1. Overview of the 2020-21 and 2021-22 Major Projects Reports

Introduction

1.1The Major Projects Report (MPR) is prepared jointly by the Department of Defence (Defence) and the Australian National Audit Office (ANAO), at the request of the Parliament. The objective of the MPR is ‘to improve the accountability and transparency of Defence acquisitions for the benefit of Parliament and other stakeholders’[1] as Defence capability projects account for a substantial expenditure of taxpayer funds. As at 30 June 2022, Defence was managing 158 acquisition projects with a total value of $130.5 billion, and an expenditure in 2021–22 of $11.2 billion.[2] The MPR contains detailed information on a selection of large-scale Defence equipment acquisition projects.

1.2The MPR was established to provide information on an annual basis on the performance of major projects in the Defence portfolio, including cost, scheduling and the technical aspects of each project. Prior to the introduction of the MPR in 2008, the Parliament and key Defence stakeholders had expressed concern that Defence projects were ‘largely invisible’ to the Parliament and the public.[3] The 2020–21 MPR and 2021–22 MPR are the fourteenth and fifteenth reports of their kind, respectively.

1.3The MPR is prepared in line with the Major Projects Report Guidelines (the Guidelines) approved annually by the Joint Committee of Public Accounts and Audit (JCPAA).[4] The MPR consists of detailed project information in the form of Project Data Summary Sheets (PDSSs) prepared by Defence according to the Guidelines, commentary on that information by the Secretary of Defence, and assurance and analysis of that information by the ANAO.

1.4It is important to consider this report in the context of the time and recognize the substantial effects of the COVID-19 pandemic on the development, acquisition, and sustainment of the major projects in the Defence portfolio.

Conduct of the Inquiry

1.5The Committee adopted the Inquiry into the 2020–21 and 2021–22 Major Projects Reports on 9 March 2023, with terms of reference to consider both those reports and the scope and guidelines of MPRs into the future. A public hearing for the inquiry was held on 19 May 2023 (see Attachment B) and the inquiry has received four submission and seven supplementary submissions (see Attachment A) as of 20 June 2023.

1.6On 11 May 2023, the Committee resolved to broaden the terms of reference of the inquiry to also consider a recent Auditor-General Report relating to the procurement of Hunter Class Frigates, which is one of the major projects included in the MPRs.

1.7The Committee resolved to issue this Interim Report focussed on the 2020–21 and 2021–22 MPRs. Matters relating to the Hunter Class Frigates and the future of the MPR (scope and guidelines) will be considered in subsequent report(s) as part of this inquiry.

Report Outline

1.8The report considers Defence’s comments and the Auditor-General’s findings in the 2020–21 and 2021–22 MPRs, including project’s:

• cost performance
• schedule performance, and
• capability performance.
  9. The report then considers project management and governance issues arising from the inquiry:
• the impact of the COVID-19 pandemic
• Projects of Concern and Projects of Interest
• Risk Management, including contingency funding and Lessons Learned
• capability forecasting, and
• caveats and deficiencies.

Overview of the 2020–21 Major Projects Report

1.10The 2020–21 MPR included 21 major projects with a combined value of approximately $58.0 billion (Figure 1.1), covering around 48 per cent of the total budget of Defence’s active major and minor capital equipment projects of $121.6 billion as at 30 June 2021.[5]

Source: 2020–21 Major Projects Report.

1.11Six projects exited the MPR since the 2019-20 MPR having achieved final operating capacity or because they were considered low risk in achieving their final deliverables. Two projects were new inclusions to the MPR:

• LAND 19 Phase 7B – Short Range Ground Based Air Defence, and
• AIR 2025 Phase 6 – Jindalee Operational Radar Network.[6]

Cost Performance

1.12Overall the 2020–21 in-year expenditure for the 21 MPR projects was lower than the forecast. At 30 June 2021, the actual expenditure for the 21 projects included in the 2020–21 MPR was $6,120.4 million, compared to an initial Portfolio Budget Statements (PBS) forecast expenditure of $6,853.0 million, and a mid-year Portfolio Additional Estimates Statements forecast of $6,396.0 million.[7] The in-year variance was caused by factors including:

