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FOREIGN AFFAIRS, DEFENCE AND TRADE LEGISLATION COMMITTEE
DEPARTMENT OF DEFENCE
Subprogram 6.1--Major capital equipment
- Committee Name
FOREIGN AFFAIRS, DEFENCE AND TRADE LEGISLATION COMMITTEE
DEPARTMENT OF DEFENCE
Senator MICHAEL BAUME
Vice Adm. Walls
Rear Adm. Purcell
Senator Robert Ray
Air Vice Marshal Rogers
Major Gen. Crews
Air Vice Marshal Collins
- Sub program
Subprogram 6.1--Major capital equipment
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FOREIGN AFFAIRS, DEFENCE AND TRADE LEGISLATION COMMITTEE
(SENATE-Monday, 6 November 1995)
- Start of Business
DEPARTMENT OF DEFENCE
Major Gen. Hartley
Senator Robert Ray
Program 1--Forces executive
- Subprogram 1.1--Strategic operation and plans
- Subprogram 1.2--Military strategic and force development
- Subprogram 1.3--Personnel
- Subprogram 1.5--Executive support
- Subprogram 1.6--Australian Defence Force superannuation
- Subprogram 1.7--Defence Housing
- Subprogram 2.1--Combat Forces (Maritime Operations)
- Subprogram 2.3--Logistics Support
- Subprogram 2.1--Combat Forces (Maritime operations)
- Program 3--Army
- Program 2--Navy
- Subprogram 3.1--Combat Forces
- Subprogram 3.2--Executive
Program 4--Air Force
- Subprogram 4.1--Combat forces
- Subprogram 4.2--Executive
- Subprogram 4.3--Logistics
- Subprogram 4.4--Training
- Program 5--Strategy and Intelligence
- Subprogram 6.1--Major capital equipment
- Subprogram 6.3--Logistics
- Subprogram 6.4--Industry Involvement and Contracting
- Program 7--Budget and management
- Program 8--Science and Technology
- Mr Merchant
DEPARTMENT OF VETERANS' AFFAIRS
Senator Robert Ray
- Program 1--Compensation
- Program 2--Health care and services
- Program 4--Corporate services
- Program 5--War Memorial
- Senator Robert Ray
Content WindowFOREIGN AFFAIRS, DEFENCE AND TRADE LEGISLATION COMMITTEE - 06/11/1995 - DEPARTMENT OF DEFENCE - Program 6--Acquisition - Subprogram 6.1--Major capital equipment
Senator MacGIBBON --We were talking this morning about the delivery of Collins. How late is it against the original estimate?
Vice Adm. Walls --I would have to take the time to check the details on that. I suspect Admiral Purcell can answer it. My understanding is that it is due to be delivered in May of next year. Perhaps Admiral Purcell can provide you with the precise answer.
Rear Adm. Purcell --The Collins schedule, when it was slipped to November of this year, represented an 11-month delay in the delivery of that vessel.
Senator MacGIBBON --That is the start of the contract.
Rear Adm. Purcell --That is correct, yes. We now anticipate the delivery to be more likely in May of next year, adding a further six months to that 11 months, which will make it 17 months behind the original contracted date.
Senator MacGIBBON --What is the flow-on going to be to the second boat?
Rear Adm. Purcell --At this stage the second boat is 53 weeks behind schedule. At this stage we have not estimated the flow-on from the delay to Collins. Part of the reason for that is that the flow-on to Collins has not as yet been negotiated with the shipbuilder. I would certainly anticipate some.
Senator MacGIBBON --But do you have any influence over the delivery time that the shipbuilder can deliver at?
Rear Adm. Purcell --We do not have an influence over the delivery time, in that it is the shipbuilder's responsibility under the contract to deliver and he controls the processes to delivery.
Senator MacGIBBON --We were roughly 18 months late on the first one. At best, we would be about 13 months late on the second one.
Rear Adm. Purcell --That is right.
Senator NEWMAN --What are the penalties for late delivery?
Rear Adm. Purcell --There are liquidated damages provisions in the contract.
Senator NEWMAN --What would they be for being 18 months late?
Rear Adm. Purcell --I do not have the numbers with me.
Senator NEWMAN --Could I have that information?
Rear Adm. Purcell --Certainly.
Senator MacGIBBON --Do they apply to the fleet or on a boat by boat basis?
Rear Adm. Purcell --They apply on a boat by boat basis.
Senator MacGIBBON --Has there been any make up of time in relation to the JORN project?
Mr Hammond --Not since the last hearing. The minister said then that the full operational capability would be approximately two years after the original delivery date. That estimate still stands.
Senator MacGIBBON --Telstra is getting a bit of publicity out of this new agreement with GEC-Marconi. What are the actual details of that arrangement? What has changed?
Mr Hammond --There is no new arrangement yet. The two companies announced in April of this year that they would consider entering a joint venture to complete the JORN project. They have been through the due diligence process that would be required before they would enter such an arrangement. The companies are now negotiating together to decide on the way ahead. As far as we are aware, the outcome will be either the joint venture or a change to the subcontract arrangements to clarify the responsibilities of the subcontractor and to place responsibility for discrete and testable parts of the system on a single subcontractor. Currently we believe that the latter outcome will be the more likely.
