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Wednesday, 13 June 2007
Page: 158

Senator MARK BISHOP (7:23 PM) —Tonight I would like to talk to the Australian National Audit Office Audit report No. 34 2006-07: High frequency communication system modernisation project. As you would be aware, Mr Acting Deputy President Murray, I have been addressing audit reports on defence procurement projects for quite a few years now, so forgive me if I sound somewhat like a scratched record. Unfortunately, this latest ANAO report follows a similar track to previous reports. It shows how the government has again mismanaged a multimillion-dollar defence procurement project. The consequences for taxpayers are bad enough. Worse still, however, is the effect this is having on Defence’s capability. Such delays as outlined in a succession of critical ANAO reports raise the question: if schedule slippage is so far behind, was such capability properly considered in the first place? After all, capability delayed is capability denied.

That is a salient question when reading the ANAO report into the upgrade of Defence’s high-frequency communication system. The purpose of this system is to give an alternative means of long-distance communication, especially for those defence platforms not fitted with satellite communications. It is the Defence Materiel Organisation’s second largest electronic system project. In 1997—a year after this government came into power—it signed a contract with Boeing to upgrade the system. The original contract called for 10 platforms to receive upgrades to their HF communications systems. Some of these platforms included: 18 Orion aircraft, 15 Seahawk helicopters, four guided missile frigates, four hydrographic ships, three F111 aircraft and two amphibious landing platforms.

The original budget, signed off by the government, was for some $505 million. It was not long, of course, before slippages appeared in the schedule. So the government went back to the drawing board and rescheduled the project. The fixed communications system of this contract—receivers and transmitters—ended up being 35 months behind schedule. It was finally installed in 2004. According to the ANAO report, we are still awaiting the final phase of the upgrade: the fitting of voice and data packs. The auditors placed this phase of the upgrade 43 months behind schedule, to be completed later this year. But that time frame has again been revised since the publication of the audit document. Indeed, this year’s budget statements put the project’s completion closer to early 2008. Apart from the loss of capability, such slippage inevitably comes with a price tag. The upgrade will now cost an extra $111 million, taking into account price and currency adjustments. That is an increase from $505 million to $616 million.

By now, the government was beginning to lose patience with the contractor. In 2003 it suspended earned value payments to Boeing Australia—a bit late, for worse was to come. For we now learn the project has been scaled down from 10 platforms to one. Get that: from 10 platforms to one. Indeed, the only platform to receive the upgrade to date is the Chinook helicopter, and they are being retired within five years of receiving the upgrade. The Black Hawks will not receive the full HF upgrade until at least 2010—and they are also due to be retired from service in 2015. Furthermore, such slippage means the upgrade will not be available to retiring platforms such as the F111 aircraft and the Seahawks. So there will necessarily be a major reduction in planned capability. Common sense would suggest a major reduction in price for such a drastic paring back of the upgrade. Nonsense! The discounted price is just $60 million from the original cost.

But surely inherent risks in major defence procurement projects should be identified and acted upon. After all, the government has a history of such failed procurement projects. It has had plenty of time and experience to develop a risk management strategy. While the ANAO report found that Defence had identified a number of risks at the beginning of the contract—which, incidentally, came to pass—little was done to manage these risks. Indeed, the initial risk management strategy was not up to the job. Defence’s response to this criticism? It has since ‘instituted more rigorous requirements for development processes’. We hope so, but I remain sceptical, and here is why.

The report concludes with a ‘project maturity score’ devised by the government. The aim of this score is to communicate the risk in projects as they progress through the acquisition process. Risks include, for example: technical understanding and difficulty, commercial constraints, and operations and support. This applied to eight platforms that are still awaiting the upgrade, including the Black Hawks. The ANAO concluded that significant risks remain because the government is no longer in contract for these upgrades. It was supposed to have contracts to provide and install the second phase of the upgrade in 2004, but this, again, has not yet been done. So much for learning from mistakes!

How did the government allow such a major defence procurement project to fall into such a perilous state? After all, this could all have been avoided had it heeded a recommendation from Labor. More than two years ago, the opposition recommended the government earmark extra funding to the ANAO to conduct audits on Defence’s 30 major procurement projects. That call was backed up by the Joint Committee of Public Accounts and Audit last year. This essentially non-partisan committee unanimously recommended the ANAO be so funded by the government. But the Prime Minister continues to dither on this major initiative. Instead of making a hard commitment in this year’s budget, he referred the matter back for further discussion between the ANAO and the Defence Materiel Organisation—the DMO. Earlier today the ANAO reported to the committee that negotiations were in their infancy with the DMO. They were discussing the form of project reporting and this process was unlikely to be concluded before the end of this year. At that stage, they would then become part of the budget process for next year. Meanwhile, defence procurement bungles such as this major upgrade continue to embarrass the government.

The ANAO audits an average four defence procurement projects each year. While quite a lot of those audits have happy endings, a significant number continue to highlight difficulties and transgressions in a range of processes. Again the taxpayer is left wondering when the government will get it right when it comes to defence procurement. Again capability is being lost when major projects experience vast slippages in their schedules. Again I fear I will be rising in the Senate to address yet another government sanctioned defence procurement fiasco. Let us try to change the record. Let us see this government come clean on its many mistakes in this area, accept responsibility and put substance to promises of reform and promises of action. Only then will we see value for money in this difficult area.