• underspends reflecting schedule delays, due to factors including COVID supply chain and travel impacts[8]
• underspends due to contract change and reprogramming activities[9]
• an underspend of the Future Submarines Design Acquisition project due to not entering the next work scope with Naval Group, and
• an overspend of the New Air Combat Capability (Joint Strike Fighter) project attributed to the early achievement of cooperative program deliverables.[10]
  13. In 2020–21 two projects made draw downs on their contingency funding:
• the Multi-Role Helicopters (MRH90 Helicopters) project committed $34.4 million of contingency funds to manage supportability and performance risks, and
• the Battlespace Communications System Phase 2B project used $30.3 million of contingency funds to address delayed delivery and refinement of specifications.[11]
  14. The ANAO found the lack of clarity between contingency funding allocations and risks continued to be an issue.[12]
  15. The total budget for the 21 MPR projects at 30 June 2021 was $58.0 billion. This was a net increase of $18.3 billion compared to the initial second pass approval, due predominantly to scope increases from a government decision to acquire additional aircraft under three programs. Four of the projects had variations over $500 million. Three of these variations occurred prior to the period covered by the 2020–21 MPR:
• Joint Strike Fighter - $15.4 billion increase due to the government decision to procure 58 additional aircraft, exchange rate variations and price indexation
• MRH90 Helicopters – net increase of $3.1 billion due to the government decision to procure 34 additional aircraft, minor scope changes and price indexation, and
• Medium Heavy Capability, Filed Vehicles, Modules and Trailers (Overlander Medium/Heavy) – net increase of $0.8 billion due to ‘project supplementation’ and exchange rate variations.[13]
  16. The MQ-4C Triton Remotely Piloted Aircraft System (MQ-4C Triton) had a net increase of $1.0 billion due to the government decision for an extra air vehicle and interim support services. In 2020–21 MQ-4C Triton was the only project in the MPR to experience a variation due to scope change or transfer. The project received a variation of $823.9 million reflecting approval to fund an additional aircraft and sustainment funding.[14] This also impacted the MQ-4C’s schedule performance (see below).

Schedule Performance

1.17Schedule performance has been and continued to be a significant issue for major projects in Defence in the 2020–21 MPR. This affects when capability is ready for operational use by the Australian Defence Force, as well as the cost of the project. Of the 21 projects in the 2020–21 MPR, ten experienced slippage and two did not have Final Operating Capability dates and could not be assessed.[15]

1.18The in-year slippage for 2020–21 MPR was a total of 73 months with the majority of this slippage attributed to four projects. The ANAO noted the projects with the most developmental content have also experienced in-year delays: MQ‑4C Triton (24 months), Civil Military Air Management System (CMATS) (13 months), Battlespace Communication System Phase 2B (12 months), and MRH90 Helicopters (six months).

1.19Developmental projects have become more common than compared to military-off-the-shelf, which are generally lower risk, since 2014.[16] The ANAO noted:

Decisions on whether to undertake developmental projects should be considered on a risk basis. In this context, the consideration of risk should be holistic and weigh up the level of capability to be acquired while having regard to Defence’s past experience in managing the delivery of developmental projects.[17]

1.20Total schedule slippage for the 19 projects in 2020–21 MPR was 405 months, with an average slippage per project of 40 months. ANAO’s longitudinal analysis indicates that ‘the reasons for schedule slippage often require a deep understanding of project technical elements and a realistic assessment of the capacity of the private sector to deliver in the expected timeframe.’[18] While the reasons for schedule slippage vary, it includes delays of software development, delays due to COVID-19 and the developmental nature of capabilities.[19]

1.21Some of the projects included in the 2020-21 MPR experiencing schedule slippage and issues with cost performance, such as the MRH90 Helicopters, are managed through Defence’s Projects of Concern and Projects of Interest processes, which are discussed further in Chapter 2.

Capability performance analysis

1.22The MPR also reports on a project’s likelihood of meeting its capability requirements as approved by government, also referred to as the Final Operating Capability (FOC). This does not contribute to the Auditor-General’s conclusion but provides an overall perspective of a key component of project performance.

1.23The ANAO noted in the 2020–21 and previous MPRs that Defence capability reporting is subjective and may be overly optimistic. An example of this subjectivity occurred in previous reporting of the Battlefield Airlift – Caribou Replacements (Light Tactical Fixed Wing 128) project in the 2013–14 MPR which reported a ‘100 per cent green capability prediction’ despite the PDSS also reporting major risks related to capability deficiency arising from the United States divesting from the program. These risks were first reported in the material capability delivery in 2018–19, one year before the Australian Government ‘pivoted’ the program and re-scoped the project.[20] The 2020-21 MPR showed the project continues to experience issues with its capability performance and is unable to deliver all required capability by the FOC.