Senator MacGIBBON --How will that advantage the Commonwealth?
Mr Hammond --By allowing the project to be managed by the prime contractor in a more sensible way and by reducing a lot of the risk which we anticipated under the previous arrangements in the integration period where the responsibilities for the discrete elements of the systems that were being delivered were dispersed among different subcontractors, leading to the obvious danger that they would start a commercial argument between themselves rather than getting on and finishing the job. By placing the responsibilities more on a single subcontractor that problem goes away.
The second question was where the Commonwealth is advantaged. The advantage is that we maintain the prime contract relationship with Telstra, which is a large and substantial organisation, rather than potentially going into a contract arrangement with a new, start-up company, the joint venture company; although in that case we would certainly have required parent company guarantees from the two participants.
Senator MacGIBBON --Under the old arrangement Telstra was the prime contractor, and all the problems with subcontractors would have been a matter for Telstra, not the Commonwealth?
Mr Hammond --That was the situation. That will still be the situation. What I was saying was that the new arrangement will avoid those problems, which are certainly Telstra's responsibility but which, if they come to pass, will impact on the Commonwealth by further delaying delivery.
Senator MacGIBBON --Whatever they do in relation to a contractual agreement, there are no cost implications or cost increases?
Mr Hammond --That is certainly the case.
Senator NEWMAN --I want to ask about the lead-in fighter project. At what stage did the minister decide to eliminate the L59F from contention? Was it before or during lunch with the media?
Senator Robert Ray --It certainly was not during.
Senator NEWMAN --Wasn't it?
Senator Robert Ray --No, not at all.
Senator NEWMAN --On the way out after lunch?
Senator Robert Ray --No. I signed off a document. I will have to get the date. I will have to get you the date on which I signed off the formal decision.
Senator NEWMAN --I understand that you announced the decision at lunch with journalists?
Senator Robert Ray --I announced the decision, amongst other announcements, to exclude two of the tenderers, yes.
Senator NEWMAN --Had you given any prior notification to Air Force materiel staff before you announced the decision?
Senator Robert Ray --We had received assessments on all five contenders. Clearly the decision to exclude one of them was made in recognition of guidance from cabinet. The elimination of the one you have mentioned was on the basis, in my view, that it was not competitive and that it would be enervative and wasting its resources to continue its bid.
Senator NEWMAN --I asked you whether you had given any prior notification to Air Force materiel staff before you announced it.
Senator Robert Ray --I may have given a verbal indication, not necessarily to Air Force, but I think to the acquisition and logistics program. That was my intention when we were discussing it.
Senator NEWMAN --You think?
Senator Robert Ray --I am fairly certain it had been discussed in my office.
Senator NEWMAN --My information is that they did not know until they heard it in the media.
Senator Robert Ray --They may not have. The final responsibility for these decisions is mine. If there was one thing which came out of the seminar-conference run over the road on defence industry this year, the one consistent message coming through to me, was to make the tendering process less enervative. They are virtually saying, `We think we cannot win. Get us out of the field.' When I ran over the criteria on this bid, I did not think they had the slightest chance. I could have left them in and used them as a leverage on price or something else. I do not think that was fair to them. They may not see it that way. Clearly they do not.
Senator NEWMAN --The formal advice from Defence to the consortium was prepared the afternoon after the media lunch?
Senator Robert Ray --The formal signing off was some time later, on both counts.
Senator NEWMAN --Don't you think it is appropriate for a defence contractor to learn of their exclusion from a project from the department before they learn of it through a news agency?
Senator Robert Ray --I think it is normally desirable, but in this case we were making an announcement, not necessarily about this one but about another one that was far more controversial at the time. That was a bid by a French company for a lead-in fighter. Having announced that, it would have been passing strange not to announce the other one.
Senator NEWMAN --Why weren't they advised?
Senator Robert Ray --As I said, one was more in response to cabinet guidance. They would have been advised later that afternoon, I think.
Senator NEWMAN --Why was the press told before the contenders? Is it not a matter of courtesy at the very least?
Senator Robert Ray --I think on most occasions those courtesies are kept. On this occasion, as I said, one of them was far more controversial than the other. I deemed it in the public interest to put that material in the public domain. I am not sure when they were informed by the department.
Senator NEWMAN --That was my information. You said that Defence Industries are always asking you to keep the tender system shorter, et cetera. I understand that full well. However, I am informed that in this case the bidders were advised at the intention to register stage that if they were successful at that stage they would be entitled to bid at the RFT stage; a short list of six contenders was cleared by you; the companies were advised accordingly; and it was while waiting for the issue of the RFT, which was eventually released four months late, that the consortium was advised that it had been eliminated from the competition. That is different from what Defence Industries is asking you. They had made it to the first stage. They were told that that would entitle them to go through to the second stage.
