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Auditor-General—Audit reports for 2014-15—No. 19—Performance audit—Management of the disposal of specialist military equipment: Department of Defence


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The Auditor-General ANAO Report No.19 2014-15 Performance Audit

Management of the Disposal of Specialist Military Equipment

Department of Defence

Australian National Audit Office

ANAO Report No.19 2014-15 Management of the Disposal of Specialist Military Equipment

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© Commonwealth of Australia 2015

ISSN 1036-7632 (Print)  ISSN 2203-0352 (Online)  ISBN 978‐1‐76033‐000‐2 (Print)  ISBN 978‐1‐76033‐001‐9 (Online) 

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Canberra ACT 5 February 2015

Dear Mr President Dear Madam Speaker

The Australian National Audit Office has undertaken an independent performance audit in the Department of Defence titled Management of the Disposal of Specialist Military Equipment. The audit was conducted in accordance with the authority contained in the Auditor-General Act 1997. Pursuant to Senate Standing Order 166 relating to the presentation of documents when the Senate is not sitting, I present the report of this audit to the Parliament.

Following its presentation and receipt, the report will be placed on the Australian National Audit Office’s website—http://www.anao.gov.au.

Yours sincerely

Ian McPhee Auditor-General

The Honourable the President of the Senate The Honourable the Speaker of the House of Representatives Parliament House Canberra ACT    

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  AUDITING FOR AUSTRALIA 

The Auditor‐General is head of the  Australian National Audit Office  (ANAO). The ANAO assists the  Auditor‐General to carry out his  duties under the Auditor‐General  Act 1997 to undertake performance  audits, financial statement audits and  assurance reviews of Commonwealth  public sector bodies and to provide  independent reports and advice for  the Parliament, the Australian 

Government and the community. The  aim is to improve Commonwealth  public sector administration and  accountability. 

For further information contact: 

The Publications Manager  Australian National Audit Office   GPO Box 707  Canberra ACT 2601    Phone:  (02) 6203 7505  Fax:  (02) 6203 7519  Email:  publications@anao.gov.au 

ANAO audit reports and information  about the ANAO are available on our  website: 

http://www.anao.gov.au 

 

Audit Team 

David Rowlands  Kim Murray  Stuart Turnbull   

     

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Contents Abbreviations .................................................................................................................. 7 

Summary and Recommendations .............................................................................. 9 

Summary ...................................................................................................................... 11 

Introduction ............................................................................................................. 11 

Audit objective and scope ....................................................................................... 12 

Overall conclusion ................................................................................................... 13 

Key findings by chapter ........................................................................................... 17 

Entity response ....................................................................................................... 27 

Recommendations ....................................................................................................... 29 

Audit Findings ............................................................................................................ 31 

1.  Introduction ............................................................................................................. 33 

An outline of Defence’s asset disposals ................................................................. 33 

Defence’s organisational arrangements for disposals ............................................ 35 

About the audit ........................................................................................................ 37 

Structure of the report ............................................................................................. 39 

2.  Disposals Framework .............................................................................................. 40 

The framework for disposal of Defence assets ....................................................... 40 

The Commonwealth’s disposals policy framework ................................................. 41 

Defence’s disposals policy framework .................................................................... 44 

Difficulties with the existing framework ................................................................... 49 

Conclusion—disposals framework .......................................................................... 58 

3.  Reform of Disposals ................................................................................................ 60 

Recent initiatives to reform disposals ..................................................................... 60 

The impetus for the 2011 reform ............................................................................. 61 

Proposal and announcement of the reform ............................................................ 66 

Progress with implementing reform ........................................................................ 68 

Conclusion—initial round of disposals reform ......................................................... 77 

Further reform of Defence disposals ....................................................................... 77 

Conclusion—recent round of disposals reform ....................................................... 84 

4.  Major Case Studies-Caribou and Boeing 707 Aircraft, and Army B Vehicles........ 86  Selection of major case studies .............................................................................. 86 

Caribou aircraft ........................................................................................................ 86 

Boeing 707 air-to-air refuelling aircraft disposal ................................................... 104 

Army B Vehicle fleet .............................................................................................. 115 

Conclusion—major case studies ........................................................................... 122 

5.  Managing Hazardous Substances in Disposals ................................................... 127 

Hazardous substances in Defence equipment ..................................................... 127 

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The risks of asbestos and controls in place since 2003 ....................................... 129 

Defence’s management of asbestos in its assets ................................................. 130 

Defence’s governance arrangements for asbestos .............................................. 133 

Case studies on management of asbestos in Defence SME disposals ............... 136  Conclusion—managing hazardous substances in disposals ................................ 162  6.  Gifting Defence Specialist Military Equipment ...................................................... 165 

How Defence specialist military equipment is gifted ............................................. 165 

The rules for gifting Defence assets ..................................................................... 166 

Whether gifting is defined adequately ................................................................... 171 

Three case studies of gifting Defence equipment ................................................. 173 

Conclusion—gifting Defence specialist military equipment .................................. 185  7.  Managing Other Risks........................................................................................... 187 

Risks in specialist military equipment disposals ................................................... 187 

Managing trailing obligations ................................................................................ 187 

Conflict of interest ................................................................................................. 192 

Disposal of non-ADF SME .................................................................................... 197 

Conclusion—other risks ........................................................................................ 201 

Appendices ............................................................................................................... 203 

Appendix 1:  Entity response ................................................................................. 205 

Appendix 2:  Responses by other parties to extracts from the proposed report ... 207  Appendix 3:  Disposals Review Recommendations .............................................. 210 

Appendix 4:  Revenues and Costs Associated with Disposals ............................. 213  Index ........................................................................................................................... 214 

Series Titles ................................................................................................................ 216 

Better Practice Guides ............................................................................................... 219 

 

Tables

Table 3.1:  Disposal of Royal Australian Navy ships, 1997-2010 ........................ 62  Table 4.1:  Payment schedule for B707 aircraft, October 2008 contract ........... 108  Table 7.1:  Selected SME disposals and ITAR requirements ............................ 189 

Table A.1:  Sales of specialist military equipment .............................................. 213 

Figures

Figure 2.1:  Defence Disposals Flowchart ............................................................. 48 

Figure 5.1:  Hazardous substances sign on Leopard tank .................................. 141 

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Abbreviations

ACM  Asbestos‐containing material 

ADF  Australian Defence Force 

ADP  Accelerated Disposals Program 

AGS  Australian Government Solicitor 

AHOs  Australian Historical Organisations 

AITT  Asbestos Inventory Tiger Team [in Defence] 

ALSPO  Air Lift Systems Program Office 

AMSO  Australian Military Sales Office 

APS  Australian Public Service 

ARPANSA  Australian Radiation Protection and Nuclear Safety Agency 

AVLB  Armoured Vehicle Launch Bridge 

CAF  Chief of Air Force 

CEO DMO  Chief Executive Officer, Defence Materiel Organisation 

CFO  Chief Finance Officer 

CPGs  Commonwealth Procurement Guidelines 

CPRs  Commonwealth Procurement Rules 

DAS  Directorate of Disposals and Sales [within AMSO] 

DDA  Defence Disposals Agency 

DEWHA  [Former] Department of Environment, Water, Heritage and the  Arts 

DGDAIM  Director‐General, Defence Assets and Inventory Management 

DI(G)  Defence Instruction (General) 

DMO  Defence Materiel Organisation 

DSTO  Defence Science and Technology Organisation 

DVA  Department of Veterans’ Affairs 

ESCM  Electronic Supply Chain Manual 

FIS  Financial Investigation Service 

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FMA Act  [Former] Financial Management and Accountability Act 1997 

HASRD  Head, Acquisition and Sustainment Reform Division, DMO 

HCIP  Head, Commercial and Industry Programs Division, DMO 

IGD  Inspector‐General of Defence 

ITAR  International Traffic in Arms Regulations [US legislation] 

JLC  Joint Logistics Command 

MSA  Materiel Sustainment Agreement 

MRTT  Multi‐Role Tanker and Transport aircraft 

PAM  Pacific Aviation Museum 

PGPA Act  Public Governance, Performance and Accountability Act 2013  [Replaced the FMA Act on 1 July 2014] 

RAAF  Royal Australian Air Force 

RFP  Request‐for‐Proposal 

RFT  Request‐for‐Tender 

RSL  Returned and Services League 

SER  Source Evaluation Report 

SME  Specialist Military Equipment 

SPO  System Program Office [within DMO] 

SRCC  Safety, Rehabilitation and Compensation Commission 

VCDF  Vice Chief of the Defence Force 

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Summary and Recommendations

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Summary

Introduction 1. Defence manages Commonwealth assets worth some $75 billion1, over  half of which comprise specialist military equipment (SME)—including ships,  vehicles and aircraft. Each type of SME must be managed through its life cycle,  the final stage of which is disposal. Disposal can include re‐use within Defence  for a different purpose, including for heritage or display, as well as transfer,  sale, gifting or destruction.  

2. SME disposed of in recent years includes the Royal Australian Navy’s  (RAN’s)  frigates  HMA  Ships  Canberra  and  Adelaide,  which  were  scuttled  as  dive  wrecks,  but  at  unexpectedly  high  cost;  the  Australian  Army’s  fleet  of  Leopard  tanks,  most  of  which  were  retained  or  gifted  for  display;  and  the  Royal Australian Air Force’s (RAAF’s) F‐111 long‐range strike aircraft, a few of  which were retained for display but most of which were destroyed because of  asbestos content. Proceeds from SME disposals vary significantly across the  years  with  changes  in  equipment  sold—proceeds  were  $12.5 million  in  2012-13 and $49.4 million in 2013-14. Defence disposal activity is expected to  increase in the medium term due to Defence’s major program of upgrading  and replacing SME over the next 15 years.2 

3. Managing  SME  disposals  requires  an  understanding  of  possible  markets  for  the  surplus  equipment.  It  also  requires  Defence  to  consider  international  obligations,  particularly  relating  to  demilitarisation  and  technology of United States (US) origin; and Australian obligations relating to  the  management  of  hazardous  substances,  such  as  asbestos;  environmental  protection; and the resource management framework applying to government  entities.  Disposing  of  SME  is  therefore  a  complex  task,  whether  achieved  through re‐use, retention for heritage or display, gifting, sale or destruction.  Disposal  risks  include  the  potential  for  excessive  and  unanticipated  costs,  stakeholder dissatisfaction, and loss of reputation should the equipment pass  into the wrong hands. 

                                                      

1 Defence, Annual Report 2013-14, Volume 2, p. 12. 2 See Appendix 4 for details of disposal sale proceeds between 2008-09 and 2013-14.

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4. For  the  period  considered  by  this  audit,  the  primary  legislation  governing disposal of Commonwealth assets was the Financial Management and  Accountability  Act  1997  (FMA  Act).3 Under  the  FMA  framework,  Defence’s  internal  instructions  imposed  an  obligation  on  staff  managing  disposals  to  optimise the outcome for the Commonwealth in each case4, having regard to:  (i) legal, contractual, government and international requirements; (ii) ensuring  that actions would withstand scrutiny; (iii) being fair, open and honest; and  (iv) considering  the  cultural,  historical  and  environmental  significance  of  providing the item to appropriate organisations. 

5. Disposal of SME is part of the Defence capability life cycle. The Defence  Materiel Organisation (DMO) has overall responsibility for disposal of SME on  behalf of Defence in conjunction with the Capability Manager, and the function  is now co‐ordinated by the Australian Military Sales Office (AMSO) in DMO’s  Defence  Industry  Division.5 However,  many  parts  of  Defence  may  have  an  interest and involvement in any particular disposal. 

Audit objective and scope 6. Following difficulties experienced with two major disposals in recent  years, the Secretary of Defence and Chief of the Defence Force (CDF) wrote to  the Auditor‐General in April 2013 and asked that he consider undertaking a  performance audit of Defence’s management of specialist military equipment  disposals.  In  May  2013,  the  Auditor‐General  agreed  to  commence  a  performance audit as part of the Australian National Audit Office’s (ANAO)  2013-14 work program. 

7. The  audit  objective  was  to  assess  the  effectiveness  of  Defence’s  management  of  the  disposal  of  specialist  military  equipment.  The  audit  considered (i) whether Defence has conducted disposals in accordance with  applicable  Commonwealth  legislative  and  policy  requirements  and  Defence  policies, guidelines and instructions; and (ii) where relevant rules have been 

                                                      

3 The main purpose of the FMA Act was ‘to provide a framework for the proper management of public money and public property’ and the Act contained rules about how public money and property were to be dealt with. On 1 July 2014, the Public Governance, Performance and Accountability Act 2013 (PGPA Act) replaced the FMA Act.

4 The relevant instruction, Defence Instruction (General) LOG 4-3-008 Disposal of Defence Assets, states: ‘Officials managing disposals are to optimise the outcome for Defence when implementing any disposal strategy.’ 5 The directorate within AMSO responsible for disposals has been known under several names over the

years but is referred to as ‘Defence Disposals’ within this audit report.

Summary

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departed  from,  the  main  reasons  and  consequences.  The  audit  examined  Defence  records  of  selected  disposals  that  occurred  over  the  last  15  years,  especially  the  period  from  2005  to  2013,  including  actions  in  response  to  disposals not proceeding as intended. 

8. The  high‐level  criteria  developed  to  assist  in  evaluating  Defence’s  performance were: 

 Defence  policies  and  procedures  governing  disposals  comply  with  relevant Commonwealth legislation and policy;  

 Defence disposal of SME is carried out effectively, in accordance with  relevant legislation, policies and instructions; and 

 recent  reforms  in  the  management  of  Defence  disposals  are  suitably  designed and progressing effectively. 

Overall conclusion 9. Defence expends a great deal of time, effort and public resources on the  procurement  of  new  SME  such  as  ships,  aircraft  and  vehicles,  and  the  introduction of such capability into service. The service life of individual items  may vary but, ultimately, all of that SME must be disposed of. While the work  of  disposing  of  equipment  is  unlikely  to  be  as  interesting  or  attractive  as  acquisition  and  sustainment,  disposal  of  SME  is  complex  and  often  time‐ consuming, and can give rise to financial and reputational risks for Defence  and the Australian Government. To be effective, and achieve the best overall  outcome, SME disposals require a balanced assessment of risks and potential  benefits with appropriate senior leadership attention within Defence. 

10. Overall, Defence’s management of SME disposals has not been to the  standard expected as insufficient attention was devoted to: achieving the best  outcome for the Australian Government; reputational and other risks that arise  in  disposing  of  SME;  managing  hazardous  substances;  and  adhering  to  Commonwealth legislation and policy for gifting public assets. 

11. The major disposals examined as part of this audit have had a largely  disappointing history. In the cases examined, disposals have generally taken a  long time, incurred substantial and unanticipated costs, and incurred risks to  Defence’s reputation: 

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 the disposal of RAN ships has proven expensive and, where they have  been gifted for use as dive wrecks, costly to the RAN’s sustainment  budget; 

 the  Army  B  Vehicles  disposal  was  arranged  through  a  request‐for‐ tender,  and  the  adequacy  of  the  tender  evaluation  process  has  been  questioned by internal and external advisers to Defence; 

 the  Boeing  707  aircraft  disposal  has  been  prolonged,  involved,  and  yielded much less than the original contracted sale price; and  

 the Caribou aircraft disposal remains ongoing after five years following  a flawed tender process and uncertainty as to the identity and business  of the major purchaser. 

12. Problems relating to the Boeing 707 and Caribou aircraft disposals were  already known to Defence and led the Secretary of Defence and Chief of the  Defence Force to request that this audit be undertaken. The audit highlights a  number of consistent underlying themes in the cases examined which go some  way to explaining Defence’s recent difficulties in managing SME disposals. The  key issues relate to: a disproportionate focus on revenue without full regard to  costs; insufficient attention to risk management; the quality of internal guidance;  fragmented responsibilities; and limited senior management engagement. 

13. Defence’s  disposal  rules  are  not  clear  or  fully  developed  for  SME  disposals,  notwithstanding  the  proliferation  of  internal  sources  of  guidance  within Defence. In particular, Defence lacks a set of operational procedures to  guide SME disposals and clearly identify roles and responsibilities across the  large number of Defence stakeholders. As a consequence, Defence staff have  limited guidance on key issues such as the potential costs of disposal activity,  and there is no requirement to check on the identity or financial or other capacity  of  the  entities  with  whom  Defence  is  dealing.  A  number  of  the  case  studies  examined in this audit indicate that shortcomings in Defence guidance relating  to establishing the bona fides of third parties have contributed to increased risks  to the Commonwealth’s reputation. Further, some of Defence’s internal rules— relating  to  gifting  of  assets—did  not  correctly  reflect  the  long‐standing  requirements of the Australian Government’s resource management framework,  introducing risks of inappropriate or incorrect gifting of surplus Defence SME. 

14. While the reform of SME disposals has been attempted in recent years,  it has not consistently held the attention of senior leadership within Defence.  The round of reform that commenced in 2011, announced by the then Minister 

Summary

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for Defence Materiel, was initiated with good intentions. However, it was not  supported by sufficient analysis and was based on a flawed assessment of the  prospect for making SME disposals into a net revenue‐generating program. It  was  almost  certainly  over‐optimistic  in  this  objective,  and  underplayed  the  importance of adopting a balanced approach to managing risks. The initiative  lacked  ongoing  senior  leadership  involvement  and  no  arrangements  were  made  to  monitor  and report  on  its  progress. It  appears now  to  have  fallen  away without tangible results. 

15. A feature of recent major disposals has been a propensity for Defence  staff  to  focus  on  the  apparent  revenue  available  from  the  sale  of  surplus  equipment  without  full  regard  to  the  risks  being  taken  in  pursuit  of  that  revenue. These risks, many of which have arisen in the case studies examined in  this audit, include reputational risks and risks of further costs being incurred  during the disposal process. As discussed, the then Minister’s announcement of  disposals reform in 2011 highlighted the gaining of revenue as an objective for  SME  disposals.  Once  the  reform  program  had  been  announced,  there  was  a  tendency at the operational level to focus on maximising the revenue from each  disposal  transaction  with  much  less  attention  to  the  costs  incurred,  some  of  which arose in other parts of the Defence Organisation beyond the immediate  purview of those responsible for the disposal transaction. As the audit shows,  when delays are incurred and risks crystallise, the costs to Defence can exceed  the potential revenue available. In the case of the Caribou aircraft disposal, a sale  price of $540 000 was obtained from the principal purchaser while the DMO  System  Program  Office  responsible  for  the  Caribou  incurred  an  estimated  $743 000 in disposal costs, including some $242 000 to pay contractors to identify  and pack Caribou spare parts. 

16. A major challenge for Defence in recent years has been the presence of  asbestos in many of its items of military equipment. To meet clearly expressed  ministerial  expectations  in  2008,  Defence  set  about  a  vigorous  remediation  program to remove asbestos from its workplaces. Defence also resolved in late  2009, through a Vice Chief of the Defence Force (VCDF) directive, that items  containing  asbestos  should  be  disposed  of  by  sale  or  gift  only  where  any  asbestos contained within the item could not be accessed by future users, and as  such would not pose a health risk to those future users. However, the audit has  identified instances where the costs of identifying and removing asbestos from  items  being  disposed  of,  and  the  prospect  of  greater  disposal  revenue,  led  Defence to dispose of items that may contain accessible asbestos without full  regard to the management of the risks or transparent declaration of those risks to 

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potential purchasers. An example is the ongoing disposal of Army B Vehicles,  where Defence stated to its Minister that its strategy would involve removal of  all accessible asbestos‐containing items, including gaskets. This has not occurred  and the risk of the continued presence of such asbestos‐containing items has not  been drawn to the attention of the purchasers of the vehicles. 

