Follow up of Managing Major Projects

This audit follows up on recommendations from our 2012 audit of Managing Major Projects. Major Projects Victoria (MPV) has addressed 15 of 21 recommendations. Much of this effort, however, has only brought MPV to a standard that Parliament and community would expect of a public sector entity. There are a number of key recommendations that have not been adequately addressed, including fundamental issues around how MPV engages and uses contractors, and the value they provide. Issues still exist as to whether contractors are in fact employees.

A fraud risk assessment of MPV did not comprehensively assess risk across MPV’s business and MPV cannot provide assurance that it has appropriate systems in place to mitigate fraud. In addition, MPV has not developed a long-term strategic plan, exposing itself to a range of risks and challenges relating to future major projects.

Weaknesses also remain around MPV’s project management practices, which are a fundamental part of its business operations. MPV has improved its internal and external reporting framework, including an electronic system and associated processes to monitor and report on projects. These continued gaps undermine confidence in MPV’s transparency and value obtained by this use of public funds.

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Ordered to be published

VICTORIAN GOVERNMENT PRINTER August 2015

PP No 64, Session 2014–15

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John Doyle Auditor-General

Audit team Chris Sheard—Engagement Leader Vicky Delgos—Team Leader Emily Arthur—Analyst Samantha Carbone—Analyst Engagement Quality Control Reviewer Andrew Evans

In February 2015 I released my first audit following up on audit recommendations from 2012–13. This inaugural report was the basis for further follow-up audits to verify the information agencies provided.

This report, focusing on Major Projects Victoria (MPV), is the second in a series of follow-up reports that I intend to release this financial year. It provides Parliament and the community with information about the improvements that MPV may have made in relation to my recommendations.

The 2012 audit Managing Major Projects identified a range of weaknesses that culminated in our conclusion that MPV lacked organisational integrity and accountability. I made 22 recommendations to improve MPV's operations.

MPV has done little worth commending to address my recommendations and their underlying issues. The bulk of its effort has been focused on improving its administrative practices and associated governance. While important, this has simply got MPV to the standard at which it should always have been.

Regrettably, little meaningful action has occurred to address the core weaknesses.

In 2012, sufficient weaknesses were identified to warrant the recommendation for a fraud risk assessment, however, the assessment undertaken was inadequate. It appears to be a review that was done to address a recommendation, rather than a serious effort to understand and address the risks of fraud.

MPV is an organisation that relies on sound project management. An effectively applied framework is the foundation of its work. In 2012, critical weaknesses were identified. Some have been addressed but weaknesses remain. Given MPV's preference for highly paid contractors, its project management practices should be of the highest standard. They are not.

MPV's engagement of contractors continues to be problematic. MPV continues to fail to adequately assess whether it can find qualified, skilled staff within the Victorian public sector. Instead, it appears intent on engaging contractors—in what are essentially employee roles—with remuneration levels that MPV has failed to adequately justify.

Given the diminishing number of major projects that MPV has to manage, there are significant questions about the value it provides to Victoria. I am not satisfied that MPV has fundamentally improved its performance.

John Doyle MBA FCPA

Auditor-General

August 2015

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Major Projects Victoria (MPV) was established to provide project delivery and development services across the Victorian public sector for complex, technically challenging or unique projects of state significance.

In October 2012, the Auditor-General tabled an audit on Managing Major Projects which found that MPV was not managing infrastructure projects effectively, efficiently or economically. The audit made 22 recommendations of which 21 were directed at MPV and the former Department of Business and Innovation, and one was directed to the Department of Treasury and Finance (DTF).

At the time, the audit raised a number of fundamental issues related to the lack of basic governance, major deficiencies with the management of internal contracts, inadequate project management, a lack of relevant and appropriate performance measures and no relevant data to assess how it is performing.

This audit follows up on whether MPV and the Department of Economic Development, Jobs, Transport & Resources (DEDJTR)—which now manages the responsibilities of the former Department of Business and Innovation and the former Department of State Development, Business and Innovation (DSDBI)—have addressed the 21 recommendations made in the 2012 audit. The DTF recommendation has not been assessed in this audit.

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Investing in and delivering infrastructure is a core function of government. Infrastructure investment is made to achieve economic, social and environmental outcomes—it provides the Victorian community with, among other things, roads, public transport, sporting stadiums, art galleries and hospitals. Victoria's infrastructure investment is significant, with Victoria projected to spend $5.2 billion on infrastructure in the 2015–16 financial year.