Senator Robert Ray --Yes, I could have let them go to a second stage. Maybe in retrospect I should have. I should have let them spend millions of dollars rather than running around lobbying everyone in sight. That was my mistake. Next time if they ever put in for a bid I will let them waste their money. My view, when I went through a whole range of criteria on how they shaped up, was that they were not in it with a chance. My view is: get them out of the field if they cannot win.
Senator NEWMAN --Why did you agree to a review of your original decision?
Senator Robert Ray --Which original decision?
Senator NEWMAN --About the contender. You reviewed it, as I understand.
Senator Robert Ray --Representations were made by the company concerned. They wanted to come and put a proposition that they were about to change the structure and nature of their bid. I indicated to them I did not think they were putting anything to me that would cause me to change my decision. They urged me very strongly to at least look at all the criteria again, go over the material again and satisfy myself that that decision was the correct one. I said, `Okay.' I did that about two weeks later. I think Air Vice Marshal Collins came over for that meeting. We went through all the criteria and how we thought they would perform. I do not believe anything that I read there would have changed my mind or altered my decision.
Senator NEWMAN --What information was provided to you from Defence about the preliminary risk assessments for the various contenders?
Senator Robert Ray --There was a preliminary assessment made on all five--remembering that one of those, AMX from Italy, had dropped out, so we were back to five. All five were evaluated against a whole range of criteria and assessments made. Clearly, the Aero Vodochody bid came out fifth and a long way behind even the fourth contender.
Senator NEWMAN --Did you get any specific recommendation about the contenders? You just got a ranking order, did you?
Senator Robert Ray --I got a ranking order. The Air Force would have been happy for all five to bid. That was not my view, though. My view was that one was disqualified on political grounds and the other was disqualified on the grounds it could not win.
Senator NEWMAN --So at the end of the day it was not only your own opinion you relied on but Air Force's advice as well, was it?
Senator Robert Ray --I am saying I relied on Air Force's evaluation, not on their advice. There are two separate cases here. Their evaluation did not rate this bid highly. Their advice probably would have been to leave all five in, but that is advice I am not bound to accept. I am the minister; I will make the decision. I excluded the Dassault bid on the basis it offended too strongly that discussion we had had in cabinet on what defence contacts we were going to have with France. The Aero Vodochody bid offended on the basis that I thought it had no chance, given the run across all the criteria and how it was rated. I took the view that this company was wasting its time and should not be required to waste any further resources on this bid. They were up against extremely strong competition from McDonnell Douglas with the Goshawk, from Aermacchi with the 339 and from British Aerospace with the Hawk--very strong contenders.
Senator NEWMAN --The difficulty, of course, is that when you step in, as you did, after they had been given to understand they would go through to the RFT stage, it has the potential to smell of political interference. I would not have thought it was your style.
Senator Robert Ray --If you are not here to make those decisions, Senator, let us get rid of ministers for defence. Occasionally you have to say--
Senator NEWMAN --Why were you interfering in the process at that stage? That is what I am asking you.
Senator Robert Ray --Because I believe it is necessary in some of these bids not to keep in bids just on the basis that it may force others--
Senator NEWMAN --Isn't that up to Defence or the service concerned to make that recommendation to you, not for you to do it?
Senator Robert Ray --Yes, preferably for them to do it.
Senator NEWMAN --That is where you got into trouble this time, isn't it?
Senator Robert Ray --I am not in trouble at all. I have exercised my judgment. I am not here as a rubber stamp for everything the department puts before me.
Senator NEWMAN --Nobody is suggesting you should be a rubber stamp.
Senator Robert Ray --Yes, you are.
Senator NEWMAN --No, I am not at all.
Senator Robert Ray --You are saying I should accept the departmental advice on all these things.
Senator NEWMAN --You have to be scrupulous in being seen to keep your--
Senator Robert Ray --In what way am I not scrupulous on this? In what way is there a personal advantage or anything else that accrues to me on this matter? None whatsoever.
Senator NEWMAN --You know as well as I do it is very difficult for a politician to be involved in the contracting process, for you to appear to be artificially excluding a company that has been assured it will be treated the same as everybody else and go through to the request for tender stage. That may be the problem--that those were the assurances given. For you then to be announcing it and for your department to hear about it after you have announced it puts you in an invidious position.
Senator Robert Ray --Again, you have said `my department'.
Senator NEWMAN --Well, what is it then?
Senator Robert Ray --Your original question was about the Air Force Materiel Division--a separate question. These sorts of discussions go on as to the relative merits. I am sure that before I made that announcement I had had discussions--
Senator NEWMAN --You were not sure before.
Senator Robert Ray --I am sure I have had discussions with departmental officials prior to that announcement.
Senator NEWMAN --To the effect that they were not surprised when you announced it. They knew you were going to announce it, did they?
Senator Robert Ray --Are you talking about Air Force Materiel or other sections of the department?
Senator NEWMAN --Both, actually--Acquisitions and Logistics and Air Force, I would have thought.
Senator Robert Ray --Air Force Materiel may well have been. They can speak for themselves as to whether or not they knew of my decision in advance. I am not sure.
