Procurement of the 'how many $billion?' Hunter Class Frigates and the future of the Defence Major Projects reports

THE FORMER Federal Government breached finance law by failing to undertake any value for money assessments before awarding a (then) $35 billion Defence contract, current value still unknown, according to the Joint Committee of Public Accounts and Audit.

The Joint Committee of Public Accounts and Audit has tabled its final report for its Inquiry into the Defence Major Projects Report (MPR) 2020-21 and 2021-22 and Procurement of Hunter Class Frigates.

The committee’s interim report for the inquiry in June 2023 dealt with cost, schedule, and capability performance assessments in both MPRs and other common themes including the impacts of COVID-19, Defence projects of interest and concern, and issues around risk management and capability forecasting.

This final report has considered the future of the MPR itself and highlighted key issues and concerns with the ongoing Hunter Class Frigate program.

On the $??,000,000,000 Hunter Class Frigates procurement

The committee was deeply concerned that no value for money assessment was ever undertaken by Defence or the former Government on the Hunter Class Frigates’ tenders, despite which the National Security Committee of Cabinet decided to proceed with a (then) $35 billion procurement of a ship from BAE Systems that was not a mature design.

Perplexingly, clear failings in the procurement identified by ANAO were only belatedly accepted by Defence after the committee initiated this inquiry and Defence conducted its own internal review.

Committee Chair Julian Hill MP said, "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.”

Further issues raised in the audit that were of significant concern to the committee included:

• the absence of any explanation why 10 percent was mysteriously knocked off the price from all tenderers in the evaluation and advice to government – the committee’s report reaches blunt conclusions on this point:
  • “While the committee would love to think the Commonwealth could just buy everything for 10 percent less than a tendered price, it’s a patently ridiculous proposition and vague claims there might be an “efficiency dividend” raise reasonable questions about the competence of officials involved. Indeed, it is not apparent to any member of the committee whether there has ever been an Australian shipbuilding project for such a major new capability that has run under budget.”
• the Hunter Class Frigate itself was assessed by Defence experts as a mature design when it had in fact never been built or even fully designed;
• key documents regarding the decision-making process went and remain missing.

Mr Hill said, “Defence must reassess how it determines maturity in future large-scale acquisitions, particularly as foreign governments will always be keen to sell expensive military hardware to Australia. A balance is needed between that approach and acquiring ‘off-the-shelf’ military capability.”

The committee makes five recommendations 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 its new recordkeeping framework.

The committee is also recommending that the Commonwealth Procurement Rules now explicitly require a value for money assessment in a tender evaluation plan as a default option which must then be cleared by the Department of Finance.

Future of the MPR

The committee said it regarded the MPR as an important accountability mechanism that should continue for the foreseeable future, albeit with potential adjustments.

Mr Hill said, "Although other external accountability and assurance mechanisms for scrutinising Defence activities exist, the MPR provides a structured level of scrutiny across major capability projects that would not be provided through these other processes.”

"The discipline of the MPR has positive impacts on Defence’s internal management of major projects.”

The committee noted the tension between national security considerations and need for ANAO to provide transparency to the Parliament and is recommending that a confidential submission and related briefings with Defence, where information cannot be published, now be provided by ANAO as a supplement to the MPR. 

The report can be downloaded from the inquiry website.

 

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