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House of Assembly - Fifty-Second Parliament, Second Session (52-2)
2012-05-01 Daily Xml
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Auditor-General's Report

AUDITOR-GENERAL'S REPORT

In committee (resumed on motion).

The CHAIR: I now open the examination of the Minister for Health and Ageing, Minister for Mental Health and Substance Abuse, and Minister for the Arts, for a period of 30 minutes. It is to deal with the Supplementary Reports of the Auditor-General 2010-11, so I would ask that people refer to those reports only, and questions related to those reports only will be allowed.

Mr HAMILTON-SMITH: Can I go in the first instance to the Oracle Corporate System, particularly pages 21 and 22 of the report. In regard to consultancy costs, I note that the Auditor-General says on page 40 that those costs are up from $1.15 million to a bit over $2 million in 2011. The minister provided some information on PKF today. Could he tell us how much is being paid respectively to Ernst & Young, KPMG and Deloitte for consultancy work?

The CHAIR: In the audit period?

Mr HAMILTON-SMITH: In the audit period, or since would be nice, but we are discussing the audit period.

The CHAIR: We are discussing the audit period, so any question relating to the audit period I am happy to allow. Any answer related to the audit period will be allowed.

The Hon. J.D. HILL: I am happy to get whatever information the member wants, in or out of the audit period. Are you talking about in relation to the Oracle system? Is that what you are referring to?

Mr HAMILTON-SMITH: In total, for all financial management issues, because I know the Oracle system is part of an overall financial management challenge facing the department.

The Hon. J.D. HILL: I am not sure that this is going to be such a simple thing to do today, but I can certainly take it on notice. I gave information today about the PKF, which was directly associated with the implementation of Oracle. We certainly had some information from Ernst & Young and I will get that for the member. In relation to the other two consultancies, they may have been broader than financial controls, but I will get whatever information I can for the member.

Mr HAMILTON-SMITH: What has been the total cost so far of phase 1 of the Oracle system and what is the projected cost of phase 2 of the Oracle system?

The Hon. J.D. HILL: I will give advice to the member that cabinet approved in September 2009 Health's proposal to implement a new enterprise finance and procurement system, Oracle Corporate System, in order to replace a number of ageing legacy systems across the portfolio, at a cost of $22.853 million—$21.14 million for implementation and $1.713 million for procurement and project planning. That is what we have done at the moment.

As I think I have indicated to the house on previous occasions, the cost of securing the Oracle system through the contract we have with Oracle could only be for five years. There was a difference, I think, in the procurement board's figures, which estimated what it might be for 15 years, and they estimated an extra $12 million. Health has yet to finalise the cost of the next stage, and that is being worked on at the moment.

As I indicated in question time today—I think it was in question time today—the costs will have exceeded these amounts, because the savings that we anticipated, which will eventually flow, have yet to be brought to book, because of the delays in rolling the system out. All of this will come out in the process of detailing the budget. It may well be that the Auditor-General in future may want to comment on these things. That is the information I have at this stage. When we know what the next stage is we will make that available to you.

Mr HAMILTON-SMITH: Did I just hear the minister say there was $22.8 million for the system, but then did I hear a figure of $21 million, or thereabouts, for the implementation? Is that an additional amount? Does that come to a $44 million figure?

The Hon. J.D. HILL: It was a $22.8 million project, 1.713 was for procurement and project planning; so, the externals, if you like.

Mr HAMILTON-SMITH: In regard to timing, when will phase 1 of Oracle be complete in your current estimation and when will phase 2 be complete?

The Hon. J.D. HILL: I am advised that phase 1 is now complete and we are in the planning process for phase 2. We hope that will be completed and rolled out within a two-year framework, but, as I say, we are going through the planning process and we will not have that finalised for a little while.

Mr HAMILTON-SMITH: Which legacy systems being replaced by Oracle have been closed and which are still being maintained and operated?

The Hon. J.D. HILL: There are 18 legacy systems operating across 100 or so bank accounts, I think. All of them are still being maintained because of the rollout of this system. They will all be closed and none of them will be maintained. In the end, as I recall it, there will be the one Oracle system and each of the LHNs will have three separate bank accounts.

