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Agencies won out. The Commission [Recommendations 16-1 to 16-4] says Section 38 should be retained:

There is a question whether some of the 65 provisions of other acts that currently are linked to the s 38 exemption meet this "highly sensitive" standard. In the FOI reform bill currently before the parliament no relevant amendments have been proposed, so re-examination of schedule 3 is another issue to be pencilled in for phase three of the reform process two years down the track.

Some fine print that hopefully won't be missed includes:

16.84 The recommendation that the exemption should be retained also recognises the fact that numerous other recommendations in this Report seek to narrow the scope of secrecy provisions, including, in most circumstances, linking them to an express harm requirement. Implementation of these recommendations will help to minimise the potential incursion of the secrecy provision exemption on the principle of open government. However, the ALRC considers that additional reforms are needed to ensure that the exemption does not operate to reinforce a ?culture of secrecy?.
16.85 First, the secrecy exemption should be amended to include a definitive list of secrecy provisions that operate to conclusively override the FOI Act. This ensures that the minister responsible for administering the FOI Act is involved in the decision to include any secrecy provisions on the list.
16.86 Further, ministers who wish to add a secrecy provision to the list of exemptions should be required to assess, and put on the public record, the potential impact of the proposed amendment on the scrutiny of government action. Such an assessment could be included in the explanatory memorandum to ensure parliamentary scrutiny and debate. Among other considerations, relevant factors would include the breadth of the class of information to which the secrecy provision applies, and the likely relevance of the information for public scrutiny of government action.

Turning the schedule attached to s 38 into the "definitive list" would  mean the end of the practice of putting other provisions in separate legislation that give effect to the section and override the FOI act. The ALRC discovered [16.24] four such provisions: National Health Security Act 2007 (Cth) s 90; Australian Prudential Regulation Authority Act 1998 (Cth) s 56; Superannuation Industry (Supervision) Act 1993 (Cth) s 252C; Reserve Bank Act 1959 (Cth) s 79A.

The Commission declined to follow the NSW and Queensland precedents that give weight  to the existence of a secrecy provision in another act not specified in the FOI act as a  consideration, to be weighed along with other relevant factors, where a public interest test applies. The report recommends an amendment to the FOI act to provide that the act overrides obligations of non-disclosure in other legislation. Other exemptions apart from s 38 of course, depending on the content of a document, might still apply.

As long as there is some serious sorting out of the current schedule, and a vigilant guard is forever on duty to stop further creep through observance of the process recommended for any attempt to add to it, this isn't a bad compromise.

Two other issues of direct FOI relevance:
The discussion of the role of oversight bodies [15.57] including the Information Commissioner and this recommendation:

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