1.24In previous MPR reviews the JCPAA has encouraged Defence to find a more robust and objective measure of capability performance.[21] As at November 2021, Defence had not updated its method for capability forecasting.[22]Defence’s capability forecasting is discussed further in Chapter 2.

1.25Noting the limitations on capability performance reporting in the 2020–21 MPR, Defence reported that 13 of the 19 projects in the MPR with approved material capability deliveries would deliver all their key capability requirements, without elevated levels of risk to the achievement of requirements. Six project offices were experiencing challenges with expected capability delivery (Joint Strike Fighter, MRH90 Helicopters, Overlander Medium/Heavy, Light Tactical Fixed Wing 128, Battlefield Command System, and Battlespace Communication System Phase 2B. Two of these projects (Light Tactical Fixed Wing 128 and Battlefield Command System) reported that they are unable to deliver all the required capability by FOC.[23]

Overview of the 2021–22 Major Projects Report

1.26The 2021–22 MPR also included 21 major projects with a combined value of approximately $59.0 billion (Figure 1.2), covering around 45 per cent of the total budget of active major and minor capital equipment projects of $130.5 billion as at 30 June 2022.[24]

1.27One project exited the MPR since the 2020–21 MPR (Indian Ocean Region UHF SATCOM) as it had minimal budget remaining and had delivered the majority of its required scope, and one new project entered the MPR, the Airborne Intelligence, Surveillance, Reconnaissance and Electronic Warfare (ISREW) Capability (Peregrine) project.[25]

Source: 2021–22 Major Projects Report

Cost Performance

1.28As occurred in the 2020–21 MPR, the 2021–22 in-year expenditure for the MPR projects was lower than forecast, with an actual expenditure of $5,654.2 million, compared to the initial PBS forecast of $6,935.0 million. The variance was caused by factors including:

• an underspend of the Joint Strike Fighter project due to revising the aircraft delivery schedule due to COVID-19
• underspends due to projects shifting deliverables and achieving contract milestones and the associated payments later than expected (Combat Reconnaissance Vehicles and Offshore Patrol Vessels)
• an overspend by the Future Submarines Design Acquisition project due to the cancellation of contract and subsequent settlement payment with Naval Group
• an underspend by the Protected Mobility Vehicle – Light (Hawkei) project due to schedule delays from problems with the braking system, and
• an underspend by the Battlefield Command System due to delays to the prime contracts.[26]
  29. As in the previous year’s MPR, the 2021–22 MPR found project contingency logs lacked clarity between the contingency allocations and the identified risks. Four projects applied contingency, and two of these did not meet Defence’s financial policy relating to contingency funding:
• the Future Submarines Design Acquisition project office ceased maintaining a contingency log when its risks were closed following the cancellation of the program, despite ongoing issues with the transition process that may require contingency funding, and
• the MRH90 Helicopters project used significant contingency funding to address capability issues and prior to 30 June 2022 did not maintain a complete log meeting all requirements of Defence policy.[27]
  30. The total approved budget for the 21 projects in the 2021–22 MPR as at 30 June 2022 was $59.0 billion. This was a net increase of $17.5 billion since second pass approval was granted, due predominantly to scope increases from a government decision to acquire additional aircraft under three programs. There were no additional variations of $500 million or more since the 2020–21 MPR.[28]

Schedule Performance and non-publication of information

1.31The 2021–22 MPR was the first time in the fifteen-year history of the MPR that Defence chose to not publish certain information in the PDSSs, including key forecast dates, which impacted ANAO’s ability to analyse schedule performance.

1.32The MPR Guidelines provide that:

Defence is responsible for ensuring information of a classified nature is made available to the ANAO for review, as it relates to the data contained within the PDSSs. Data of a classified nature must be prepared in such a way as to allow for unclassified publication. Defence will confirm to the ANAO the classification of information proposed to be published in the MPR. Defence will provide advice with regards to the aggregated security classification of information contained within the PDSS suite, and suitability for unclassified publication.[29]

1.33Defence assessed some information related to individual projects in the 2021-22 MPR, and when considered as a whole, ‘would or could reasonably be expected to cause damage to the security, defence or international relations of the Commonwealth without sanitisation of the data.’[30] As a result, Defence excluded information on four projects (Offshore Patrol Vessel, Peregrine, Short Range Ground Based Air Defence, and Jindalee Operational Radar Network Mid-Life Upgrade) from publication.