It will transform dramatically the way all the health units are being operated, which will produce a much better system. Its transitional process is obviously complex and difficult and it has not been without its problems, as the Auditor has pointed out. I am absolutely convinced that it was something that was essential to do. Notwithstanding the problems about the implementation, the benefits to the system and to government will be profound once it is introduced.

Mr HAMILTON-SMITH: Still on the Oracle system, pages 16 and 17 of the report talk about centralised logistics management as part of the Oracle warehouse management system. What problems have been identified and, in particular, what impact have these problems had upon suppliers to SA Health through its distribution centre?

The Hon. J.D. HILL: I think the member might be conflating two issues. I think you are probably suggesting it in relation to payment of accounts. It is not as a result of the warehousing system as I understand it. The general issues with implementation of Oracle have been really to do with the training of staff and getting staff familiarised with the system.

The advice I have is that controlled weaknesses identified by the audit highlight the part-year changeover between the master plan general ledger and the Oracle general ledger and associated issues with the adoption of new processes. There was a range of issues in relation to the payments to external organisations, but I do not think it relates to this particular matter.

Mr HAMILTON-SMITH: I thank the minister for his answer. To explore that further, I have had concerns raised from industry about the increasing centralisation of logistics within health through a distribution centre at Camden Park. I am just trying to find the connection between that centralisation and what is happening with Oracle and really striking to the question of whether there is a process of central ordering going on that might result in local suppliers, if you like, being cut out from everything from paper rolls, and so on, to a more centralised distribution?

The Hon. J.D. HILL: They are separate issues. Sorry, I understand the issues the member is getting to now. The procurement systems were centralised two or three years ago now, from memory. In the past every individual hospital had responsibilities for a procurement. There were some incredibly poor practices in place, particularly when it came to reasonably expensive medical hardware or even business hardware.

Individual hospitals, small country hospitals and city hospitals would be out in the marketplace trying to procure a particular item. They would have contracts in place with suppliers, and individual units were then paying a lot more than we were getting in a city hospital. What we have done is to centralise the procurement process so that we can get the best deal for the taxpayers and for the units. We also, of course, now that it is centralised, have expertise that can apply equally to the smallest hospital as to the largest hospital; so, there are huge benefits to the system both financially and in terms of contract expertise.

There were some objections around the edges, particularly from country communities, that local suppliers were being left out of the picture, but there is a balance, and I think that food and those kinds of things which are best supplied locally are still supplied locally. The things which are common to our whole system that are not perishables are managed through a central system. We managed to get the old state supply warehouse and we have centralised the warehousing functions in that location. I think that it has settled down pretty well. I have not heard any complaints.

Just as there is in everything you do in government, not just Health, every time you introduce a new system there are teething problems and there are people who feel that they might be disadvantaged and make complaints, but I certainly cannot recollect any correspondence or concerns expressed in recent times.

Mr HAMILTON-SMITH: Still on this question of logistics, minister, the directive from Ms Margo Mains got some media attention recently about a tightening up in supplies and services in the northern area. Could you just explain what that measure is, why that measure was necessary and what savings you hope to achieve from it?

The Hon. J.D. HILL: We are now talking about budget control issues more than the Auditor-General's Report, I suppose. As the member knows, health has always been in this position as long as I have been aware of it, not just in my period but in the period of the former government. Health has always spent more money than it has been given. There is a range of reasons for this and one of them is increased demand. We have managed to reduce growth in demand but there is still a little bit which causes cost pressures, but there are also other functions in a health system which cause cost pressures.

I just put it to the house this way: we have thousands of beds in our health system (I think 5,000, or thereabouts—3,000 plus in the city and a couple of thousand around the country), and all those beds are allocated into wards. They have people in charge of those wards who make decisions about what is required in those wards and what staffing levels are required in advance. There are formulas that apply, but, obviously, you cannot wait until after the shift has occurred before you work out what level of staffing you need: you do it in advance.

