Audit Report No. 27 2008-09
Chapter 3 Management of the M113 Armoured Personnel Carrier Upgrade Project
Introduction
3.1
M113s are the only tracked vehicle in the Australian Defence Force’s
(ADF’s) fleet of armoured troop transports used for transporting and supporting
infantry in a battlefield. M113s first saw service with the ADF during the
Vietnam War and are undergoing a major upgrade to improve protection,
lethality, mobility and habitability.
3.2
Currently, 431 upgraded M113s are on order for delivery by the end of
2011 under Project Land 106: Upgrade of M113 Armoured Vehicles. The initial
purchase in July 2002 of 350 upgraded vehicles for delivery by December 2010
was extended in December 2008 to include an additional 81 upgraded M113s as
part of the Enhanced Land Force (ELF) initiative.[1]
3.3
With the total anticipated expenditure in the order of $1 billion[2],
the upgrade is one of Defence’s top 30 projects by forecast 2008-09 expenditure,
with some $100 million in expenditure under Project Land 106 forecast for this
financial year.[3]
3.4
Upgraded M113s are to be a core component of the ADF’s capability. They
are fundamental equipment for Army’s two mechanised battalions, the 5th
and 7th Royal Australian Regiments (7 RAR and 5 RAR), and are
currently forecast to be in service until 2020.[4]
3.5
The Australian National Audit Office (ANAO) previously examined the
Department of Defence’s (Defence’s) progress in delivering this project in
Audit Report No. 3 2005-06, Management of the M113 Armoured Personnel
Carrier Upgrade Project. Given the continuing significance of this project
and developments since the 2005-06 audit, the ANAO scheduled this audit to
provide updates on the progress against Project Land 106’s stated schedule,
cost and technical performance objectives, and on Defence’s implementation of
the recommendations and findings of the previous audit.
The Audit[5]
Audit objectives and scope
3.6
The objectives of this audit were to assess:
n the progress of the
M113 Armoured Personnel Carrier Upgrade Project against stated schedule, cost
and technical performance objectives; and
n Defence Materiel
Organisation’s (DMO’s) progress in implementing the recommendations and
addressing the findings of ANAO Audit Report No. 3 2005-06, Management of
the M113 Armoured Personnel Carrier Upgrade Project.
3.7
The audit covers significant developments since the previous audit,
including contract negotiations and outcomes, the commencement of final
production, and the initial introduction into service of the upgraded vehicles.
The ANAO visited production facilities to examine the arrangements for final
production of the upgraded M113s, and 7 RAR at 1 Brigade in Darwin to examine
vehicle logs, reports of defects and faults, and the current state of the
upgraded M113 capability.
Overall audit conclusion
3.8
The ANAO made the following overall audit conclusion:
The M113 Major Upgrade Project commenced in July 2002 and has
suffered a series of delays. Army has so far received 42 of the 350 vehicles to
be upgraded. Of these, 16 are in service with 7 RAR, five are awaiting issue to
units and the remaining 21 are allocated primarily to driver and crew training
units.
Many of the initial technical difficulties with the Project
were resolved by the end of 2007, at which time extensive negotiations with the
Prime Contractor were successfully concluded. Those negotiations enabled final
production to get underway and reaffirmed the December 2010 delivery date.
Subsequently, however, production has been slow. In July
2008, the Prime Contractor informed Defence that the existing production
facilities at Bandiana, Victoria, were not adequate to the task and, at
December 2008, there was a potential shortfall of around 100 upgraded vehicles
by December 2010.
Defence is currently working with the Prime Contractor on
measures to improve and expand the M113 production facilities and recover the
anticipated production shortfall. On 28 October 2008, the Minister for Defence
announced that additional production will occur at Williamstown, Victoria, and
Wingfield, South Australia. ANAO notes that recovering the production schedule
will be challenging.
Defence advised that the upgraded M113s achieved a limited
Initial Operational Capability as of December 2007 and could, if circumstances
required, be deployed. However, Defence has yet to complete the Operational
Testing and Evaluation of the upgraded vehicles, which is necessary to achieve
Operational Release. In light of increasing threats, Defence is considering
additional protection for its M113s, at a potential additional cost of up to
$0.2 million per vehicle, if they are deployed on more hazardous missions.
As of September 2008, the 16 upgraded M113s delivered to 7
RAR had travelled less than 1,000 kilometres. They were first used in a
training exercise in November 2008 and, by December 2008, had travelled almost
9,000 kilometres. Defence advised ANAO in December 2008 that, notwithstanding
delays in the delivery of the upgraded M113s, demands on capability had been
manageable. This was due, in part, to Defence’s ability to use alternative
armoured troop transports, and because troops who would otherwise have been
assigned to M113s were necessarily deployed elsewhere on operations. Defence
advised ANAO in December 2008 that:
The development of the [upgraded
M113] capability is adversely impacted by support to operations. This cost
has been assessed and accepted by Chief of Army as Capability Manager. Indeed,
the cost is manageable within Army’s wider priorities and strategic guidance.
