Wednesday, 28 February 2007
Matters of Public Interest
I rise in this matters of public interest discussion to make a few comments about a recent report of the Australian National Audit Office relating to the purchase, chartering and modification of a new fleet oiler. The report was released, as I recall, in late January or early February this year. This report examines the government’s Westralia replacement program. As we will all recall, the Westralia was a tanker supply vessel that suffered a fire in the engine room in 1998 in which four people were unfortunately killed. The overall audit report into the procurement of Westralia’s replacement, the HMAS Sirius, is positive, and that needs to be stated up-front. Defence, of course, was quite pleased to heavily publicise the generally favourable report of the National Audit Office under the headline ‘A Defence procurement project that has come in under budget and on time’.
Once one goes behind the press release from the Department of Defence, one finds that that is not the complete story, and hence the audit report is worthy of reading and analysis. The main concern the Audit Office had was the delayed time frame in finalising HMAS Sirius’s safety case report, which would have caught the Audit Office’s attention because it directly linked back to the unfortunate accident that occurred in the predecessor vessel. That would have meant that the purchase and modification of this ship, one presumes, would have had a lot of attention paid to safety aspects. As the ANAO commented in passing, at paragraph 4.22, this is ‘an important element of the ... safety baseline against which contract deliverables should be tested’. In terms of contract compliance, the ANAO, properly in my view, had regard to the safety case and the safety case report as key indicators.
The Defence Materiel Organisation required this report to be delivered by October of 2005; yet in January of 2006, when the auditor asked to access the report as part of its preparation for this document, it was told by the DMO that the report at that stage was still in draft form. Amazingly, at the release of the ANAO report earlier this month, a comprehensive safety case had still not been delivered. This prompted the following rebuke from the ANAO, which is at paragraph 4.27:
It is clearly desirable, from a risk management perspective, that Safety Cases ... are finalised prior to the contractual acceptance ... by DMO so that system hazards have been adequately identified and the exposures managed ...
We need to remember that this vessel is the replacement for HMAS Westralia, which suffered a fatal fire in which four sailors were killed back in 1998. That tragedy has been described as Australia’s worst peacetime naval disaster since the 1964 Voyager incident. That fire was caused by the rupture of a flexible fuel return line, and I would have presumed that the lesson for the government from that tragedy was that ensuring the safety of Navy personnel in replacement vessels and in all other vessels is paramount, and there is no reason to suggest or imply otherwise.
Yet there has been substantial delay in compiling the safety case report for Westralia’s replacement, the HMAS Sirius. Even by August 2006, for example, a number of safety tests and trials had not been completed. These included the sprinkler piping pressure test, the system operational test and the deck fire-fighting foam test. Those details are reported at table 4.3 in the ANAO report. More important than that, there was no first aid equipment evident and no escape signs, and test tallies for fuel, hydraulic and flexible hoses were missing. That is a whole 10 months after the DMO required such a report from the prime contractor.
At the conclusion of the ANAO report, it states that Defence advised that the whole ship safety case report would be finalised by this month. One makes the point in passing that, having given that assurance to the ANAO, one hopes that that assurance is complied with, because this vessel is expected to be granted full operational release by June of this year. With a bit of luck, we will get the final safety case report by some time in March or April of this year and final clearance for delivery to Navy in June of this year.
ANAO also raised a number of other concerns about the procurement and chartering of HMAS Sirius. These related to the leasing of the vessel and the need for a ship that was faster than the ageing Westralia, but Navy ended up buying a ship that was slower. Here are the facts. The need to replace the Westralia was first identified in the Defence white paper in the year 2000. Government decided to buy a commercial tanker, the Delos, and convert it for Navy service—there is nothing wrong with that. But, as mentioned, the reason for replacing the Westralia was that vessel’s slow cruising speed. It had a maximum speed of 16 knots and thus it was unable to integrate with any task group which needed vessels with a speed of at least 18 knots, as the ANAO has identified.