Major Projects Victoria (MPV) was established to provide project delivery and development services across the Victorian public sector (VPS) for what are considered complex, technically challenging or unique projects of state significance.

In October 2012, VAGO tabled an audit, Managing Major Projects. The audit examined how effective, efficient and economical MPV was in managing major capital projects, and whether there were frameworks in place to enable MPV to assess and report performance and demonstrate value for money.

The 2012 audit concluded that MPV was not able to demonstrate that it operated and managed infrastructure projects effectively, efficiently or economically. There was poor oversight, and a lack of effective internal controls had contributed to poor governance standards and a lack of organisational integrity and accountability. These aspects were particularly highlighted by:

• poor processes to engage and manage contractors and associated internal contracts
• records management practices that did not meet the requirements of the Public Records Act 1973
• the project management framework and better practice were not routinely applied, which resulted in poor project planning and the potential of poor outcomes and increased costs
• unreliable data collection processes and incorrectly reported performance, failing to meet public sector accountability standards.

The audit made 22 recommendations, 18 aimed at MPV, three for the former Department of Business and Innovation and one for the Department of Treasury and Finance.

Following the 2012 audit, there were machinery‑of‑government changes and MPV was merged into the former Department of State Development, Business and Innovation (DSDBI) before further machinery-of-government changes merged it into the Department of Economic Development, Jobs, Transport & Resources (DEDJTR).

Figure 1A summarises the 21 recommendations from the 2012 audit that were directed to MPV and the former Department of Business and Innovation—now DEDJTR—and provides an overview on whether they have implemented the recommendations.

Figure 1A

Status of recommendations

Source: Victorian Auditor-General's Office.

The 2012 audit found that MPV was not being effectively governed. It was broadly performing its property development and project management roles. However, there were significant issues with complying with key pieces of legislation, including the Standing Directions made under the Financial Management Act 1994 and the Public Records Act 1973.

There were also major deficiencies with the way MPV managed internal contracts—there were missing contracts, variations made without adequate reason or assessment of performance, and questionable recruitment practices. Administrative deficiencies such as these diminish accountability and transparency as well as increasing the risk of error and fraud.

The audit made 10 recommendations focused on clarifying the role of MPV and establishing key components of good governance, such as conflict of interest, recordkeeping and effective contract management processes.

1.2.1 Employment status

The 2012 audit found that MPV had a number of contractors who had similar benefits to those typically available to employees, such as annual leave and executive bonuses. In addition, contractors had financial delegations and were authorising payments for MPV, contrary to the Standing Directions of the Minister for Finance.

Figure 1B

Recommendation 1

Since our audit, MPV has obtained legal advice on these two issues. Its legal advice on the employment status of its contractors indicates that it was unlikely that contractors would be considered employees if they used a proposed standard form contract.

MPV's legal advice was limited to the use of its proposed standard form contract, rather than an assessment of its contractors against a list of factors that determine someone's employment status. The importance of not just relying on the contract, but taking into account these other factors when determining employment status was included in MPV's legal advice.

MPV has failed to go beyond relying on its legal advice and properly assuring itself about the status of its contractors. As such, it has not addressed the underlying issue identified in the 2012 audit. Consequently, risks remain around the employment status of MPV's contractors.

1.2.2 Skills and capabilities

The 2012 audit found that MPV used a mix of VPS staff and contractors to deliver its projects. However, there was no documentation to demonstrate a need for engaging contractors, nor any assessment of the existing capability to fill those roles from within the VPS. The audit found that in most situations MPV considered only the use of contractors.

Figure 1C

Recommendation 2

MPV's actions since the 2012 audit have not addressed these issues and indeed, are contrary to, and disregard, the recommendation it accepted.

In the same month that the initial audit was completed, October 2012, MPV engaged a recruitment consultant to run a recruitment process for three Group Directors, two general Project Directors and one Project Director for the Melbourne Market Relocation Project.

Before it started the recruitment process, MPV had prepared position descriptions. However, it did not assess whether the skills needed existed within the VPS already and it did not test the VPS market before going to contract. MPV also did not obtain advice from the Department of Premier and Cabinet about creating additional executive officer positions. Additional executive positions would enable MPV to fill vacancies from within the VPS and also make clear that these were employee roles, avoiding uncertainty about employment status and the ability to delegate certain functions.

