Health Bid Debacle

Tuesday, November 19th, 2002 @ 7:42AM

Adjournment Speech


19 November 2002

An Australian National Audit Office report, titled Health Group IT Outsourcing Tender Process, was undertaken at the request of the Senate Finance and Public Administration References Committee.

This request was made following a Senate Finance and Public Administration inquiry into the Coalition’s IT Outsourcing Program.

During this inquiry serious questions were raised about the probity of the Health Group tender.

In June 2001, the Auditor-General began a performance audit into the Health Group tender process.

The Auditor’s report revealed that:

“On the basis of the available evidence, ANAO is not able to provide an assurance that no tenderer unfairly gained a competitive advantage in the Health Group process [and] there was a lack of transparency of the manner in which probity issues were considered by OASITO…”

The Auditor also found that the successful bidder, IBM-GSA

  • Had access to the detailed bids of the other two tenderers;
  • May have substantially reduced its own bid after this access;
  • Lodged this revised offer after the stipulated deadline; and
  • Was awarded the Health Group contract without all the relevant tender oversight committees being informed of these irregularities.

The possible corruption by OASITO, the Office of Asset Sales and IT Outsourcing, of the tender process involving a major IT Outsourcing contract is a very serious matter indeed.

Yet in respect to this Health Group tender, the Auditor-General found maladministration and raised the possibility of corruption of the tender process.

This tender goes back to 1999, when IBM-GSA was one of three tenderers for the IT outsourcing contract for the Department of Health and Aged Care, the Health Insurance Commission and Medibank Private Limited. This was known as the Health Group.

The other tenderers were CSC and EDS.

The Request for Tender (RFT) was issued in November 1998, and closed on 15 February 1999. IBM-GSA was announced as the successful bidder in September 1999 and on 6 December 1999 contracts were exchanged to the value of $351 million.

It is important to note that CEO of OASITO at this time was Mr Mike Hutchison. He oversaw the Health tender process. Also at that time, Mr Greg Barnes was advising the Minister, John Fahey, on IT Outsourcing.

In relation to the ANAO report, one of the main issues of the Auditor’s inquiry was that during the tender process, OASITO gave IBM GSA a computer disk containing critical information relating to the final pricing of their rival tenderers.

This has come to be known as the ‘disclosure event’.

OASITO, the agency then responsible for overseeing the tender process, claimed they “inadvertently” sent IBM GSA the computer disk containing information about their competitors’ bids.

OASITO accepted IBM’s assurance that they did not examine their rival’s bid information contained on the disk, or copy it.

However, the Audit Office found that after receiving this computer disk, IBM-GSA was not able to prove that they did not revise their tender bid.

IBM then lodged their revised bid after the due deadline.

At the time, OASITO described giving IBM details of their rivals bids as an, ‘inadvertent error’.

At the time, the Minister for Finance, John Fahey, dismissed my repeated calls for an immediate halt to the tender process.

On February 8, 2000, during Senate Estimates, which was the first available opportunity, I questioned officers from OASITO about the probity of the tender process.

OASITO representatives, and in particular Mr Ross Smith, made this statement:

“[The tender] Was conducted in accordance with the advice from both the probity auditor and our legal advisers engaged for the initiative.

All parties concurred at the time that the process could continue unchanged….[OASITO] briefed the probity auditor in person [who] immediately came back to us with a proposed course of action…we engaged the probity auditor to participate in all of our discussions to make sure that he fully witnessed the nature of the discussions and he was happy that we had delivered the messages in accordance with his proposed course of action.

[And] The management of the event, including the consultation with the agency heads and other tenderers in the process, was conducted in accordance with the advice from both the probity auditor and our legal advisers engaged for the initiative.

All parties concurred at the time that the process could continue unchanged. [And] The following day OASITO officials briefed the probity auditor in person.

The probity auditor wrote to OASITO proposing a course of action to address the situation, on the same day, and initial statutory declarations were received from the tenderer employee that opened the disk.

In sharp contrast to this statement, the ANAO’s findings that a probity auditor report did not exist exposes the misleading evidence provided to me by OASITO at Senate Estimates.

The Audit Office report concluded:

“All requests by OASITO for advice from both the Legal Adviser and the Probity Auditor regarding the disclosure event were oral…There was no record retained by OASITO of its conversations with either the Legal Adviser or the Probity Auditor in relation to the disclosure event, the instructions provided about the event and the nature of the advice sought by OASITO, nor of the options discussed with either party…

There is no written advice from the Probity Auditor (who was overseas at the time), nor from his representatives, regarding the probity aspects of accepting the late offer from IBM GSA following the disclosure event; either before or after the decision to accept it had been made.” (ANAO, p 10)

This means that

1. OASITO appear to have misled the Senate by saying that a probity auditor had provided advice that the tender could proceed. The ANAO found that this had not happened. Only on request through Estimates for this probity report did the Department of Finance begin to prepare such a report.

2. Furthermore, the Legal Adviser was not empowered by OASITO to advise that the tender process could cease, thus compromising the status of their advice.

3. IBM-GSA may have altered their price and included as yet unknown ‘out-of-scope’ Industry Development commitments between the disclosure event and late lodgement of their final offer, as they were unable to prove otherwise; and

4. The relevant health group departments and agencies were not informed of the disclosure event at the time, or the subsequent changes in final bids, or the late lodgement of the IBM-GSA bid.

It’s interesting to note that following this period, Ross Smith was awarded a public service medal. It’s hard not to draw the conclusion that the government was rewarding Mr Smith for his protection of the Minister’s political interests.

Now almost three years later, and no longer accountable to the parliament or taxpayers, John Fahey told the Audit Office in September 2002:

“When the disc containing all three bids was delivered to IBM GSA in error my reaction on being informed directly by OASITO was to cancel the tender. I could not see that a tender process with integrity could continue. At the conclusion of the tender, I was both disappointed and annoyed at the limited role of the Probity Auditor and the absence of a separate report on the issue.”

But the tender did continue, and IBM-GSA was awarded the Health Group contract.

Having originally raised concerns about the Health Group bid in 1999, and having carefully followed this debacle over the course of a number of inquiries, I can only conclude that OASITO officers deliberately misinformed the Senate to cover up possible corruption of the Health Group tender process – and this was designed to ensure that IBM-GSA won the bid.

The Government must immediately take action to satisfy all the parties involved – and Australian taxpayers – that this tender process was not corrupted in any way.

The Government must accept responsibility for this debacle and I will continue to pursue the government in the appropriate forums about their culpability to ensure this shambles of a tender process does not happen again.

Link to Media Release: Fahey finally tells the truth: tendering process for Health’s IT Outsourcing Program was without integrity

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