Amazingly, Westralia’s replacement, HMAS Sirius, is slower. The Delos’s maximum speed is going to be, we are informed by the ANAO, somewhere between 15 and 16 knots. The government’s defence for not meeting this requirement relates to a compromise on the issue of cost. One presumes that they had the full information and hence made that trade-off. But we simply note in passing that one of the reasons for acquiring a new vessel was to have a high-speed vessel that could be integrated with a task force, and the government has chosen, essentially, to trade off speed for cost.
The cost of the Delos, subsequently renamed the Sirius, was well within budget. The total cost of the project was $118.7 million, well within an anticipated total project cost of something in the order of $143 million.
Senator Johnston says, ‘That’s good.’ I am not criticising that; I am just drawing attention to some other shortcomings that have existed as part of the total project. The cost breakdown of that $118.7 million was $45.5 million for the Delos and an extra $76 million for modifications.
But we note that that efficiency and economy has been compromised by the way the government handled leasing arrangements for this vessel. The lease was certainly a good idea in theory. It was to be leased to a private company for $8.22 million for the year 2004-05. That is fine. But Defence failed to collect the rent from the lease until one full year after it had expired. When we are talking about an income for a year of about $8 million, you do not have to be Einstein to work out the interest forgone, and the opportunity costs lost in not ensuring systems were adequate to receive the lease payments on a regular basis. Indeed, in that light, Defence was criticised by the auditor for administrative weaknesses, which included insufficient diligence in banking public funds, no authority for the withdrawal of those public funds and lack of adherence to GST legislation, and that can be found at paragraph 18 of the report.
The ANAO also noted that, while this procurement project has been largely well managed and has achieved a good result, it was not required at any time to pass the Kinnaird two-pass approval system—the reason this project fell behind the 2005-06 framework for its implementation. That does raise an interesting issue, because it is increasingly becoming the norm that a range of strategic decisions to purchase major advanced platforms and weapons systems involving multibillions of dollars in payments over decades are being unilaterally determined by either the Prime Minister or the minister without cabinet knowledge or approval.
After the decision has been made to buy a particular platform, a particular set of ships or a particular weapons system, the cost-benefit analysis and the strategic rationale for that decision are flicked to the relevant department or departments for analysis and later report. It strikes me as being an odd way to do business when Defence has a white paper which is amended from time to time. There is a Defence capability plan that sets out our strategic needs until the end of the second decade of this century and there is a system established for regular cabinet briefing, review, understanding and decision making on a range of major strategic purposes.
Yet, increasingly of late, we wake up on a Friday or a Saturday morning and read in the papers that we are going to be spending $4 billion on Super Hornets—which has not been approved by Defence and has not gone to cabinet or the appropriate subcommittee, yet we are going to whack off this $4 billion without any strategic rationale apart from the fact that we think we might have some sort of air capability gap some time between 2010 and 2015. That is apparently sufficient to spend $4 billion on Super Hornets. They might be fine planes in themselves and they might be entirely justified and it might be an entirely proper decision in terms of a strategic rationale, but we do not know that because there has not been any planning, investigation, report, analysis or review by the national security subcommittee. All we have is a decision because of a fear of a gap—a funny way to do business, but increasingly it appears to be the norm, as I say, in major procurement projects.
But I depart from my text because of my interest in the material. I should return to this Audit Office report, relating to the purchase, chartering and modification of a new fleet oiler because it is the reason for my contribution to this discussion today. Having made other comments which were critical not of Defence but of the decision makers in this debate—that is, government and the appropriate ministerial level people in cabinet—it is fair to say that this is the second report I have discussed this week.
Again, it suggests that a lot of the problems that have been occurring on the procurement side within Defence and DMO are being attended to and some solutions that are clearly right are being found. As a general proposition, the fact that this purchase of the fleet oiler and its structural modification came in ahead of time, below budget and consistent with the contract specifications is a welcome development and it appears to suggest that things are improving within the relevant procurement agency. One does note that the ANAO thought it worth while to identify a range of deficiencies. They are quite right to point out problems on the safety side. The last thing we want in a replacement vessel is to have the same problem in the new vessel simply because some people did not think it sufficiently important that clauses in the contract requiring adherence to particular safety regimes or particular safety practices were adhered to. With those comments, I surrender the floor.