Senator NEWMAN --It seems to me a surprising thing that you would go out and announce it without it being the recommendation of your department that that company should be removed from the list.
Senator Robert Ray --Why is it surprising?
Senator NEWMAN --For the reasons I have just given.
Senator Robert Ray --No, you have not given any reasons as to probity or anything else as to why a minister cannot say who goes on a short list or not. If you want to go back and say, `No, this is a wonderful bid, it is a top class bid, how could you possibly exclude it?' what I did have before me was an evaluation of how it came up on a whole range of criteria. I do not care what lobbyists run around this building or anywhere else on this--and they have been very active on it--I looked at those criteria and it just did not measure up. I still think I have done that company a major favour in excluding it so it does not have to waste or enervate its resources on a bid it cannot win. That, I think, is my responsibility to do.
Senator NEWMAN --As shadow minister for defence, I get a lot of disgruntled contractors. I well understand the difficulty of these issues. There have been very few that I have seen fit to pursue. I do think, however, in this case you left yourself open to accusations of interfering in a proper contracting process. You did not have advice that they were to be dropped off the list. They had been told they would go through to the RFT stage. You intervened and announced it, and gave surprise to at least the Air Force program of your department, if not Acquisitions and Logistics; I do not know. But I think you were unwise to have done that.
Senator Robert Ray --I do not think I was unwise at all. Was I unwise to knock out Dassault as well, who had a higher ranking than this one?
Senator NEWMAN --That was a cabinet decision--quite a different situation.
Senator Robert Ray --No, it was my decision to make. Cabinet gave me the discretion to make that decision.
Senator NEWMAN --That is quite a different thing from just pulling out somebody.
Senator Robert Ray --If you want to go back and look at the Price report on industry and everything else, it is quite clear that a minister has the decision. Yes, I would be worried if you could think up one improper motive for me knocking this group out. I do not have one.
Senator NEWMAN --It is out of character for you to do something like this.
Senator Robert Ray --I do not have an improper motive for knocking them out.
Senator NEWMAN --I have your assurance on that.
Senator Robert Ray --Not only an assurance but you have no other evidence on the record that I would do otherwise.
Senator NEWMAN --It just shows how you should keep to due process.
Senator Robert Ray --No, due process is not just being a rubber stamp. You might as well get rid of the minister if I have to accept every bit of advice put to me and just stamp it, saying, `Oh well, that's good, it's gone.'
Senator NEWMAN --But you did not have advice to get rid of these.
Senator Robert Ray --Yes, that is the point I am making. You do not have to cop advice on every occasion. Ministers can occasionally think and make decisions. If it is the wrong decision, you are entitled to criticise. You have not adduced one piece of evidence to say that is the wrong decision other than that the department did not advise me to do it.
Senator NEWMAN --Certainly, at the very least, it was a breach of faith to a company that had been assured, having passed that first step, it was going through to the second step.
Senator Robert Ray --The question of a breach of faith--
Senator NEWMAN --If they want to spend the money, that is up to them, is it?
Senator Robert Ray --I do not think it is up to them. It is grossly misleading to say, `We now have an evaluation of where your bid is. We don't think you have a ghost of a chance of winning. But chuck a few hundred thousand down the drain on this bid that you can't win.' It is wrong to let a company down like that.
Senator NEWMAN --Why give assurances to companies that they will go through the same stage?
Senator Robert Ray --I do not know that those assurances were ever given in those terms. I will ask Mr Jones. They made that claim to me. They did not back it up or prove it. But they have run around all over the place with their lobbyists whingeing and complaining about this decision. Losers always whinge. In this case, where they were going to lose, I thought that we had saved them money. Obviously, I would never do it again with that company. They can go the full ride as far as I am concerned.
Senator NEWMAN --Without the advice of the department to drop them off the list. That is where you fail.
Senator Robert Ray --I got an evaluation from the department.
Senator NEWMAN --But not advice to get rid of them off the list?
Senator Robert Ray --I got advice about the merits of their bid. I drew the proper conclusion that they could not win. Departments may not necessarily have the same view of
industry policy as me. They may have the attitude that people can throw their money away; I do not. I like defence industry to make a profit on the job they do, because then they will do the next one better. Mr Jones may contradict me for all that I know. He was going to go to the point about whether they had been given assurances.
Mr Jones --My recollection of the events is that the short-listing process was announced as an initial short list. I am unaware of any guarantees provided to any of the firms that made the short list that they would definitely receive the RFT. Certainly in my mind it is always an option open to the organisation if it finds reasons why it should reduce its short list at any time. I do not believe that in any way we made guarantees to that company that it would definitely be allowed to tender for this proposal.
Senator NEWMAN --Was this put on paper, or was this gentlemanly chat?
Mr Jones --My recollection was that the short list was announced as an initial short list. I recall that at the time there was considerable debate about going to six or further down the list. You have heard the minister's views on that. That meant that, from the time when the short list was decided, we had officers continuing to investigate the merits of the offers. Those investigations included a further evaluation of what they had offered us and further investigations that we did. There was no prohibition or impropriety on the part of Defence or the minister at any subsequent time, should the judgment be reached that it was inappropriate to continue with all the people on the short list.
