A federal public service agency has been scolded after giving a quid pro quo contract to a former employee without going to tender.
The Commonwealth Ombudsman found the National Film and Sound Archive did not adequately address concerns about a potential conflict of interest before giving the contract to Canberra business DAMsmart.
DAMsmart general manager Joe Kelly previously held the position of head of preservation and technical services at the NFSA.
Chances of the contract being extended were destroyed after a complaint from a competing company casting doubt on the probity of the agreement.
The archive, which looks after part of Australia's heritage by preserving audiovisual records, did not have enough paperwork showing what it did to avoid a conflict of interest before the agreement was signed, according to the ombudsman's report written last year and obtained by Fairfax Media.
The archive now agreed "this could have been handled better".
The competing contractor, Broadcast Transfers, first cast doubt on the probity of the agreement in 2012.
The NFSA loaned DAMsmart a valuable Quadruplex videotape machine which transferred two-inch tapes.
DAMsmart was going to use the machine to service its own private clients. In return DAMsmart agreed to digitise 200 hours of cassette tapes - a different kind to the two-inch tapes - a year.
Broadcast Transfers, which also digitises two-inch tapes, said the NFSA's decision to loan out the machine allowed DAMsmart an unfair advantage in the marketplace.
"NFSA put us out of business with that contract," a Broadcast Transfers spokesman said.
"We're not saying we wanted that NFSA contract, we're saying the contract allowed DAMsmart to undercut us in the private industry with a subsidised machine."
The Broadcast Transfers spokesman said DAMsmart could have done up to $1 million of work with the Quadruplex machine over two years servicing its own clients.
In return the taxpayer was set to receive up to $120,000 worth of work for DAMsmart to digitise the cassettes.
"It's like swapping an electric scooter for a Kenworth truck," the spokesman said.
The NFSA-DAMsmart contract shows the government agency signed an agreement forcing the archive to pay for up to 36 hours maintenance a year on the machine and pay for an unlimited number of spare parts.
The ombudsman's report said the NFSA should have applied procurement principles to the agreement - even though it was not mandatory - which would have provided a framework to assess the issues of concern.
The ombudsman's main issues were whether taxpayers were getting value for money and if Commonwealth resources had been used ethically.
NFSA conceded to the ombudsman it could have better handled the investigation into the complaint.
DAMsmart general manager Joe Kelly said taxpayers received value for money and the complaint was "sour grapes".
Mr Kelly said his business returned the machine when the contract was "torn up" and bought his own machine from the United States.
He said DAMsmart spent $20,000 upgrading the machine and the archive did not spend any money on spare parts despite allowance for it in the contract.
"We rebuilt an asset for the national archives," he said.
"I don't think DAMsmart or the NFSA has anything to apologise for."
Overall he said DAMsmart did not get the chance to run the machine 24 hours a day, seven days a week and that the company broke even financially on the deal after the machine was returned.
Mr Kelly said quid pro quo agreements, otherwise known as this for that or non-cash contracts, should be "explored more" at a time when cultural institutions such as the archive had bigger workloads and fewer staff.
"Otherwise a lot of our institutions won't be able to deliver," Mr Kelly said.
"NFSA management should be congratulated.
"I'm not suggesting anybody should be bending or breaking rules."
On Tuesday a Senate Estimates hearing was told six national cultural institutions in Canberra, including the NFSA, will cut jobs and review operations again as they deal with the Turnbull government's efficiency dividend.
An NFSA spokesman said the archive had put measures in place to identify and manage potential conflict of interest issues "to ensure this would not happen again".
Following the ombudsman's investigation the archive has decided the machine will not be loaned to a third party again because of the risk of damaging it or losing it.