contracts at the end of financial year and a large number with the same supplier valued just below the $80,000 threshold, above which agencies must approach the market.

“The risk of ‘splitting contracts’ or having multiple contracts with the same supplier with a combined total exceeding the $80k threshold will always be a challenge for agencies to manage,” submits PM&C.

“This risk is further exacerbated” by the use of credit cards for purchases under $10,000, its submission adds. “Agencies need to ensure that the implementation of controls needs to be balanced with administrative efficiency, potential risks and the allocation of resources to monitor and review.”

The AGD suggests increasing the $80,000 threshold to $200,000 and doubling the $10,000 threshold for contract reporting procurement to $20,000, which would mean more credit card use. It asserts that its own internal review found no evidence of inappropriate contract-splitting, in line with other APS submissions.

The department also says the June spike is due to “alignment with the budget cycle, careful fiscal management and re-prioritising of activities to ensure full utilisation of annual appropriations” and this point is reiterated by PM&C.

Agencies don’t want surpluses because after July 1, leftover money from past years can only be accessed through application to the Finance Minister.

The Department of Infrastructure, Regional Development and Cities, whose AusTender entries will be looked over in the next audit, says its June contract spike is driven by “budgetary cycles and project commencement and closing cycles associated with the implementation of new projects and policy”.

It also contends that widespread contract-splitting isn’t really happening, it just looks that way because lots of AusTender notices have very similar or identical descriptions but are genuinely separate, isolated purchasing, or in some cases because they are only notices of variations to previous listings.

About half of DIRDC contracts for this financial year, as of the end of January, bear these kinds of outward similarities. The department says its use of “generic descriptions” may give the auditor-general the impression that it has more duplicate contracts than it really does. This is another common explanation offered throughout the APS submissions.

Every perspective under the sun

The figures that agencies provided the committee show large fluctuations in the use of consultants, individual contractors and on-hire labour — both between particular agencies and across the five financial years. While the government has been spending a lot more more on contracted labour in recent years and keeping strict control over APS headcount at the same time, the link between the two is clearly not a simple correlation.

Beyond trying to confirm the scale of this growth in spending and identify ways it can be tracked more easily going forward, the committee’s main concerns are why it is happening and whether it is a cause or a symptom of any problems related to the efficient use of public funds and APS capability.

These are much harder questions, besides being politically contentious, so a clear consensus is unlikely.

The APS submissions typically assert they are achieving value for money through their procurement, but how they assess this is far from clear, especially when it comes to money spent on consultants.

Failing to demonstrate value for money is one of the most common concerns raised by auditors-general, across the board, including in areas where it should be more straightforward to assess. As JCPAA deputy chair Julian Hill asked in the first hearing, how does one determine a $2 million consulting job was worth the money?

He did not get a simple answer.

There is certainly a good balance of perspectives on this perennial topic in the submissions to the inquiry, and many will be explored in its second hearing in a week’s time. A lot start from the premise that increasing use of consultants and contractors is a problem, but have mixed views about why, although a few note the valuable roles they can play if used appropriately.

Scholars provide context and insights from the academic discourse on the matter, think tanks seize the day and advance their ideas about what is best for the Commonwealth’s administrative arm, and a couple of big consulting firms weigh in with their own interests in mind, but nonetheless make some good points.

The Community and Public Sector Union continues its longstanding arguments that in many cases, necessary and ongoing jobs are pushed out to the private sector at higher cost for perverse budgetary reasons. Individuals, both well-known and otherwise, comment from personal experience at all levels of the public service, doing so anonymously, in several cases.

There is already plenty of fodder for a deep and wide-ranging discussion followed by an interesting set of recommendations at the end of the process, possibly relating to the the staffing cap and how agencies employ consultants. But after it’s all said and done, it is hard to imagine much more than a new set of procurement reporting requirements coming down the pipeline, at least in the short term.

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