1.34The combined effect of Defence’s non-publication of FOC forecast dates for three major projects and the fact that FOC dates had not been settled for four additional major projects meant ANAO could not conduct aggregate analysis of schedule performance against FOCs. This reduced the transparency and accountability of MPR projects.[31] These issues will be considered in more depth in the next phase of the inquiry.

1.35Despite the reduced transparency, schedule performance continued to be an issue in the 2021–22 MPR. The 2021–22 MPR included an analysis of historical schedule performance analysis and reiterated the findings from the 2020–21 MPR, noting that developmental projects carry a higher level of technical risk and therefore risk of slippage. The ANAO also noted the importance of accurate initial assessments of project complexity.[32]

Capability performance analysis

1.36As noted above, MPRs, including the 2021–22 MPR, found that Defence capability reporting is subjective and may be overly optimistic.[33] The 2021–22 MPR reported Defence had still not updated its method for capability forecasting.[34]

1.37Noting the limitations in the reporting on capability performance in the 2021–22 MPR, Defence reported 11 of the 19 projects in the MPR with approved material capability deliveries would deliver all their key capability requirements without elevated levels of risk to the achievement of requirements. Ten project offices were experiencing challenges reaching the expected capability/scope delivery, and four project offices reported that they are unable to deliver all the required capability by FOC (Future Submarines Design Acquisition, MRH90 Helicopters, Hawkei, and Battlefield Command System.[35]

1.38In response to the Committee’s question on factors contributing to the successful delivery of capability, Defence advised:

The projects’ confidence to be able to deliver the full materiel scope demonstrates effective risk management, ensuring that progress towards capability delivery remains on track, even when managing significant technical, schedule or cost pressures.[36]

1.39Additionally, in response to the Committee’s question on systemic issues that contribute to projects facing difficulty in capability/scope delivery, Defence advised more complex developmental projects come with increased risk and increased levels of complex structural and technical integration required.’[37] This is consistent with the increased risk of project slippage for developmental projects discussed in paragraph1.33.

Auditor-General’s conclusion

1.40Through the MPR the Auditor-General provides a limited assurance of the information provided by Defence in its PDSSs in accordance with the relevant auditing standard, ASAE 3000. A limited assurance review provides a lower level of assurance than reasonable assurance reviews, such as performance audits, in terms of the evidence required and nature and scope of issues covered, and presents the conclusion in negative terms.[38]

1.41In line with this requirement, for both the 2020–21 and 2021–22 MPRs and their respective Guidelines, the Auditor-General concluded in his Independent Assurance Report that:

Based on the procedures I have performed and the evidence I have obtained, nothing has come to my attention that causes me to believe that the information in the 21 Project Data Summary Sheets in Part 3 (PDSSs) and the Statement by the Secretary of Defence, excluding the forecast information, has not been prepared in all material respects in accordance with the [respective] Major Projects Report Guidelines (the Guidelines), as endorsed by the Joint Committee of Public Accounts and Audit.[39]

1.42The Secretary of Defence also provided a statement on the accuracy of the PDSSs. For both the 2020–21 and 2021–22 MPRs and their respective Guidelines the Secretary of Defence advised:

In my opinion, the Project Data Summary Sheets comply in all material respects with the Guidelines and reflect the status of the projects.[40]

1.43The 2021–22 MPR is the fifth consecutive MPR to have an unqualified audit finding from the Auditor-General. The last qualified finding was in 2016-17, when the Auditor-General identified issues with the accuracy and consistency of the information in the PDSS for the ARH Tiger project.[41] The ARH Tiger project is not included in the 2020–21 or 2021–22 MPRs.

1.44Defence’s project forecast information was excluded from both the 2020–21 and 2021–22 Auditor-General’s Independent Assurance Reports due to the lack of systems at Defence which could provide complete and accurate evidence in a timely manner.[42] Forecast information has consistently been excluded from the assurance review in previous MPRs.[43] However, the Auditor-General does take any material inconsistencies in this forecast information into account when forming the review’s conclusion.[44] As such, the MPR may still include analysis of Defence’s risk management and capability forecasting. Defence’s risk management processes in major projects are discussed further in Chapter 2.

1.45The scope of limited assurance reviews and the non-publication of information will also be considered in the next phase of the inquiry.

Footnotes

[1]Auditor-General Report No. 12 2022-23, 2021–22 Major Projects Report, (hereafter, 2021–22 Major Projects Report), p. 311.

[2]2021–22 Major Projects Report, p. 81.

