Mekong River bridge contract
4.58 Finding: In the sample of ten contracts examined by ANAO, one instance was noted where AusAID had negotiated on a foreign exchange
loss incurred by a construction contractor. AusAID advised ANAO that, as far as it is aware, this is the only instance where this had occurred.
The instance identified by ANAO involved an $A800 000 payment in 1999 to the construction company on the Mekong River Bridge project at My Thuan in Vietnam. The Commonwealth’s share of this payment was
$A520 000.
4.59 The contract expressly excluded any liability or responsibility of the Commonwealth for any currency fluctuation or exchange rate loss on the construction project. However, AusAID settled the claim after receiving legal advice as it considered there was a potential contractual liability and there existed serious contingent risks associated with the contractor ’s claim. However, ANAO found that there were a number of significant deficiencies in the process by which AusAID negotiated the settlement of this claim.
118 On 14 January 2000, AusAID advised ANAO that, before it put a settlement offer to the contractor, it undertook, a analysis of likely financial exposures and other relevant costs of the claims.
AusAID was unable to produce any evidence of this analysis or quantify its findings. AusAID further advised ANAO that it gave consideration and weight to all costs to the Commonwealth and with due regard to project and aid program objectives. However, again, AusAID was unable to articulate what costs it had identified and considered or the weight that was given to these costs.
Recommendation No.12
4.60 ANAO recommends that, where the signed written contract requires the contractor to bear foreign exchange risk, AusAID implement procedures that require:
(a) a rigorous and documented examination of all claims by contractors for foreign exchange losses; and
(b) where payment for foreign exchange losses is proposed, sign-off to be obtained that the payment may properly be made, in accordance with relevant Commonwealth policies governing the expenditure of public moneys.
Agencies responded to the recommendation as follows:
4.61 Agree: AusAID and Treasury.
Introduction
5.1 Through its network of overseas posts and Canberra-based officials, the Department of Foreign Affairs and Trade (DFAT) seeks to support Australia’s interests in international security, contribute to national economic and trade performance, and promote global cooperation.119 As of 30 June 1999, DFAT was managing a network of 81 overseas posts comprising Embassies, High Commissions, Consulates and Multilateral Missions in 70 countries.120 DFAT considers its network of overseas posts to be a key asset in maintaining and strengthening the bilateral relations at the core of Australia’s national security and economic well-being.121 The overseas posts also assist DFAT to provide Australians abroad with access to consular and passport services.
5.2 DFAT is the largest overseas operating agency in the Australian Public Service. Approximately one-third of DFAT’s running costs are spent overseas, with foreign currency expenditure of some $A209 million in 1998–99. In addition, DFAT is exposed to ongoing payments to international organisations that are denominated in various foreign currencies.
5.3 Unlike capital expenditure based exposures which typically have a defined term, DFAT’s exposures represent an ongoing commitment and may be regarded as perpetual. In many ways these exposures are similar to those of Australian importers of foreign goods and services where there is no locally produced equivalent good or service (that is, limited or no import replacement). Any hedging of these exposures would be described as “anticipatory” because the exposure amount is not yet known with certainty. Similar considerations apply to DFAT’s foreign exchange exposures.
119 Portfolio Budget Statements 1999–2000—Foreign Affairs and Trade Portfolio, Budget Related Paper No. 1.10, p. 15.
120 Department of Foreign Affairs and Trade—Annual Report 1998-99, pp. 302–304.
121 Portfolio Budget Statements 1999–2000—Foreign Affairs and Trade Portfolio, Budget Related Paper No. 1.10, p. 7.
Audit methodology
5.4 Administrative support to Commonwealth agencies operating overseas is provided through the overseas posts network. DFAT has a cross-agency arrangement, the Common Administrative Services Agreement, under which it provides personnel, office, property, financial and communications services to agencies operating overseas on a fee-for-service basis.122 The Department of Immigration and Multicultural Affairs, Defence and Austrade are the main purchasers of services under this Agreement.123 ANAO examined the foreign exchange exposure associated with DFAT’s overseas operations and the efficiency and cost-effectiveness of the administrative arrangements by which DFAT’s overseas budget is prepared and budget supplementation received for exchange rate variations.
5.5 Another important aspect of DFAT’s activities is pursuing Australian interests in regional and multilateral forums and negotiation of international treaties. The Department’s responsibilities include making payments for Australia’s participation in international organisations such as the United Nations and the Organisation for Economic Co-operation and Development (OECD), although such memberships are of whole-of-government interest.124 ANAO’s audit examination focused on a sample of payments to ten of these organisations, which collectively represented 82 per cent of DFAT’s payments to international organisations in 1998–99.
122 Ibid, p. 197.
123 DFAT also has purchaser/provider arrangements with agencies that require international telecommunications services for staff at Australia’s overseas missions. Source: Portfolio Budget Statements 1999–2000—Foreign Affairs and Trade Portfolio, Budget Related Paper No. 1.10, p. 75.
124 Portfolio Budget Statements 1999–2000—Foreign Affairs and Trade Portfolio, Budget Related Paper No. 1.10, p. 8.
125 One reason for the dominance of United States dollar exposures is that, in many countries in which DFAT operates, expenditure is made in United States dollars rather than national currency.
0
5.6 In its overseas operations, DFAT has exposures to some 68 currencies, the most significant exposure being to United States dollars125 with nine currencies collectively representing more than 62 per cent of total foreign currency operating expenditure in 1998–99 (see Figure 5.1).
Figure 5.1
Foreign Currency Running Costs Expenditure: 1998–99
Source: ANAO analysis of DFAT data.
5.7 Many of the currencies to which DFAT is exposed are not freely-floating but are tied to, or closely correlated with, other currencies. DFAT advised ANAO that, in respect of the vast majority of the 68 foreign currencies, it minimises its risk by only converting into the local operating currency on a needs basis. Nevertheless, ANAO’s Strategic Adviser advised ANAO that there could be merit in DFAT examining its exposure to major currency blocs (such as the United States dollar and the Euro) with management attention focused on significant exposures, such as to the United States dollar bloc.