Senator NEWMAN --When you accept people at the first stage, you write to them and tell them so. Do you tell them the conditions under which they go forward to the next stage? Correspondence must be passed between you.
Mr Jones --There would typically be correspondence saying that they have been successful as a short-listed tenderer and that we would take the following actions. We would then list our current plans. But there is no guarantee that they will continue in the process.
Senator NEWMAN --Could we please have a copy of that.
Mr Jones --I presume that can be made available.
Senator NEWMAN --Thank you.
Sitting suspended from 6.33 to 7.40 p.m.
Senator Robert Ray --Air Vice Marshal Rogers has some further information on Williamtown.
Air Vice Marshal Rogers --There were questions on program 4.1, one related to the officers' mess at Williamtown and the other to a car wash. The details are that the officers' mess was built in the 1959-60 era. There were some works to refurbish the building in the late 1970s. There has been no work on the building for the last 15 years. The mess had deteriorated to the extent that there were holes in the ceiling because light fittings could not be repaired, the carpet was worn and some of the wood in the outdoor area was rotten. Indeed, when they pulled it down, it was full of wood rot. The work cost $340,000--
Senator NEWMAN --$340,000?
Air Vice Marshal Rogers --for the refurbishment--
Senator NEWMAN --You could almost build a new one.
Air Vice Marshal Rogers --Senator, I do not think you would get much for $340,000 for a mess on a base the size of Williamtown. The refurbishment included interior refurbishment, repainting, new carpet, furniture and refurbishing the outdoor area, and it was finished in June-July this year.
On the second question in respect of the car wash, we have encouraged our commanders in the field to investigate any efficiency measures they may put in place to improve the efficiency on their bases. They did a study at Williamtown, I understand, on the efficiency and management of the transport fleet. They have over 100 light vehicles on the base, which are washed twice a week for about 30 minutes a time. Again, mainly because of our efforts in the Air Force to keep our image up in the local area, a lot of these vehicles go off the base on representative tasks.
Each wash took about 30 minutes. That is about 100 man hours a week. When you translate that into man years it is quite a number. The machine cost in the order of $70,000, including installation. The operating costs downstream are estimated to be about $1,500 per year for electricity and water. There are no man hours involved in the operation of it because it is an automatic machine. The maintenance is in the order of three per cent of capital cost per year. If you equate that out at three per cent of $70,000 plus $1,500 and put that against the man hours saved, we estimate that there is quite an efficiency dividend. It was delivered in July but it was not installed. There was a delay with the contractor in getting some of the infrastructure correct. It is nearly installed now and it should be operating by the end of November.
Senator NEWMAN --That is a fair number of months to sit in a crate, is it not?
Air Vice Marshal Rogers --Yes, it is. I have no explanation for that.
Senator Robert Ray --The new cappuccino machine at Old Parliament House sat there for eight months.
Senator NEWMAN --Thank you for your help, Minister. I wanted to go back then to the $400,000 funds for the officers' mess. Is it correct that, at the same time, the sergeants' mess required renovations urgently due to occupational health and safety issues, yet funds were hard to come by? In fact, the sergeants' mess later had to take out a loan of $10,000 to cover the cost of work done.
Air Vice Marshal Rogers --I would correct the cost. The estimate was $340,000 on the officers' mess, not $400,000.
Senator NEWMAN --I am sorry, yes, my allegation was $400,000.
Air Vice Marshal Rogers --I cannot answer your question on the sergeants' mess. But I would point out that I would be most surprised if the sergeants' mess took out a loan, because those facilities are Air Force property. It is the responsibility of the Commonwealth to update them, not the members themselves.
Senator NEWMAN --Yes, I would have thought so too. The rest of the information I have is pretty accurate, give or take a few matters of fine detail--
Air Vice Marshal Rogers --I will take that one on notice.
Senator NEWMAN --If you can follow up with that, thank you.
Senator MICHAEL BAUME --Minister, you kindly gave me a response to a question on notice about project JP7, the procurement of a class of unmanned aerial target vehicles to replace the current Jindivik fleet. That response stated:
There was no Invitation to Register interest process for Project JP7. Rather the Department has been preparing a Request for Tender, the release of which was advertised in the Australian newspaper on Saturday 7 October 1995.
Further it stated:
No concessions have been made to Aerospatiale or any other company expressing an interest in the project.
I rephrase the question: was there any delay in preparing the request for tender? I understood that the people who had been told of the upcoming tender were surprised that it did not come out until much later than had been indicated to them?
Senator Robert Ray --I understand that there were some delays, none of which is surprising in this area.
Rear Adm. Purcell --The release of the tender was two to three months late. That time was occupied by us getting the tender right, finetuning the document.
Senator MICHAEL BAUME --An Australian company had complained to me that they understood that it suited Aerospatiale for the request for tender to be delayed and that they understood Aerospatiale was not in a position to proceed had the earlier date been stuck to. Is that simply not so?