If it gets busy people have authority to make decisions in the short term about bringing in extra staff. It is very hard to get a management system in place that properly and completely and accurately 100 per cent of the time allocates staff according to formula. There is often over-expenditure associated with those practices. We also have individual doctors and hospital managers who order supplies and things that are required on the clinical or administrative side of the hospital and sometimes they may order a large lot. What this memo from Ms Mains (who is highly regarded and an excellent manager) was about was just to say, 'You are all part of a system. You need to be cautious in the way that you make decisions which have financial impacts, and we can manage our systems in a tighter way,' and she gave some clues as to how that should happen. It is certainly what we would expect all of our managers to do, as I am sure the member would if he were in this position.

You cannot just have people making ad hoc decisions. You must have strict protocols in place but you also have to allow for the fact that individual managers in difficult circumstances (and health managers often find themselves in difficult circumstances) sometimes are not going to get it 100 per cent right. I think that explains a lot of the cost pressures that we find ourselves in in Health. We are trying to get the system right—and Oracle will help us do this—so that everybody understands where the money is going and how it is being spent, and then get management at the appropriate level to take responsibility for decisions. All of those things are part and parcel.

As to how much will be saved by the measures that Ms Mains is suggesting, I do not know if there is a particular figure in mind: it is just saying, 'Let's all do the right thing and try and be sensible about how we spend public money.'

Mr HAMILTON-SMITH: In various parts of his report, the Auditor-General deals with the issue of contracts and contract management, particularly for supplies and services. One of the contract issues that has arisen is to do with Spotless, which I understand is a principal supplier to the department. Are there any problems at the moment in our hospitals with linen services? I am getting reports that hospitals might not be getting their linen on time, or whatever. Are there any issues?

The Hon. J.D. HILL: No, my advice is that there are no general problems. From time to time people say there are not enough pillows in a hospital, or blankets and things, but that is really just making sure they are moved to where the patients are. I do not know how many pillows the health system owns, and I would hate to think about it, but they move around the hospitals.

In fact, a bit of hoarding goes on in hospitals. One of the things we hope to do in the new RAH is to have everything bar coded and have a just-in-time system in place in each hospital so staff will not feel the need to hoard. Wheelchairs, in particular, are hoarded. You can walk down a ward of a hospital and see stuff everywhere and, largely, it is because it is being hoarded. What we want is a proper system where all the equipment that is used, and the linen and so on that is used, is properly stored and provided to the people who need it so they do not feel the need to set up their own storage system. That is partly changing culture and partly putting in good systems, and Oracle and all of these management systems are part of that. I am not aware of any particular issues. If the member has some specifics, I am happy to have them followed up.

Mr HAMILTON-SMITH: Was there a contract failure—and the Auditor-General refers to some of these issues—with a contract being let to a Danish company (which has its head office in Sydney) called ISS that won a tender to provide linen services to Health; and did that tenderer prove not to have the capacity, the proper machinery or the infrastructure in place to meet its contractual obligations; and was it necessary then for the department to terminate that contract and let the work out to Spotless without a re-tendering process in order to keep linen supplies functioning? What went wrong in that case with that particular contract?

The Hon. J.D. HILL: As I understand it, I remember the matter coming forward. We went through a tender process and I think a couple of contractors—Spotless and ISS, from memory—were the successful tenderers. They had geographic cover. We broke the system into various areas and Spotless won some and ISS won others, and there was an appropriate tender process. I think there was a third company as well which was looked at but was not successful.

ISS then, through a range of processes, was not able to deliver on the contract that they had agreed to, so that contract was breached and we did not pursue that contract. I think Spotless was then awarded the rest of the contract. The procurement board process was brought into it and the agreement was made to award it to Spotless. I cannot remember the details of whether or not they had come in second in the other areas. I cannot recall. I will not make that claim because I just do not recall. The department certainly went through the procurement process. I am aware that there is probably an aggrieved party who has been making claims about these matters. I looked into it at the time and I am absolutely certain that it was done properly.

Mr HAMILTON-SMITH: Moving to the non-government organisations and their funding on page 14 of the report, could you list the principal NGOs that have had their funding cut?

