- Introduction
Overview
1.1The Australian National Audit Office (ANAO) and the Department of Defence (Defence) jointly prepare the Major Projects Report (MPR) each year. The MPR was introduced in 2008 at the request of the Parliament with the aim of improving the accountability and transparency of Defence acquisitions as a significant expenditure of taxpayer funds. Prior to this, the Parliament and key Defence stakeholders had expressed concern that Defence projects were ‘largely invisible’ to the Parliament and the public.
1.2The MPR contains detailed information on a selection of Defence projects, including cost, project schedule and technical aspects. This information is provided in four parts:
- ANAO’s independent review and analysis, which provides limited assurance of the accuracy of the information presented
- Defence’s Major Projects Report and assessment
- the Project Data Summary Sheets containing detailed information on each project assessed in the MPR, and
- the MPR Guidelines for the year, as approved by the Committee.
- As at 30 June 2022, Defence was managing 158 acquisition projects with a total value of $130.5 billion.
Conduct of the inquiry
1.4The 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 MPR audits into the future.
1.5On 11 May 2023, the Committee resolved to broaden the terms of reference for the inquiry to also consider issues raised or related to Auditor‑General Report No. 21 2022–23 relating to the procurement of Hunter Class Frigates, one of the major projects included in the MPRs.
1.6The Committee held three public hearings for the inquiry (see Attachment B) and received 5 submissions and 17 supplementary submissions (see Attachment A).
Interim report in 2023
1.7The Committee tabled an interim report for the inquiry on 26 June 2023, which examined key issues arising from both the 2020-21 and 2021-22 Major Projects Report. Some of the key conclusions of the Committee were that:
- delays in taking appropriate and timely actions once a Defence project is formally designated a ‘Project of Concern’ is a significant issue and should not occur without valid reasons
- there are still inconsistencies in Defence’s risk management practices, although improvements have been made, and this still needs to be addressed going forward
- contingency funding and Defence’s approach to ‘Lessons Learned’ have been consistent issues across previous MPRs and continue to persist
- Defence has not met the intent of the Committee’s previous recommendation to properly define terms that are used in relation to a delta or deviation from project milestones being achieved.
- The following three recommendations were made in the interim report:
- Recommendation 1: The Committee recommends that the Department of Defence updates internal governance to require decisions for projects to enter the Projects of Interest or Projects of Concern list be actioned in a timely manner, taking no more than three months between decision and implementation
- Recommendation 2: The Committee recommends that the Department of Defence provide a detailed update on the implementation of and compliance with internal policies for contingency funding and Lessons Learned for Major Projects
- Recommendation 3: The Committee recommends that the Department of Defence provide an update on the requirements and consideration process to close recommendations from the Australian National Audit Office and the Joint Committee of Public Accounts and Audit, including an explanation as to why Recommendation 4 of Report 489: Defence Major Projects Report 2019-20 has been closed without meeting its intended purpose
- Responses to these recommendations had not been received at the time of adoption of this final report.
Focus of this (final) report
Report structure
1.10In this final report, a focus of the Committee was the future conduct of the MPRs. These included an assessment of the reduced transparency of certain information in the Project Data Summary Sheets (PDSSs) for the Committee and the Parliament due to National Security concerns, and the limited nature of the assurance that ANAO can provide in these audits. These issues are discussed in chapter 2.
1.11The Committee also conducted its investigation of the Hunter Class Frigates procurement by Defence, which is ongoing, in which it further scrutinised the findings of the ANAO in its specific performance audit of this process. This is the subject of chapter 3.
Future considerations for Major Projects Reports (chapter 2)
1.12The Committee considered the issue of transparency in relation to the MPR set against the need to withhold classified information on certain Defence spending from publication. The Committee acknowledges the tension between adequate Parliamentary scrutiny of and fostering public confidence in the expenditure of such large sums of public money on critical defence capability, versus issues of national security requiring the protection of certain information regarding capability and potential vulnerabilities arising from publication.
1.13The Committee acknowledges that there are external accountability and assurance mechanisms in place to scrutinise Defence activities other than the MPR. The Committee considers however that the MPR is an important accountability mechanism that should continue for the foreseeable future, as it provides a structured level of scrutiny and granularity across major capability projects that would not be provided through these other processes.
1.14The Committee discusses the ideas expressed by both Defence and ANAO during the inquiry to potentially provide sensitive information confidentially in the future to the Committee.
