Chair's Foreword

In this Final Report, the Committee considers the future conduct of the Defence Major Projects Reports (MPRs) as well as issues raised in the ANAO’s audit of the Hunter Class Frigates program.

This final report complements the Committee’s Interim Report in June 2023 which focussed on core issues arising from the 2020-21 and 2021-22 MPRs. The matters considered by the Committee at that time included cost, schedule, and capability performance assessments for both reports and common themes including the impacts of COVID-19, Defence projects of interest and concern, and issues around risk management and capability forecasting. Three recommendations were made in the Interim Report.

Future of the MPR

The Committee regards the MPR as an important accountability mechanism that should continue for the foreseeable future, albeit with potential adjustments. There are of course other external accountability and assurance mechanisms for scrutinising Defence activities however the MPR provides a structured level of scrutiny and granularity across major capability projects that would not be provided through these other processes. The discipline of the MPR over many years has also had positive impacts on Defence’s internal management of major projects.

Firm conclusions have not been reached by the Committee with regard to the future scope of the MPR at this stage. There are few useful international comparators that provide the rigour of public, independent assurance via a national audit institution.

Questions of confidentiality and national security in relation to the material published in the MPR have become more significant in recent years. There is an inherent tension between accountability and continuing to publish a robust and useful report, and the need to protect sensitive information.

The Committee accepts that national security considerations may at times necessarily prevent the publication of certain information while also agreeing with the ANAO’s advice that it has an underlying duty to the Parliament to provide adequate transparency. The ANAO’s concerns about providing assurance over information that cannot be published are reasonable.

Given this tension, the Committee’s recommendation is that the ANAO supplement the published MPR with a confidential submission and related briefings with Defence where information cannot be published. In reaching this conclusion the Committee makes clear that Defence and the ANAO must continue to maximise the information published in the MPR, as the availability of confidential mechanisms must not be used as a device to reduce transparency to all Parliamentarians and the public or media scrutiny.

Procurement of Hunter Class Frigates

Failings in the procurement of the Hunter Class Frigates were clearly identified in the Auditor-General’s report yet only belatedly accepted by Defence after its own internal review. The Committee understands the significant pressure and risks that resulted from the then Government’s sudden decision to accelerate the project and subsequent supply chain issues. Demonstrating value for money and compliance with the Commonwealth Procurement Rules (CPRs) are nevertheless non-negotiable requirements, particularly when expending tens of billions of dollars of taxpayer money.

It is simply inexcusable that no value for money assessment was ever conducted before the former Government selected BAE for the then $35 billion project.

It is striking that neither Defence nor the ANAO were able to identify any other project that went to Government for decision without a value for money assessment. Ministers have every right to be able to rely on the detailed and technical assessments which underpin such processes and advice to government, whether to Ministers individually or collectively via Cabinet. The evidence however clearly indicates that this submission which went to Ministers was unique for not including a value for money assessment. Despite this, the former Government decided to select BAE for a (then) $35 billion project anyway in breach of Finance Law.

Ministers are not supposed to be rubber stamps or daleks and there are two possibilities as to how this happened: (1) either no one noticed that no value for money assessment was undertaken, or; (2) they did know but didn’t care and blithely decided to proceed with a (then) $35 billion procurement anyway. Ultimately as this was a Cabinet process via the National Security Committee of Cabinet no one will ever really know what happened; whether there was a conspiracy or predetermined decision that BAE win the prize, or whether it was simply shocking incompetence by this group of Ministers in the then Government.

No explanation was given as to why the requirement for a value for money assessment was mysteriously removed from the Tender Evaluation Plan. Defence has now at least acknowledged this glaring deficiency following its internal review. It refused to accept this finding however when it was pointed out by ANAO in its audit. Finance has also indicated to the Committee that it would ‘probably’ take a different approach in its own processes for future procurements of this nature and scale. Probably.

Another puzzling issue for the Committee was that no rationale was provided for the seemingly unprecedented decision to knock 10 per cent off the price from all tenderers in the evaluation and advice to government on this procurement. It is doubtful whether there has ever been an Australian shipbuilding project that has run under budget and this action calls into question the judgement and competence of the officials involved.

The issue of design maturity for the Hunter Class frigates was a critical consideration in the inquiry as it relates to the capability of the vessel and its overall cost effectiveness both at the time of procurement but also at construction. It was concerning to the Committee in this respect that this ship was not in the water anywhere in the world during this entire process and was therefore seemingly still at the pre-prototype stage. The Committee understands that the Hunter Class design was based on a successful ship that had been in service for many years, but the fact of the matter is that this was a completely redesigned and updated vessel that is yet to actually exist. Despite the fact that it was assessed by Defence experts as a mature design, this was clearly not the case. The Secretary of Defence admitted this by making the welcome, if somewhat overdue, statement at a hearing for the inquiry that he would not have characterised it as mature.

Defence must therefore reassess how it determines maturity in future large-scale acquisitions, particularly when dealing with foreign governments who will always be keen to sell expensive military hardware to Australia. A balance is needed between that approach and the acquisition of ‘off-the-shelf’ military capability which would be expected to be deliverable far more quickly and at considerably less expense. The Committee is mindful also of the ongoing and necessary tension between the role of capability managers and delivery managers after a procurement decision is made. The Committee intends to explore both of these issues in future MPR inquiries.

Recordkeeping was a constant area of prosecution by the Committee in its extensive Commonwealth procurement inquiry in 2023 and disappointingly, but, perhaps not surprisingly, was an issue also in the Hunter Class procurement process. The lack of recordkeeping highlighted in the Auditor-General’s report was acknowledged by Defence but its formal response to this audit finding was frankly dismissive, if not flippant. The Committee fully appreciates the ANAO’s position that the unavailability of only a very miniscule proportion of the relevant documentation was simply not the point it was trying to make.

Key documents that went to the core concerns about the process, including minutes of the Defence Committee–the apex decision making forum of the entire enterprise, were not available. Defence has at least now admitted this failing after its internal review, and the advice that it is adopting a new framework for records management is reassuring.

Five recommendations are made in relation to the Hunter Class Frigate program. Four of these request updates from Defence on changes arising from its internal review, progress with the project, how it will assess design maturity in the future, and the implementation and impact of its new recordkeeping framework. The Committee is also recommending changes to the CPRs that will explicitly require a value for money assessment in a tender evaluation plan as a default option and that the Department of Finance must determine and then advise the procuring entity whether this has been completed appropriately.

I thank the Deputy Chair in particular for her active participation and assistance and all members of the Committee. We acknowledge the work and the professionalism of the Committee secretariat in supporting this inquiry.

Julian Hill MP

Chair