STAFF REPORTER | PNGi
PORT MORESBY - Last week the Australian Financial Review published a series of hard-hitting investigative reports into the award of $423 million in security contracts for the Manus Island detention centre – a controversial mechanism used by the Australian government to offshore its widely criticised refugee policy.
The contracts went to Paladin Solutions PNG Ltd, whose principals include Ian Duncan Stewart and former Australian soldier come private security contractor, Craig Thrupp.
It is common in the anti-corruption community when studying contracts to look for red flags, which point to heightened risks that a transaction may have been affected by improper or illegal dealings. The more red flags, the higher the risk, and the greater the need for a formal investigation.
And with an especially high priced transaction such as this, in an area of strategic importance for the Australian government (and in particular the Liberal Party, which holds onto government by a thin margin), it must and should come under close scrutiny.
There are a whole range of scenarios to be on the watch for, the most malevolent of which is that the Australian government knowingly awards an inflated contract to a company which it is aware will launder the money and solicit bribes to senior PNG politicians, who in turn will green light this deeply unpopular offshore method for processing asylum seekers.
PNGi has no evidence to suggest this was the case here, but the red flags described below certainly show that this scenario cannot be ruled out at this stage
Then there is the possibility that while the Australian government may not explicitly set out to bribe its PNG counterparts using a third party company, it consciously employs a highly opaque and high risk contracting process in the knowledge it will likely pump-prime bribes to PNG decision makers, getting Australia the all important green light (i.e. the see no evil, hear no evil, approach).
Again PNGi has no evidence to support this proposition, but the red flags are of such a substantive nature, it is a factual scenario that must be within the purview of the investigative authority appointed to scrutinise this scandal.
At the most benign level, there is the risk that in a bid to keep a lid on a highly sensitive policy mechanism at a time of electoral vulnerability, the Australian government pushed through an opaque and poorly run procurement process, in a bid to secure a contractor, especially one that is more immune to public pressure in Australia.
Given these different potential risks, it is critical contracts such as those awarded to Paladin Solutions are carefully examined for red flags – the more red flags, of a serious nature, the greater the likelihood something nefarious may have occurred.
Red Flag 1 – Extravagant price
It is reported that Paladin Solutions PNG Ltd has been paid A$423 million for 22 months work. Although this amount is at first glance obscene, the real red flag lies in the estimated rate of profit.
The AFR estimates that Paladin Solutions’ monthly costs amount to A$3 million. Under the most recent contract they are receiving A$20 million per month from Australia. The industry standard is a 40% profit rate, would indicate A$4.5 million would be the broad market price paid for similar services.
Why is an exorbitant contract price a red flag?
It can denote ‘hidden expenses’ associated with a bidding process, that are paid off the book i.e. bribes.
For example, in the Somare bribery scandal, an American national Philip Doerhman was successfully prosecuted in Singapore for his role in soliciting bribes to the Somare family. Doerhman told police:
“[T]here were PNG government officials who would demand monies from us before they would do their jobs and hence we need to set aside such contingency funds for such demands for monies from government officials and presently demanding for more and more as we are near sign off, in particular one request for up to USD 5 million by Ambassador Dominic Diya which was reduced to USD 1 million.”
Against this backdrop exceptionally large contract prices can signal that a contractor has built in costs for such ‘contingency funds’.
And when contracts are fixed illegally, there is no motivation to submit a competitive bid, so firms paying the bribes are incentivised to inflate their own rate of return. This is a particularly notorious problem in the country’s national health procurement system.
In the case of Paladin Solutions, we have no idea if any illegal payments were made. If a formal investigation is launched, Australian Federal Police will almost certainly be seeking access to the company’s offshore bank records to detect whether anything improper took place.
Red Flag 2 – Flawed Tender Process
Astonishingly the Financial Review reports that Paladin was exempted from complying with Commonwealth procurement rules:
“The [Australian] federal government chose not to run an open tender process for contracts worth $423 million to provide security for refugees on Manus Island, raising more questions about how the thinly capitalised and inexperienced Paladin group was chosen. Government procurement documents show the Home Affairs Department ran a ‘limited tender’ for both contracts won by Paladin, which typically means it was the only party invited to bid.”
The provision of private security services is a pretty standard product these days, even for ‘remote’ locations. Additionally, the Australian civil service is an experienced hand at running open and public tenders in an efficient manner. There is on the face of it no compelling reason why the Australian government would use an opaque method for running a tender of such high value, in a very sensitive policy area.
This is a red flag that the tender has potentially been fixed in an improper or illegal manner.
Our own national courts are replete with evidence how ‘certificates of inexpediency’, which allow government to avoid competitive tenders in emergency situations, have been abused for illegal ends.
Hence when we observe governments avoid open, competitive tenders without any compelling reason, the risk of misdealing is amplified.
Once married to the fact that the tender price was well above the industry average, this red flag is screaming high risk to the Australian taxpayer.