[3]Auditor-General Report No. 9 of 2008-09, Major Projects Report 2007-08, p. 11; Senate Foreign Affairs, Defence and Trade References Committee, Report into Materiel Acquisition and

Management in Defence, March 2003, pages 78-79.

[4]The guidelines for the 2020–21 Major Projects Report are available at: Auditor-General Report No. 13 2021–22, 2020–21 Major Projects Report, (hereafter, 2020–21 Major Projects Report), p. 319, and the guidelines for the 2021–22 Major Projects Report are available at: 2021–22 Major Projects Report, p. 309.

[5]2020–21 Major Projects Report, p. 3.

[6]2020–21 Defence Major Project Report, pages 3 and 79.

[7]2020–21 Defence Major Project Report, p. 48.

[8]This relates to the Combat Reconnaissance Vehicles and Offshore Patrol Vessel projects.

[9]This relates to the Future Frigates, Maritime Operational Support Capability, and Battlefield Command System projects.

[10]2020–21 Defence Major Project Report, p. 48.

[11]2020–21 Defence Major Project Report, p. 30.

[12]2020–21 Defence Major Project Report, p. 30.

[13]2020–21 Defence Major Project Report, p. 46.

[14]2020–21 Defence Major Project Report, p. 46.

[15]2020–21 Defence Major Project Report, pages 12 and 64.

[16]2020–21 Defence Major Project Report, pages 53 and 66.

[17]2020–21 Defence Major Project Report, p. 56.

[18]2020–21 Defence Major Project Report, p. 64.

[19]2020–21 Defence Major Project Report, pages 64-66.

[20]2020–21 Defence Major Project Report, pages 71-72.

[21]Joint Committee of Public Accounts and Audit, Report 442: Inquiry into the 2012–13 Defence Materiel Organisation Major Projects Report, May 2014, pages 37–39; Joint Committee of Public Accounts and Audit, Report 458: Defence Major Projects Report (2014-15), May 2016, pages 48–49; Joint Committee of Public Accounts and Audit, Report 468: Defence Major Projects Report (2015-16), p. 9.

[22]2020–21 Defence Major Project Report, p. 74.

[23]2020–21 Defence Major Project Report, pages 69-70.

[24]2021–22 Defence Major Project Report, p. 3.

[25]2021–22 Defence Major Project Report, pages 3 and 84.

[26]2021–22 Defence Major Project Report, pages 50-52.

[27]2021–22 Defence Major Project Report, p. 52.

[28]2021–22 Defence Major Project Report, pages 46-47.

[29]2021–22 Defence Major Project Report, p. 315.

[30]2021–22 Defence Major Project Report, p. 82.

[31]2021–22 Defence Major Project Report, pages 7 and 54.

[32]2021–22 Defence Major Project Report, pages 54 and 66.

[33]As noted above, this assessment does not contribute to the Auditor-General’s conclusion but provides an overall perspective of a key component of project performance.

[34]2021–22 Defence Major Project Report, p. 73.

[35]2021–22 Defence Major Project Report, pages 68-69.

[36]Department of Defence, Supplementary Submission 1.4 (responses to questions on notice and written questions), p. [18].

[37]Department of Defence, Supplementary Submission 1.4 (responses to questions on notice and written questions), p. [18].

[38]Auditing and Assurance Standards Board, Standard on Assurance Engagements ASAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, pages 10 and 25.

[39]The Auditor-General’s conclusion in the 2020–21 MPR referred to the 2020–21 Guidelines, and the conclusion in the 2021–22 MPR referred to the 2021–22 Guidelines.

2020–21 Major Projects Report, p. 113, and 2021–22 Major Projects Report, p. 113.

[40]2020–21 Major Projects Report, p. 115, and 2021–22 Major Projects Report, p. 116.

[41]Auditor-General Report No. 26 2017–18, 2016–17 Major Projects Report, pages 8-9.

[42]2020–21 Major Projects Report, p. 113, and 2021–22 Major Projects Report, p. 113.

[43]Auditor-General Report No. 17 of 2010-11, 2009-10 Major Projects Report, p. 132, Auditor-General Report No. 12 of 2013-14, 2012-13 Major Projects Report, p. 139, Auditor-General Report No. 2 of 2017-18, 2016‑17 Major Projects Report, p. 111, Auditor-General Report No. 19 of 2020–21, 2019-20 Major Projects Report, p. 119.

[44]2020–21 Major Projects Report, p. 113, and 2021–22 Major Projects Report, p. 113.