17. The  history  of  SME  disposals  indicates  that  Defence  ministers  often  wish to be involved in making decisions on the gifting of military equipment,  which  can  attract  considerable  community  interest.  However,  the  Defence  Minister  does  not  hold  the  formal  decision‐making  authority  for  gifting  Commonwealth  assets.  It  is  a  long‐standing  feature  of  the  Australian  Government’s resource management framework that the Finance Minister has  that authority and has delegated it to the Secretary of Defence. A challenge  remains  for  Defence  to  develop  an  approach  that  provides  early  advice  to  ministers about the requirements and operation of the gifting delegation where  any options for gifting are to be contemplated. 

18. The  key  message  from  this  audit  of  Defence  SME  disposals  is  that  decision‐making should be based on a broader understanding of the benefits,  risks  and  costs  of  each  disposal.  To  achieve  an  effective  overall  outcome,  officials  performing  the  disposals  function  need  to  have  regard  to  the  full  picture, weighing up potential revenue against the cost of disposal action and  the  range  of  potential  risks  to  Defence  and  the  Australian  Government— including the potential for reputational damage. The effective assessment and  treatment  of  risks  often  requires  experience  and  must  be  afforded  higher  priority within the Defence Organisation, including through senior leadership  attention at key points in the disposal process for more sensitive items. Those  who are assigned management responsibility for an SME disposal should be  expected  to  develop  the  necessary  breadth  of  understanding  and  be  well  placed to complete the disposal efficiently, effectively and properly.  

19. The ANAO has made five recommendations aimed at strengthening  Defence’s  SME  disposals  framework  and  practice  through:  the  review  and  consolidation of Defence’s internal guidance on disposals; the identification for  each future major disposal of a project manager with the authority, access to  funding through appropriate protocols and responsibility for completing that 

disposal;  the  collection  of  better  cost  information  on  each  disposal;  and  reinforcement of Defence’s conflict of interest and post‐separation employment  policies. 

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Key findings by chapter

Disposals Framework (Chapter 2)

20. Disposal of Defence SME is governed by a framework of legislation,  policy and procedure which, for the period under review, was established by  the  FMA  Act.  The  FMA  framework  placed  an  obligation  on  each  chief  executive officer to manage agency affairs in a way that promoted proper use  of Commonwealth resources.6 The Australian Government’s general disposals  policy was stated indirectly in the gifting delegation provided by the Finance  Minister to chief executives: that the property being disposed of should be sold  at market price or transferred to another Commonwealth agency. While the  Commonwealth  Procurement  Rules  (CPRs)  provide  a  whole‐of‐government 

framework for procurement, they do not extend to disposal and there is not,  and has not been, a counterpart to the CPRs for the disposal part of the asset  life  cycle.  In  the  absence  of  an  explicit  Commonwealth  policy,  Defence  developed internal procedures and processes for its disposal activities. 

21. Within Defence there is a range of policy and guidance on disposals,  some  of  which  is  inconsistent  and  requires  review.  Notwithstanding  the  proliferation of material, Defence’s policy and guidance is cast at too high a  level of generality and lacks a practical procedural focus. For instance, Defence  offers no direction in how to estimate and capture the full costs of a disposal  project; and guidance does not include a requirement to verify the identity,  financial viability or business purposes of a party to whom Defence may be  considering  selling  its  surplus  SME.  These  practical  issues  arose  more  than  once in the case studies examined in this audit, affecting the successful conduct  of  SME  disposals. 7  Another  shortcoming  in  Defence’s  current  disposals  framework is the absence of well‐defined and robust disposal tender processes,  resulting in one tender examined in this audit attracting criticism from both  internal  and  external  advisers.8 Sound  guidance  for  the  conduct  of  an  SME  disposal  has  been  lacking  for  some  years  and,  although  DMO  has  been  working on developing new policy and guidelines, these are not yet in place. 

                                                      

6 ‘Proper use’ was defined as efficient, effective, economical and ethical use not inconsistent with Commonwealth policies. Comparable high-level obligations are currently placed on accountable authorities (such as a departmental secretary) and officials by s.15 of the PGPA Act 2013.

7 See, for example, paragraphs 4.56 and 4.85. 8 See paragraphs 4.118 - 4.127.

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Overall, Defence’s disposals framework remains immature, particularly given  the nature of Defence materiel subject to disposal, and the associated risks.  

Reform of Disposals (Chapter 3)

22. Defence initiated a first round of reform of SME disposals in 2011 with  four priority areas: to reduce if not eliminate Defence major disposals cost9; to  return funding to the sustainment of current capability; to generate and then  maximise  revenue  from  the  sale  of  Defence’s  military  assets;  and  to  appropriately  recognise  and  preserve  Defence  heritage,  particularly  war  heritage. 

23. Defence  based  this  reform  on  comparison  with  overseas  experience.  However, the reform proposal was not underpinned by sufficient analysis or  research to support the expectation of generating revenue from SME disposals.  Defence  set  about  implementing  the  reform  primarily  through  establishing  long‐term strategies for the disposal of SME in specific ‘domains’: two such  strategies  were  those  for  RAN  ships  and  for  Army  B  Vehicles.10 The  ships  strategy  has  already  run  its  course  with  only  two  ships  disposed  of—the  ex‐HMA Ships Manoora and Kanimbla—at a substantial cost to Defence. The  B Vehicles strategy has returned funds, but there is no information on the costs  incurred by Defence of managing the disposal. 

24. Defence  has  not  reported  its  performance  in  terms  of  the  four  2011  reform  priorities  nor  have  measures  or  targets  been  set  that  would  enable  Defence to do so. The lack of financial data on major equipment disposals also  hinders  performance  assessment  against  the  priorities.  The  most  significant  insight from the initial round of reform is the need to take proper account of  the relatively small scale of Defence equipment disposals, the additional costs  which  can  arise  due  to  Australia’s  distance  from  overseas  markets,  and  a  limited local market for these assets based on historical sales experience.  

25. In response to recent reviews and investigations of disposal processes,  Defence  has  pursued  a  further  round  of  reforms.  Key  initiatives  underway  include  the  revision  of  Defence’s  disposals  policy,  the  development  of  documented processes and templates to guide staff through disposal processes, 

                                                      

9 At the time the primary source of concern about costs arose from the experience of disposing of two RAN ships, ex HMA Ships Canberra and Adelaide, as dive wrecks gifted to the states. This had cost Defence at least $13 million and taken considerable administrative effort over an extended period.

10 B Vehicles comprise about 12 000 trucks, trailers and four and six-wheel drives.

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and high‐level planning for forthcoming disposals. However, there is currently  no mechanism that allows Defence Disposals to track costs associated with a  disposal  project,  and  Defence  should  implement  a  monitoring  and  reporting  mechanism that captures all significant costs. Substantial disposal costs can be  incurred by disparate parts of the Defence Organisation, and while it may be  challenging to keep track of them, monitoring can contribute to the effectiveness  of Defence’s management of SME disposals by highlighting escalating areas of  expenditure, such as berthing costs relating to ship disposals.11 

26. The  potential  benefits  of  recent  reforms  are  likely  to  be  eroded  if  Defence does not more clearly identify project management responsibility and  establish structured consultation arrangements for major equipment disposals.  At present, a large number of separate Defence groups may be involved in, or  have expertise relevant to, disposal processes, highlighting the need for clearly  defined  and  well‐coordinated  disposal  processes,  and  consistent  internal  guidance.  Further,  in  more  complex  or  sensitive  cases,  there  is  a  need  for  sufficient senior leadership involvement in major equipment disposals and key  decisions, to contribute to the effective and timely identification, assessment  and management of risks. 

Major Case Studies—Boeing 707 and Caribou Aircraft, and Army B Vehicles (Chapter 4)

27. The audit considered three case studies in detail, comprising the two  disposals whose difficulties gave rise to the request for this audit, the Caribou  and Boeing 707 (B707) aircraft fleets, and a more current disposal, B Vehicles. 

The Caribou aircraft case

28. Defence sought to dispose of its last nine Caribou transport aircraft by  sale, issuing a request‐for‐tender in October 2010. Two aircraft, earmarked for  heritage  purposes,  were  successfully  sold  to  an  historical  aircraft  society.  However, the sale of the remaining seven aircraft proved troublesome. The  preferred tenderer was replaced by another entity, and doubts arose over the  latter’s credibility and financial viability. While Defence proceeded with the  disposal and the purchase of the aircraft by the replacement entity, which paid  for  the  seven  aircraft,  Defence  retained  the  aircraft  until  doubts  about  the 

                                                      

11 Defence informed the ANAO that it was setting up a process to capture cost information associated with AMSO activities. However, many disposal costs are incurred outside AMSO and these other costs will need to be properly captured and attributed if disposal costs for SME are to be fully identified.

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entity could be resolved. In January 2015, Defence informed the ANAO that  the  sale  to  this  entity  had  been  cancelled  and  Defence  was  considering  alternative disposal options for the aircraft. 

29. The Caribou disposal process demonstrated three key administrative  shortcomings. Defence:  

 did not observe that the original tenderer was being substituted by a  separate entity and that the change was not merely a change of name; 

 did not seek advice on the financial viability, background and integrity  of the entity it was dealing with; and 

 proceeded  with  the  sale  transaction  (by  issuing  an  invoice  to  the  purchasing  company)  after  becoming  aware  of  concerns  about  the  buyer. Not acting on available information exposed Defence and the  Commonwealth to financial and reputational risk. 

The B707 aircraft case

30. After first receiving an offer in mid‐2007, Defence sold its B707 air‐to‐ air refueller fleet to a private company based overseas, Omega Air, with an  initial 2008 contract price of $9.2 million. Selling the B707 aircraft fleet proved  troublesome  to  Defence.  The  disposal  process  demonstrated  three  key  administrative and contractual shortcomings. Defence: 

 did  not  conduct  adequate  checks  on  the  financial  viability  of  the  purchasing company—an issue which also arose in the Caribou aircraft  case; 

 agreed that the payment of $3 million of the purchase price would be  contingent  upon  US  Federal  Aviation  Administration  (FAA)  certification of the aircraft, when it was known to Defence that this was  unlikely. In effect, this approach provided the company with a price  reduction; and 

 allowed  the  purchasing  company  to  remove  the  aircraft  from  Commonwealth premises before full payment had been received. This  arrangement was contrary to advice received from the Department of  Finance and Deregulation and left the Commonwealth with reduced  capacity to secure payment. 

31. During much of the period over which the B707 transaction took place,  Defence hired air‐to‐air refuelling services from the purchasing company, at a 

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cost of over $24 million. The refuelling arrangement was cancelled in 2013 on  the advice of the Secretary. 

32. The company ultimately paid Defence $6.2 million for the B707 aircraft  and related equipment. Defence did not receive the remaining $3 million of the  original  contract  price  because  FAA  certification  was  not  achieved  by  31 December 2014.  

The B Vehicles case

33. B Vehicles comprise about 12 000 Army trucks, trailers and four and  six‐wheel drives, which are beyond their expected operating life. Defence has  sought to dispose of the vehicles through an arrangement with an external  company  to  detect and  remediate asbestos  in brake  linings,  and  on‐sell  the  vehicles to the public. This arrangement is expected to operate over some years  as the vehicles are progressively withdrawn from service. 

34. The  B  Vehicles  disposal  was  arranged  through  a  request‐for‐tender  process which, following Defence’s tender evaluation, drew a complaint from  a  non‐preferred  tenderer.  Defence  obtained  several  sets  of  internal  advice  about the tender evaluation process, some of it highly critical (and some of it  contradictory), and twice sought urgent external advice.  

35. The  external  advice  noted  that  there  had  been  a  number  of  fairly  significant  concerns  raised  about  the  evaluation  process  by  internal  review  teams within Defence, raising doubt about the defensibility of the evaluation  outcome and process. The reputational risks for Defence included exposure to  criticism,  loss  of  industry  confidence  and  doubt  about  the  integrity  of  the  tender  process.  However,  the  final  external  advice  also  noted  that  Defence  would have a basis to defend its decision provided it demonstrated that the  assessments  undertaken  (including  financial  assessments)  were  sound,  factually correct and supported by reliable analysis.  

36. Defence persisted with its original tender decision without acting on  the final external advice to demonstrate that its assessments were sound. The  delegate’s decision to proceed with the preferred tenderer did not set out his  reasons  for  not  acting  on  the  external  advice.  Given  the  sensitivities  and  potential  risks  involved  in  proceeding  with  the  original  tender  decision,  it  would have been prudent to escalate the matter to more senior management, 

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for  additional  counsel,  oversight  or  decision.12 Defence  records  indicate  that  this course was not adopted. 

Major case studies—common themes

37. Each of the major case studies considered in this audit took place in an  environment of disposals reform focused on reducing costs and maximising  revenue.  This  environment  was  due,  at  least  in  part,  to  Defence’s  Strategic  Reform Program (SRP)13 and later reinforced by the disposals reform program  announced mid‐2011. A consistent theme in the case studies has been pursuit  of the disposal option that promised to yield the greatest revenue. 

38. The  disposal  of  SME  is  a  complex  undertaking,  requiring  a  broad  understanding  of  the  benefits,  risks  and  costs  of  each  disposal,  and  their  effective  management.  The  focus  on  revenue  has  not  always  been  matched  with appropriate consideration of disposal costs nor of risks of a non‐financial  kind,  such  as  risks  to  reputation.  Further,  Defence  did  not  monitor  the  net 

financial position—that is, revenue minus all significant costs incurred by the  Commonwealth  for  each  disposal—to  help  assess  the  overall  benefit  of  its  disposal strategies. Probity and financial checks and identifying non‐financial  risks also received either limited attention or were given reduced weight in  decision‐making. 

39. Disposing of SME through an RFT process requires Defence to strike a  balance between optimising sale proceeds and minimising the Commonwealth’s  overall costs and risks. To achieve an effective outcome, Defence must manage  disposal activities, including any tender process, openly, fairly and equitably,  and in a manner that will withstand scrutiny. Government and industry need to  have  confidence  in  the  way  Defence  undertakes  disposals,  and  the  Defence  Organisation needs to maintain fairness in its dealings with industry. Achieving  these objectives necessarily requires a balanced assessment of risk and a broader,  rather than narrower, view of Australian Government interests when planning  and managing the disposal of SME. 

                                                      

12 At the time of the decision to proceed to contract the Branch Head, Defence Disposals (Senior Executive Service (SES) Band 1), was acting Head, Commercial and Industry Programs Division (SES Band 2).

13 In 2009, Defence began a decade-long major reform of its business intended to generate savings to be reinvested within Defence. This was known as its ‘Strategic Reform Program’.

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Managing hazardous substances in disposals (Chapter 5)

40. Hazardous substances, in particular, asbestos, have been used widely  in the manufacture of Defence SME. Over the last decade, Defence has put  substantial effort and resources into remediating asbestos in its inventory and  its SME. 

41. A major decision in the management of asbestos in disposals was the  VCDF’s clear directive to the Defence Organisation in October 2009: items that  contain asbestos should be disposed of by sale or gift only where any asbestos  contained within the item cannot be accessed by future users, and as such do  not  pose  a  health  risk  to  those  future  users.  A  tension  subsequently  arose  between the VCDF’s directive and the approach within Defence to maximise  revenue from major equipment disposal. 

42. In several cases examined by the ANAO—in  particular, the Caribou  aircraft and B Vehicles fleet—Defence has struggled in its efforts to manage the  risks posed by asbestos in equipment intended for disposal. In the case of the  Caribou  aircraft,  equipment  disposal  was  a  trigger  to  cease  asbestos  remediation. The sale of the majority of the Caribou was not completed and  asbestos components remain in place, and it is now a matter for Defence to  decide a future course of action. The two aircraft sold to an historical aircraft  society retained any asbestos items previously contained in them. 

43. Defence has not always provided appropriate information to potential  purchasers or recipients about the asbestos content of SME subject to disposal,  notwithstanding  legal  advice  to  do  so,  senior  leadership  expectations  and  undertakings to government. This is the case, for example, with the B Vehicles. 

44. The  B Vehicles  may  contain  accessible  asbestos  in  various  locations  such as brake linings and gaskets. The vehicles are on‐sold to the public by a  private company engaged by Defence and established for this purpose. After  receiving the B Vehicles, the company only reports back to Defence on the  results of its checking for asbestos in the vehicle brakes, and remediating these  components where necessary.14 This disposal is ongoing.15 

                                                      

14 Defence advised the then Minister for Defence Materiel in 2011 that 95 per cent of the B Vehicles were free of asbestos components. However, it has been unable to provide evidence for this estimate. 15 Defence advised the ANAO in January 2015 that, as a result of the findings of this performance audit, Defence had again reviewed the controls relating to B Vehicle disposal.

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45. The  F‐111  aircraft  disposal  was  largely  managed  by  the  DMO’s  Disposal  and  Aerial  Targets  Office.  Defence’s  preference,  given  the  use  of  asbestos throughout the aircraft, was to destroy most of them and retain only a  few for Defence museums. Ministerial preferences led to a small number of  aircraft  also  being  retained  for  display  outside  Defence’s  direct  control  in  private museums, but with ongoing Defence involvement in monitoring and  reporting on risks. Defence has based its management of this arrangement on a  professional assessment of the risks, but the costs of ongoing monitoring and  reporting by Defence are yet to be assessed. 

46. Defence’s approach to some more recent disposals suggests that it has  moved  by  increments  from  the  VCDF’s  original  position  of  allowing  no  accessible asbestos to be gifted or sold. Defence informed the ANAO during  the audit that the directive remains in place. 

47. The  potential  long‐term  risks  of  SME  containing  asbestos  have  been  highlighted  by  a  request  for  Australian  Government  assistance  from  an  external  organisation.  The  organisation  was  gifted  a  major  item  of  Defence  SME  by  the  Australian  Government  several  decades  ago.  The  item  has  asbestos‐containing material that is widespread through its structure and the  organisation has advised Defence that the asbestos is now posing a hazard.  While the SME is no longer owned by the Commonwealth and the issue of  Defence  or  Commonwealth  assistance  is  yet  to  be  determined,  it  raises  the  question of whether other legacy cases exist and what action may be needed to  address any risks posed. 

48. In December 2014, DMO advised the then Minister for Defence that it  was ‘proposing to undertake a review of a number of past disposal activities to  identify those items that contain hazardous substances, in particular asbestos  containing material, that may give rise to potential future liabilities’. DMO did  not indicate when that review was expected to be complete nor what action it  proposes  should  the  review  identify  further  risks  related  to  past  disposal  activities. 

Gifting of Defence Specialist Military Equipment (Chapter 6)

49. Gifting of public property was prohibited under the FMA Act except in  certain defined circumstances, including where the Finance Minister had given  written  approval  to  the  gift  being  made.  The  Finance  Minister  had  sole  ministerial  authority  over  gifting,  and  had  delegated  that  power  to  chief  executives under the FMA (Finance Minister to Chief Executives) Delegation, 

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Part  17.16 This  instrument  required  delegates  to  observe  specific  conditions  when considering making such a decision. These long‐standing arrangements  have  largely  continued  under  the  Public  Governance,  Performance  and  Accountability Act 2013 (PGPA Act). 

50. The gifting rules have not been reflected accurately nor consistently in  many instructions and guidelines for Defence staff. This may be due, in part, to  the proliferation of such sets of instructions and guidelines. Defence should  give prompt attention to the drafting of Defence instructions and guidelines to  bring  its  documentation  into  alignment  with  the  Australian  Government’s  resource management framework. 