3.9
Until it receives all its upgraded vehicles, Defence will continue to
operate its fleet of original M113s, many of which are over 35 years old. At
the time of this audit, Defence’s assessment was that there were no viable
alternatives to the upgraded M113.[6]
3.10
The ANAO identified significant progress since the previous audit. To
control scope changes, Defence specified and applied financial thresholds for
the approval of changes to capital acquisition projects. To complement these
arrangements, ANAO recommended Defence develop additional guidance to ensure
that appropriate levels of approval are sought for scope changes that affect
capability.
3.11
The ANAO found that Defence had successfully recovered against
deliverables outstanding prepayments identified in the previous audit. However,
it was difficult to establish with certainty the financial and other benefits
accruing to the Commonwealth by making substantial prepayments under the Major
Upgrade Contract. Consequently, ANAO recommended that Defence develop clear
policy guidance on the circumstances in which prepayments will be considered
for inclusion in future major acquisition contracts.
3.12
Defence has put in place a suite of guidance and instructions to staff
responsible for administering liquidated damages. In the case of the Major
Upgrade Contract, administration was hampered by complex arrangements that
applied liquidated damages to approximately 3100 contract milestones. ANAO has
recommended that liquidated damages arrangements in future major acquisition
contracts apply to clearly identified, key contract milestones.
3.13
Defence provided evidence of its effective oversight of technical issues
in the development of the upgraded M113s.[7]
ANAO recommendations
3.14
The ANAO made the following recommendations:
Table 3.1 ANAO recommendations, Audit Report No. 27
2008-09
1.
|
ANAO recommends that Defence and DMO set suitable threshold
criteria for determining changes in scope to acquisition projects and
promulgate advice to staff to allow decision-makers to be provided with
sufficient, consistent and appropriate information and advice on potential
scope changes.
Defence response: Agreed
|
2.
|
ANAO recommends that Defence develop clear policy
guidance on the circumstances in which prepayments will be considered for
inclusion in future major acquisition contracts, and maintain an appropriate
record of the basis for agreeing to advance payments as part of contract
negotiations.
Defence response: Agreed
|
3.
|
ANAO recommends that Defence ensure that liquidated
damages arrangements in future major acquisition contracts apply to clearly
identified, key contract milestones.
Defence response: Agreed
|
The Committee’s review
3.15
The Committee held a public hearing on Monday 15 June 2009, with the
following witnesses:
n Australian National
Audit Office (ANAO);
n Defence Materiel
Organisation (DMO); and
n Department of Defence
(Defence).
3.16
The Committee took evidence on the following issues:
n scope changes;
n capability of the
M113;
n timely delivery of
the project; and
n value for money.
Scope changes
3.17
The Committee noted there were inconsistencies in what constituted a
scope change, asking Defence and DMO for more information. DMO replied that
existing policy had been examined, and a review had been conducted. DMO
reported that the Defence Procurement Policy Manual (DPPM) was the primary
reference document for procurement, and that it complied with Commonwealth
legislation and policy as well as internal Defence guidelines. The DPPM
addressed the issue of scope changes:
Where the proposed contract amendment will increase the value
of the contract, Proposal Approval must also be exercised for the additional amount.[8]
3.18
DMO also noted that there were specified financial thresholds for the
approval of changes to capital acquisition projects via DMO instructions.[9]
3.19
The Committee asked whether it was as simple as applying a ratio that
would not be proceeded past. DMO replied:
There are a number of delegations and a number of checks and
balances that we go through in determining the scope. It involves both Defence
and DMO – that is, Defence delivering the project in accordance with the
requirements of Defence represented by capability development in this case. Our
responsibility is to look at that change in scope – whether it is within the
comprehension of the contract and government approval and certainly look at the
value and magnitude of it. It is not just a financial consideration; it is
about whether it breaches or is comprehended by the intent and the actual
government approval. So there are processes there for us to review that, have a
look at it and then bring it to government if we feel it needs government approval.[10]
3.20
The Committee asked what had been done to ensure decision makers were
provided with sufficient, consistent and appropriate information and advice on
potential scope changes. DMO replied that there was a clear process in place in
the documentation, and that ‘administrative discipline’ was required to ensure
those processes were followed.[11]
3.21
The Committee is pleased to see that the agencies have accepted ANAO
Recommendation No. 1, and that DMO believes appropriate processes are in place
to inform decision makers on potential scope changes. However, the Committee is
somewhat concerned that staff may be unaware of the processes currently in
place for providing advice on potential scope changes, and recommends:
Recommendation 6
|
|
That the Defence Material Organisation (DMO) provide a brief
report to the Joint Committee of Public Accounts and Audit (JCPAA) within six
months of the tabling of the Committee’s report on the steps taken to ensure
DMO staff adhere to the existing processes to inform decision makers of scope
changes.
|
Capability of the M113
3.22
The Committee inquired into the capabilities of the upgraded M113,
noting that the vehicles were not currently suited to operating in Afghanistan.