The Hon. J.D. HILL: Mr Chairman, I seek advice from the member. The member has asked me to list the not-for-profit/non-government organisations which have had their funding cut. I am not sure which audit point the member is referring to. I am happy to get that information—

The CHAIR: I am sure he will bring it to our attention straightaway because he knows the rules.

Mr HAMILTON-SMITH: Let me clarify that. There is a list of them on page 43 of the Auditor-General's Report which lists the funding from 2010-11. I understand that there have been a number that have had funding cut since then.

The CHAIR: No. That is outside the audit report.

The Hon. J.D. HILL: I will give what advice I can. If you look at these figures, it lists both the figures for 2010 and 2011, so you can work out for yourself who has gone up and who has gone down between 2010 and 2011. I am not sure that we have all of the bits in place for 2012, and that will be reported in due course. Certainly, there has been some controversy around SHine where we have reduced their funding based on a negotiation with them. They have given the public of South Australia based on funding from the health system to provide a range of sexual health services. There was a desire by the department to sharpen their processes and have better outcomes and that has produced the change, but that is a result of what we wanted them to do, not through any sense of cutting them for any other purpose.

I am not aware of any other ones that have changed overly in this time. There have been a couple that have not got their funding. The organisation associated with the Hon. Ann Bressington was not re-funded because it just did not win the tender but another organisation would have got the money that it otherwise would have got. To the extent that we can do it prior to the end of the financial year, I am happy to perhaps get the half-dozen top changes for the member. That might satisfy him.

Mr HAMILTON-SMITH: Moving to page 22 of the report on the Office of Business Review and the Resources Unit that has been put together, the price has been given at $10 million over four years, led by Mr Archer. Can you clarify a few things for us? Is that group reporting and completely under the control of you as the Minister for Health or is it reporting to the Treasurer? Could you confirm and clear up the issue of how many times it has met, what it has done and what recommendations it has made in regard to improved financial management so far?

The Hon. J.D. HILL: The basis of the question needs some clarification. The group that has been set up is a team that has been established following negotiations and discussions between Treasury and Health. Treasury were of the view, and we certainly agreed with them, that Health did not have sufficient numbers of resources of a financial management type to manage the issues that went before Health. It was a way of supplementing the basic systems that were in Health, and there was a cabinet submission and approval to allocate the funds the member referred to. As the member said, a senior public servant, Mr Archer, was appointed to that job. He reports to the head of the department, Mr Swan—and I apologise, I should have introduced Mr Swan, the CE of Health, to the house before.

We have also established a joint committee with Treasury which the head of Treasury, the head of Health and Mr Archer are on. That is a kind of oversight body to make sure that both departments are happy with it. In addition, the ERDC committee of cabinet receives a report on a quarterly basis, I think. Further to that, I meet with Mr Archer and the head of the department on a regular basis. The joint committee of Treasury and Health has met about three times; that is not the working group though. The team would meet every day; it is working together, so it is not a separate body.

Mr HAMILTON-SMITH: I thank the minister for that. Can the minister just clear up, for the house, how these entities will all work together? There is the resources unit that you have just described, then you have the normal management structures of the department under Mr Swan and his own executives, then you have the group you announced today, you mentioned a committee a moment ago that had been formed to ensure that all this was working, and you have announced today the formation of an independent board to manage phase 2 of the Oracle introduction—which I presume will report you as health minister or to the CEO. What I am seeing is overlapping layers of bureaucracy: an independent board, a resources unit, an existing structure. How is this going to work without inefficiency?

The Hon. J.D. HILL: I think that is a fair question to ask; I do not criticise you for asking it. It is putting a system in place. Bureaucracy, by its very nature, is levels of accountability from the minister, if you like, down to the person doing the job on the floor, and you need systems in place to support the worker on the floor. So we have clinical systems, we have administrative systems, we have financial systems, IT systems, legal systems, a whole range of governance systems in place in Health, and there are people who are accountable for those. They are disposed in a series of directorates which report through to the CE, who then reports to me.