51. The audit identified instances when Defence did not approve gifting of  SME  in  accordance  with  applicable  Commonwealth  legislative  and  policy  requirements. For example, when DMO recommended to the then Minister for  Defence in 2005 that he write to state premiers and territory chief ministers  offering the ex‐HMAS Canberra as a gift for use as a dive wreck, DMO did not  advise  the Minister  that  he  did  not  have  the  authority  to  make  such  a  gift  under long‐standing legal arrangements17, nor of the requirements set out in  the  gifting  delegation.  Similarly,  the  Australian  Defence  Force’s  (ADF’s)  Leopard tanks were offered by the Minister for Defence as a gift to Returned  and Services League (RSL) branches in 2007, before a request was made to the  Finance Minister seeking formal approval of the gifting. 

52. Invariably,  when  items  of  SME  are  to  be  withdrawn  from  service,  Defence  will  offer  early  advice  to  the  Minister  for  Defence  on  proposed  disposal arrangements. In that context, where any options for gifting are to be  contemplated, Defence should advise the Minister that the Minister does not  have  authority  to  approve  a  gift,  and  of  the  specific  requirements  of  the  Finance Minister’s gifting delegation, including the requirement placed on the  Finance Minister’s delegate to adhere to the Commonwealth’s general policy  for  the  disposal  of  Commonwealth  property,  and  to  avoid  establishing  an  undesirable precedent. 

53. Further, experience has shown that gifting items of SME can involve  substantial costs for Defence. For example, the disposal of the two RAN ships, 

                                                      

16 The Finance Minister’s delegation was to officials, not ministers. 17 Authority to gift Commonwealth assets lies with the Finance Minister, who has delegated it to the Defence Secretary. The Secretary has sub-delegated his authority to the Chief of the Defence Force and other members of the Defence Organisation.

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ex‐HMA  Ships  Canberra  and  Adelaide  by  gifting  them  to  Victoria  and  New  South Wales cost Defence at least $13 million. 

Managing Other Risks (Chapter 7)

54. In addition to the matters considered above, a range of specific risks  add to the complexity of managing SME disposals. The audit considered the  following additional sources of risk: 

 management  of  trailing  obligations,  specifically  adherence  to  United  States  (US)  International  Trade  in  Arms  Regulations  (ITAR),  which  limit how Defence can dispose of US‐sourced SME; 

 perceived and actual conflicts of interest, which can arise for Defence  personnel involved in disposals; and 

 disposal of non‐ADF SME, which has arisen in a small number of cases. 

55. The US controls access to its defence technology through ITAR, making  this  a  major  consideration  in  many  disposals  because  a  large  proportion  of  ADF SME is of US origin. Obtaining ITAR approval can take time and might  not  be  granted.  This  can  have  cost  or  other  consequences  for  a  disposal.  Defence  has  generally  obtained  ITAR  approval  where  relevant  for  SME  disposals over recent years. However, Defence has no centralised register of  ITAR  obligations  in  relation  to  existing  SME,  and  could  consider  the  cost‐ benefit of compiling a register to help manage its obligations. 

56. A conflict of interest involves a conflict, which can be actual, potential  or perceived, between a public official’s duties and responsibilities in serving  the  public  interest,  and  the  public  official’s  personal  interests.18 The  audit  observed  a  number  of  instances  involving  individuals  working  for  Defence  subsequently  taking  up  related  positions  with  external  organisations  doing  business with Defence. In some cases, the individual had remained a Reservist  with continued access to Defence resources. 

57. Defence’s post‐separation employment policy requires ADF members  and Defence Australian Public Service (APS) employees wishing to take up  employment with private sector organisations to fully inform Defence of the  situation. However, this does not always take place and has limited Defence’s 

                                                      

18 ANAO Audit Report No.47 2013-14, Managing Conflicts of Interest in FMA Agencies.

Summary

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capacity to manage potential conflicts of interest.19 Defence should reinforce its  conflict of interest and post‐separation policies to its ADF members and APS  staff,  particularly  the  need  for  transparency  concerning  any  future  private  sector and Defence Reservist employment, and introduce practical measures to  achieve  consistent  application  of  policy  across  the  Defence  Organisation.  Defence  could  also  provide  illustrative  examples  of  certain  situations  or  behaviours  requiring  close  management,  including:  related  post‐separation  employment, Reservists undertaking private business with Defence, personal  business interests and requests for favours. 

58. From time‐to‐time Defence needs to dispose of non‐ADF SME. While  unusual  and  unpredictable,  these  instances  impose  a  workload  on  Defence,  and  require  planning  and  funding,  in  common  with  more  conventional  disposals.  In  the  case  of  the  Russian‐made  military  helicopters  flown  to  Australia  in  199720,  Defence  has  been  incurring  some  unquantified  cost  in  storing them at Tindal for the better part of two decades. Greater awareness of  such costs and the assignment of responsibility within Defence for disposal of  SME  that  currently  lacks  a  clear  internal  ‘owner’  would  assist  in  effective  disposal of such equipment. 

Entity response 59. Defence provided the following response to the proposed audit report: 

Following a request from the Secretary of Defence and the Chief of the Defence  Force  to  the  Auditor‐General  in  April  2013,  Defence  thanks  the  Auditor‐ General for recognising concerns around the management of major equipment  disposal. 

Defence  welcomes  the  thoroughness  of  the  review  and  agrees  with  the  recommendations  that  will  help  to  improve  Defenceʹs  governance  around  disposal management. 

Defence acknowledges that the disposal of military assets is an area of concern  and that this important aspect of asset management appears to have not had  the same level of attention relative to higher profile acquisition, sustainment                                                        

19 Measures to manage conflicts of interest could include: allocating alternative duties; the restriction of the flow of information to the Defence member/employee; a review or audit of access that the Defence employee/member has, or has had, to specific information with relevance to their future employment; and restrictions on access by the Defence employee/member to information systems.

20 The helicopters were part of a shipment of equipment diverted to the Northern Territory in 1997. A United Kingdom-based private military company, Sandline International, had assembled the equipment for use under contract to the Papua New Guinea Government.

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and  operational  activities.  Defence  appreciates  the  analysis  provided  by  ANAO  and  will  undertake  to  address  the  shortcomings  in  policy  and  performance. 

The audit has highlighted the broad range of issues that must be considered in  planning  for  disposal  of  major  equipments.  The  audit  report  indicates  that  Defence does, for the most part, address the majority of these considerations,  but that policy and guidance has been deficient which leads to the difficulty in  achieving consistently high standards across the wide range of disposal types. 

The report includes a chapter on the treatment of hazardous materials and  draws attention to Defenceʹs handling of asbestos containing material through  the disposal process. Defence seeks to ensure that all hazardous materials are  properly considered and managed, and that it complies with all of its legal  obligations, when undertaking the disposal of Defence equipment. 

Defence  considers  that  the  chapter  overstates  the  risk  associated  with  non‐ friable forms of asbestos that might still be in equipment subject to disposal.21  Defence considers the residual risk posed by exposure to asbestos in the B‐ vehicles is no greater than that inherent in a wide range of vehicles of similar  vintage  which  are  also  still  saleable.  However,  Defence  has  taken  steps  to  address the concerns raised in this report. Specifically, Defence has delayed the  B‐vehicles disposals to allow time to ensure Defenceʹs asbestos management  policies are both responsible and pragmatic. 

The  report  validates  Defenceʹs  concerns  regarding  cost  implications  for  the  Commonwealth and the potential for future liability arising from gifting of  Defence assets, albeit with positive intent. 

This  report  also  rightly  serves  to  remind  Defence  that  there  are  broader  considerations other than revenue that are important to the Commonwealth  when planning the disposal of specialist military equipment. 

60. The  ANAO  also  sent  extracts  from  the  proposed  report  to  the  Department of Finance (Finance) and to three commercial parties whom the  ANAO considered had a special interest in the content of those extracts. The  two responses received, from Finance and Omega Air, are at Appendix 2. 

 

                                                      

21 ANAO comment: Chapter 5 of this report considers the treatment of asbestos in disposal of major equipment having regard to the governance arrangements that Defence put in place in 2009 for managing asbestos (including the Directive by the VCDF—see paragraph 5.29). It is open to Defence to review the VCDF Directive in light of current legislative requirements and standards generally accepted in the community.

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Recommendations

Recommendation No. 1

(paragraph 2.59)

To  rationalise  and  simplify  its  existing  framework  of  rules  and  guidelines  for  disposal  of  specialist  military  equipment, the ANAO recommends that Defence: 

(a) review  and  consolidate  relevant  existing  guidance  with  a  view  to  ensuring  that  it  is  concise, complete and correct; and  

(b) consult the Department of Finance in the course  of  this  review,  to  maintain  alignment  with  the  wider resource management framework. 

Defence response: Agreed  

Finance response: Supported 

Recommendation No. 2

(paragraph 3.93)

The  ANAO  recommends  that,  to  improve  the  future  management  of  the  disposal  of  Defence  specialist  military  equipment,  Defence  identifies,  for  each  major  disposal, a project manager with the authority, access to  funding  through  appropriate  protocols  and  responsibility for completing that disposal in accordance  with Defence guidance and requirements. 

Defence response: Agreed 

Recommendation No. 3

(paragraph 3.95)

The  ANAO  recommends  that,  to  improve  the  future  management  of  the  disposal  of  Defence  specialist  military  equipment,  Defence  puts  in  place  the  arrangements necessary to identify all significant costs it  incurs in each such disposal (including personnel costs,  the  costs  of  internal  and  external  legal  advice,  management of unique spares and so on), and reports on  these costs after each such disposal. 

Defence response: Agreed 

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Recommendation No. 4

(paragraph 6.82)

To  bring  its  instructions  and  guidelines  that  address  gifting  of  Defence  assets  into  alignment  with  the  requirements  of  the  resource  management  framework, 

the ANAO recommends that Defence promptly review  all such material. This could be undertaken as part of the  review recommended in Recommendation No. 1. 

Defence response: Agreed 

Recommendation No. 5

(paragraph 7.39)

The ANAO recommends that Defence: 

(a) reinforce  its  conflict  of  interest  and  post‐ separation policies to all ADF members and APS  staff,  particularly  in  relation  to  future  private  sector and Defence Reservist employment; and  

(b) introduce practical measures to achieve consistent  application  of  the  policies  across  the  Defence  Organisation. 

Defence response: Agreed 

 

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Audit Findings

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1. Introduction

This  chapter  provides  an  overview  of  disposals  of  specialist  military  equipment  in  Defence. It also introduces the audit, including the audit objective, scope and approach. 

An outline of Defence’s asset disposals

Defence assets

1.1 Defence  manages  approximately  $75  billion  of  Commonwealth  assets  including  about  $41  billion  of  specialist  military  equipment  (SME).22 Over  the  next  15  years Defence  expects  to replace or  upgrade  up to 85 per  cent  of  its  military equipment, including SME. During this time, Defence plans to dispose of  up to 22 ships; 14 boats; 70 combat aircraft and 100 other aircraft; 110 helicopters;  470 armoured vehicles; 10 000 other vehicles; and a range of communications  systems, weapons and explosive ordnance. This would be the biggest disposal of  military equipment since World War II. 

1.2 The  disposal  of  Defence  SME  is  an  integral  part  of  managing  the  asset  through its life cycle. Disposal is the final phase in that life cycle, and requires the  appropriate assessment and treatment of risks relating to specific items of SME. An  institutional risk is that within Defence, disposal may receive insufficient attention,  as new capability and the transition to it attracts higher priority. However, this does  not  diminish  Defence’s  responsibility  for  the  proper  management  of  public  resources under its control.23 

1.3 When disposing of Defence assets, such as SME, Defence managers are  required to seek the best outcome for the Commonwealth. That outcome might  not be represented simply by revenue from sales. Decision makers need to take  account of the costs of disposal (which can be substantial), any heritage aspects  to  the  equipment  being  disposed  of,  restrictions  on  the  disposal  due  to 

                                                      

22 Net carrying value. Defence assets include: SME (including Repairable Items and Assets under Construction); general stores inventory; explosive ordnance; fuel; land, buildings and infrastructure; other plant and equipment; heritage and cultural assets; and intangibles (including intellectual property). Defence, Annual Report 2013-14, Vol. 2, p. 12.

23 This is an obligation which, during the period considered by this audit, was imposed until 30 June 2014 by s. 44 of the (former) Financial Management and Accountability Act 1997 (FMA Act). Section 15 of the Public Governance, Performance and Accountability Act 2013 (PGPA Act), which took effect on 1 July 2014, imposes a similar duty to promote the proper use and management of public resources, while s. 16 imposes a further duty to establish and maintain appropriate systems of risk oversight, management and internal control.

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international obligations or agreements with the original supplier, and a range of  risks, including hazardous substances the equipment may contain and potential  reputational risk to Defence and the Commonwealth. 

1.4 Defence withdraws SME from service because it is either surplus to, or  no longer suitable for, its requirements. Assets that are no longer required may  be: 

 re‐used within Defence for different purposes, for example, as training  aids, for spares or components, for research, or as targets; 

 retained by Defence for heritage or display purposes, for example, by  transfer  to  Defence‐managed  museums  and  history  units  or  as  ‘gate  guards’ outside Defence establishments; 

 transferred  to  another  Commonwealth  Government  entity,  for  example, the Australian War Memorial; 

 gifted  to  Australian  state  or  territory  governments,  foreign  governments, or non‐government heritage/community organisations; 

 sold  by  tender,  auction  or  private  treaty  as  a  going  concern,  for  historical or display purposes, for spare parts or for scrap; or 

 destroyed. 

1.5 Proper  disposal  of  SME  requires  Defence  to  observe  legislative  and  policy requirements, and to consider community interests and expectations,  including: 

 over the period under consideration, the financial framework require‐ ments  established  under  the  Financial  Management  and  Accountability  Act 1997 (FMA Act) and regulations under the Act24;  

 military  heritage  interests  and  community  expectations  as  to  the  availability of old military equipment for display; 

 a  need  to  deal  with  hazardous  substances  (such  as  asbestos)  and  workplace health and safety; 

                                                      

24 The FMA Act, which was in effect until 30 June 2014, provided a framework for the proper management of public money and public property and contained rules about how public money and property were to be dealt with.

Introduction

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 Australian Defence export controls and, in particular, the requirements  of the Standing Inter‐Departmental Committee on Defence Exports;  

 US ‘International Traffic in Arms Regulations’ (ITAR); and 

 environmental  compliance;  for  example,  delays  were  incurred  with  scuttling of ex‐HMAS Adelaide, where higher standards were imposed  by the courts following environmental and community concerns. 

Defence’s organisational arrangements for disposals 1.6 Disposal  of  the  full  range  of  Defence  assets  is  handled  by  several  Defence Groups: 

 Joint Logistics Command (JLC) disposes of Defence inventory items,  weapons and artillery; 

 Chief  Information  Officer  Group  disposes  of  information  technology  equipment;  

 Defence Support Group disposes of real estate;  

 Munitions  Branch  and  Guided  Weapons  Branch  in  the  Defence  Materiel Organisation (DMO) disposes of surplus explosive ordnance; 

 Joint  Fuels  and  Lubricants  Agency  in  DMO  disposes  of  fuels  and  lubricants; 

 Land Systems Division in DMO disposes of commercial vehicles; and  

 the Directorate of Disposals and Sales (DAS) in the Australian Military  Sales Office (AMSO; a branch of DMO’s Defence Industry Division) has  a co‐ordinating role for the disposal of SME. 

1.7 SME  disposals  are  complex.  AMSO  has  identified  that  some  25  organisational areas across Defence (including DMO) can be stakeholders in  the disposal of SME.25 

Development of organisational arrangements for SME disposals

1.8 Defence first created a single point of reference for the development  and promulgation of disposals policy in 1997. This occurred when it formed 

                                                      

25 This is based on the number of stakeholders identified for the Landing Craft Heavy (LCH) disposal project. The number of stakeholders will vary according to the project.

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the internal ADF Disposals and Marketing Agency (ADF DMA), a tri‐service  organisation which amalgamated a number of functions. 

1.9 Since DMO was formed in July 2000, the SME disposals function has  been moved several times internally. At the outset, ADF DMA was absorbed  into DMO and managed under various organisational structures before being  transferred to the Defence Asset and Inventory Management Branch, in DMO’s  Finance Division, in January 2008. ADF DMA was renamed ‘Defence Disposals  Agency’  (DDA)  in  July  2008.  In  August  2010,  DDA  was  moved  to  DMO’s  Acquisition and Sustainment Reform Division and then, in September 2011, to  DMO’s Financial Reporting and Policy Branch in Finance Division. 

1.10 On 1 June 2012, DDA was moved to AMSO in DMO’s Commercial and  Industry  Programs  Division.  In  November  2012  the  agency  was  renamed  ‘Disposals  and  Sales’  (DAS).  On  1  July  2013,  as  part  of  the  broader  DMO  Commercial  Group  restructure,  AMSO  became  part  of  the  new  Defence  Industry Division. To avoid confusion from the various changes, DAS and its  predecessors are referred to as ‘Defence Disposals’ in this audit report. 

1.11 The  then  Minister  for Defence  Materiel  announced  major reforms  to  disposals in June 2011.26 The reform objective was to generate revenue from  Defence  disposals,  to  be  achieved  by  managing  disposals  as  a  commercially‐focused major program.  

1.12 Defence’s  2011-12  Annual  Report  identifies  four  priority  areas  for  Defence Disposals: 

 to reduce if not eliminate Defence major disposals cost; 

 to return funding to the sustainment of current capability; 

 to  generate  and  then  maximise  revenue  from  the  sale  of  Defence’s  military assets; and 

 to  ensure  that  Defence  heritage,  particularly  war  heritage,  is  appropriately recognised and preserved.27 

                                                      

26 Minister for Defence Materiel, media release, ‘Reforms to Disposal of Military Equipment’, 29 June 2011. 27 Defence, Annual Report 2011-12, p. 216.

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Recent difficulties with Defence SME disposals

1.13 Recently,  Defence  has  experienced  difficulties  with  two  major  disposals. One was Defence’s sale of its fleet of Boeing 707 air‐to‐air refuelling  aircraft and the other was Defence’s sale of part of its fleet of Caribou aircraft.  Both disposals led to reviews by DMO’s legal counsel. The latter disposal also  led  to  an  investigation  by  the  Inspector‐General  of  Defence  (IGD)  and  an  internal audit by Defence’s Chief Audit Executive. 

1.14 In July 2013, DMO commissioned a consultant to review its disposals  function to identify the underlying problems for some specific disposals cases,  including the two disposals mentioned above, and to inform an agenda for  disposals reform. The consultant completed the report of the review in mid‐  October 2013. The report found ‘a systematic shortcoming in the way in which  major  disposals  have  been  conducted’  and  made  six  recommendations  to  improve disposal activities.  

1.15 DMO has made organisational and staffing changes, has been revising  disposals  policy,  developing  templates  and  documenting  processes  for  disposals. This work was continuing during the audit. 

About the audit 1.16 In April 2013, the Secretary of the Department of Defence and the then  Chief of the Defence Force, in light of the difficulties mentioned above, wrote  to  the  Auditor‐General  asking  that  the  ANAO  consider  conducting  a  performance  audit  of  Defence  SME  disposals  during  2013-14.  The  Auditor‐ General agreed to commence a performance audit as part of the ANAO’s 2013- 14 work program. The audit began in November 2013. 