Rear Adm. Purcell --That certainly was not a factor in our deliberations. We got that tender out as quickly as we could.
Senator MICHAEL BAUME --So there was no approach by Aerospatiale for any special consideration or delay or anything like that?
Rear Adm. Purcell --Certainly none that I am aware of.
Senator MICHAEL BAUME --Thank you. The next question I want to ask is about the Anzac ship project price escalation. I think Senator MacGibbon raised this earlier. The Australian National Audit Office wrote to me when I raised this matter in June this year in the Senate expressing my concern about the increase of $1,294 million in the project cost. An officer from the audit office responded as follows:
. . . the increase was not relevant to our audit of contract amendments and arose from contract provisions for price escalation and exchange rate variations.
. . . . . . . . .
The ANZAC Ship Project Office has now provided me--
that is, the Australian National Audit Office--
with the following information:
There are some 215 formulae used to escalate the various components of the Prime Contract.
In those circumstances, I wonder whether it would be appropriate for this committee to be advised of the price escalations so far relating to the major sources. For example, I understand from this letter that in June of this year, in the seven years since the price base was established--which was April 1988--the Australian price variation for Australian content material was 31 per cent; for the United Kingdom, 43 per cent; for Germany, 36 per cent; Sweden, 39 per cent; and the Netherlands, 18 per cent. I just wondered whether it would be appropriate for that information--or an updated version of it because this was back in June--to be provided to the committee.
Mr Jones --We could certainly do that. All the projects we have are continually adjusted for price and exchange and, as we discussed earlier in the hearings, sometimes real price increases. In this particular project there were some real price increases resulting from the addition of the gun that was described earlier. But from time to time the price may also go down because of exchange rate variations. We can certainly provide an update for that, if you wish.
Senator Robert Ray --I am sorry to intervene--but with this reservation. Both the submarine and frigate projects require reporting to cabinet on a six-monthly basis. I would not release that information to you if it had not yet gone through that process. I have a feeling that I have signed off on it, but it is yet to be considered by the appropriate cabinet committee. That is the only reservation I would put on that. But, if that is under way, it will be in the next couple of weeks. The information can then be made available.
Senator MICHAEL BAUME --By the way, the figures I was quoting at the end are what are described as indicative Australian dollar price escalation or indicative pound sterling price escalation. If you like, I will let you have a look at this for interest's sake, if I could have it back later.
Senator Robert Ray --We will promise to return it.
Senator MARGETTS --On page 104, $86 million in adjustments occur, apparently in relation to contracts not to be paid this year. Could we check whether that is the case. I assume that they will fall due next year. Could someone let me know whether that is the case.
Mr Jones --Are you referring to those five items on the middle of page 104?
Senator MARGETTS --Yes.
Mr Jones --Those amounts are variations from the original estimates we made earlier this year for the budget. As a result of a number of things, including the achievement last year, in this additional estimate process, which was prepared probably about July-August, this is our best current estimate of how much will need to be spent this financial year. The larger variations against those projects are shown there. For example, we now anticipate a $45 million lower spend for the first one, the Australian light armoured vehicle, than we did at the time of the budget. If you wish, we could go into the reasons why that was so.
Senator MARGETTS --These are not deferred figures? They are actual savings?
Senator Robert Ray --No.
Mr Jones --These are reduced payments we anticipate to make this financial year. The total project cost is still expected to be the same at the end of the day. Another way of looking at it is that there will be further payments in later years.
Senator MARGETTS --I am trying to clarify this. All these figures will still need to be paid?
Mr Jones --Yes.
Senator MARGETTS --When will they need to be paid?
Mr Jones --Spread over the life of the project. It depends on the nature of the reason. It depends on the reason why the reduced payment occurs this financial year. In general, a fair proportion of that would tend to be paid next year. But often there is a ripple effect. In other words, if the project is delayed three months, the final payment may be three months in two or three years. You can see the effect at that later time.
Senator MARGETTS --What happens, though, by doing it that way? This money obviously may fall due next year, but it might not necessarily. It is not included in any subsequent year budgets as a provision, is it, at this stage?
Mr Jones --Not at this stage. There is no future budget provision at this time. It will be included in the amounts estimated for future years, so it is not a case of being able to say that it will not be provided. I would expect, from the allocations we anticipate we will get in future years, based on the guidance we have from government for defence expenditure, that we will be able to accommodate them in later years. Indeed, we have some flexibility in the program in terms of the timing of the placement of contracts and things like that.
Senator MARGETTS --But surely then that means it will look artificially like a saving from this budget? If it is not in the next budget, it will look as though we are not increasing expenditure. If we end up having to spend it anyway, it will not appear in this budget but will have to be spent. I am not sure how you can justify actually taking it out of the budget if it is still a liability. It will have to be spent probably in this next year.
Mr Jones --Take that first particular project. I do not know the figure, but there are probably several hundred million dollars remaining to be spent on that project. So it is just a question of over which future financial years that money will have to be paid.
