Nowhere near Ship Shape
Introduction
I thank the committee and secretariat for their ongoing work in this inquiry.
Again, I wish to thank all of those outside the Defence Organisation that contributed to this inquiry. I won’t repeat my critical comments regarding the behaviour of the Defence senior leadership in regards to this inquiry, other than to say they stand.
The slow progression of the various projects covered by this inquiry during a period of increasing international tension and shortened warning times, is a significant concern for Australia’s national security. The rising costs of delivering naval capabilities compared to other nations places unreasonable burden on the taxpayer and deprives the Australian Defence Force (ADF) of other much needed ground, air and space capabilities.
This report is handed down in the final moments of an election campaign in which the Morrison Government has repeatedly tried to make claims that they are strong on defence and national security. These claims are not substantiated by the actual outcomes.
National security is not the area for marketing slogans or shallow claims. Major capability projects often have long lead times, run for many years and invariably come with high costs. Poor decision making in source selection and sub-optimal project management can be expensive, place our service men and women at higher risk and leave Australia exposed. Unfortunately, the projects in this report, provide examples of all these aforementioned failures.
The structure of my additional remarks follows that of the Chair’s report, stepping through each of the projects.
Future Submarine Project
The Attack-class submarine project, having expended $5.5 billion to deliver no additional submarine capability, is Defence’s greatest defence acquisition project failure. The project was loaded with risk, was going to result in a submarine that was delivered too late, 2035, cost way too much, $90 billion, and not deliver the Australian industrial expectations required for us to have true sovereign capability.
Whilst Defence was right to abandon the project (a decision made several years too late), they have, however, foolishly jumped out of the frying pan and into the fire.
The concern is that the lessons to be gleaned from this project, have not been absorbed and applied to other relevant projects. The risk profile of the AUKUS submarine is unknown, what is known is that it will result in a submarine that’s delivered way too late, at least 2040, and cost too much, unbelievably $171 billion and will be built overseas, completely undermining our sovereign capability.
The only way an AUKUS submarine will assist Australia’s national security will be if it comes with a time machine fitted in the reactor compartment.
The failure of the Attack-class program and the commencement down the acquisition pathway for a new nuclear-powered submarine means the Navy faces a submarine capability gap.
The Life of Type Extension (LOTE) for the Collins-class is the attempt to address this gap. It’s a patch which will not do the job. Australia will be left with a capability deficiency and our submariners will likely face unacceptable risks. An interim capability is required.
Recommendation
Defence must procure an interim submarine capability; an off-the-shelf design, built in Adelaide and enhanced in Australia, with construction to commence in 2024.
Future Frigate
Against claims of needing to get Australia’s continuous naval shipbuilding program underway, Defence rushed into this project, now the project is behind schedule, will face additional cost increases and is unlikely to deliver the targeted capability.
The approach of breaking SEA 5000 into several stages each requiring approvals by the Australian Government to ensure it remains within cost constraints, is sensible for a development project. Unfortunately, this project was not supposed to be a developmental contract, it was supposed to acquire a proven platform, ensuring the project would deliver a known capability on time and on budget.
The Future Frigate Engineering Team Assessment that was leaked to the media earlier in the year, provides a very different perspective on the project to that continually espoused by Defence leadership to the Senate and the media, which is an almost continuous broadcast of: “all good, nothing to see here.”
This engineering review, despite the position taken by Defence’s senior leadership that it is “a pessimistic, conservative view”, is without doubt the most unambiguous and unadulterated assessment of the project that has come into the public domain.
An element of the project that has yet to come under any scrutiny or consideration are the sustainment costs, these were unknown when the project obtained second pass approval and are still unknown. This is not sensible investment.
The Frigate project is unfortunately displaying the same ‘symptoms’ as the Attack-class submarine project, the outcome of which we already know.
There are a number of indications that Defence leadership has yet again misled the Senate regarding the status of this project and the frigates capabilities. Unfortunately Ms Lutz is involved again.
This unacceptable behaviour hinders Senators in the performance of their duties and undermines the relationship between Defence and the Senate, and more particularly Defence and the Australian public it is supposed to serve.
Recommendation
Defence provide an unambiguous and unadulterated report regarding the status of the SEA 5000 Frigate project to the Senate which will enable objective assessment and measurement of the project as it currently stands, and for oversight of project performance going forward.
Offshore Patrol Vessel
Rigid Hull Inflatable Boats
The outcome with the Rigid Hull Inflatable Boats (RHIB) for the Offshore Patrol Vessels (OPV) is probably the most obvious example that the ‘Maximise Australian Industry’ program is not delivering the outcome that was expected.
There are three components to the procurement of the RHIB’s that leave a lot to be desired.
Whilst the prime contractor had free reign to select which ever boat supplier they saw fit as a sub-component of the overall vessel, the Department of Defence does not actually have the same latitude. Commonwealth procurement rules should apply and in the absence of Ministerial approval to conduct this as a sole source procurement, standard procurement processes should have applied. However, defence didn’t conduct an open tender and they did not test the market, instead they proceeded with a sole source contract against a claim of: “Supply by particular business: due to an absence of competition for technical reasons” and entered into a contract valued at $55.8 million with a foreign boat manufacturer.
Through questioning, Defence has claimed that Ministerial approval to acquire the seaboats was obtained via the second pass approval for the whole OPV acquisition strategy, it was later confirmed that a sole source procurement of the RHIB’s was not part of that approval.
Australia may have a variety of gaps in onshore industrial capability and capacity, but the design and manufacture of boats is not one of them. The RHIB’s for the OPV were an obvious area where Australian industry could have been contracted to supply, with minimal if any risk, consistent with the requirement to maximise Australian industry participation.