1.17 The  audit  objective  was  to  assess  the  effectiveness  of  Defence’s  management  of  the  disposal  of  specialist  military  equipment.  The  audit  considered (i) whether Defence has conducted disposals in accordance with  applicable  Commonwealth  legislative  and  policy  requirements  and  Defence  policies, guidelines and instructions; and (ii) where relevant rules have been  departed from, the reasons and consequences. The audit examined Defence  records  of  selected  SME  disposals  that  occurred  over  the  last  15  years, 28 

                                                      

28 This performance audit focuses on disposals defined by Defence as ‘Major disposals’. Major disposals comprise those items which are expected to recover more than $1.0 million in revenue upon their disposal, or are capability platforms, weapon systems or items of significant public interest which require specialist disposal action and planning. See paragraph 2.27.

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especially  the  period  from  2005  to  2013,  including  actions  in  response  to  disposals not proceeding as intended.29 

1.18 The  audit  focuses  upon  Defence  disposals  from  the  point  where  a  decision has been made to withdraw an item of Defence SME. That is, the audit  is not concerned with the question of maintaining capability, which is one that  must  be  foremost  in  the  capability  manager’s  mind  when  he  or  she  sets  a  planned withdrawal date and decides to dispose of SME. 

1.19 Finally,  the  audit  considered  recent  DMO  reforms  to  the  disposals  process,  including  the  agenda  following  the  then  Minister  for  Defence  Materiel’s announcement in 2011 about reform of disposals (paragraph 1.11). It  also  considered  Defence’s  progress  with  this  agenda,  including  efforts  to  obtain better value‐for‐money for the Commonwealth from SME disposals. 

1.20 The audit drew on the records held by Defence, including electronic  records retained by Defence Disposals. Defence has no database, register or  other systematic collection of records dedicated to tracking its SME disposals.  Therefore, relevant material sometimes needed to be gathered from diverse  locations. The audit also drew on some of the investigation work conducted by  Defence before the audit commenced (paragraph 1.13). The auditors visited a  small  number  of  recipients  of  items  of  military  equipment  disposed  of  by  Defence to gather their perspectives on the operation of disposals. 

1.21 The  high‐level  criteria  developed  to  assist  in  evaluating  Defence’s  performance were: 

 Defence policies and procedures governing disposals comply with all  relevant Commonwealth legislation and policy;  

 Defence disposal of SME is carried out effectively, in accordance with  relevant legislation, policies and instructions; and 

 recent  reforms  in  the  management  of  Defence  disposals  are  suitably  designed and progressing effectively. 

                                                      

29 The audit did not encompass disposal of non-military items, real estate, ICT equipment, explosive ordnance, general consumable items nor Defence’s management of its stocks and inventories.

Introduction

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1.22 The  audit  was  conducted  in  accordance  with  ANAO  auditing  standards at a cost to the ANAO of approximately $571 000. 

Structure of the report 1.23 The remainder of the report is arranged as follows: 

Chapter Content

2. Disposals Framework Examines the Commonwealth and Defence frameworks for disposal of Defence SME.

3. Reform of Disposals

Considers the two initiatives in recent years to reform SME disposals in Defence.

4. Major Case Studies-Caribou and Boeing 707 Aircraft, and Army B Vehicles

Examines two major disposals that were troublesome for Defence and prompted this performance audit—the disposal of the Caribou and Boeing 707 aircraft. It also examines shortcomings in the more recent disposal of Army B Vehicles.

5. Managing Hazardous Substances in Disposals

Considers Defence’s management of hazardous substances in carrying out its disposal of SME, focusing on asbestos.

6. Gifting Defence Specialist Military Equipment

Examines the Australian Government’s gifting rules and how Defence has set about gifting SME assets that are no longer required.

7. Managing Other Risks

Considers Defence’s treatment of specific risks in managing certain disposals, including restrictions imposed on arms purchased from the US, conflict of interest risks, and disposal of non-ADF equipment.

 

 

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2. Disposals Framework

This  chapter  examines  the  Commonwealth  and  Defence  frameworks  for  disposal  of  Defence SME. 

The framework for disposal of Defence assets 2.1 Disposal of SME requires Defence to follow a range of legal and policy  requirements relating to: the proper use of Commonwealth resources; dealing  with hazardous substances; workplace health and safety; environmental issues  such as those associated with the use of ships as dive wrecks; and restrictions  on the re‐transfer of military items, particularly those of US origin. 

2.2 The audit examined: 

 the Commonwealth framework for the disposal of Defence SME over  the  period  under  consideration.  For  this  period,  the  framework  included  the  former  FMA  Act  and  the  Finance  Minister  to  Chief  Executives gifting delegation made under the FMA Act; 

 Defence’s disposals policy framework. This comprised the Defence and  DMO Chief Executives’ Instructions made under the FMA Act and a  range of internal policy and procedural documents; and 

 difficulties with the existing framework.30 

2.3 The audit considers the rules for gifting Defence assets separately, as  Defence guidance documents vary in their detail on this topic. This is set out in  Chapter 6, with an analysis of specific examples of gifting Defence SME. 

2.4 Given the wide range of matters relevant to disposal of major Defence  equipment,  this  chapter  has  not  sought  to  catalogue  all  Commonwealth  legislation or international arrangements that Defence must take into account.  However,  where  these  rules  are  relevant  to  particular  disposals  they  are  discussed in the appropriate chapter of this report. For example, Chapter 5  (which addresses management of hazardous substances) refers to legislation  on asbestos management in Australia, and Chapter 7 (which deals with a range  of disposal risks) discusses Defence’s adherence to the US ITAR. 

                                                      

30 Matters arising from the application of the framework (as contrasted with the framework itself) are addressed in subsequent chapters.

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The Commonwealth’s disposals policy framework 2.5 For  the  period  under  consideration,  the  FMA  Act  established  the  Commonwealth  financial  framework  for  the  management  of  financial  and  other resources within the Australian Government. The FMA Act, therefore,  also provided the relevant framework for disposal of Commonwealth assets.31  Major disposals in Defence, more often than not, required consideration of the  Act for two reasons: the asset is a Commonwealth resource; and the disposal  process consumes Commonwealth resources, sometimes exceeding the value  of the asset.  

Framework established by the FMA Act

2.6 Under  the  FMA  Act,  responsibility  for  managing  Commonwealth  property  rested  with  Commonwealth  agency  chief  executives.  This  responsibility was governed by the principle‐based requirements in the Act, in  particular,  the  requirement  to  promote  the  proper  use  of  Commonwealth  resources  (s. 44)  and  Part  6  of  the  Act,  which  dealt  with  the  control  and  management of public property.32  

2.7 Section  44  of  the  FMA  Act  established  a  positive  and  personal  obligation on each agency head to manage Commonwealth resources in a way  that promoted their efficient, effective, economical and ethical use and was not  inconsistent  with  the  policies  of  the  Commonwealth. 33 Section  44  was  an  overarching  requirement  applying  to  all  aspects  of  an  agency’s  resource  management,  including  the  management  of  ‘public  money’  and  ‘public  property’,  the  administration  of  programs,  the  provision  of  grants,  and  procurement.  

2.8 In  addition,  there  were  several  specific  references  to  the  disposal  of  Commonwealth  assets  within  the  FMA  Act  and  in  the  associated  FMA  (Finance Minister to Chief Executives) Delegations, under which the Finance  Minister delegated specific powers of the Finance Minister to Chief Executives. 

                                                      

31 The main purpose of the FMA Act was ‘to provide a framework for the proper management of public money and public property’ and the Act contained rules about how public money and property were to be dealt with. On 1 July 2014, the PGPA Act replaced the FMA Act. The FMA Act was the extant legislation for the period covered by this ANAO performance audit.

32 The specific relevant sections were s. 41-Misapplication or improper use of public property, and s. 43- Gifts of public property. 33 Like the FMA Act, the PGPA Act requires the Accountable Authority (typically the Secretary, Chief Executive Officer, or governing body) of a Commonwealth entity to govern it in a way that promotes

the proper use and management of public resources for which the entity is responsible.

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One  of  these  powers  was  the  power  to  gift  Commonwealth  assets. 34 The  delegation to Chief Executives included specific directions from the Finance  Minister, with which delegates had to comply.  

2.9 The  FMA  Act,  s.  41,  required  that  ‘an  official  or  Minister  must  not  misapply public property or improperly dispose of, or improperly use, public  property’.35 Section 43 of the FMA Act explicitly prohibited disposal by gift,  except in specific circumstances: 

An official or Minister must not make a gift of public property unless:  

(a) the making of the gift is expressly authorised by law; or  

(b) the Finance Minister has given written approval to the gift being made; or 

(c) the Commonwealth acquired the property to use it as a gift.36  

2.10 The Commonwealth’s general policy for the disposal of public property  was stated in the Finance Minister to Chief Executives gifting delegation made  under the FMA Act. The policy was that, wherever it was economical to do so,  the property should be disposed of at market price or transferred to another  Commonwealth agency. Specifically, the property being disposed of should: 

(a) be sold at market price in order to maximise return to the Commonwealth;  or 

(b)  otherwise,  should  be  transferred  (with  or  without  payment)  to  another  Commonwealth Agency with a need for an asset of that kind.37 

                                                      

34 FMA Act, s. 43, Gifts of public property. 35 FMA Act, s. 41, Misapplication or improper use of public property. 36 FMA Act, s. 43, Gifts of public property. The PGPA Act (s. 66) also prohibits the gifting of public property unless:

(a) the property was acquired or produced to use as a gift; or (b) the making of the gift:

(i) is expressly authorised by law; or

(ii) is authorised by the Finance Minister in writing; or

(iii) is made in accordance with any requirements prescribed by the rules. 37 FMA (Finance Minister to Chief Executives) Delegation 2013, Part 17.2(1). The equivalent delegation under the PGPA Act sets requirements for gifting assets as follows: When contemplating whether to authorise a gift of relevant property, a delegate must consider the

overarching principles that, if appropriate to do so, the relevant property should be: (a) agreed to be transferred with or without payment to another government entity within Australia (including State or Territory governments); or (b) sold at market value, where it is economical to do so. Source: PGPA (Finance Minister to Accountable Authorities of Non-Corporate Commonwealth

Entities) Delegation 2014, Part 10.2(1).

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2.11 Further directions on gifting are set out in the delegation. These are  discussed in Chapter 6, which considers both the gifting framework and how  Defence has set about the gifting of SME assets that are no longer required. 

Relevance of Commonwealth Procurement Guidelines and Rules

2.12 Under the FMA Act, Regulation 7 (1) allowed the Finance Minister to  issue guidelines in relation to procurement and Regulation 7(3) required an  official undertaking procurement to act in accordance with such guidelines.  

2.13 Until  2012,  these  guidelines  took  the  form  of  the  Commonwealth  Procurement Guidelines (CPGs). The CPGs were replaced on 1 July 2012 by the  Commonwealth Procurement Rules (CPRs). At their introduction the CPRs were  presented as an instrument which ‘combines the requirements of Australia’s  international  trade  obligations,  government  policy  and  good  practice  in  procurement  into  a  core  set  of  rules  which  apply  to  Commonwealth  procurement.’  

2.14 The  applicability  over  the  years  of  the  CPGs/CPRs  to  disposals—as  contrasted with procurement—has required clarification. FMA Regulation 7(1)  has always included a reference ((d), below) to disposal of public property: 

(1)  The  Finance  Minister  may  issue  guidelines  in  relation  to  procurement,  including: 

(a) procurement policies and processes; and 

(b) requirements regarding the publication of procurement details; and 

(c) requirements regarding entering into procurement arrangements;  and 

(d) requirements regarding the disposal of public property. 

2.15 While  there  have  not  been  any  separate  guidelines  issued  by  the  Finance Minister in relation to disposal, the 2005 edition of the CPGs included  the statement ‘Procurement also extends to the ultimate disposal of property at  the end of its useful life.’ This reference appeared to extend the application of  the CPGs to disposal action. However, a Finance Circular issued the following  year provided a clarification which meant that:  

the CPGs have no application to the disposal of public property. Rather, the  management of disposals falls within the responsibilities of an agency’s Chief 

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Executive under s 44 of the FMA Act (promoting efficient, effective and ethical  use of Commonwealth resources).38 

2.16 The CPGs became law on 1 July 2009 and were further amended when  the CPRs replaced them in 2012. The CPRs were perceived as a clearer and  more  concise  set  of  rules  with  no  major  differences  from  the  CPGs  except  terminology. However, the CPRs introduced a minor revision to the definition  of procurement: 

Procurement continues through the processes of risk assessment, seeking and  evaluating alternative solutions, the awarding of a contract, the delivery of and  payment  for  the  goods  and  services  and,  where  relevant,  the  ongoing  management of the contract and consideration of disposal of goods. 

2.17 As  there  is  no  explanation  of  the  intended  meaning  of  the  words  ‘consideration of disposal of goods’ and some Defence equipment is sold by  tender, the intended effect of these changes on disposal practice is not clear in  the  wording.  However,  the  CPRs  state  that  procurement  does  not  include  (among  other  items)  sales  by  tender. 39 Further,  in  October  2014,  Finance  confirmed to the ANAO that ‘the CPRs do require consideration of whole of  life costs, including disposals, but only to the extent that it may or should affect  decision making regarding the initial procurement.’40 

2.18 While  the  Australian  Government’s  procurement  and  grants  frameworks are now well‐developed, with consolidated whole‐of‐government  guidance  to  support  their  application  (in  the  form  of  the  CPRs  and  Commonwealth Grant Guidelines), the disposals framework remains less well‐ developed.  The  only  definitive  statement  of  Commonwealth  policy  is  that  contained  in  the  Finance  Minister’s  Delegation  Part  17.2  (1),  quoted  above  (paragraph 2.10), with no further elaboration above agency‐level rules. These  rules are considered in the following paragraphs. 

Defence’s disposals policy framework 2.19 As the CPRs do not apply to disposals, the next level of guidance below  the FMA Act is that produced by Defence. Defence has an extensive system of  instructions,  manuals  and  directives  referred  to  as  the  ‘System  of  Defence 

                                                      

38 Finance Circular 2006/02 Commonwealth Procurement Guidelines—Clarification. 39 Commonwealth Procurement Rules, paragraph 2.9(c). 40 Finance advice to the ANAO, 27 October 2014.

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Instructions’ (SoDI). The first to be considered are the former Chief Executive’s  Instructions (CEIs), issued under the FMA Act.41 

Defence and DMO Chief Executives’ Instructions

2.20 One way chief executives discharged their responsibility to promote the  proper use of public resources under s. 44 of the FMA Act was by ensuring  that their agencies had appropriate internal controls and guidance in place,  such as CEIs and operational guidelines. 

2.21 The Department of Defence and DMO were separate agencies for the  purposes  of  the  FMA  Act. 42  Each  agency’s  Chief  Executive  issued  CEIs  applicable to their own agency.43 Disposal of Defence SME assets is an activity  that DMO carries out on behalf of Defence. Therefore, the DMO CEIs referred  DMO officials responsible for disposing of Defence assets to Defence’s policies  and procedures for disposals. They required those DMO officials to: 

 comply with Defence’s CEIs and any other relevant CEI or policy and  procedures relating to the disposal of public property; and 

 not approve the disposal of Defence‐controlled public property unless  they hold a delegation under the relevant Defence delegation schedule  issued  by  the  Secretary  of  Defence  [that  is,  the  Financial  Delegations  Manual (FINMAN 2)].44  

2.22 Defence’s  CEIs  also  required  assets  to  be  disposed  of  in  accordance  with policies endorsed by the Secretary and/or the Chief of the Defence Force.  They referred to Defence Instruction (General) LOG 4‐3‐008 Disposal of Defence 

                                                      

41 Section 52 of the FMA Act stated that ‘The regulations may authorise Chief Executives to give instructions to officials in their Agencies on any matter on which regulations may be made under this Act.’ Regulation 6 of the FMA Regulations 1997 (FMA Regulations) stated that ‘The Chief Executive of an Agency is authorised to give instructions ... to officials in that Agency on any matter necessary or convenient for carrying out or giving effect to the Act or these Regulations, including instructions relating to the matters mentioned in paragraphs 65(2)(a) and (b) of the Act.’

42 The Department of Defence and DMO remain separate agencies under the PGPA Act. 43 CEIs were issued by the Secretary of the Department of Defence (for the Department of Defence) and the Chief Executive Officer DMO (CEO DMO). CEIs could be issued on matters listed in s. 65(2)(a)(iv) of the FMA Act, including ‘using or disposing of public property.’

44 DMO CEIs, March 2010, Part 6—Public Property, 6.4—Disposal of Public Property, 6.4.3. The CEIs required Defence officials to comply with Defence’s Financial Management Manual (‘Finance Manual 5’ (FINMAN 5)), the Financial Delegations Manual (‘Finance Manual 2’ (FINMAN 2)), relevant documents forming part of SoDI and other policy as specified in the CEIs.

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Assets (the Disposal Instruction), discussed below, as the primary reference for  direction and guidance on policy for effective and efficient asset disposal.45  

Defence Instruction (General) LOG 4-3-008 Disposal of Defence Assets

2.23 The Disposal Instruction, issued in 2006, set out policy to be followed  once a decision had been made to dispose of an asset. Despite being in need of  updating  it  remained  the  primary  source  of  mandatory  policy  for  Defence  during this audit.46 

2.24 Under the Disposal Instruction, the decision to dispose of assets rested  with the relevant manager in Defence. For major platforms this is the capability  manager (most often a Service Chief).47 

2.25 The  Disposal  Instruction  established  the  following  six  mandatory  policy directives that govern the disposal of Defence assets: 

 disposals planning and management must be conducted as part of the  lifecycle management process; 

 all disposal activities are to be managed and conducted openly, fairly  and  equitably,  and  in  a  manner  that  will  withstand  government,  public and international scrutiny; 

 officials  managing  disposals  are  to  optimise  outcomes  for  Defence  when implementing any disposal strategy48; 

 when disposing or gifting public property it is mandatory to comply  with the FMA Act; Defence and DMO policy on asset management 

                                                      

45 The Secretary and CDF jointly issue each DI(G) pursuant to s. 9a of the Defence Act 1903. The Secretary authorises DIs(G) under the Public Service Act 1999 and they are enforceable under that Act. The CDF issues DIs(G) under the Defence Act 1903 and they are enforceable under the Defence Force Discipline Act 1982.

46 This DI(G) was cancelled in December 2014, towards the end of the audit, and replaced by a new chapter of the Defence Logistics Manual (‘DEFLOGMAN’). Note that the DI(G) did not apply to disposal of all types of Defence assets. It excluded disposal of land, buildings, infrastructure and non-deployable property, plant and equipment; the sale of assets currently in use and inventory; disposal of explosive ordnance; and the disposal of some controlled Defence and strategic equipment. These assets are covered by other Defence instructions.

47 The Disposal Instruction does not identify the ‘relevant manager’. However, paragraph 23 of the Instruction refers the reader to the Defence Supply Chain Manual for further detail. The Defence Supply Chain Manual (July 2003) was replaced in July 2010 with the Electronic Supply Chain Manual (ESCM), which is part of the Defence Logistics Manual Series. The ESCM, Volume 4, Chapter 7, paragraph 42, identifies the capability manager as the relevant manager for capability platforms generally, subject to the relevant delegations for the disposal of assets issued under the CEIs.

48 ANAO comment: The Disposal Instruction states that the optimum outcome ‘may not be limited to monetary return, as there is a number of options for consideration when determining a disposal strategy’.

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and  financial  management  delegation  schedules;  and  International  Treaty obligations;  

 weapons  are  not  to  be  gifted,  sold  or  transferred  without  the  appropriate approval; and 

 all weapons not gifted, sold or transferred to other organisations are to  be disposed of, or destroyed, in a manner appropriate to the type of  weapon.49  

2.26 The  Disposal  Instruction  also  required  that  auditable  records  of  disposals  be  maintained  and  retained  to  demonstrate  adherence  to  Defence  logistics governance processes, and that disposal records be signed original  documents  that  allowed  the  content  to  be  traced  to  the  primary  asset  management system. 