Senator MARGETTS --So it does mean that the real budget is or could be bigger by at least $86 million than indicated?
Senator Robert Ray --Could you just repeat that? I did not follow it, and I am not sure that Mr Jones did.
Senator MARGETTS --If it has been taken out as a negative and not put back in as a budgeted item or a set aside item, the real budget will be different from how it appears. It might come in next year, and somehow we will find it as part of additional expenditure. Somebody will be trying to say that it was unforeseen expenditure, as perhaps has happened in the last couple of years.
Mr Jones --No. That is not the case in terms of defence allocations. We will have to accommodate any variations within the overall allocations.
Senator MARGETTS --I realise that you need to accommodate it. But where will you get it if it has not been actually budgeted for now in this budget? Where will you then get it from? Will we be seeing it in additional appropriations?
Mr Jones --There are two things to say. One is that some of those minus figures are offset by other defence expenditure. You will note that in the overall additional estimates we are not having a real reduction in defence spending. For example, we are spending slightly more on facilities than we had planned at budget time and the additional estimates. To some extent, that offsets this expenditure.
Senator MARGETTS --But it does not really offset it, does it? Should you not be holding back $86 million in order to cover these debts that you know you will have to pay?
Mr Jones --Not necessarily. I will continue with my example. If we were to take $45 million of additional facilities expenditure this year because of an ability to accelerate or need to pay, that would mean a reduction in that amount in later years in facilities. That would offset the increase necessary in this item. So it is essentially a zero sum gain, provided that defence outlays are as predicted.
Senator MARGETTS --It does not generally happen like that in Defence, does it? I cannot think of any other department which necessarily would be so comfortable about not making a provision in areas of such large magnitude, and perhaps spending the money and assuming that they would be able to get it in another budget.
Senator Robert Ray --That is because we deliberately have a global budget. Because of the very nature of the expenditure, it tends to be over several years rather than just year by year like a lot of other departments, where you can do it line by line. We cannot do that. That is why we have been given flexibility for a global budget. Underspends in one area can be picked up in another and then balanced out the following year. In addition, two budgets ago we were given a rollover facility. If there are no other priority areas for this money that is underspent to be spent on, we can roll it over into next year's budget up to a limit, which is just over one per cent of Defence's budget.
Senator MARGETTS --If in the meantime you have brought forward a proposal, there should be some sort of gap in it so that what you have brought forward cannot then be added to later by something else. That is what I am trying to say.
Senator Robert Ray --Mr Jones was saying that if, for some reason, the facilities either spend more this year or can be induced to spend more this year on things that they would normally do next year, the money is reallocated from next year to pay these bills.It can be done that way. But you cannot do it in a silly way. You cannot just say, `We have underspent $80 million in this area. We will make sure that we spend it all.' Previous budget arrangements almost tried to force you into that, even though we resisted it. But you now can carry the rollover provision from one year to the next year.
Senator MARGETTS --But would good bookkeeping indicate that you should keep aside that amount of money and indicate in the budget that that is what it is being kept aside for? You would do that rather than spend it for the next cab off the rank and then try to work out how to organise it.
Senator Robert Ray --It is not quite that simple. These are complex formulas. They are fairly used to making these decisions. They do not just make them arbitrarily. Any time that you put together a budget of $10 billion with more discretionary expenditure than in any other department, you know that you have this flexibility. You know that you will never meet every target; that is virtually impossible. The ABC can blow their $600 million target by 10 per cent in one year. Normally, we come in within 0.1 per cent of our total spending.
Senator MARGETTS --I will certainly be looking very carefully at the figures that come up in next year's additional appropriations. If the $86 million comes up as an unexpected expenditure in next year's appropriations, you can expect me to be questioning it.
Senator Robert Ray --But you will probably be looking in the wrong area. You should look at next year's appropriations, not the additional ones. So do not wait for the additional ones. Look at the appropriations.
Senator MARGETTS --We will, too. Be sure of it.
Senator Robert Ray --But that is where they are most likely to be budgeted for.
Senator MacGIBBON --I cannot find any reference to project Pintail. A month or so ago, I read that a preferred tenderer had been announced, which was Stanilite Electronics. Is that correct?
Senator Robert Ray --That is correct.
Major Gen. Crews --Pintail is covered by the army minor capital program, which is funded out of the army program. It is correct that Stanilite has been nominated as the preferred tenderer. Contract negotiations are currently taking place with that company.
Senator MacGIBBON --So you cannot reveal the contract price?
Major Gen. Crews --Not at this stage. It has not yet been finalised.
Senator MacGIBBON --That is the article in the press that there are 1,300 units being bought; is that correct?
Major Gen. Crews --It is of that order; I do not have a specific figure.
Senator MacGIBBON --Is it correct that they are hand-held VHF radios?
Major Gen. Crews --That is correct.
Senator MacGIBBON --Do they provide any secure voice capability or are they just like the civil ones?
Major Gen. Crews --It was not a mandatory requirement for secure voice with this radio. I cannot recall whether this does have a secure voice facility, but it was certainly not mandated in the specification.
