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Thursday, 18 November 1993
Page: 3167

Senator MacGIBBON (4.25 p.m.) —by leave—I move:

  That the Senate take note of the document.

I would like to take a few minutes of the Senate's time this afternoon to pass some comment on the Auditor-General's report No. 11 of 1993-94: Efficiency Audit—Department of Defence ANZAC Ship Project Monitoring and Contracting. This is a report of more than 50 pages, which I have not had time to more than skim. But there are a few general observations that can be made that are pertinent to this report at this time. The findings of the report, in summary, are:

The arrangements put in place by the Department of Defence for the purposes of monitoring progress of the ANZAC Ship Project are satisfactory. Nevertheless, the ANAO considers that the ANZAC Ship Contract should have included better provisions to reduce risk and costs to the Commonwealth in the event of non-compliance with the contract or a worst-case scenario of contractor default. . .

Then it goes on to develop those themes.

  I would say at the outset that anything I say that is critical of the shipbuilding arrangements should not be taken in any way at all as being critical of the quality of the product we have got out of AMECON or Transfield, as it is now called, in relation to the frigate program. I have not had the opportunity to see those ships yet but I do believe, from the advice I have received, that it really is a world class product we are getting there, just the same as we are getting out of the Australian Submarine Corporation in South Australia. I have the greatest of admiration for the men and women in the design, management and construction side of both those facilities. Nothing I say reflects on what they have done.

  But I have some very serious concerns about both these programs, and they really relate to getting value for money. I think the Commonwealth was remiss in both of those contracts in not demanding the tightest terms possible to reduce costs to the nation and to the taxpayer. It is not true to say, as I am sure the minister will, that it is all very well to say that with the benefit of hindsight. By the standards of the times, both contracts were extremely lax. We cannot blame the commercial contractor for that; he is involved in a commercial operation and, if his client is prepared to pay many times more than should be paid for the product, good luck to the contractor—although, sadly, it is the taxpayer that pays.

  In plain language, what the Auditor-General is saying here is much the same as he said about the submarine contract in the report he presented at the end of last year: that it really was quite a loose contract that the Commonwealth signed with the manufacturers with respect to getting value for money. In that sense, there certainly was a failure to protect the national interest.

  The particular point of both Auditor-General's reports—although they do vary considerably in detail—is that there is an exposure by the Commonwealth to any risks that might emerge later on in the performance of the contractor. I have no doubt that there is absolute integrity and security in the ASC and in AMECON-Transfield in that they are not going to default on us. But it is not so much a matter of a major default; it is the problem of the integration of the weapons systems into both platforms that is a very difficult process where very high cost overruns can occur. While that is not spelt out in much detail, it is certainly hinted at in reading between the lines of the report I have read so far.

  I want to come back to this point of getting value for money, which is something that is not raised in either report. We really have got involved in two hugely expensive programs here. In 1986, the Joint Committee on Public Accounts of this parliament recommended that Defence adopt incentive pricing programs for major contracts of this nature. I do not know when incentive pricing came in. From my own personal experience with major defence manufacturers in the United States, I found that it was routine and established practice by the early 1980s. So I presume that it was at least invoked in the United States and was operating in the 1970s. In 1986 the Public Accounts Committee recommended that the Australian government follow that with Defence contracts—and it was not done in this case.

  The difference between this contract and the submarine contract is that the submarine contract included large parts which only had provisional costing figures, PCs, against them and which later on were refined and added in. So at the time that contract was signed we did not know precisely what the liability of the Commonwealth was. In this one, it is allegedly a fixed price contract, but that in itself is misleading in so far as the provisions are there for escalations in respect of currency, inflation rates, presumably changes in labour rates and payments of that nature.

  I mention that because the movement in defence manufacturers and suppliers in both the aerospace and marine industries has changed dramatically. We signed a contract that was allegedly a fixed price contract for these ships but which included escalation clauses which have allowed nearly $1 billion to be added to the contract price of this contract since it was signed in 1989. By the time it is finished we will be looking at a ship that costs at least $600 million—a ship that has relatively limited use in a naval sense, in a military sense.