2.27 As Figure 2.1 illustrates, there are three levels of disposal in Defence,  Major, Routine and Unit. This performance audit focuses on disposals defined  by  Defence  as  ‘Major  disposals’,  that  is:  those  items  which  are  expected  to  recover more than $1.0 million in revenue upon their disposal, or are capability  platforms, weapon systems or items of significant public interest which require  specialist disposal action and planning.  

                                                      

49 Defence Instruction (General) LOG 4-3-008 Disposal of Defence Assets, October 2006.

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Figure 2.1: Defence Disposals Flowchart

 

Source: Adapted from Defence, DI(G) LOG 4-3-008 Disposal of Defence Assets. The flowchart is reproduced in the Electronic Supply Chain Manual (ESCM) Volume 4, s. 7, Chapter 1.

Note: ADFLM = Australian Defence Force Logistics Manager.

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Other Defence manuals

2.28 Other Defence and DMO manuals contain further guidance relevant to  disposals over the period considered by the audit. These include: 

 the Defence Logistics Manual (DEFLOGMAN) Series (including Part 2,  Volume  5,  Defence  Inventory  and  Assets  Manual50 and  Part  3,  the  Electronic Supply Chain Manual (ESCM)); 

 the DMO Acquisition and Sustainment Manual; and 

 the DMO standard operating procedure for managing disposals (SOP  (FD) 01‐0‐073).51 

Other directives

2.29 From time to time, senior Defence managers issue directives to address  new  or  emerging  issues  that  affect  disposals,  adding  to  the  rules  Defence  Disposals must follow. An example is the directive by the Vice Chief of the  Defence  Force  (VCDF)  in  October  2009  prohibiting  the  sale  or  gifting  of  Defence  equipment  containing  asbestos  that  would  be  accessible  to  future  users,  and  which  would  be  a  potential  health  risk.  Implementation  of  this  directive is considered in Chapter 5.  

Difficulties with the existing framework 2.30 The audit observed a number of difficulties with the existing Defence  disposals framework, relating to: 

 the structure, consistency and completeness of the guidance; 

 a lack of rigour in disposal tender evaluations; 

 cases where disposals become procurements; and 

 the clarity of guidance relating to approvals for disposal activity. 

                                                      

50 The ANAO initially found that the chapter of this manual intended to cover inventory and asset disposals was empty. In the course of this audit a revised draft of the chapter was endorsed by the Defence Logistics Committee in March 2014 and approved by the Vice Chief of the Defence Force (VCDF) in September 2014. Defence informed the ANAO that it had been published in December 2014.

51 Standard Operating Procedure, Finance Division, Manage Major Disposals, SOP (FD) 01-0-073, Version 2.2, 24 November 2010. DMO informed the ANAO that some DMO Divisions/System Program Offices (SPOs) have also issued their own standard operating procedures.

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2.31 Chapter 3 examines the lack of clarity in management responsibility for  SME disposals in Defence policy and guidance. In addition, difficulties relating  to varying interpretations of the gifting rules are examined in Chapter 6.  

The structure, consistency and completeness of the guidance

2.32 Instructions and guidance to Defence staff on disposal action lie in an  extensive range of documents, of varying vintage and completeness. This may  be due in part to the number of separate parts of a large organisation which  have a legitimate interest. However, having multiple points of reference may  not be necessary or helpful. It is more resource‐intensive to update, provides a  potential  source  of  error  and  inconsistency,  and  creates  challenges  for  personnel seeking to keep abreast of requirements. 

2.33 Some of the existing guidance is inconsistent across different sources  and possibly incorrect. This has been analysed for the rules on gifting, and this  analysis is set out separately in Chapter 6 (paragraph 6.5 forward). 

2.34 The  most  challenging aspect  of this  framework  for  disposals  is  that,  notwithstanding  the  apparent  proliferation  of  sources  of  guidance,  there  is  little practical guidance on the interpretation of the policy principles. This was  the  view,  for  example,  of  the  Chief  Contracting  Officer  at  Richmond  on  relevant policies regarding disposal of assets in November 2012: 

There’s a Defence Instruction General that I read at the time, a DI(G). ... And I  think there was also a Disposals Manual or something like that I looked at at  the time. But when I looked at those policies, they were all very high‐level  policies and quite vague about the actual governance of the mechanics of a  disposal by sale activity. 

2.35 Similarly, when asked about the ‘the mandated or stipulated processes,  policies, instructions regarding disposals’ the former branch head responsible  for Defence Disposals said, in December 2012:  

Well,  there  are  none  or  there  are  none  that  I  would  say  would  be  contemporary or relevant, and that’s where we were moving to, to come up  with a business process ... that we thought was relevant and would work, then  our aim was to actually drive ... some of the business process and business  policy change.52 

                                                      

52 This statement was made in December 2012 in a formal discussion within Defence reviewing the failure of the Caribou disposal. That disposal is examined in Chapter 4.

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2.36 Defence  Disposals  obtained  external  advice  on  policies  applicable  to  asset disposal in mid‐2011. That advice noted that: ‘there appears to be very  little guidance for personnel involved in disposal of assets which explains the  policies  and  processes  that  should  be  followed,  and  issues  and  factors  that  should be considered, in a way that the [Defence Procurement Policy Manual]  does for procurement.’ 

Example of incomplete guidance

2.37 An example of incomplete guidance relates to the cost‐effectiveness of  disposals.  Policy  Directive  3  in  the  Disposal  Instruction  requires  officials  to  optimise the outcome for Defence when implementing any disposal strategy.  The Instruction explains that ‘this may not be limited to monetary return, as  there is a number of options for consideration when determining a disposal  strategy.’  However,  the  Instruction  provides  neither  an  explanation  nor  examples  of  what  is  meant  by  ‘not  limited  to  monetary  return’,  nor  any  guidance as to how the monetary return itself is to be estimated and an overall  assessment  made.  It  references  the Defence  Supply  Chain  Manual53 and  the  Defence  Procurement  Policy  Manual  for  further  guidance  on  selecting  a  method of disposal.54 

2.38 In contrast, the ESCM usefully points out that estimates of both costs  and revenue from the disposal must be taken into account when selecting a  disposal method:  

When  considering  disposal  options,  the  full  anticipated  sale  value  is  to  be  used. This is the estimate of the market value less cost of sale. It provides a  comparative basis to determine the most cost‐effective means of disposal. 

2.39 However, the ESCM provides no guidance on how to estimate costs or  which items should be considered for inclusion in the costing. 

2.40 The DMO standard operating procedure does not help on this point,  largely re‐stating the desirability of taking into account the cost‐effectiveness of  the disposal method: 

                                                      

53 This reference in the Disposal Instruction is out-of-date. The Defence Supply Chain Manual was replaced by the Electronic Supply Chain Manual (ESCM) in 2010. The ESCM, authorised jointly by the Secretary of Defence and the Chief of the Defence Force, was first issued in 2010, and is updated regularly. The relevant chapter is the Department of Defence, Electronic Supply Chain Manual, Volume 4, s. 7, Disposal of Defence Assets.

54 The Defence Procurement Policy Manual primarily refers readers back to the DI(G) LOG 4-3-008.

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Once assets are identified for disposal, the most appropriate means of disposal  needs to be identified taking into account cost effectiveness and any known  restrictions  on  disposal  including  export  and  on‐selling  limitations  and  the  heritage value of the item. 

2.41 In  practice,  there  are  many  elements  that  need  to  be  considered  in  estimating the cost‐effectiveness of a method of disposal, including elements  with  a  non‐financial  character,  such  as  the  equipment’s  perceived  merit  for  heritage and display. The key elements with financial implications include: 

 the expected revenue from sale. This will depend on the condition of  the equipment and its potential uses. The revenue may also be sensitive  to  market  conditions  (and,  therefore,  timing  of  sale),  including  the  availability of similar items from other countries; 

 the  cost  of  preparing  items  for  sale  (demilitarisation,  remediation,  hazardous substance removal, repainting); 

 storage/mooring/accommodation  costs  (or  other  scarce  Defence  resources) until disposal takes place; 

 transport/towing/delivery  costs,  particularly  if  specialist  services  are  required; 

 destruction costs (dismantling, explosive demolition, burying, sinking); 

 identification, collection and disposal of unique spares associated with  the  equipment  (these  may  be  distributed  widely  among  Defence  facilities); 

 legal costs (internal and external)55; 

 sales costs, for example, where an agent or other party is involved in  arrangements to sell assets on to a third party and attracts a portion of  the payment received from that third party; 

 the expected time taken to obtain ITAR approval. Although not a cost  in  itself,  the  delay  can  cause  increases  in  other  costs,  such  as  storage/mooring  costs  and,  potentially,  a  delay  can  lead  to  the  transaction taking place in different market conditions; 

                                                      

55 The audit has observed that Defence frequently seeks legal advice in support of disposals.

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 residual maintenance costs. It will be important to make a sound and  timely judgement as to when to cease maintenance on the equipment  and the depth of any further maintenance before disposal56; and 

 personnel  costs  (including  salary  and  overheads)  in  all  of  the  above  activities, including for the relevant Systems Program Office (SPO) and  disposals personnel. Personnel costs are less visible to the managers  involved but, nevertheless, need to be taken into account. 

2.42 Awareness  of  these  costs  could  also  reveal  matters  needing  active  internal  management  within  Defence  during  the  disposal.  For  example,  a  disposal manager may need to manage expectations as to how long a request‐ for‐offer process or obtaining ITAR approval may take, as this may have cost  implications for the SPO with custody of the equipment to be disposed of.57 

DMO Disposals Review

2.43 The 2013 DMO Disposals Review also emphasised the lack of lower‐ level policy and procedural guidelines: 

While [Defence] Disposals personnel appear to be aware of the requirements of  [the] legislation and policy framework, a number of disposal activities appear  to  have  suffered  from  a  failure  to  comply  with  policy  and  due  process— resulting in internal and external criticisms of those activities.  

These failures appear to have resulted from two primary issues—first, a lack of  detailed  and  consistent  policy  guidance  and  ‘checkpoints’  for  disposal  processes, and second, a historical culture of focusing on achieving outcomes  (as approved by the Minister), rather than following due process. 

                                                      

56 This may involve terminating contracts with outside parties. The decision will need to take account of whether the equipment is to continue to operate, to be used as a static display or scrapped. 57 The DMO Disposals Review (conducted by an external consultant for DMO, October 2013) stated (p. 17):

the relationship between SPOs as ‘custodians’ of assets and [Defence] Disposals as the disposal body has been strained. This may, in part, have been driven by the fact that SPOs need to seek funding for costs associated with holding and preserving assets while Disposals undertook disposal activities, resulting in capability managers/owners bearing additional costs where disposal processes were protracted.

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2.44 The review acknowledged that considerable work had been done but  there  was  still  significant  outstanding  work  to  implement  a  comprehensive  suite of disposals processes and procedures.58  

2.45 The Disposals Review’s first recommendation was that Defence review  in detail the legislation and policy applicable to disposals, and develop a single  guidance  document  to  set  out  clearly  the  applicable  legislative  and  policy  framework. In December 2013, DMO engaged the consultant who undertook  the Disposals Review to draft such a document. The consultant had, by April  2014, provided two draft ‘deliverables’. In late April 2014, Defence informed  the ANAO that: 

AMSO has provided initial feedback to [the consultant] indicating that the draft  deliverables do not meet our requirements and will provide more guidance. 

Separately,  [the consultant]  and  AGS  (who  was  involved  in  providing  legal  advice in the lead up to the establishment of AMSO) will be invited to attend a  planning workshop to support the legislation policy review and to assist in  proposing remediation actions.59 

Lack of rigour in disposal tender evaluations

2.46 Lack of rigour in the Defence disposals framework also arose in the  project in 2012 to dispose of Defence’s older fleets of Army B Vehicles.60 This  came to light following a complaint about Defence’s selection process for a  company or entity to help it dispose of these vehicles.61 

2.47 The  complaint  concerned  Defence’s  evaluation  of  the  tenders  it  received. Defence then instigated a range of reviews and obtained legal advice.  The advice pointed out that: 

It is noteworthy in this regard, that the legislative and policy environment in  which disposals are conducted is generally less detailed and rigorous than that  applicable  to  procurements—so,  for  example,  the  Commonwealth’s  obligations/commitments  under  the  [Defence Procurement Policy Manual]  and  CPRs do not apply to disposals in the same way they apply to procurements. 

                                                      

58 Among the previous work identified by this ANAO audit was the drafting of procedures and probity guidelines by the Australian Government Solicitor (AGS) in mid-2012. The draft AGS material was annotated to indicate that it was contingent on the cancellation of DI(G) LOG 4-3-008 Disposal of Defence Assets. That DI(G) was cancelled in December 2014, towards the end of the audit.

59 In October 2014, Defence informed the ANAO that this work was still in progress. 60 B Vehicles comprise about 12 000 trucks, trailers and four and six-wheel drives, which are beyond their expected operating life. 61 A more detailed analysis of Defence’s Army B Vehicles tender process is set out in Chapter 4.

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Failure to conduct adequate financial checks on purchasers

2.48 An absence of guidance within the Defence disposals framework also  contributed to the difficulties Defence had with obtaining payment from the  purchaser  of  its  B707  aircraft  and  associated  equipment  (see  Chapter 4).  Defence  did  not  carry  out  adequate  checks  on  the  financial  viability  of  the  purchasing company which, even before the sale contract had been executed,  claimed to be experiencing financial difficulties. 

Recognition of a need for a rigorous disposal policy and process

2.49 DMO has recognised the desirability of introducing greater rigour in  disposals  and  improving  consistency  between  disposals  policy  and  the  procurement  framework  established  by  the  CPRs.  Following  the  difficulties  DMO  experienced  with  the  Caribou  sale,  in  March  2012  the  Secretary  of  Defence expressed surprise when informed that it was not standard practice to  make probity checks on commercial bidders for ex‐military aircraft, whereas  probity checks are a normal feature of procurement processes. Subsequently,  the Deputy Chief Executive Officer DMO stated (March 2012): 

Noting  the  current  major  disposals  program—and  the  lack  of  a  Common‐ wealth policy framework around disposals (disposals are not covered by the  Commonwealth Procurement Guidelines, for example), I think we have been a  little too laissez faire in our approach to date, and we are now remediating  this.  In  principle,  we  will  now  apply  the  usual  procurement  policy  and  practice rigour to disposals, notwithstanding that the CPGs do not apply.62 

2.50 Later,  he  instructed  DMO  officers  to  ensure  that  the  relevant  DI(G),  which  was  under  review,  be  aligned  with  the  financial  management  and  accountability framework and related guidance.63 

Where a disposal becomes a procurement

2.51 Ordinarily, it might seem that procurement and disposal are distinct  processes, but this has not always been so for Defence SME. Defence wanted to  dispose  of  the  ex‐HMA  Ships  Manoora  and  Kanimbla  by  sale.  However,  it 

                                                      

62 Defence internal correspondence, Deputy CEO DMO to Chief of Staff to the Secretary of Defence and Director-General of Defence Disposals, March 2012. 63 The development of any policy for disposals at the Commonwealth level—as a counterpart to the CPRs—would require action by the responsible department, the Department of Finance.

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became  apparent  that  the  only  likely  sale  was  for  recycling  as  scrap. 64  Moreover, any purchaser of the ships would charge more for removing them  than it would pay for the scrap. In the event, Defence paid $4.17 million to  have the ships towed away and received $1.67 million for the scrap.65 Thus,  this  asset  disposal  became  a  procurement  of  services,  costing  the  Commonwealth (with other charges) a net $2.56 million. 

2.52 Professional advice obtained by Defence in November 2012 set out the  essence of the argument for this business transaction becoming a procurement: 

the question of whether an activity is properly categorised as a procurement or  a disposal (and treated accordingly from a legislative and policy perspective)  really turns on the substance of the transaction ... a disposal activity which  involves  substantial  costs  (such  that  the  disposal/sale  really  becomes  a  secondary  activity)  is,  in  our  view,  more  properly  categorised  as  a  procurement  activity—i.e.  when  viewed  properly,  the  Commonwealth  is  procuring the services of a third party to dispose of an asset, rather than selling  an asset. 

2.53 The  change  of  classification  from  disposal  to  procurement  raised  concerns as to whether the disposal process—now a procurement—might be  flawed  when  viewed  from  this  new  perspective,  and  might  need  to  be  cancelled.  Defence  obtained  assurance  that  if  it  were  able  to  confirm  and 

document a range of matters (including that the process could and would now  continue in a manner consistent with the CPRs) then there would be grounds  to defend a decision to continue with the process, which it did. 

2.54 This  turn  of  events  highlights  the  importance  of  focusing  on  the  substance of a transaction, which may change in the course of a disposal. In  this case an attempt at disposal by sale failed to attract sufficient revenue to  meet disposal costs, giving rise to a procurement. While the Department of  Finance has, since 2009, highlighted the need to classify transactions carefully 

                                                      

64 In April 2012, the then Minister for Defence Materiel approved the release of a request-for-tender to companies which would undertake the work in Australia. The contract for disposal was signed in May 2013.

65 Defence records indicate that the net cost to Defence of disposing of the two ships for scrap in Australia would have been between $8 million and $10 million.

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in the grants context66, there is a lack of whole‐of‐government advice relating  to classification at the interface of disposal and procurement activity.  

Ministerial approval of disposal strategy

2.55 As discussed in paragraphs 2.6 to 2.10, under the FMA Act (and now  the PGPA Act), the power (delegated from the Finance Minister) to approve  the  disposal  of  public  property  other  than  at  market  price  rests  with  the  Secretary of Defence and the Chief Executive Officer of the DMO (CEO DMO).  They have delegated this power to holders of specific positions within Defence  and the DMO.67 However, the Disposal Instruction states: 

Any disposal strategy that could reasonably be expected to attract heightened  political or public interest may require Ministerial approval. In such instances  the disposal strategy must be submitted by the appropriate Australian Defence  Force Logistics Manager, to the ADF Disposals and Marketing Agency (ADF  DMA) [Defence Disposals] for its advice prior to submission to the appropriate  Minister or Delegate for approval.68 

2.56 While  a  careful  reading  of  this  key  paragraph  in  the  Disposal  Instruction  indicates  that  it  refers  to  ministerial  approval  of  the  disposal  strategy, rather than the actual decision to dispose of materiel, its wording is  not sufficiently clear to distinguish between these two activities. The Disposal  Instruction  does  not  clearly  or  explicitly  distinguish  between  a  Minister’s  understandable interest in the disposal of major assets in his or her portfolio  and the proposed strategy, and the formal authority under the law to make  gifting decisions, which is the responsibility of the Finance Minister and his or  her  official  delegates,  including  the  Secretary  of  Defence.69 Defence’s  policy  and guidance in this area needs to be explicit to support the proper operation  of the gifting delegation. A particular risk, examined in Chapter 6, is that the  Defence Minister has not always been clearly advised on the operation of the  gifting delegation. 

                                                      

66 Finance emphasised the importance of focusing on the substance of a financial transaction when categorising Commonwealth activity and determining the appropriate legal and policy framework to apply. See Finance, ‘Grants, Procurements and other Financial Arrangements’, Finance Circular No. 2013/01, paragraph 2 forward. This circular was preceded by Finance Circular 2009/03 ‘Grants and other common financial arrangements’.

67 The delegation involves the disposal of public property by sale, trade-in, swap/exchange, transfer, dumping, destruction or abandoning. This includes the disposal of public property that is surplus, unserviceable or obsolete, including property which has a value of nil.

