Victoria's failed Ultranet project 'corrupted', declares IBAC

The management of Victoria's failed education data network Ultranet has been declared "corrupted" by the state's Independent Broad-based Anti-corruption Commission (IBAC).

Ultranet, first announced in 2006, was intended to be a purpose-built network for Victorian schools, connecting students, teachers, and parents. It would "revolutionise learning", said the then state premier.

But Ultranet rarely worked. Costs blew out by AU$60 million, and then AU$180 million. It was eventually killed off seven years later, in 2013. The total cost to Victorian taxpayers is estimated to be somewhere between AU$127 million and AU$240 million, although the exact figure will never be known.

IBAC's inquiry, dubbed Operation Dunham, was launched in August 2014. It heard evidence in March 2016, revealing tales of lavish spending, boys' clubs, money funnelling, and blatant abuse of power.

Throughout the inquiry it was revealed that there were so many backdoor payments and secret deals happening, even the most senior auditors have found it hard to trace what money was spent and where.

On Friday, IBAC formally announced that the Ultranet project had been "corrupted". Operation Dunham had found evidence of "process corruption, improper diversion of funds, conflict of interest, and mismanagement at senior levels".

This included receiving hospitality and travel inappropriately; improper communications intended to influence the tender process; a likely attempt to stack an evaluation panel with "like-minded colleagues" to influence the tender outcome; and decisions "contrary to proper procurement process, in particular singular preference for a particular bidder, despite serious concerns about its credentials".

An external company was found to have paid almost a million dollars in an attempt to prop up the project.

There was also evidence some senior departmental officers used confidential information to purchase shares, and misled the Department of Education and Training about those purchases. This may constitute a breach of insider trading laws, according to IBAC.

The full Operation Dunham special report was tabled in the Victorian Parliament on Friday. Its 114 pages detail a complicated web of potentially corrupt connections.

IBAC found that the tender process was corrupted through "improper relationships" between senior departmental officers and Oracle Corporation Australia Pty Ltd (Oracle), and then with private IT services company CSG Services Pty Ltd.

Operation Dunham had focused on Darrell Fraser, then principal of Waverley Secondary College.

"This investigation found that, from a position of power as a senior executive responsible for the allocation of significant funds, Mr Fraser was instrumental in manipulating procurement processes to ensure the Ultranet contract was awarded to the CSG/Oracle consortium -- companies with whom he had a long-standing relationship," IBAC wrote.

This "unreasoned and inexplicable" decision was made despite serious concerns about CSG's commercial credentials, and "strong expert advice" to do otherwise.

"So remarkable was this behaviour that one witness in evidence remarked that Mr Fraser's 'blatant and visceral' disregard for his advice meant: 'I couldn't arrive at an explanation other than corruption that made all the things hang together'," IBAC wrote.

When Ultranet ran into difficulties, Fraser set up the Learning Technologies Quality Assurance Project (LTQAP), which he described as "the little project". But evidence suggests that the "little project" was in fact "a one million dollar sham" and a "puppet project", according to IBAC.

Departmental funds were paid to Alliance Recruitment and then corruptly injected into CSG to ensure it had sufficient cashflow to properly deliver Ultranet, IBAC wrote.

"This desire to support and maintain CSG's involvement in the project can only be understood through the lens of the likely private gains to be made should the vision for the Ultranet be realised: 'Why stop at Victoria?', Mr Fraser was asked on one occasion, 'You could effectively on-sell Ultranet to the world'."

IBAC found that there was no evidence that Fraser, or anyone else, told the department, or even sought advice about or permission to set up a "private company to exploit an idea developed at school, by school staff, on school time".

IBAC blames "flawed systems and culture" for the corrupt behaviours to have gone undetected for so long.

"The willingness of some senior leaders in the department to deceive has resulted in the waste of millions of dollars of public money. However, it was the collective failure of the department's three 'lines of defence' that ultimately allowed the conduct under investigation to continue unabated," IBAC wrote.

The first line of defence relies on managers and leaders to follow correct procedures and to act with integrity. The second line of defence consists of systems and processes to safeguard and regulate individuals' actions. This includes financial approval processes, procurement processes, and governance committees and frameworks. The third line is the departmental audit process which confirms that the second line systems are working.

The department also had a culture that "excused or ignored breaches of probity and process," IBAC wrote.

IBAC has recommended that the Secretary of the Department of Education and Training report by September 30, 2017 on the implementation of its reform program to address these issues, with a final report demonstrating the effectiveness of these reforms by March 30, 2018.

IBAC has also recommended that the Victorian Public Sector Commission consider banning public sector employees from receiving any gift, benefit, or hospitality from a current or prospective supplier; and that Department of Treasury and Finance consider the issues raised in the report to identify any opportunities for further improvements in relation to probity and governance.

Individuals investigated as part of Operation Durham may well face criminal charges.

On Friday afternoon, CSG responded to the IBAC report with a statement posted to the ASX.

"After reviewing the IBAC report, CSG denies that it and its officers have done anything wrong," the company said. "CSG has responded to the adverse statements against it and CSG Services through the appropriate channels.

"CSG understands that shareholders and the broader community have particular expectations about the way in which CSG operates. In accordance with its code of conduct, in all its dealings, CSG and its officers will act in compliance with the law and the company continues to commit to continuous compliance training."

Updated at 4:33pm AEDT, January 27, 2017: Added response from CSG.