  But, putting that aside, I return to the conditions that Australian aerospace manufacturers, which subcontract to companies like Boeing, have faced for a number of years. Companies in Australia that have been subcontracting to the American aerospace industry were told some years ago, `We know your baseline figures for the 1980s; they are the benchmark we start from. You will have to discount by 20 per cent your 1980s prices and agree to no escalation clauses under any circumstances if you're interested in tendering for us in the 1990s'. We have a number of manufacturers in this country which produce flaps, rudders and fins for big American companies like Boeing. They are the terms; that is the invitation they get: 20 per cent less on their 1980s prices plus no escalation clauses—`If you're interested, we'll talk and refine details; if not, we're not interested in proceeding'.

  The Commonwealth has got locked into two very massive contracts in the submarine program and in the frigate program, which commits us to extremely high cost weapons systems. I am not arguing about the quality of them; I think the quality, particularly of that submarine, is excellent. But we have to consider price.

  At $1 billion a copy for the submarine, we are buying the most expensive diesel electric boat in the world. When one looks at a group of them, one has to ask oneself: what is the best in Australia's national interest? Is it best to put $1 billion a copy into a number of submarines and, in this case, nearly $600 million for a ship or are there alternative ways of spending that money which would give us more flexibility for Australian's defence needs? Clearly that question was not answered.

  It was not answered because both of these programs were largely driven not by strategic guidance, which the government flaunts all the time, but by the basest of political imperatives—the need to win elections for the government's friends in the state parliaments of Australia. I well remember, before the submarine contract was signed, Mr Bannon, who was not sure that he was going to win the election, doing his electoral advertising at his desk in his office in Adelaide, smirking into the cameras, with a model of the submarine in front of him on the desk sending the message to every viewer in South Australia—`Vote for me, you get the submarine and a $5 billion contract'.

  Again, as in the case of Mr Bannon, the frigate contract was driven through to save Mr Cain in Victoria. Mr Cain was in a great deal of trouble. So the ever obliging and impetuous Mr Beazley, supported by Dr MacIntosh, who was the chief of materiel procurement—neither of them were ever fussed with details or making a long-term analysis of what they were doing—rushed in and signed the contracts. There have been a lot of consequences from that. It is all very well to protect the unemployed and try to give them work in the rust bucket states but, surely, if that is going to be done, part or all of that should come out of the social welfare program, not out of the defence vote.

  With both these programs we now have an unbalanced expenditure with respect to capital equipment—so much money is now going into ships for the navy. The rough figures are, of every $10, $6 goes to navy capital equipment, $3 to the air force and $1 to the army. It not only causes problems today in the air force and the army but it also creates a situation where Australia's defence capability will become very inflexible. It will dictate the nature of the response we can make to situations in our region because of our equipment and the investment in that equipment that we have made, which will be with us for 30 years. We will be able to send ships. We will not be able to use the greatly increased flexibility and adaptability of air. We will not be able to develop air power. We will not be able to develop any land forces because of this imbalance that has been created by the wish to create employment in both Melbourne and Adelaide. These matters should have been foreseen at the time but were not foreseen by the government.

  I come back to the report itself. It makes detailed comment on the ways that the government should reduce its exposure to the contractor. The ANAO has a number of concerns regarding the contract which it believes involves a lack of protection for the Commonwealth's interests. The ANAO notes, for example, that when queries were made concerning the requirement that the contractor has to maintain a certain level of shareholders' funds it was necessary to get legal advice. The Anzac ship project office within the Department of Defence was unclear as to whether the contract requirements regarding shareholders' funds could be satisfied using the consolidated group financial statements. That gets back to what I was talking about earlier as to whether, in the event of difficulties and cost overruns, the funds are there in the company to overcome those difficulties or whether the company would default on them and leave the taxpayer to pick up and complete the program.

  I re-emphasise once more that I am not critical at all of the nature of the work being done. I think both constructors have done an excellent job on both projects. But I think the Commonwealth has been grossly out of step with best practice internationally—best practice that was established at least in the 1970s and in the early 1980s in the United States—of providing incentive payments to contractors so that both the Commonwealth and the contractor benefits. We are now going to be lumbered with some very expensive equipment and the consequence is that, as well as all the other disabilities I have mentioned, at the end of the day, the defence forces, with diminishing budgets, will not have the capabilities and the modern equipment that they need because there simply are not the funds to go around.

  Question resolved in the affirmative.