68 Defence Instruction (General) LOG 4-3-008 Disposal of Defence Assets, paragraph 25. 69 This is a long-standing feature of the Australian Government’s financial management framework.

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Conclusion—disposals framework 2.57 Disposal of Defence SME is governed by a framework of legislation,  policy and procedure which, for the period under review, was established by  the  FMA  Act.  The  FMA  framework  placed  an  obligation  on  each  chief  executive officer to manage agency affairs in a way that promoted proper use  of Commonwealth resources.70 The Australian Government’s general disposals  policy was stated indirectly in the gifting delegation provided by the Finance  Minister to chief executives: that the property being disposed of should be sold  at market price or transferred to another Commonwealth agency. While the  Commonwealth  Procurement  Rules  (CPRs)  provide  a  whole‐of‐government  framework for procurement, they do not extend to disposal and there is not,  and has not been, a counterpart to the CPRs for the disposal part of the asset  life  cycle.  In  the  absence  of  an  explicit  Commonwealth  policy,  Defence  developed internal procedures and processes for its disposal activities.  

2.58 Within Defence there is a range of policy and guidance on disposals,  some  of  which  is  inconsistent  and  requires  review.  Notwithstanding  the  proliferation of material, Defence’s policy and guidance is cast at too high a  level of generality and lacks a practical procedural focus. For instance, Defence  offers no direction in how to estimate and capture the full costs of a disposal  project; and guidance does not include a requirement to verify the identity,  financial viability or business purposes of a party to whom Defence may be  considering  selling  its  surplus  SME.  These  practical  issues  arose  more  than  once in the case studies examined in this audit, affecting the successful conduct  of  SME  disposals. 71  Another  shortcoming  in  Defence’s  current  disposals  framework is the absence of well‐defined and robust disposal tender processes,  resulting in one tender examined in this audit attracting criticism from both  internal and external advisers.72 Sound guidance for the conduct of an SME  disposal  has  been  lacking  for  some  years  and,  although  DMO  has  been  working on developing new policy and guidelines, these are not yet in place.  Overall, Defence’s disposals framework remains immature, particularly given  the nature of Defence materiel subject to disposal, and the associated risks.  

                                                      

70 ‘Proper use’ was defined as efficient, effective, economical and ethical use not inconsistent with Commonwealth policies. Comparable high-level obligations are currently placed on accountable authorities (such as a departmental secretary) and officials by s.15 of the PGPA Act 2013.

71 See, for example, paragraphs 4.56 and 4.85. 72 See paragraphs 4.118 - 4.127.

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Recommendation No.1 2.59 To  rationalise  and  simplify  its  existing  framework  of  rules  and  guidelines  for  disposal  of  specialist  military  equipment,  the  ANAO  recommends that Defence: 

(a) review  and  consolidate  relevant  existing  guidance  with  a  view  to  ensuring that it is concise, complete and correct; and 

(b) consult  the  Department  of  Finance  in  the  course  of  this  review,  to  maintain alignment with the wider resource management framework. 

Defence response: Agreed 

Finance response: Supported 

 

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3. Reform of Disposals

This chapter considers the two initiatives in recent years to reform SME disposals in  Defence. 

Recent initiatives to reform disposals 3.1 There have been two major initiatives in recent years to reform Defence  disposals practice for SME: 

 the  then  Minister  for  Defence  Materiel73 announced  the  first  major  reform in 2011; and 

 Defence initiated a new round of reform in 2013, following difficulties  with the Caribou and Boeing 707 aircraft disposals. 

3.2 In June 2011, in announcing the first round of reform, the then Minister  for  Defence  Materiel  stated  that  he  was  ‘reforming  Australia’s  system  of  military  disposals—to  reduce  costs,  generate  potential  revenue  and  provide  opportunities  for  Defence  industry  involvement.’  The  major  feature  was  to  turn SME disposals from a loss‐making function into a net revenue‐producing  function.  In  advancing  this  proposal,  Defence  highlighted  relevant  developments in the United Kingdom (UK) as a model for Australia. 

3.3 This chapter considers this first round of reform and examines: 

 the  impetus  for  the  reform,  including  events  leading  to  their  announcement; 

 the announcement of the reform and the objectives and expectations  set; and 

 progress with implementation and achievement of objectives. 

3.4 The second, further round of reform was under way at the time of the  audit. Hence, only limited comment can be made on that here, focusing on  arrangements for future disposals management. 

                                                      

73 The Minister for Defence Materiel at that time was the Hon. Jason Clare MP.

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The impetus for the 2011 reform 3.5 Reform of the disposal of major equipment has occurred in the context  of  other  major  activities  within  Defence.  The  following  are  relevant,  in  particular, to understanding the disposal reform announced in 2011: 

 Accelerated Disposals Program (ADP)—on 27 November 2007, the VCDF  asked  that  the  CEO  DMO  review  items  of  inventory  that  were  potentially surplus to Defence requirements. Defence then began the  ADP for obsolete and surplus inventory. While this program did not  include SME, it gave equipment disposal and related problems, such as  substances with hazardous properties, greater profile.74 

 Disposal of the ex‐HMA Ships Canberra and Adelaide—disposal of these  two ships from planned decommissioning of the first ship in late 2005  to  scuttling  of  the  second  in  2011  was  prolonged,  problematic  and  expensive.75 Further, disposal of former naval ships and boats over a  decade or more had been costly to Defence (see Table 3.1).  

 Strategic Reform Program (SRP)—in 2009, Defence began a decade‐long  major  reform  of  its  business  intended  to  generate  savings  to  be  reinvested  within  Defence.  This  set  a  strong  imperative  to  seek  opportunities to save funds by improving practices.76 

                                                      

74 Defence initiated its ADP to identify efficiency improvements and generate savings. This was directed at the many hundreds of thousands of types of item (comprising many millions of individual items) held in Defence warehouses under the control of Defence’s JLC. At this time, it was accepted that disposals was ‘not something that Defence has done well in the past but there is now a determination to fix this issue and to harness all the benefits to be generated from undertaking this important activity.’ Source: Defence, internal correspondence, Director General Supply Chain Branch, JLC, 7 December 2008.

75 The disposal of these ships is discussed in more detail in Chapter 6. 76 The 2008 Audit of the Defence Budget (the Pappas Review, 3 April 2009), which underpinned the SRP, focused on opportunities to improve on the management of general inventory—and commented on the progress then being made. However, it did not identify SME disposals as an opportunity.

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Table 3.1: Disposal of Royal Australian Navy ships, 1997-2010

Year Name Fate and revenue Additional cost to

Commonwealth A

1997 Swan Scuttled at Geographe Bay,

W.A.

Not known

1998 Ovens Gifted to Western Australian

Museum

Not known

1999 Torrens Sunk in deep water off W.A.

coast as live-fire exercise Not known

1999 Moresby Sold at public auction for

$580 000

Not known

2000 Bermagui Sold at public auction for

$584 000

Not known

2000 Kooraga Sold at public auction for

$584 000

Not known

2001 Ardent Sold by private treaty for

$150 000

Not known

2001 Shoalwater Sold by public tender for

$160 000

Not known

2001 Rushcutter Sold by public tender for

$180 000

Not known

2001 Perth Gifted to Western Australia—

scuttled at Albany, W.A. Not known

2001 Otama Sold to Western Port Oberon

Association for $55 000 $500 000 Federation Grant

2002 Hobart Gifted to South Australia—

scuttled off Yankalilla Bay Not known

2003 Brolga Sold at public auction for

$255 000

Not known

2005 Brisbane Gifted to Queensland—

scuttled off Mooloolaba $3 million

2006 Westralia Sold following request-for-

proposal for $2.75 million Not known

2006 Orion Scrapped in Henderson, W.A. $3.2 million

2006 Cessnock Scrapped in Darwin $400 000

2006 Whyalla Scrapped in Darwin $400 000

2006-07 Bunbury Scrapped in Darwin $450 000

2006-07 Geraldton Scrapped in Darwin $450 000

2006-07 Fremantle Scrapped in Darwin $450 000

2006-07 Geelong Scrapped in Darwin $450 000

2006-07 Launceston Scrapped in Darwin $450 000

2006-07 Bendigo Scrapped in Darwin $450 000

2006-07 Ipswich Scrapped in Darwin $450 000

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Year Name Fate and revenue Additional cost to

Commonwealth A

2006-07 Dubbo Scrapped in Darwin $450 000

2006-07 Warrnambool Scrapped in Darwin $450 000

2007 Wollongong Scrapped in Port Macquarie $400 000

2007 Gladstone Gifted to the Gladstone

Maritime Museum

Not known

2007 Townsville Gifted to the Townsville

Maritime Historical Society $200 000 grant

2008-09 Canberra Gifted to Victoria—scuttled off

Barwon Heads

$7 million payment to state

2008-10 Adelaide Gifted to New South Wales—

scuttled off Terrigal

$6 million payment to state

2011-12 Manoora Sold for scrap in Texas:

$1.5 million revenue

$4.17 million removal fee

2011-12 Kanimbla

Sources: Defence, Ministerial Submission ‘Disposal of Navy Ships 2011 to 2019’, November 2010, and Source Evaluation Report for disposal of HMA Ships Manoora and Kanimbla.

Note A: Represents Defence estimates of budgeted direct costs to Defence for the disposal. Does not include indirect costs associated with contracting, legal advice, advertising, sale agents’ fees, and valuations.

3.6 The ex‐HMA Ships Canberra and Adelaide were gifted to the states of  Victoria and New South Wales to be scuttled as dive wrecks. In each case,  managing the disposal, including the selection of a suitable site, preparing the  ship  and  addressing  environmental  and  other  concerns,  turned  out  to  be  lengthy and complex and, in the New South Wales case, involved court action.  Defence  Disposals  invested  extensive  administrative  effort,  including  in  working  with  state  government  bodies.  Defence  has  estimated  that,  taken  together,  the  two  disposals  cost  the  Commonwealth  about  $13 million  in  funding provided by Defence to the states, primarily to prepare the ships for  scuttling.77 

3.7 By way of background, an earlier Minister for Defence78 had offered to  meet the costs of preparing the ex‐HMAS Brisbane for use as a dive wreck over 

                                                      

77 Defence informed the ANAO that funds to meet these costs were obtained from allocations within Defence for naval sustainment. However, Commonwealth funding may not have met all the scuttling costs. For example, one account states that ‘The NSW Government originally committed $0.25m to the project, as well as in-kind contributions, but had to meet significant additional costs to complete the project.’ Source: C Cole and C Abbs 2011, Catchments & Lands, Department of Primary Industries, Newcastle, NSW, ‘Scuttling the ex-HMAS Adelaide as an artificial reef and recreational dive site: A case study in complexity’, available at: , [accessed August 2014]. 78 The Hon. Peter Reith MP.

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a decade ago. Even though this offer had been capped at $3 million by a later  minister79, an expectation of similar funding had been created for later offers of  ships as dive wrecks. This precedent80 and its consequences for the disposal of  ex‐HMA  Ships  Canberra  and  Adelaide  are  discussed  in  Chapter  6  (from  paragraph 6.31). 

Ships Disposal Strategy 2011-19

3.8 In June 2010, Defence began work on a ships disposal strategy for the  following  decade,  the  remaining  period  of  the  SRP.  The  strategy  was  to  address  a  substantial  program  of  ship  disposals  over  that  period.  Defence  expected  to  decommission  up  to  two  dozen  ships,  including  HMA  Ships  Tobruk, Kanimbla, Manoora, Darwin, Newcastle, Sydney and Melbourne. Defence  wanted to avoid incurring similar costs to those incurred when it disposed of  the ex‐HMA Ships Canberra and Adelaide. 

3.9 Moreover, on the basis of Defence’s understanding of the experience of  the  UK  Ministry  of  Defence  (in  particular,  with  former  Royal  Navy  ship  ex‐HMS Fearless), Defence identified a potential for funds to be returned to the  Commonwealth from ship disposals, as a contribution to the SRP, by recycling  a high proportion of the constituent material. Defence believed it could not  only avoid the previous losses but earn revenue, if only from scrap. Defence  internal estimates at that point, for example, showed that had the ex‐HMAS  Adelaide been sold for scrap, it could have returned revenue of $3 million. 

3.10 Defence Disposals then developed a strategy to enable ship recyclers to  compete against other interested parties (including dive wreck/artificial reef  proponents)  on  a  value‐for‐money  basis.  Defence  first  drafted  a  ministerial  submission proposing the strategy in July 2010. This was finalised and put to  the then Minister for Defence Materiel81 in November 2010. 

3.11 In essence, the strategy pointed out that Defence had incurred costs in  recent years from ships gifted as dive wrecks. Since it would dispose of a large  number of ships during the remainder of the SRP period, it estimated the cost  to  Defence  of  continuing  past  practices  to  be  up  to  $40 million.  However,  Defence  had  formed  a  view,  based  on  reports  of  UK  experience,  that  ship 

                                                      

79 Senator the Hon. Robert Hill. 80 As discussed in Chapter 6 (paragraph 6.11), the Finance Minister’s Delegation for gifting public property alerts delegates to the potential risks posed by precedents. 81 The Hon. Jason Clare MP.

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disposal could be more effective and profitable, citing, in particular, examples  centred on dismantling, recycling and recovery of materials. 

3.12 The  strategy  Defence  developed  was  to  release  a  global  request‐for‐ proposal (RFP) to seek options for the disposal of up to 17 ships and associated  equipment, encompassing methods such as: sale or export as a going concern;  dismantling  and  recycling;  dive  wrecks;  and  museum  exhibits.  Defence  envisaged successful respondents could form a panel of prospective tenderers,  with tenders assessed on a ship‐by‐ship basis. 

3.13 The  Minister  for  Defence  Materiel  did  not  immediately  approve  the  proposal  but  sought  further  advice  on  the  potential  for  involvement  of  the  Australian  shipbuilding  industry. 82 After  consulting  a  range  of  Australian  companies, Defence responded to the Minister with a further submission on  5 April  2011.  Defence  had  concluded  from  its  consultations  that  there  was  sufficient industry interest to proceed with the proposed RFP. Defence then  sought  ‘priority  consideration’  of  the  ships  disposal  strategy,  which  the  Minister approved on 7 April 2011. 

3.14 In June 2011, shortly after the strategy was approved, Defence further  advised the Minister on the timing and structure of the RFP. This followed the  decommissioning  of  the  HMAS  Manoora  on  27  May  2011—earlier  than  expected. The RFP would now be in two parts, one for the ex‐HMAS Manoora  (and potentially HMAS Kanimbla, should it also be decommissioned early) and  the other for the remaining ships to be decommissioned through to 2019. 

Other ‘domain solutions’

3.15 From  about  October  2010,  Defence  began  to  develop  further  longer‐ term disposal strategies similar to that for Navy ships. The next such strategy  was to be a ten‐year vehicle disposal strategy, enduring for the remainder of  the  SRP  period  and  modelled  on  the  ships  strategy.  Following  vehicles,  it  expected to develop aerospace and helicopter strategies to complete the set. 

3.16 In  early  2011,  DMO’s  acting  Head  of  Acquisition  and  Sustainment  Reform  Division  (HASRD)  stated  that  his  ongoing  strategic  review  of  the  2011─20 disposal environment showed that Defence would be undertaking its  largest disposals program since World War II. This would test Defence (and  Defence Disposals) in terms of resources, and also industry capacity. However, 

                                                      

82 The Minister’s response was perceived within Defence as an initial rejection of the strategy.

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in developing ‘domain solutions’ (such as the ships and vehicles strategies),  Defence  Disposals  expected  to  be  in  a  well‐informed  position  to  develop  a  business case for more internal resources if required. 

Proposal and announcement of the reform 3.17 The major reform proposal put to the Minister for Defence Materiel in  May 2011 by the CEO DMO set out two key points: 

 first, the large scope of military equipment disposals over the coming  decade  (representing  54  per  cent  of  Defence’s  specialist  military  equipment83); and 

 second,  that  ‘managing  disposals  as  a  commercially‐focused  major  program’ presented a financial opportunity. 

3.18 Defence advised the Minister that Defence Disposals had begun a range  of  measures  to  deal  with  imminent  disposals.  These  comprised  the  F‐111C  disposal strategy, the ships strategy (then recently approved by the Minister),  and  a  forthcoming  vehicles  strategy.  Defence’s  advice  drew  a  particular  contrast between the high disposals revenue obtained by the UK since 1997  (£650 million) and the losses made by Australia ($19 million). Defence based  this advice on information on UK disposals that had come to hand in early  2011. 

3.19 Defence attributed the difference in performance to: 

a. a  reactive  [Australian]  disposals  process,  where  disposals  have  been  undertaken  on  an  asset  by  asset  basis,  with  detailed  planning  not  occurring until late in an asset’s life; 

b. utilising  military  assets  to  establish  State  tourism  infrastructure,  e.g.  ex‐HMA Ships Perth, Hobart, Brisbane, Canberra, Adelaide being gifted (in  some cases with cash contributions) for use as artificial reefs/dive wrecks;  and 

c. the  lack  of  a  commercial  focus  for  disposals,  encompassing  planning,  target setting, market analysis, product development, industry partnering,  etc. 

                                                      

83 This, according to the ministerial submission, is in terms of the equipment’s original acquisition cost and includes supporting inventory.

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3.20 The submission stated that the CEO DMO had asked Defence Disposals  to develop further initiatives which would reduce and eliminate disposal costs,  return  funds  to  sustainment,  and  generate  and  maximise  revenue  for  both  Defence  and  the  Commonwealth.  The  submission  noted  that  a  number  of  complexities  would  need  to  be  addressed  to  realise  these  objectives  and  manage disposals as a major program, including ITAR, occupational health  and  safety  and  heritage  issues. 84 The  next  initiative,  however,  would  be  international  benchmarking  focused  on  the  UK,  US  and  Canada.  A comprehensive program plan was promised to follow. 

Announcement

3.21 The  Minister  for  Defence  Materiel  announced the  reform to  military  equipment  disposal  on  29  June  2011.85 The  announcement  emphasised  the  large scope of expected disposals over coming years and the contrast between  the  substantial  revenue  generated  by  the  British  Government  from  their  military disposals since 1997 and the costs incurred by Australia. The rationale  for  reform  was  ‘to  reduce  costs,  generate  potential  revenue  and  provide  opportunities for Defence industry involvement’. 

3.22 The announcement stated that the ships disposal strategy would be the  first  initiative  under  the  reform  and  that  this  would  seek  proposals  in  two  parts: first, disposing of HMAS Manoora and, second, all other ships. The plan  to dispose of up to 12 000 Army B Vehicles had also been approved by this  point, and was included in the Minister’s announcement.  

3.23 Consistent  with  the  Minister’s  announcement,  Defence’s  2011-12  Annual Report identified four key priority areas for Defence disposals: 

 to reduce if not eliminate Defence major disposals cost; 

 to return funding to the sustainment of current capability; 

 to  generate  and  then  maximise  revenue  from  the  sale  of  Defence’s  military assets; and 

                                                      

84 On the question of generating revenue for Defence, one threshold issue not addressed in the submission related to Defence’s ability to retain receipts from the disposal program. Under s.31 of the FMA Act and FMA Regulation 15, there were defined circumstances in which FMA Act agencies could do so. Receipts not of a type listed in the Regulations would go to consolidated revenue.

85 The Hon. Jason Clare MP, Minister for Defence Materiel, press release, ‘Reforms to Disposal of Military Equipment’, 29 June 2011.