3.23
Defence replied that the M113s provided a capability in various types of
terrain and environments, and while they were suited to the terrain of
Afghanistan, they were not suitable to operate in the current threat
environment. Defence reported that the best combat vehicle for the current
threat environment in Afghanistan was the ASLAV, and the best general duties
vehicle was the Bushmaster. Defence noted that the M113 could be deployed to
Afghanistan, but that it would require additional protection due to the current
threat environment.[12]
3.24
The Committee asked whether there was an identified need to upgrade the
M113s to deal with rocket propelled grenades (RPGs) and Improvised Explosive
Devices (IEDs), two key elements of the threat environment in Afghanistan.
3.25
Defence replied that this was the focus of the contract, and that they
were also testing passive protection measures used overseas, as well as
developing their own passive protection measures independently.[13]
Further, Defence noted that the M113s would ‘probably not’ be deployed in a
place where there is sustained close combat expected on a daily basis.[14]
Timely delivery of the project
3.26
The Committee asked about the likelihood of the M113 upgrade being
completed by its deadline. DMO replied that the project had been running a year
late for several years, but that it was anticipated that the project would
still be completed a year late. DMO noted, however, that the completion of the
project by that deadline was still assessed as being ‘high risk’, but that
there were incentives in place to encourage the company to complete the project
by December 2010, still one year late.[15]
3.27
The Committee is concerned that the delivery of the M113 upgrades may
yet be delayed further, and recommends:
Recommendation 7
|
|
That the Department of Defence and the Defence Materiel Organisation
(DMO) provide the Joint Committee of Public Accounts and Audit (JCPAA) with a
brief report detailing the progress of the M113 upgrade process, and the likelihood
of the project being completed by the revised target date of December 2010.
|
Value for money
3.28
The Committee expressed its concern about the value for money obtained
through the upgrade. It asked Defence whether, during the time the upgrade was
being considered, any thought had been given to buying new vehicles, rather
than upgrading the M113.
3.29
Defence replied that the terms of reference for the review into the
business case for the M113 upgrade included a review of further alternatives,
including the acquisition of a new vehicle. Defence rejected the purchase of
the US Bradley, or similar vehicle, on several grounds:
Vehicles such as the US Bradley are prohibitively expensive.
The need for a tracked capability (for mobility reasons in close combat in
difficult terrain) was also restated by capability staff as the reason for
rejecting replacement of the M113 fleet with a wheeled vehicle (and new wheeled
vehicles such as ASLAV are also more expensive than an upgraded M113).
This assessment remains current. To use the Bradley example,
the vehicle carries half the troops in comparison to the M113, and therefore
Defence would need to buy twice the number of vehicles. Secondly, the Bradley
costs four times the M113 upgrade cost and thirdly, the Bradley is 30 tonne and
cannot be deployed by C130 (C17s are not suitable for the small dirt strips in
our region).[16]
3.30
The Committee noted that a lot of money was being spent on the M113 for
little return, comparing it to the Super Seasprite, a Defence procurement project
that has been shelved. DMO replied that the Army considered the M113s to be
capable assets that are useful, and that the Army would need within the next
ten to twenty years due to conditions in Northern Australia and other tropical
areas.[17]
Conclusion
3.31
The Committee believes more must be done within DMO to ensure its staff
are aware of their responsibilities to report potential scope changes to key
decision makers, and believes the implementation of its recommendation would be
of benefit.
3.32
The Committee is concerned that the prospect of the M113 upgrade
project’s timely delivery is still assessed as ‘high risk’, and is extremely
interested in ensuring the project is completed in a timely manner, and wishes
to remain informed about the progress of the project.
3.33
The Committee is encouraged to see that alternatives to the M113 upgrade
were considered, and that both operational requirements and value for money
were primary considerations of Defence and DMO.
3.34
The Committee acknowledges that the M113 is not currently considered to
be able to be deployed in Afghanistan due to its unsuitability to the current
threat environment, and expresses its hope that it will be able to be readily
deployed to other more suitable environments if it is required.
3.35
On a related matter, the Defence Major Projects Report initiated with
the JCPAA’s support in 2008 is an important initiative which will give the
Parliament an improved capacity to track the progress of major projects such as
the M113 project while they are still in train, rather than relying on the
scrutiny of individual projects after projects have been completed.
3.36
Further, the Committee has also decided to continue to scrutinise
Defence major capital equipment projects, resolving to review ANAO Audit Report
No. 48 2008-09 Planning and Approval of Defence Major Capital Equipment
Projects which examined the strengthened “two-pass” process for major
capital equipment projects implemented following the Kinnaird review as the
first post-Kinnaird review audit.