Procurement of the Hunter Class Frigates (chapter 3)
1.15On 4 August 2015 the Australian Government announced it was bringing forward its plans (to 2020) to replace the Royal Australian Navy’s current fleet of eight ANZAC class frigates. Defence planned to build these new frigates in Australia as part of the Government’s plan for long-term continuous shipbuilding. This shipbuilding plan was intended to develop a sovereign Australian shipbuilding industry and create jobs in Australia.
1.16Auditor-General Report No. 21 2022–23 assessed the effectiveness of the Department of Defence’s procurement of Hunter class frigates and the achievement of value for money. The audit built on previous work by the Auditor-General on Defence’s acquisition and sustainment of Navy ships and implementation of the Australian Government’s 2017 Naval Shipbuilding Plan.
1.17A number of MPRs, including the 2021-22 audit, included the Hunter Class Frigates (originally named the Future Frigates) project. This was a project of significant public and parliamentary interest due to its importance to Australia’s shipbuilding industry and maritime defensive capability, and due to the very large cost to the taxpayer.
1.18At the time of the announcement in 2018 of BAE Systems as the successful tenderer for the building of these frigates, this was designated as a $35 billion program. The ANAO noted in its audit of this procurement that:
As of January 2023, Defence’s internal estimate of total acquisition costs, for the project as a whole, was that it was likely to be significantly higher than the $44.3billion advised to government at second pass in June 2018.
1.19The Australian Government’s 2020 Force Structure Plan (which included the acquisition or upgrade of up to 23 classes of Navy and Army vessels) subsequently reported that the cost of the Hunter class frigates was $45.6 billion out-turned.
1.20The Government launched its new National Defence Strategy and Integrated Investment Program in April 2024 in which it was announced that only six Hunter Class Frigates will now be acquired (down from nine in the original program).
1.21The audit found overall that Defence’s management to date of its procurement of the Hunter class frigates had been only partly effective and raised numerous concerns regarding Defence’s process and administration, advice to Government and the then Government’s decision to choose BAE for a (then) $35 billion project without a value for money assessment. ANAO made two recommendations in its report, both of which were agreed to by Defence, that:
- Defence ensures its compliance with the Defence Records Management Policy and statutory record keeping requirements over the life of the project, and
- Defence ensures its advice to Government on procurement for major capital acquisition projects documents the basis and reason for proposed decisions, including information on whole-of-life cost estimates and assessment of value for money.
- ANAO also suggested further training and oversight might be required for Defence officials involved in major capital acquisition projects, and that there is scope for more active engagement with the Department of Finance in its role as the policy owner of the Commonwealth Procurement Rules (CPRs).
- Key observations of the Committee in relation to this procurement process include:
- the core principles outlined in the CPRs of demonstrating value for money are fundamental to any expenditure by government on behalf of the taxpayer and it is patently evident that they were not adhered to by Defence in assessing proposals and advising government
- Defence now accepts that a lack of a value for money assessment was a deficiency in the process, having now conducted its own internal review, but did not do so when formally responding to the audit finding in which it argued that these assessments had in fact been done
- it is striking that neither Defence nor the ANAO were able to identify any other project a Value for Money Assessment was not undertaken, yet the former Government nevertheless proceeded to select BAE for a (then) $35 billion project;– as this was a Cabinet process no one will ever really know whether this was a conspiracy to achieve a pre-determined outcome or incompetence
- it is peculiar that the rules required Finance to prepare a Cost and Risk statement for Government following the selection of the preferred tenderer, but not to play any further role in ensuring value for money was being demonstrated
- the design maturity of the Hunter Class frigates was a critical consideration, yet they selected BAE to build a ship that had never been built anywhere in the world and is seemingly still at the pre-prototype stage years later. The assessment by Defence through its panel of in-house and international experts that the Hunter Class frigate design was ‘mature’ simply makes no sense and the Committee welcomes the Secretary’s admission that in retrospect it is clear the ship selected was simply not a ‘mature design’
- the lack of record-keeping highlighted in the Auditor-General’s report was acknowledged by Defence through this inquiry as a serious issue which is welcome, despite its decidedly flippant response in the audit report while agreeing to the corresponding recommendation
- the Committee accepts that this project was rightly assessed as high-risk given the new and very constrained timeframe that was imposed on Defence by the then Government.