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 to  ensure  that  Defence  heritage,  particularly  war  heritage,  is  appropriately recognised and preserved.86 

Organisational support

3.24 To implement the reform, a proposal was formulated in May 2011 for  consideration  by  the  CEO  DMO  to  create  an  ‘enhanced’  Defence  Disposals  unit.  This  would  require  additional  resources  of  15  full‐time  equivalent  positions plus operating expenses.87 The basis for the proposal was the size and  complexity of the reform program. The reform program was referred to by  Defence Disposals during the remainder of 2011 as the ‘Strategic Divestment  Program’. 

Progress with implementing reform 3.25 On  the  question  of  its  progress  with  the  reform  announced  by  the  Minister in June 2011, Defence informed the ANAO: 

Two  key  activities  in  financial  year  2011-12  aimed  at  reducing  cost  and  maximising revenue to Defence were progressing of the Navy ships disposal  Request for Proposal (RFP) released in July 2011 and the Army non‐combat  vehicles disposal RFP released in August 2011. 

3.26 Taking account of these and the other items identified above, the audit  assessed progress with: 

 the ships disposal strategy;  

 the vehicles disposal strategy; 

 Defence’s international benchmarking of disposals; 

 the tracking of both disposal costs and revenue; and 

 the comprehensive program plan promised by the CEO DMO to the  Minister. 

3.27 Each of these is discussed in the following paragraphs (3.28 to 3.64).88 

                                                      

86 Defence, Annual Report 2011-12, p. 216. 87 The proposal did not include an estimate of the costs. 88 A further initiative, which had already been underway but could be considered part of this round of reform, was a proposed Blanket Demilitarisation and Disposal Agreement (BDDA) with the US. This

relates to US ITAR and is considered in Chapter 7.

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Ships disposal strategy

3.28 In  November  2011,  five  months  after  the  ministerial  announcement  discussed  in  paragraphs  3.21  to  3.23,  Defence  ministers  issued  a  progress  report on the full range of Defence reform then underway (including much  that is well beyond equipment disposals). The progress report noted that the  RFP for ship disposals closed on 14 October 2011 and responses were being  evaluated. A decade‐long ship disposal solution was expected to be finalised  and in place during 2013, with the focus for 2011 and 2012 being cost‐effective  disposal of the ex‐HMA Ships Manoora and Kanimbla.  

3.29 In  December  2011,  the evaluation  report  on  the  proposals  expressed  disappointment with the 17 proposals received: 

the  Commonwealth  sought  innovative  solutions  from  the  industry  on  the  disposal  options  for  the  fleet  of  [Navy]  obsolete  vessels  over  the  coming  decade.  The  responses  were  disappointing  as  no  innovative  solutions  were  provided.  Each  of  the  respondent  proposals  would  incur  a  cost  to  the  Commonwealth and in some cases this cost would be ongoing with the risk of  some costs escalating over the proposed ten year disposal period. 

3.30 The  evaluation  report  also  considered  options  proposed  for  the  ex‐ HMAS  Manoora 89  and  ex‐HMAS  Kanimbla  (which  had  then  just  been  decommissioned). The report observed: 

the overwhelming response for the disposal option for Manoora and Kanimbla  has been that of recycling at Commonwealth expense. Most of [the] proposals  assessed  incurred  a  cost  to  the  Commonwealth.  Of  the  few  proposals  that  suggested a return to the Commonwealth when further assessed also incurred  costs to the Commonwealth in the form of towing and transportation of the  vessel to the recycling facility overseas. 

3.31 The  fate  of  the  ex‐HMA  Ships  Manoora  and  Kanimbla  was  thereafter  settled as a separate matter from the overarching ships disposal strategy. 

Disposal of the ex-HMA Ships Manoora and Kanimbla

3.32 Defence advised the Minister for Defence Materiel in March 2012 that  ‘evaluation of the RFP responses [to the ships strategy] was underway.’90 The 

                                                      

89 The disposal of the ex-HMAS Manoora formed a separate part to the RFP as the Navy wished to expedite it.

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advice stated that, following the earlier than expected decommissioning of the  ex‐HMA  Ships  Manoora  and  Kanimbla,  Defence  now  held  sufficient  market  knowledge  to  recommend  an  immediate  disposal  strategy.  There  had  been  neither industry interest in the sale of the ships as going concerns nor any  interest from foreign navies. There were no viable responses either to use the  ships as dive wrecks nor as museum exhibits. Defence now proposed to release  a restricted request‐for‐tender (RFT) to selected companies for the sale of the  ships for recycling. 

3.33 Defence’s ministerial advice noted separate expressions of interest from  areas such as the Queensland Gold Coast and Sunshine Coast, and the New  South Wales Illawarra region, for use of the ships as dive wrecks. The advice  counselled against such options, noting that: 

 those responses received to the RFP that had offered dive wrecks as a  proposal  were  considered  deficient  and  the  respondents  expected  Commonwealth funding; and 

 even  a  robust,  funded  proposal  would  meet  opposition  on  environ‐ mental grounds with potential for protracted litigation. 

3.34 Following  a  meeting  between  the  Minister  and  Defence  officials  on  30 May  2012,  the  Minister  asked  for  further  advice  on  recycling  the  ships  within Australia and overseas; use of a vessel by State governments as a dive  wreck; and their possible disposal as a live‐fire target. The Minister, who had  received representations from state and federal members of parliament seeking  to have a decommissioned RAN ship sunk off the Queensland coast as a dive  wreck, also sought a draft letter of offer to the Queensland Government. 

3.35 On  6  June  2012,  Defence  provided  the  advice  and  draft  letter  the  Minister  had  requested.  Defence  recommended  that  one  or  both  ships  be  offered to the Queensland Government for use as a dive wreck: 

on an Êºas is, where isʺ basis, with the immediate removal of the ship(s) from  Sydney Harbour, and all costs and expenses in the removal, preparation for  scuttling, legal and environmental compliance or any activity associated with  this transaction to be borne by the Queensland State Government. 

                                                                                                                                             

90 Evaluation of the RFP responses had been underway since November 2011, as indicated in the Minister’s press release at that time on progress of Defence reforms. The ministerial submission of March 2012, which was focused on the disposal of the ex-HMA Ships Manoora and Kanimbla, does not explain why so much time had elapsed on this task.

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3.36 Should the offer be declined, Defence proposed that the ships be made  available for recycling through a select tender process. 

3.37 The  Minister  wrote  to  the  Queensland  Government  in  June  2012  offering a ship as a dive wreck, and advising that it would cost a minimum of  $10 million to sink one ship for this purpose. The Queensland Government  declined and Defence issued the RFT on 10 July 2012. However, discussions  continued with a view to the New South Wales Government using one of the  ships for the same purpose. On 28 September 2012, it also declined a similar  offer. Defence then proceeded with the RFT for sale of the ships for recycling. 

3.38 When Defence began evaluating responses to its RFT it found that: 

the sale contract released in the RFT has hit a snag. None of our tenderers can  provide an ‘in the black’ sale price. That is, they are prepared to offer a sale  price but either due to the cost of the removal or the cost of the recycling it  would still come at a cost to the Commonwealth. 

3.39 Defence ultimately signed the contract with the successful tenderer on  20 May 2013 and the ships were later taken to the US to be broken up. As  mentioned  earlier  (paragraph  2.51),  the  contract  involved  a  net  cost  to  the 

Commonwealth  of  about  $2.5  million.  This  was  because  the  cost  to  the  Commonwealth of removing the ships from Sydney and towing them to the  breaker’s yard in Brownsville, Texas, was considerably higher than the price  paid to the Commonwealth for them.91 

3.40 The full cost of the disposal, however, is much higher.92 The ships had  to be removed from Garden Island in Sydney to allow for repairs to facilities in  preparation  for  the  International  Fleet  Review.  Defence  then  had  to  meet  mooring costs for the ships until 4 July 2013, when the ships were transferred  to  the  disposal  contractor.  DMO  obtained  commercial  mooring  for  them  at  Glebe Island, which cost some $3.25 million. 

3.41 Although the revenue returned from the scrap can be identified, the  ANAO has found no evidence that Defence monitored the costs of the entire 

                                                      

91 Defence records indicate that the net cost to Defence of disposing of the two ships for scrap in Australia would have been between $8 million and $10 million. 92 Some of the costs incurred in disposing of HMA Ships Manoora and Kanimbla can be attributed in part to the delay in Defence obtaining ITAR approval from the US. However, on this occasion, Defence

added to this delay through its own administrative error. When it was conducting final negotiations with the two preferred tenderers, it submitted an ITAR approval application for one tenderer on 15 January 2013 but omitted to submit one for the other (ultimately successful) tenderer until 13 March 2013.

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disposal  of  the  ex‐HMA  Ships  Manoora  and  Kanimbla  to  inform  future  disposals,  nor  did  it  document  the  process  for  learning,  education  or  accountability purposes. 

Fate of the ships disposal strategy

3.42 Ultimately, Defence took up none of the proposals received in response  to the ships disposal RFP. Defence informed the ANAO that, nevertheless, the  ‘RFP  did  provide  important  information  to  help  guide  future  ship  disposal  planning.’ However, Defence did not identify the nature of this information  nor how it will guide that planning. 

3.43 One reasonable conclusion from this work is that a stream of revenue  from this source is unlikely to be realised and that Navy ship disposal in the  foreseeable future is more likely to generate net costs to the Commonwealth.  Transport  costs,  in  particular,  are  high  for  ship  disposals  overseas,  and  additional costs can mount quickly if delays occur. 

3.44 Aside from the disposal of ex‐HMA Ships Manoora and Kanimbla, the  ships disposal strategy appears to have run its course without result. Defence  has not indicated how this turn of events has been acquitted with ministers or  the Parliament, who may have expectations based on earlier announcements.  

3.45 The experience of the ships disposal strategy highlights the need for  key strategies to be strongly grounded in an understanding of the operating  context or historical experience, and supported by analysis.93 As indicated in  Table 3.1, in the decade before the strategy, disposal of ships had generally  come  at  a  cost  to  the  Commonwealth.  The  step  change  envisaged  in  ship  disposal outcomes now looks too optimistic. 

Vehicles disposal strategy

3.46 On 21 June 2011, the Minister for Defence Materiel approved Defence’s  recommended strategy for the disposal of about 12 000 Army B Vehicles over  10 years (2011-20). However, it took Defence until November 2012 to sign a 

contract to give effect to the strategy. The audit examined the development of  these arrangements as a case study (Chapter 4) and in relation to hazardous  substances (Chapter 5). 

                                                      

93 As discussed, Defence’s thinking was informed by recent UK experience. However, it is necessary to assess differences in circumstance, such as the likely transport costs arising from Australia’s distance from overseas recyclers compared to those faced by the UK.

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3.47 Defence informed the ANAO that: 

the Army non‐combat vehicles RFP aimed to give industry the opportunity to  propose disposal solutions which would reduce Defence’s cost and return net  funding to sustainment of current Defence capability. This RFP ultimately led  in  2012  to  the  contract  with  [the  successful  contractor]  for  the  B  Vehicles  disposal, which is an innovative commercial approach that has led to over  $9 million in revenue being returned to Defence [in calendar year 2013]. 

3.48 However, Defence’s internal project tracking report for the B Vehicles  disposal indicated that, as at May 2014, the ‘project health’ was of ‘concern’  due to Defence’s own slow release of surplus vehicles to the contractor. As a 

result, Defence has agreed to reduce, substantially, the Commonwealth’s share  of  the  revenue.  Under  a  complex  revenue‐sharing  formula,  Defence’s  share  was originally set at an effective 64 per cent of the proceeds from sale of the  vehicles. For 2014-15, Defence has agreed to drop this share to 24 per cent.  Thus, the revenue Defence gains from this arrangement in 2014-15 will be a  smaller proportion of a lower than anticipated revenue stream. 

International benchmarking

3.49 Defence’s undertaking to the Minister in May 2011 was that its next  initiative  would  be  further  international  benchmarking,  encompassing  both  departmental  and  industry  activities  and  outcomes  in  the  UK,  US  and  Canada.94 The  term  ‘benchmarking’  can  be  used  to  refer  to  any  process  of  comparison, but it also has a more technical meaning, implying specific steps  and structured procedures designed to identify and replicate best practice. The  audit sought to identify where, on the continuum between general comparison  and structured analysis, Defence Disposals’ benchmarking work lies. 

3.50 Defence Disposals reported to the CEO DMO, in September 2011, that  the outcome of international benchmarking for disposals would be a paper on  the  future  structure  and  operation  of  disposals  in  Defence.  This  paper,  prepared in October 2011, sought to create an ‘enhanced Defence Disposals  Agency’, including by raising the Defence Disposals staff level from 13 APS  full‐time‐equivalent staff to 21 and by creating a single organisational unit by  combining staff from JLC and Defence Disposals.95 

                                                      

94 See paragraph 3.20. 95 The earlier proposal to increase the size of Defence Disposals to support the disposals reform program (see paragraph 3.24) had not succeeded.

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3.51 In relation to the benchmarking work done by Defence Disposals, the  October 2011 paper stated: 

The business models used by allied nations have shown that this model works  and  can  generate  significant  revenue  in  an  area  where  Defence  has  traditionally expended budget allocation. In particular, the model used by the  UK MoD [Ministry of Defence] has a large number of contracts covering the sale  of  B  Vehicles,  helicopters,  military  spares,  scrap  metal,  rubber  goods,  etc.  There are very few items disposed of by the MoD which result in a cost, and  this is the business model which will be adopted by [Defence Disposals].96 

3.52 It is not clear how far this proposal advanced, but it is apparent that it  did not succeed as a funding/establishment request. However, elements of the  business model (such as the B Vehicles disposal) have proceeded. 

3.53 Defence  has  not  identified  any  other  material  output  from  the  benchmarking work or the undertaking made to the Minister in May 2011. 

Benchmarking against the UK

3.54 Reference  to  the  UK  experience  in  disposals  became  more  voluble  within  Defence  in  2011.  DMO  officials  had  observed,  in  mid‐April  2011,  a  report  in  a  UK  magazine97 stating  that  the  Ministry  of  Defence  (MoD)  had  earned  revenue  of  £650 million  since  1997  from  the  sale  of  defence  equipment.98  

3.55 Defence  promptly  provided  a  comparison  in  disposals  revenue  performance to ministers’ offices and to the CEO DMO, pointing out that, in  the same period that the MoD had obtained this revenue, Australian Defence  disposals had cost the Commonwealth about $20 million. This comparison was  also prominent in the subsequent ministerial submission proposing reform to  the disposals program as a whole. 

3.56 In late April 2011, after submitting its advice to ministers’ offices and  the CEO DMO, Defence Disposals became aware of important further detail of  the MoD arrangement. Closer scrutiny of the source material (the answer to a 

                                                      

96 The audit has not found any evidence drawn upon by Defence to support the statement ‘There are very few items disposed of by the MoD which result in a cost’. 97 The report was in the March 2011 edition of the UK Ministry of Defence magazine ‘Desider’, which characterises itself as ‘the monthly corporate magazine for [UK] Defence Equipment and Support

(DE&S). It is aimed at readers across DE&S, the wider MoD, armed forces and industry, and has stories and features about support to operations, equipment acquisition and support.’ 98 This article was based on an answer provided to a Parliamentary question in the House of Commons, a copy of which Defence subsequently obtained from the Internet.

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Parliamentary question) showed that the revenue of £650 million represented  the total of the return to both the private contractors involved and the MoD.  Each would receive only a proportion of that gross figure, which also included  payments to the private partners for ‘collection, storage, accounting, upgrade  and sale’ of the stores and equipment. 

3.57 This  suggests  that  Defence  Disposals  had  misunderstood  the  magnitude of the revenue obtained by the UK Government on its sale of MoD  equipment.  There  is  no  evidence  that  this  caveat  was  transmitted  to  more  senior Defence management or ministers’ offices, who may have been left with  the impression that the UK Government had earned more revenue than in fact  it had from disposal of military equipment. 

3.58 Defence  records  provide  no  analytical  evidence  of  serious  benchmarking  effort  to  compare  the  Australian  disposals  performance  with  that of the UK or the other countries mentioned in the May 2011 submission to  the then Minister. Defence’s proposal for a new approach based on the UK  model seems to have been based on a general understanding of the industry  partnership model it had adopted and a superficial comparison of reported  gross sales revenue. Further, during the audit, Defence informed the ANAO  that: 

some  research  was  undertaken  to  benchmark  Defence’s  disposals  with  overseas countries; however, there is no evidence that DMO provided further  written advice to the minister regarding the benchmarking outcomes. 

3.59 Further,  there  is  no  evidence  of assessment  by  Defence  Disposals  of  how  the  UK  industry  partnership  model  would  translate  to  Australian  circumstances or what factors the model might be sensitive to. For example,  factors that could have been considered in any such analysis might be: 

 the likely large number and variety of MoD equipment disposed of and  the proximity of these assets to the substantial European market; and 

 the  relatively  smaller  scale  of  Defence  equipment  disposals,  the  distance from overseas markets, and an apparently limited local market  for these assets based on historical sales experience. 

Revenue and costs

3.60 One of the main objectives of the reform to disposals as announced by  the Minister in June 2011 was to reduce costs and increase revenues.  

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3.61 To manage and track disposals, and assess progress with cost reduction  and  increasing  revenues,  Defence  needs  appropriate  business  procedures,  including  a  mechanism  that  draws  together  all  of  the  expenditures  and  revenues associated with each disposal. This would allow Defence to work out  the net position for each disposal, report progress against undertakings to the  Minister and, potentially, identify lessons from particular disposals so as to  manage  future  disposals  more  effectively.  Such  a  mechanism  would  be  a  fundamental requirement in a ‘commercially‐focused major program’ seen as  presenting a financial opportunity (paragraph 3.17). 

3.62 As mentioned in Chapter 1 (paragraph 1.20), Defence has no database,  register or other systematic method to manage or collect records for its major  equipment  disposals.  Moreover,  Defence  did  not  put  business  processes  in  place to track financial or other progress of the reform. Thus it is not clear how  Defence expected thereafter to manage the initiative or report its performance  other than on an ad hoc basis (for example, by undertaking data collection on  each occasion that performance information was required). 

3.63 Within  Defence,  concern  had  developed  at  the  costs  associated  with  gifting naval ships for use as dive wrecks. During 2011 these costs became a  focus for Defence in considering options for reducing the cost of disposals.  However, as discussed in Chapter 2 (see paragraph 2.41), there are many other  sources  of  expenditure  which  can  contribute  to  the  costs  of  a  disposal,  including  personnel,  hazardous  substances,  storage,  accommodation  and  towing  costs,  and  legal  costs.  These  costs  are  borne  by  different  parts  of  Defence and there seems not to have been any means to draw them together to  present a full record of the costs and revenues for SME disposals. 

Comprehensive program plan

3.64 In  the  reform  proposal  to  the  Minister  in  May  2011,  the CEO  DMO  undertook to provide a comprehensive program plan to support the reform  initiative. Defence records indicate that no program plan was prepared as part  of  the  reform  initiative,  and  any  attempt  at  comprehensive  planning  for  disposals awaited a further round of reform from 2013 onwards.  

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Conclusion—initial round of disposals reform 3.65 Defence initiated a first round of reform of SME disposals in 2011 with  four priority areas: to reduce if not eliminate Defence major disposals cost99; to  return funding to the sustainment of current capability; to generate and then  maximise  revenue  from  the  sale  of  Defence’s  military  assets;  and  to  appropriately  recognise  and  preserve  Defence  heritage,  particularly  war  heritage.  