In November 2012, MPV hired a recruitment consultant to undertake a Salary Benchmarking Survey which was intended to establish whether the salary range being offered for the MPV roles was consistent with similar roles in the broader project management and construction industry.

The benchmarking exercise had methodology weaknesses. It used 'career conversations' with individuals in the construction and project management industry to determine what salary MPV's contractors should receive. These conversations relied on individuals to disclose their salaries, rather than seeking evidence. In addition, it matched positions in other organisations against MPV's positions, but, it is unclear how they were matched.

In February 2013, after MPV had advertised the positions and undertaken interviews, the recruitment consultant produced a report titled Review of Major Projects Victoria Senior Structure. The review's aim was to recommend a senior structure for MPV and also to 'fulfil the Minister's commitment to implement all of the Auditor‑General's recommendations'.

The report does not meet any of the Auditor-General's 2012 recommendations. Instead it recommends that MPV use contractors—a continuation of the issues identified in the original audit. This report comments on the skills required for MPV—something that should have been considered before October 2012 when the recruitment process began.

MPV's workforce strategy notes that its 'highly skilled senior contract project ... bring important private sector experience to the public sector together with vital project continuity'. It is unclear from the resourcing strategy what 'important' private sector experience is, or what is meant by 'vital' project continuity.

From this recruitment round, MPV appointed one VPS staff member—already within the VPS—and engaged four contractors. A fifth contractor was also engaged in a separate recruitment process conducted in February 2013. However, as with the previous recruitment round, MPV did not assess whether the skills needed existed within the VPS already and it did not test the VPS market before going to contract. While DSDBI drafted a letter to the Department of Premier and Cabinet to increase its number of executive officer positions, this letter was never sent.

Cost of MPV's senior staff

MPV's staffing costs are high. Its choice to engage contractors has had a significant cost impact on the organisation. MPV's decision to engage five contractors without assessing the skills and capabilities of staff in the VPS raises questions around value for money. MPV has contracts in place with its five main contractors that range from two years, with an optional further two, to five years. This length of contract is similar to those of VPS executive officers.

MPV pays five contractors a 'retainer' each month. This is a fixed amount, ranging from $23 000 to $33 000, which is paid regardless of the hours worked by the contractor. In effect, this payment method also means that contractors are paid for periods of annual leave and sick leave. This contract payment method lacks transparency. MPV does not know how many hours its contractors work each month. Contractors complete a monthly self-attestation on performance, which is signed off by the executive director.

Figure 1D shows the annual remuneration for MPV's executive officers and senior contractors which totals to around $2.8 million, or more than a quarter of MPV's total $10 million annual cost. This is significant given MPV is delivering few projects. MPV had four Executive Officer 2 (EO2) positions prior to May 2015, at a cost of almost $1.14 million. In addition, its five contractors cost in excess $1.6 million for the period of May 2014 to April 2015.

In comparison, in April 2015, a large Victorian government department responsible for building large, complex infrastructure advertised for a project director. It sought this position within the VPS, with a salary range of $141 969 to $193 078. This is significantly less than the remuneration provided to MPV's project directors.

Figure 1D

Remuneration of MPV executive staff and senior contractors

(a) This VPS staff member resigned April 2015.

Source: Victorian Auditor-General's Office.

Employment status

The 2012 audit found there was uncertainty about whether MPV's contractors were in fact employees because the contractors were:

• heavily integrated within MPV, using its premises and equipment to conduct their business
• a part of MPV's senior management team
• economically dependent upon MPV.

Many of these issues still exist with MPV's current contractors. MPV's 2014–15 Workforce Strategy lists its five long-term contractors as part of the 'MPV Core Staff' rather than as contractors. Contract terms highlighted above indicate that the five contractors are regarded as staff rather than contractors.

Two contractors currently hold senior management roles within MPV, and a third contractor recently held a senior management role.

MPV advised that contractors are regularly available and accessible at its premises or offsite office at Melbourne Park—further suggesting contractors are heavily integrated into MPV and using its premises to conduct their business. MPV's advice that contractors are regularly available also raises issues about contractors being economically dependent on MPV—another factor that blurs the lines between contractor and employee.

1.2.3 Contract and contractor management

MPV's contract management practices were found to be significantly deficient in 2012. There were a number of weaknesses with internal contracts including:

• five missing contracts
• little documentation to support contract variations
• little or no documentation to support extensions to the length of contracts and revised payment terms.