And, of course, in contravention of Section 4.7 of the Commonwealth Procurement Rules, Defence did not undertake an ‘economic benefit to Australia’ assessment of the procurement.
Defence advised that by contracting Boomeranger directly they saved $10 million, it is very concerning that a saving of such a magnitude could be achieved on what we now know to be a contract with an initial value of $55.8 million, a saving of almost 18 per cent of the final contract value is unbelievable, made worse because that 18 per cent reduction still allows Boomeranger to, quite rightly, recognise profit on the contract.
Defence’s decision to source the RHIB’s from an overseas manufacturer and the manner in which they have done so, has sent quite a disturbing message to Australian businesses and forced a realisation that maximising Australian industry involvement in our naval shipbuilding program is not what it’s spruiked to be.
Main Gun
The debacle with the OPV’s gun, the platforms main armament, is a prime example of what undermines confidence in defence procurement. From the outset the concept for procurement of the OPV platform was that it would be off the shelf.
The Luerssen ‘off-the-shelf’ platform was selected, but not with the Bofors 57mm gun that it had been delivered with to the Royal Brunei Navy (the only Navy operating this platform), but with a new developmental 40mm gun. In July 2021, three and half years after contract signature, or six months prior to the original planned delivery date, Defence instructed Luerssen to cancel the contract for the 40mm gun contract, due to technical certification concerns.
The cost of this shambles? At the time of this report that was still to be determined, but it was clear that the contract was terminated for convenience, not failure to deliver, so there will be a cost for this termination. There will also be an additional cost to have a 25mm Typhoon gun fitted, and then there will be an additional cost to incorporate the final gun selected into the platform, in the form of design work, physical installation, integration with the combat management system, modifications to the magazine, new test and acceptance procedures and of course removal of the redundant 25mm guns.
This is why the recommendation from so many reviews of Australian defence procurement is that Defence procure off-the-shelf platforms and equipment.
Coincidentally, the $10 million paid for no gun, effectively cancels out the projected saving associated with the RHIB’s.
This brings the score on this project to: Taxpayer nil; Australian Industry nil; Foreign industry 2.
Incredibly at the estimate hearings 1 June 2021, the First Assistant Secretary, Ships, Ms Sheryl Lutz, in response to questions from the late Senator Kitching about possible issues integrating the weapons and combat systems with the new vessels, stated: “There are no anticipated problems at this stage”, the inference being there were no problems.
In her position, Ms Lutz would have known there were technical issues with the status of the gun at that time and she should have answered accordingly. It could be understood that she may not have wanted to state they were considering terminating the contract, however, the manner and content of Ms Lutz’s responses can only be taken as deliberately deceptive.
Continuous Naval Shipbuilding Program
The continuous naval shipbuilding program has become what could only be described as another marketing slogan of government, but probably the most expensive to date.
As it stands, the program has thus far delivered no platforms. Of the three sub-ordinate projects the first to deliver, SEA 1180, will deliver OPV’s with a 25mm gun instead of the 40mm gun deemed necessary to meet the capability requirements, until a new gun is selected. The second, SEA 5000, is late, cost is climbing and there are serious doubts regarding its final delivered capability. The third, SEA 1000, has been cancelled.
No wonder the ‘revised’ Naval Shipbuilding Plan’s actual status is unclear and yet to be released. Is it being withheld because the Frigate program is about to be torpedoed?
In the meantime, noting both parties of government believe we should be building ships and submarines in Australia, whilst Defence ‘regroups’ the ship and submarine construction facilities at Osborne could be progressed to ensure the yard was ‘ready’ to commence construction at the earliest opportunity.
Recommendations
Defence and Australian Naval Infrastructure Pty Ltd (ANI) complete the design of the Osborne ship and submarine construction yards and progress construction of the common elements.
The Naval Shipbuilding Plan be reviewed, with a renewed focus to establish the Australian shipbuilding industry, which can then deliver the necessary ships and submarines to the Navy in a well-defined structured program, that increases technical complexity commensurate with the onshore capabilities, skills and experience.
Australian Industry
This inquiry has made it clear that there is a substantial inequality in the relationship between Australian defence industry and the ADF. Many defence businesses refused to participate in the inquiry due to fears of negative repercussions towards the awarding of work to their businesses.
The sole requirement of an entity having an Australian Business Number (ABN) to make it an Australian business is quite insufficient for a nation trying to build a sovereign industry. A system that considers variables relevant in the economic benefit assessment is clearly required.
In 2016, Australian industry was recognised as a Fundamental Input to Capability, the inference and rhetoric was that there would be a new regime for utilising Australian industry. In March 2019, Senator Reynolds, then Minister for Defence, backed this in with the Defence Policy for Industry Participation. It is unclear if any substantive progress has actually occurred, however, statements contained within the Future Frigate program engineering assessment report regarding Australian Industry Capability (AIC), support the view that the program to maximise AIC is failing.
As an organisation, Defence appears to have very poor understanding of the resident capabilities of Australian industry and seems almost totally incapable of utilising the capability that does exist. Their inability, or possibly lack of interest, in utilising Australian industry is a significant and persistent problem.
Defence’s actions in relation to maximising Australian industry participation have sent a clear message, use of Australian industry is entirely optional.
The taxpayers quite frankly have a legitimate right to expect better.
The defence of Australia deserves much better.
Recommendation
A consolidated Australian industry commission be established as a statutory authority [independent of Defence], with responsibility for the development and implementation of Australian Industrial Plans.
Senator Rex Patrick
Member
Independent Senator for South Australia