The contents of this second paragraph explain why the cost of retrenchments was included as a component of Narama's levellised base price.
100 Under a heading "Analysis of Supply Strategies", the following appeared:
"In a broader context, the competitive pricing of the four lowest priced offers, if accepted, would put the Commission in a better commercial position with respect to future tenders, particularly for supply from the Commission's own mines. It is unlikely that many of these mines could offer better prices than those received for these tenders.
The two 20 year tenders proposed for acceptance (from BP Coal and Narama) enable a reduction in the proportion of the Hunter Valley supplies which must be replaced in the period 2001 to 2002. The potential contestability of the market at that time is therefore increased. Figure 1 illustrates the proposed change in the Commission's position.
This market contestability in the year 2000 may be significantly impacted by export steam coal price levels at that time. The Australian Bureau of Agriculture and Resource Economics, in its 1989 Outlook for Australia Mineral Resources Exports to 2000, has forecast a 3.4% real average annual increase in the export steaming coal price up to the year 2000 (refer Figure 2). As the potential market for coal supplies to Bayswater/Liddell at that time will most likely include a number of mines supplying this export market, it is considered prudent to take the opportunity now to secure some supplies beyond that date based on current competitive pricing ." (emphasis added)
101 The Board met on 15 December 1989 and resolved to accept the four nominated tenders. It advised the Minister of this by memorandum dated 22 December 1989. In doing so it informed the Minister that:
"It is to be noted that, as a result of the Board's decision, the current Swamp Creek operation will be forced to close at the end of the existing contract (mid 1991) with the progressive loss of some 200 jobs. The coal in the deposit is not suitable for export without a power station supply contract for the major portion of production. The manning required by the Narama mine is 87 in 1992 increasing to 121 in 1993. No additional mining labour is required at Narama prior to the expected completion of mining at Swamp Creek in mid 1991. Advice received from Hebden is that, should it not be successful in being awarded a contract, it will need to commence retrenchments early in 1990, with most recent advice being retrenchment of 13 people as early as 1st January, 1990.
The proposed actions to shut the Swamp Creek mine and open the Narama mine will require the approval of the Joint Coal Board, whilst the Department of Minerals and Energy are involved in the cessation of mining activity. Subject to the Minister's concurrence, it is proposed to approach these organisations for the necessary approvals.
Accordingly, it is recommended that approval be given to proceed with the above course of action with respect to the award of coal supply contracts and the sale of the dragline."
102 The Minister gave his approval on the same day.
103 The Minister was not advised of the methodology used to assess the tenders, nor was he advised that there was uncertainty as to whether the Commission was responsible for the cost of the Swamp Creek retrenchments or that that cost had been added to the Narama Joint Venture tender price so as to assess its competitiveness. However, Mr Flanagan recognised that the inclusion of the cost of retrenchment of the whole Swamp Creek workforce in the Narama Joint Venture's levelised price paid no regard to the fact that there would be a "pick up" of jobs once Narama came into operation (albeit two to three years after the Swamp Creek retrenchments commenced).
104 Mr Flanagan agreed in cross-examination that he would not expect the recipient of a competitive tender bid to be advised what profit element was built into the bid. He said however, that he would expect some detail of the costs analysed. His evidence was:
"Q In the normal course would you agree with me that it would not be your expectation that tenderers would give you details of their costs analyses which they use for arriving at their base price?
A Well, if the base price is the price which has to be escalated, then I think they have to give us some details of the costs analyses of that and they do so with the price adjustment clause.
105 His attention was then directed to the fact that the cost structure of these contracts was determined by the weighting of various components. The cross-examination on this point proceeded:
Q But the price adjustment clause gives a particular weighting, doesn't it?
A Yes.
Q And in giving that particular weighting in this case, the condition the Commission put on it, as you understood the position, was that 10 per cent had to be fixed.?
A Yes.
Q And in considering tenders, may we take it, it would be your expectation that Mr Henness and his assistants would give consideration to the appropriateness of the weightings?
A Yes.
…
Q May we take it, so far as you can recall, at no time, up to the time this contract was entered into, or for that matter subsequently, did Mr Henness or anyone else from Mr Henness's department say to you that the weightings were either unreasonable or were operating unreasonably?
A No, they didn't."
106 It was apparent from this and other of his evidence that Mr Flanagan had little familiarity with the individual tenders at the time the four successful tenders were approved by the Board. In particular, he had never seen the weighting for labour given by the various tenderers for the purpose of the Labour Index in each tender. He did not know, for example, there was a difference in the weighting given to the labour costs in the Bayswater tender as compared to the Narama Joint Venture tender. He was not given any information as to how labour costs were made up and he said that was something which did not bother him at the time.