Mr Archer's team is a separate directorate that has been established. Mr Archer is at a very senior level, and he has authority to make interventions in the system to make sure that we are performing well. He will advise on particular savings tasks and give advice to the CE about how to implement a particular savings initiative, for example. He will also look at the system generally and get an understanding of where the costs are greater than we would benchmark it.

For example, we know what the cost of providing cleaning is across our system—I do not know if this is one of the things he is looking at, but let us just take cleaning as an example. How much does it cost to clean a square metre in hospital X, and how much does it cost across the whole system? We have so many cleaners, so many square metres, it will cost X dollars to clean our system; yet in this hospital it costs X plus two while everywhere else it is X or below.

So X plus two is a place you want to look because, on paper, that is where there is a more expensive way to deliver a service. There might be good reasons why it is more expensive to clean floors in hospital X; it might be an old hospital and the floors might be made of a particular material. Then you would look at that and say 'No; that is not a cost savings area.'

If you can imagine doing that across $4.7 billion worth of expenditure, looking at all the systems we have in place, all the operations, that is the kind of territory that Mr Archer and his team will be exploring. It is a very detailed bit of work, and it is not something that can be done in the day to day jobs of other people who have other functions. So the person who runs finance will make sure that the financial systems are appropriately operating, and the independent board which will advise on how Oracle should be implemented will give advice to that directorate through to the CE. I do not think there is overlap there. There is oversight, which is exactly what we need.

Mr HAMILTON-SMITH: Just a final question on the hospital. Page 22 of the Auditor's report mentions this, and I am remembering that the Treasurer and, I think, yourself in a previous presentation said there would be $397 million required each year to pay for the hospital. Can you explain how that is going to work going forward, because the Auditor-General makes reference to this? Will that money all come to Health and will you then pay the whole amount? When it kicks in in the near future, will that $397 million required each year to finance the hospital cost all come to the health budget and then you will pay it? Could you also tell us what component of that $397 million will be for the capital cost of the hospital, compared to the operating cost of the hospital, because I note the Auditor is foreshadowing a separate report of some kind on this in this budget report?

The Hon. J.D. HILL: That is a complex question to answer in zero minutes; I will do my best. The advice I have is that the money will come to Health. Some of it will, of course, already be in Health, because once we close down the existing RAH we will not need to spend money there. Treasury is not foolish; they will not give us new money and let us keep the old money, so there will be some sort of reconciliation between those two. No doubt there will be argy-bargy about what that should be; that is just the normal course of doing business.

The annual figure which we pay the project company works in this way. It is a bit like a house mortgage; more like a house mortgage on a serviced apartment, I suppose, where you pay an annualised fee which gives you occupancy, the cleaning services, the maintenance services, partly the electricity services, the orderly services, car parking, and all the other things that are required; all those kinds of services. If you imagine a serviced apartment (I think that is the model I would get to), over a 30-year period you pay all those services and at the end you have paid it off. It is yours and then you can either renegotiate or you just own it.

It has to be maintained as new all the way through, so at the end of the 30 years you get a brand new facility which you then own. As with a house mortgage, you normally start with a higher amount of interest and a relatively small amount of capital and over time they move, so that the interest amount you pay goes down and the capital amount you pay goes up. Over a 30-year period you balance all that out and at the end you have a zero amount.

Just as we do in a house mortgage, you have a fixed amount, say, or a variable interest rate, but you have a regular amount that you pay. It is fixed in today's dollars, so over time the relative value of that amount you pay declines as CPI increases and other price pressures increase. It becomes a relatively small part of your overall budget; it starts off relatively high and becomes relatively small.

The bits that will increase, though, in relation to CPI are the bits with a non-capital and a non-interest, and that is the services, the maintenance, the cleaning, the car parking and all those arrangements. There are some refurbishment elements too, so there are some lumpy bits in it as well which will flatten out. That is as I understand it. I am not sure if that completely answers the question of the member, but I am happy to organise a briefing for him if he wants to get somebody who can go through the technicalities of it. That is pretty well how I think it works.

The CHAIR: That concludes the examination of the Supplementary Reports of the Auditor-General for 2010-11 involving the Deputy Premier, the Minister for Transport and the Minister for Health.

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