Defence confesses that Hunter-class frigates purchase was a disaster

In a rare insight into the Defence Department’s problematic procurement systems, secretary Greg Moriarty has tabled a summary of its review of the procurement process around the beleaguered $50 billion Hunter-class frigate program.

In May this year, the auditor-general released one of his trademark “scathing” reports into the procurement, criticising it for poor process, failure to obtain value for money and terrible record-keeping. The undocumented role of then-secretary Dennis Richardson in selecting BAE in the shortlisting process has drawn particular criticism after the eventual decision to award the contract to that company. The suitability of the BAE design has also come in for criticism, prompting the company to alter the design to include more missile launchers.

Parliament’s Joint Committee of Public Accounts and Audit followed up the audit by adding it to its list of current inquiries, and yesterday Defence lodged a submission from Moriarty detailing the review it had undertaken after the ANAO report into the procurement process from 2014-18.

Moriarty said “successive government ministers were closely involved as the process developed”, and “officials were conscious that a key program objective from the outset was to ensure that the program could materially contribute to the implementation of the then-government’s policy to achieve continuous naval shipbuilding in Australia”.

This protectionist approach appears to have been a crucial element in the debacle that unfolded: “Following initial pass in June 2014, the review found that there was a growing incompatibility between project objectives including continuous naval shipbuilding and the intended procurement method as described throughout the tender process.”

That is, the need for value for money, and the political goal of propping up Australian defence manufacturing, clashed — unsurprisingly, as we know from the extended debate over the acquisition of submarines that major naval projects come with at least a 30% premium for local builds.

The result was an incoherent process — made worse by the rush in which it was conducted — without clear goals, leading to “disjointed advice” to government, without Defence fully understanding what was happening: “Defence did not appear to recognise how the incompatibility between the project objectives including considerations relating to price and continuous naval shipbuilding and the procurement method as described in the tender documents would impact on Defence’s ability to achieve value for money.” This was exacerbated by “deficiencies in the process”.

The BAE intervention by Richardson and the panel he led reflected a misunderstanding of what actually formed part of the procurement process; in Moriarty’s words, they “did not adequately recognise that the shortlisting of alternatives and the decision to shortlist was part of the procurement process and therefore subject to the legislated requirements and Defence procurement policy” — a remarkable statement about senior bureaucrats. The result:

During the shortlisting process and to take into account the evolving project objectives including continuous naval shipbuilding and an accelerated schedule, Defence departed from the agreed process and this departure lead to shortfalls in terms of the extent of reasonable enquiries made to facilitate accountable and transparent decision making; the level of diligence, fairness and consistency applied during shortlisting considerations; and the overall effectiveness of this stage of the procurement.

In short: “Defence did not fulfil the requirements of the Commonwealth Procurement Rules in relation to achieving value for money”. It also gave the government poor advice, partly as a result of shoddy record-keeping that meant Defence really couldn’t properly explain its recommendations to government.

In its own quiet way, Moriarty’s summary is more damning than the auditor-general report. While a succession of Coalition Defence ministers must share some of the blame, the primary responsibility must fall on the Richardson-era department, which made absolutely astonishing lapses in the most basic of procurement processes — and when they needed to apply under Commonwealth law.

The bigger issue beyond bureaucratic incompetence, however, is the problems generated by the clash between value for money and local construction.

It’s always been clear that taxpayers simply do not get value for money from local defence construction — the cost per job runs into the hundreds of thousands or millions per employee in the industry — but it’s now clear that the requirement for local building also undermines Defence’s capacity to conduct effective procurement processes at all.