Tender doublespeak adds risk to submarine decision

The government’s political play on submarines could backfire. Image sourced from Shutterstock.com

Days after announcing Australia’s largest ever defence contract will be awarded via a “competitive evaluation process”, the government is still scrambling for a sensible definition of what such a process is and how it differs from a tender. No one knows, because such a thing doesn’t exist.

Despite having spent time working in the corporate in-house legal team for a large multinational shipbuilder, I have never heard the phrase “competitive evaluation process” as distinct from a tender.

I have also never, ever heard this phrase used as a legal term of art. Not as a student of contract law either at an undergraduate or a masters level. Not once in my time working in-house on defence procurement matters. Not in the five years subsequent in which I have taught international trade law.

The current and former colleagues I have asked also have no idea what the government is talking about. This is consistent with what is being widely reported.

This is not to say the term “competitive evaluation process” has never before been uttered. It clearly has. However, in context it has always referred to some sort of tender process, or occasionally what’s known as an EOI or expression of interest, usually for some future tender.

So why is the government so keen avoid calling the procurement process for the submarines a tender?

Tony Abbott proffered the answer that if we had an “open tender process”, then nothing would stop Russian President Vladimir Putin bidding for the submarine contract and demanding that Australia accept his offer. Sidestepping the political debate, as a basic legal proposition the PM’s characterisation of an open tender is simply wrong.

How do ‘open tenders’ work?

An open tender is perfectly compatible with a set of criteria for potential bidders. For an example, the WA Government Finance Department’s description of an Open Tender process includes specific reference to the existence of “qualifying criteria”. These criteria ordinarily include business experience, demonstrated previous capacity, having been a company for a certain number of years, and so on and so forth. In defence procurement it is very common for such criteria to include country of origin.

The Senate economics committee investigating the future of Australian shipbuilding has recommended in its draft report that all future procurement contracts for defence shipbuilding be open tenders.

Education Minister Christopher Pyne, in an appearance on ABC Radio argued:

“The difference is that an open tender is where anybody can tender. A competitive evaluation is where a consortia come together of people who can deliver such an important, expensive and massive program as the building of submarines, and the government evaluates between them who is the best to do it. So, for example, the ASC (Australian Submarine Corporation) might go into a joint venture with an overseas builder, potentially the Germans or Swedes or whomever.”

This, too, is plainly wrong as a matter of legal fact. Consortium bids, or joint ventures are extremely common in defence procurement open tenders. Indeed, SEA 1444, the procurement project for the supply of the Armidale Class Patrol Boats was won by a joint venture between Austal Ships and DMS (Defence Maritime Services).

An open tender process is only one of many permutations of a tender more generally. It is always possible for the government to submit RFTs - request for tender contracts - to a number of preferred suppliers. This is very common in defence procurement, particularly with respect to very complex equipment that is not purchased off-the-shelf. Indeed, it was precisely this kind of tender process that was used for the AORs - Auxiliary Oiler Replenishment ships.

It would be trivial for the government to add ASC to its preferred supplier list and issue them a request for tender. This would doubly ensure Vladimir Putin was unable to bid for the contract.

Which invites the question, why is the prime minister so determined to avoid the word tender?

When tenders go wrong

Here we necessarily get into speculation. However, there are aspects of a tender process that would raise potential political problems for the Abbott government.

Quite famously the government ran into these difficulties in the 1997 case of Hughes Aircraft Systems International v Airservices Australia.

After being invited to submit to a closed tender, Hughes Aircraft Systems International was unsuccessful in their bid. Unhappy with this, it contended that the government had not engaged in its evaluation process in the manner specified in the tender documents, among other things. Ultimately Justice Finn of the Federal Court found in favour of Hughes Aircraft. In doing so he sent something of a shot across the bow of government procurers everywhere, finding that the tender documents in fact and in law imply an obligation on behalf of the government to conduct the tender in good faith, and in accordance with the specified process.

If, as some commentators are suggesting, a deal with the Japanese is already well advanced it implies that any future tender process would be merely a case of “going through the motions”. This is inconsistent with legal obligations. An astute lawyer might suggest tender documents explicitly deny an obligation for the government to give tenderers equal treatment, or that the government conduct the tender according to a specified process. While this may solve the legal problem, it would doubtless invite a great deal of political criticism.

Any attempt by the government to avoid the ordinary rules of good faith and probity in the tendering process would come with a substantial economic and project management risk. The ill-fated tender for the supply of a new payroll management system to Queensland Health is a case in point.

In the Qld Health case an initial cost estimate of approximately A$6 million blew out to in excess of A$1.2 billion. The lack of an established probity officer, whose job is to ensure that the procurements process is undertaken fairly respect to all sides, is cited as a major complicating factor which led to the entire process going off the rails. The impropriety includes allegations that a preferred contractor – IBM – was fed information during the tender bidding process which gave it an advantage over rivals.

That a lack of probity courts risk should come as no surprise. The entire rationale for having a tender process in the first place is to allow a procurer to openly and objectively assess various bids to supply a particular product. The tender process is expected to guard against any internal bias or impropriety.

The government is twisting itself in knots trying to avoid the use of the word tender for what would appear to be purely political purposes. This is a major risk that would concern anyone who has been involved in complicated procurement contracts.