107 Notwithstanding his lack of familiarity with the Labour Indexes in each tender Mr Flanagan said in cross-examination that he would have considered a change in the labour force from 121 to 82 as "a significant commercial matter", because:
"the base price of the coal was largely dependant on labour. 40 per cent of the base price of the coal was made up by labour costs and if the labour had suddenly reduced by about a third, I would regard it as a significant commercial matter."
108 His evidence continued:
"Q And you then [said] that you would have instructed your officers to go along and renegotiate the price, in light of that information?
A Yes.
Q What I want to ask you is: What would you have done had Costain or Peabody simply said to you 'We are not prepared to reduce the price because of the risks inherently involved in a long term contract' of the nature of that in question?
A Well, they knew that those risks were there when they tendered and they tendered on the number of 121. I would want to know why they suddenly found they could now do it with 86.
Q What I want to ask you is: If, at the end of the day, regardless of your inquiries, they simply said they were not prepared to reduce the base price, or the labour index, at all, what would you have done?
A I would have taken the matter back to the board to find out if the board still wanted to proceed on these matters.
Q You just don't know what the board would have done in those circumstances?
A No, I can't be sure.
Q Indeed, you can't be sure of what you would have done in those circumstances?
A I would have recommended to the board that we talk to the other tenderers again, because I think there was a significant matter here that had not been dealt with by Narama to our satisfaction."
109 Notwithstanding that Mr Flanagan said he would have gone back to the Board and recommended they talk to the other tenderers, he had to concede that he would not have expected a tenderer to approach the Commission after a tender had closed offering a lower price because of some change of circumstance, if its bid was otherwise competitive. This was clear from the following cross-examination:
"Q But if the contractor put in a price, say $4 or $6 per tonne better than its nearest equivalent competitor, you would have been satisfied from that alone that it was competitive, would you not?
A Yes, except, as I say, if there was a change made during the tender negotiations then we would want to know why the change was being made.
Q Why do you suggest the tenderer should come to you and say 'Look, we can do it cheaper'?
A I suppose it is hard to answer that question. If they were making changes, then I think we would want to see some justification for it. If they came to us and said they wanted an increase in staff, then they would make sure they could justify it in order to try and get the base price increased.
Q Would you mind just focusing on my question for the moment? Why do you say it was your expectation that if a tenderer discovered, after he submitted his tender, that he could possibly, because of changed circumstances, make a greater profit than he previously anticipated, he was under an obligation to go and tell you?
A I find it hard to answer that in terms of an obligation. I would have expected him to come along and say 'Look, we are able to mine this more effectively and more efficiently' by doing this or doing that.
Q Would you have expected Mr Henness or Mr Lynch to go and tell Narama, if it be the case, that their tender was at a considerably lower price than anyone else's, and they could get the contract, even if they offered a price a little bit higher?
A No.
Q Why, in those circumstances, do you suggest the tenderer should come along and tell you that because of changed circumstances it could make more profit than it originally anticipated?
A I can't answer that question. I don't know why.
Q In your experience has it ever occurred?
A I can't recall it occurring, no.
Q In your experience did the Electricity Commission ever go to a tenderer and say 'Look, charge us a bit more because you will still be competitive'?
A No.
Q The reason that you can't recall either of the two events happening is because it is something which never occurs in a tender process in your experience, does it?
A Well, that particular aspect, no, it doesn't. If there are changes being negotiated during the period of the contract negotiation, we expect to know about it.
Q You expected to know about something which would affect the tenderer's ability to perform the contract. Correct?
A Yes.
Q You didn't expect to know about something which might make the tender more profitable or, for that matter, less profitable to the tenderer?
A No. That's right. " (emphasis added)
110 He also conceded the Commission was effectively only interested in the "bottom line" of each tender.
111 Finally, he accepted that in the hypothetical circumstance that he had instructed his officers to seek to renegotiate the contract, he would have told them to take "what prudent steps" were necessary to ensure the contract did not go off. He also said that had they been unsuccessful, the Commission would have had "no option" but to "go ahead" with the Narama Joint Venture tender. This was simply because the Commission could not get the supplies it needed at a competitive cost without the Narama Joint Venture contract.
112 I have already mentioned Mr Flanagan's lack of familiarity with the individual tenders. The evidence to which I have just referred is indicative of Mr Flanagan's lack of understanding of how Specification 4007 and the Narama Joint Venture tender worked. It is a fair assessment in my opinion to say that Mr Flanagan did not fully understand the concept of weighting or how it was derived, other than that he knew that in the Narama Joint Venture tender the weighting given to labour was 40 percent of the price component.
113 In my opinion, Mr Flanagan's evidence as to the commercial significance of the workforce numbers, was, with respect to him, an ex post facto justification for seeking to get out of the contract. The real reason for seeking the workforce numbers was so as to be in a position to inform the Minister of the position. This is the effect of his affidavit evidence that:
"If the Electricity Commission had been advised of such a decrease [from 121 to 82] in proposed additional employee numbers, I would have immediately notified the Minister, in writing, of these changes."