Senator MacGIBBON --So they are really a convenience factor, not an operational piece of kit?
Major Gen. Crews --It is a short-range radio, hand-held. It will work at squad level and will be interoperable with the Wagtail and Raven radios available elsewhere in the combat force.
Senator MacGIBBON --Will they be manufactured in Australia, even though Stanilite is an Australian company?
Major Gen. Crews --Stanilite is an Australian company, but the radio itself will principally be manufactured overseas. It is a United States designed radio.
Senator MacGIBBON --Where we are on the C130J program that we discussed at the last hearings?
Mr Jones --As you would recall from the last discussion, we have proceeded with a request for quotation from Lockheed Martin Corporation, for the supply initially of 12 C130Js and options for further aircraft. These are a stretched aircraft. We have a response from the company. We are currently in negotiations with the company on the matter.
Senator MacGIBBON --When do you expect those negotiations to be concluded?
Mr Jones --That depends how quickly the company agrees to our reasonable request.
Senator MacGIBBON --You do not have any idea when that would be?
Mr Jones --The company would like us to complete negotiations by the end of this calendar year. We have no immediate need to do so, but if the offer is attractive enough and we conclude that the risks are controllable at that stage, we will proceed to recommend going to contract.
Senator MacGIBBON --What will be the delivery date on the aircraft?
Air Vice Marshal Collins --At the moment we are planning five aircraft to be delivered in 1997 and the remaining seven in 1998. That delivery schedule is one of the negotiable features with Lockheed.
Senator MacGIBBON --Will they all be fitted for an air-to-air refuelling capability?
Air Vice Marshal Collins --That is correct.
Senator MacGIBBON --What are the future studies in relation to the Boeing 707 aircraft? Is there anything in hand about the replacement of them?
Vice Adm. Walls --I would have to check my facts, but I believe the answer to the question is that the life of type of the aircraft exceeds something approaching 20 years. We have been conducting studies recently into the need for tanker aircraft. Some difference of opinion has been expressed as to whether it is necessary to have, for example, jet tankers for fast jet aircraft. The need for in-flight refuelling for helicopters has also been another subject that we have been addressing. We have not reached any firm conclusion at present. To give you further information, I would have to check the facts.
Senator MacGIBBON --When you say that the life of type is 20 years, do you mean 20 years from now or total?
Air Vice Marshal Collins --The Air Force's planning figure at the moment is about 2010--that is the planned withdrawal date.
Senator MacGIBBON --So that will run another 15 years?
Air Vice Marshal Collins --That is subject to the issues that VCDF mentioned.
Vice Adm. Walls --We have one other consideration that I should mention about 707s. It concerns hush-kitting the engines for noise.
Senator MacGIBBON --But that aeroplane is going to be 45 years old by the end of the time and it has some very high airframe hours on it.
Air Vice Marshal Collins --The airframe will not have high airframe hours on it by commercial aircraft standards.
Senator MacGIBBON --What is the current--
Air Vice Marshal Collins --I do not have a precise figure, but I believe it is in the order of 40,000 to 50,000 hours. What is more important perhaps for a 707 are things like ground-air-ground, landing gear and cabin pressurisation cycles. Again, the aircraft are relatively young by commercial aircraft standards.
Senator MacGIBBON --Yes, but the 707 fleet is recognised to be very high time now around the world. There will come a time where the Boeing Aeroplane Corporation will not support that aeroplane because of the exposure to litigation. The moment they withdraw their technical support, the aeroplane is worthless to us and there may be very little warning of that before Boeing does it.
Air Vice Marshal Collins --My experience in the civil aviation community is that reputable manufacturers do not withdraw their support for commercial type aircraft at short notice. Furthermore, they are generally required by civil airworthiness certification authorities to perform that function while there is still a number of aircraft in commercial service around the world. They are recognising ours as a military aircraft. If that eventuality as predicted arises or is heading towards us, we will have to factor that into our long-term plans for the Boeing 707.
Senator MacGIBBON --The exposure financially is quite enormous for the company. I think that will weigh more heavily with them than past practice with earlier generations of aircraft. In relation to the 130J, there have been a spate of articles in the press that the Air Force has a predilection for the 130J as the platform for the AEW aircraft. What is the status of the AEW at present?
Vice Adm. Walls --We are continuing with the studies that I think we discussed at the hearing on 2 June. You will recall from those discussions that we are expecting the results to be considered by the committee process in December of this year.
Senator MacGIBBON --What will that lead to? An RFT?
Vice Adm. Walls --That is my expectation.
Senator MacGIBBON --What would be your assessment of the findings of the committee?
Vice Adm. Walls --We would be getting a definition of the aircraft platform of the systems associated with the AEWAC together with the rest of the equipment and systems that go with the support of the platform and the AEWAC system itself.
Senator MacGIBBON --Is there a consideration of other platforms beside the 130J?
Vice Adm. Walls --Most certainly.
CHAIR --There being no further questions, that completes subprogram 6.1.