Figure 1E

Recommendations 3 and 4

MPV is now meeting the basic requirements of all public sector agencies for contract management. Contractor files are kept on MPV's record management system. It also has guidance that outlines performance discussions are to be held with contractors every six months. There was evidence that these discussions were held and records kept. Between 2012 and the time of this audit, MPV had not made any contract extensions or variations.

1.2.4 Fraud risk

The 2012 audit found deficiencies with systems and processes. These included missing contracts, contract variations made without documentation and significant issues with the recruitment of ex-employees into contractor roles. In addition, there were unexplained changes to master files.

Figure 1F

Recommendations 5, 6 and 7

A fraud risk assessment was commissioned by the former DSDBI. This was inadequate. It included a simple online 'fraud assessment' survey of MPV staff and tested some internal controls. However, it did not comprehensively assess risk across MPV's business and the methodology did not examine procurement—a key part of MPV's business.

The fraud risk assessment also did not examine any other issues found in the 2012 audit, such as master file changes and IT business rules. It was also unclear what level of testing of the internal controls was undertaken. While DEDJTR has committed to revisit this recommendation and undertake a comprehensive fraud risk assessment of MPV, its lack of action to appropriately address this recommendation does not provide assurance that it has appropriate systems and processes in place to mitigate the risk of fraud.

We found that since the 2012 audit, MPV has introduced guidelines for the recruitment of VPS staff. The guidelines provide information on the process involved and include checklists for inclusion in human resources files. Overall the guidelines are comprehensive. MPV has also established a conflict of interest register and a supporting process. There was evidence that where conflicts have arisen, they have been considered by an appropriate officer and a decision has been made and documented. The implementation of these guidelines and the conflict of interest register means that MPV now conforms to the minimum standard expected of all public sector agencies.

1.2.5 Records management

The 2012 audit found that there were significant deficiencies with the way MPV was managing its key records. MPV could not provide key project information, such as project planning documents, construction contracts, project data and consultant reports.

Figure 1G

Recommendations 8 and 9

We found that MPV has now established a records management system, which is a basic requirement of all public sector agencies. After undertaking a review in 2013, MPV produced guidance for records management, which mandates the use of its document management system for all MPV staff. The guidance also mandates a file structure and file naming conventions.

There was mandatory, comprehensive training for all staff in 2013. Since then, there has been one-on-one training for new starters and those that require further assistance. MPV has been undertaking information management audits every six months. The audits monitor usage of the system and the network drive as well as other methods of file management, such as compactus. In addition, MPV was able to locate key documentation when requested, such as internal contracts, performance assessments and conflict of interest forms.

1.2.6 Business planning

In 2012, we found that MPV had developed a four-year strategic business plan but stopped using it after only a year following a change of government. MPV was without a fundamental planning document to aid effective governance. The 2012 audit also found that MPV's stated role did not match its actual role, as it did not deliver 'complex, technically challenging, and unique projects of state significance'.

Figure 1H

Recommendation 10

MPV has not addressed this recommendation. It is still without a long-term strategic plan, relying on its annual planning. This approach is inadequate, given MPV's unique role within DEDJTR and public sector. While MPV is an agency that reacts to government infrastructure policy decisions, there is still a need for it to plan strategically. The very fact that it is reactive means it is exposed to a range of risks and challenges, particularly the risks around the sustainability of its workforce where there is policy uncertainty.

In its 2013–14 and 2014–15 annual plans, MPV stated that it had considered its role and it remains unchanged. However, there is no evidence that MPV has formally reviewed its role or how it assesses the achievement of its role. There is also no evidence that MPV is undertaking any complex or technically challenging major projects, as described in our 2012 report. In fact, since 2012, the number of projects MPV is undertaking has declined and it is undertaking more planning or development projects than in 2012.

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Introduction

In accordance with section 16(3) of the Audit Act 1994, a copy of this report was provided to Major Projects Victoria and the Department of Economic Development, Jobs, Transport & Resources.

The submissions and comments provided are not subject to audit nor the evidentiary standards required to reach an audit conclusion. Responsibility for the accuracy, fairness and balance of those comments rests solely with the agency head.

RESPONSE provided by the Acting Secretary, Department of Economic Development, Jobs, Transport & Resources

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