3.66 Defence  based  this  reform  on  comparison  with  overseas  experience.  However, the reform proposal was not underpinned by sufficient analysis or  research to support the expectation of generating revenue from SME disposals.  Defence  set  about  implementing  the  reform  primarily  through  establishing  long‐term strategies for the disposal of SME in specific ‘domains’: two such  strategies  were  those  for  RAN  ships  and  for  Army  B  Vehicles.100 The  ships  strategy  has  already  run  its  course  with  only  two  ships  disposed  of—the  ex‐HMA Ships Manoora and Kanimbla—at a substantial cost to Defence. The  B Vehicles strategy has returned funds, but there is no information on the costs  incurred by Defence in managing the disposal.  

3.67 Defence  has  not  reported  its  performance  in  terms  of  the  four  2011  reform  priorities  nor  have  measures  or  targets  been  set  that  would  enable  Defence to do so. The lack of financial data on major equipment disposals also  hinders  performance  assessment  against  the  priorities.  The  most  significant  insight from the initial round of reform is the need to take proper account of  the relatively small scale of Defence equipment disposals, the additional costs  which  can  arise  due  to  Australia’s  distance  from  overseas  markets,  and  a  limited local market for these assets based on historical sales experience. 

Further reform of Defence disposals 3.68 In  response  to  the  recent  reviews  and  investigations  of  disposal  processes, Defence has: 

 made a number of organisational and staffing changes;  

                                                      

99 At the time the primary source of concern about costs arose from the experience of disposing of two RAN ships, ex HMA Ships Canberra and Adelaide, as dive wrecks gifted to the states. This had cost Defence at least $13 million and taken considerable administrative effort over an extended period.

100 B Vehicles comprise about 12 000 trucks, trailers and four and six-wheel drives.

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 identified forthcoming disposals by reference to the Key Defence Asset  Register (KDAR); 

 set out a general disposals plan in a spreadsheet; and 

 set about revising departmental disposals policy, developing templates  and documenting disposals processes. 

3.69 Defence has also recently developed a formal monitoring and reporting  mechanism for individual disposals. The new reports for individual disposals  available to date mainly provide a commentary on the progress of the disposal  and  do  not  generally  identify  a  total  budget  for  the  disposal,  nor  track  expenditure and revenue.101 However, this work is ongoing.102 

3.70 The most substantial recent review of disposals was instigated in mid‐ 2013, when Defence obtained the services of external consultants to review the  operation of Defence Disposals. The consultant stated its task thus: 

The review was ... established to provide DMO stakeholders with an under‐ standing of the issues that may have given rise to past problems.103 

3.71 The DMO Disposals Review was completed on 16 October 2013 and  provided  to  Defence.  It  gave  particular  focus  to  four  case  study  disposals:  Caribou aircraft; B707 aircraft; B Vehicles; and Landing Platform Amphibious  ships (ex‐HMA Ships Manoora and Kanimbla), all of which have been examined  in this audit. 

3.72 The review made six recommendations and Defence accepted them all.  The recommendations (which are set out in Appendix 1) address: legislation  and  policy  review;  delegation  framework  clarification;  the  disposals  governance  framework;  risk  analysis,  disposals  templates,  processes  and  instructions; and training and resourcing. In April 2014, Defence developed a  plan to implement these recommendations by December 2014 and to assess  progress in the period January to June 2015. 

                                                      

101 In several cases, the reports observed stated that no specific project budget had been allocated. 102 In October 2014, Defence informed the ANAO that, from July 2014, an additional level of reporting detail has been added to Defence’s financial management system to enable AMSO to monitor its expenditure associated with each disposal project. However, AMSO does not have visibility of

expenditure related to SME disposals incurred by other areas in Defence, where major disposal costs may be incurred. 103 Defence, DMO Disposals Review, 16 October 2013, p. 3.

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3.73 Some  major  issues  raised  in  the  review’s  recommendations  are  also  discussed in this audit report (for example, matters relating to legislation and  delegation  are  considered  in  Chapters  2  and  6).  However,  one  aspect  highlighted  by  the  review  warrants  further  consideration  here:  the  overall  management of the disposals function in Defence. The following matters were  considered by this audit: 

 responsibility for major equipment disposals; and 

 senior leadership involvement in disposal processes. 

Responsibility for disposals

3.74 DMO  is  responsible  for  the  disposal  of  Defence  major  military  equipment  as  part  of  the  sustainment  phase  of  the  asset  lifecycle,  which  includes  disposal.  Sustainment  of  the  equipment  is  administered  through  Materiel  Sustainment  Agreement  (MSA)  arrangements104,  whereby  DMO  is  funded by Defence to sustain Defence equipment. 

3.75 Defence records indicate that the former DDA105 saw itself as having  the project management role: for example, in presentations given in 2011 it  stated that: ‘Defence Disposals Agency manages the disposal of major items.’  Frequent  direct  correspondence  between  the  Minister’s  office  and  DDA  (including by email) is consistent with DDA being perceived as having prime  management responsibility.  

3.76 When  the  AMSO  was  established  within  DMO  in  July  2012,  it  subsumed the DDA. DDA was subsequently renamed ‘Disposals and Sales’  (DAS)  in  November  2012.  Current  Defence  guidance  identifies  that  DAS  is  now the single point of contact within the DMO for guidance and support on  SME disposal policies, processes and procedures:  

In  the  context  of  disposals,  AMSO‐DAS  is  responsible  for  provision  of  guidance and support to DMO System Program Offices (SPO) in the disposal 

                                                      

104 The ANAO is conducting an audit of Defence’s MSAs. The objective of the audit is to examine the contribution made by Defence's MSAs to the effective sustainment of SME. 105 See paragraphs 1.9 and 1.10 for a description of the various organisational changes to Defence Disposals.

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of  Defence  capability  platforms,  major  disposal  programs  and  items  of  significant interest.106,107 

3.77 Notably, the function carried out within AMSO is described in Defence  guidance as providing advice, support and guidance, but not management of  the disposal: ‘DAS has been resourced to provide SPOs with the advice and  support  necessary  to successfully  plan  and  conduct  Major  Disposals’.108 The  ostensible reason is that ‘DAS is not funded to conduct disposals or to manage  assets inventory’.109 These recent statements indicate that AMSO seems to have  taken a step back from ‘managing’ and being ‘responsible for’ the disposal of  major items (the position in 2011) to ‘facilitating’, ‘supporting’ and ‘providing  guidance’ for disposals work. 

3.78 As noted above, relevant funding is allocated to DMO SPOs through  MSAs. SPOs are responsible for the ongoing sustainment (including disposal)  of  capital  assets  and  therefore,  unlike  DAS,  notionally  control  the  funding  allocated  by  the  capability  manager  for  meeting  disposal  costs  through  Defence’s MSA arrangements.  

Other instructions and guidelines unclear on management responsibility

3.79 The lack of clarity in management responsibility for SME disposals is  exacerbated by other current Defence instructions and guidelines, which are  inconsistent. Defence’s policy documents that address the disposal of major  Defence assets present a confused picture of who is responsible for what when  it comes to the disposal of these assets, with the allocation of responsibilities  differing between documents, and in some cases, within the same document.  

3.80 New templates, accountability matrices and guidance being developed  within AMSO should help as a roadmap through the complicated disposals  landscape.  Nevertheless,  there  is  a  risk  this  material  will  have  limited  effectiveness if the accountabilities and responsibilities for disposals are not 

                                                      

106 Defence defines capability platforms as those assets designed to provide Defence with a military capability, either individually or collectively. These assets will generally be land vehicles, ships, aircraft or submarines and will be listed in the Key Defence Asset Register (KDAR). Defence defines a major disposal as relating to those items which are expected to recover more than $1 million in revenue upon disposal, or are capability platforms, weapon systems or ‘items of significant public interest which require specialist disposal action and planning’. Source: DI(G) LOG4-3-008 Disposal of Defence Assets. 107 Defence, DEFGRAM No. 197/2013, Management of Major Platform and Inventory Disposals,

8 April 2013. 108 Defence, Disposals and Sales Disposal Guide, version 1.0, May 2013, p. 9. 109 ibid, p. 11.

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made  clear  to,  and  accepted  by  all  stakeholders,  and  supported  through  appropriate management structures. That is, in concert with devising any new  guidance there is also a need to more clearly identify who should have overall  management responsibility and authority for disposal activity below the level  of the CEO DMO. Management responsibility and authority should be clearly  and  consistently  reflected  in  all  policy  and  guidance  documents,  and  supported through appropriate organisational arrangements. 

3.81 It needs to be borne in mind that Defence SME disposal is a process  rather than a single event. SME disposal can be costly, complex and involve  multiple organisations within, and external to, Defence. Without clear lines of  accountability and responsibility accompanied by appropriate guidance and  levels of resourcing, Defence increases the risk of poor outcomes in respect of  cost, capability, public safety, the environment and its reputation from these  types of disposals.  

Multiple spheres of expertise

3.82 Major equipment disposals are complex projects with many spheres of  expertise likely to be involved in any one disposal. These include: technical  expertise in the equipment; contracting expertise; legal advice; logistics (JLC  may  have  relevant  responsibility  for  associated  inventory);  sales  and  marketing proficiency; knowledge of hazardous substances; and knowledge of  export and related controls. Some disposal projects will not call on all of these  types  of  expertise.  However,  since  there  will  be  many  organisational  units  involved  in  each  major  disposal,  identifying  and  providing  appropriate  authority  to  a  project  manager  would  enhance  the  prospect  of  successful  management of a disposal. 

3.83 Consultation arrangements involving the various organisational units  responsible  for  different  aspects  of  a  disposal  process  currently  lack  any  defined structure comparable, for example, to the structures employed at the  opposite  end  of  the  lifecycle,  in  capability  development.  In  reviewing  the  extensive documentation in the course of the audit there was little evidence of  formal  consultation  during  disposal  processes.  Managing  disposals  with  informal  consultation  arrangements—‘knowing  whom  to  talk  to’—may  introduce  risks,  particularly  as  experienced  staff  members  move  on  and  informal organisational connections and knowledge are lost.  

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3.84 The DMO Disposals Review also identified coordination weaknesses: 

While there are various bodies that are acknowledged as having a role in the  disposal process (including Integrated Disposal Project Teams), it appears that  these  bodies  have  relied  on  informal  working  relationships  which  do  not  always result in the views of each stakeholder organisation being taken into  account in the disposal process.110 

3.85 The  current  organisational  structure,  management  arrangements  and  departmental guidance for major equipment disposals are fragmented, with  Defence  in  effect  relying  on  a  form  of  collective  responsibility  across  organisational  boundaries.  This  fragmented  approach  introduces  additional  risks for the Commonwealth in disposal of SME. The challenge for Defence is  to ensure adequate consultation takes place when managing disposals without  creating unwieldy committees, or alternative management arrangements, that  may be prone to dispersed or unfocused responsibility. 

3.86 In  reviewing  the  case  studies  examined  in  this  audit,  tensions  have  been apparent between Defence Disposals and other organisational units (for  example, with JLC in relation to the disposal of the B Vehicles—see Chapter 4).  Again, this was identified by the Disposals Review: 

the  relationship  between  Disposals  and  key  stakeholders  such  as  JLC  and  [Defence’s  Chief  Finance  Officer  Group]  has  been,  in  some  cases,  strained— primarily as a result of a lack of clarity regarding responsibility for disposal of  particular assets, and how funds incurred/received through a disposal process  should be handled.111 ï€ 

3.87 Competition  among  organisational  units  over  the  expected  financial  returns from disposals is unlikely to assist in the effective and efficient disposal  of major military equipment, and there would also be benefit in clarifying this  aspect of the disposals process.  

Senior leadership involvement in disposal processes

3.88 The  2013  Disposals  Review  report  indicates  that  it  had  become  the  practice for the DMO section handling major military equipment disposals to  draft  its  preferred  approach  to  a  disposal,  obtain  ministerial  approval,  and 

                                                      

110 Defence, DMO Disposals Review, 16 October 2013, p. 18. 111 Defence, DMO Disposals Review, 16 October 2013, p. 17.

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then assume  that  the  authority  of  that approval  would  over‐ride  any  other  procedural consideration: 

it appears that Disposals (in particular DDA) has in the past had a very close  working  relationship  (ie  a  “direct  line”)  to  the  Minister  and  has  sought  Ministerial endorsement of disposal strategies in most cases ... 

it  appears  that  Disposals  sought,  and  obtained,  Ministerial  approval  of  Disposals’  proposed  course  of  conduct  for  most  disposals  and  that  this,  in  turn, was seen to override any competing views given by stakeholders. This  also appears to have created a culture focused on implementing the Minister’s  approved  strategies,  with  less  than  full  consultation  and  co‐operation  with  other Defence organisations.112 

3.89 A fortnightly report to the CEO DMO in July 2011 referred to the ‘ever  increasing Ministerial involvement in disposals’ and the view within Defence  Disposals  in  late  2012  was  that,  over  the  previous  five  years,  ‘ministerial  advice, notings and requirements for approvals have increased significantly.’  A former Director of Defence Disposals reported in December 2012 that his  focus  had  been  ‘disproportionately  aimed  at  keeping  the  minister’s  office  happy’. His key function in that role as director: 

ending up being very much a liaison role I suppose with the minister’s office.  As  much  as  that  probably  shouldn’t  have  been  the  main  game,  that  really  ended up being the priority customer.113 

3.90 The level of ministerial involvement in an activity is a matter for the  minister and government of the day. Where a minister does wish to be closely  involved in a particular issue, it is appropriate that senior management also  become involved and advise Defence leadership as necessary. However, based  on the ANAO’s review of Defence’s records for disposals over recent years,  there is little record of involvement of senior leadership above the branch head  level.  Appropriate  engagement  with  senior  leadership,  particularly  at  key  points of significant disposals, would help Defence identify and manage the  relevant risks when disposing of SME. 

                                                      

112 ibid., pp. 18-19. 113 Defence, internal records, December 2012.

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Conclusion—recent round of disposals reform 3.91 In response to recent reviews and investigations of disposal processes,  Defence  has  pursued  a  further  round  of  reform.  Key  initiatives  underway  include  the  revision  of  Defence’s  disposals  policy,  the  development  of  documented processes and templates to guide staff through disposal processes  and high‐level planning for forthcoming disposals. However, there is currently  no mechanism that allows Defence Disposals to track costs associated with a  disposal  project,  and  Defence  should  implement  a  monitoring  and  reporting  mechanism that captures all significant costs. Substantial disposal costs can be  incurred by disparate parts of the Defence Organisation, and while it may be  challenging to keep track of them, monitoring can contribute to the effectiveness  of Defence’s management of SME disposals by highlighting escalating areas of  expenditure, such as berthing costs relating to ship disposals.114  

3.92 The potential benefits of recent reform are likely to be eroded if Defence  does not more clearly identify project management responsibility and establish  structured  consultation  arrangements  for  major  equipment  disposals.  At  present, a large number of separate Defence groups may be involved in, or  have expertise relevant to, disposal processes, highlighting the need for clearly  defined  and  well‐coordinated  disposal  processes,  and  consistent  internal  guidance.  Further,  in  more  complex  or  sensitive  cases,  there  is  a  need  for  sufficient senior leadership involvement in major equipment disposals and key  decisions, to contribute to the effective and timely identification, assessment  and management of risks.  

Recommendation No.2 3.93 The ANAO recommends that, to improve the future management of  the disposal of Defence specialist military equipment, Defence identifies, for  each major disposal, a project manager with the authority, access to funding  through appropriate protocols and responsibility for completing that disposal  in accordance with Defence guidance and requirements. 

3.94 Defence response: Agreed 

                                                      

114 Defence informed the ANAO that it was setting up a process to capture cost information associated with AMSO activities. However, many disposal costs are incurred outside AMSO and these other costs will need to be captured and attributed if disposal costs for SME are to be fully identified.

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Recommendation No.3 3.95 The ANAO recommends that, to improve the future management of  the disposal of Defence specialist military equipment, Defence puts in place the  arrangements necessary to identify all significant costs it incurs in each such  disposal  (including  personnel  costs,  the  costs  of  internal  and  external  legal  advice, management of unique spares and so on), and reports on these costs  after each such disposal. 

3.96 Defence response: Agreed 

3.97 As an initial step, Defence could incorporate guidance on which items  to take account of in costing an SME disposal in the revision of its existing  framework of rules and guidelines for SME disposal (see Recommendation 1). 

 

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4. Major Case Studies-Caribou and Boeing 707 Aircraft, and Army B Vehicles

This  chapter  examines  two  major  disposals  that  were  troublesome  for  Defence  and  prompted this performance audit—the disposal of the Caribou and Boeing 707 aircraft.  It also examines shortcomings in the more recent disposal of Army B Vehicles. 

Selection of major case studies 4.1 As noted in Chapter 1, the failed disposal of the Caribou aircraft and  the  troubled  disposal  of  the  Boeing  707  (B707)  aircraft,  each  through  a  commercial sale process, were the projects that prompted the request by the  Secretary of Defence and CDF for this audit.  

4.2 Both of these disposals have been analysed and reviewed internally by  Defence, generating extensive documentation, particularly in the case of the  Caribou disposal. However, the main focus of this earlier work has been on  legal matters or identifying possible misbehaviour by particular parties and  individuals. The focus in this chapter is on the administrative aspects of the  disposals  and  identifying  weaknesses  that  could  have  contributed  to  the  difficulties experienced in each case. 

4.3 Defence suggested the B Vehicles disposal to the ANAO as an example  of a more recent disposal, and one which it viewed as successful. Review of the  project  during  the  audit  has  revealed  shortcomings  in  some  aspects  of  the  disposal.  

Caribou aircraft

Withdrawal of the Caribou fleet

4.4 The  Caribou  is  a  Canadian‐designed  light  tactical  transport  aircraft  capable of operating from unprepared airfields. It can function as an air‐bridge  or as a platform for paradrop and airdrop operations and is suited to aerial  re‐supply to remote areas. The RAAF took delivery of its first of 29 Caribou 

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aircraft in 1964. The first project to replace the Caribou began in 1978, with  planned withdrawal extended many times thereafter, ultimately to 2010.115 

4.5 A  brief  in  January  2008  advised  the  Chief  of  Air  Force  (CAF)  that  Caribou availability was satisfactory but there was doubt about future Caribou  viability  due  to  asbestos  within  the  aircraft.  Within  nine  months,  Defence  became  more  dissatisfied  with  Caribou  availability.  The  CDF  informed  the  then  Minister  in  September  2008  of  his  intention  to  examine  the  option  to  withdraw  the  ADF’s  remaining  fleet  of  14  Caribou  aircraft  by  the  end  of  2009.116 This proposed withdrawal was attributed to the Caribou being beyond  the end of its economic life, and suffering from reduced availability due to  fatigue,  corrosion,  obsolescence  and  the  need  for  increased  maintenance.  Although  the  advice  to  the  Minister  at  this  time  did  not  mention  asbestos,  when  the  Minister  announced  the  earlier‐than‐planned  retirement  of  the  Caribou aircraft on 19 February 2009, he cited asbestos, corrosion, fatigue and  obsolescence as reasons.117 

4.6 Caribou  aircraft  contain  asbestos  in  the  airframe  and  in  some  replaceable parts. Under Australian law, the use of all types of asbestos was  effectively banned from 31 December 2003 (the use of some types of asbestos  was  banned  much  earlier)  subject  to  a  very  limited  range  of  exemptions.  Defence  had  been  granted  exemptions  for  continued  use  of  Caribou  parts,  though the exemptions were due to expire at the end of 2009.118 

Allocation of Caribou aircraft to museums

4.7 On  9  March  2009,  the Minister  announced  that  two  Caribou  aircraft  would be preserved for historic purposes. One was to go to the RAAF Museum  at Point Cook and the other to the Australian War Memorial. By October 2009, 

                                                      

115 ANAO Audit Report No.3, 2013-14, AIR 8000 Phase 2 — C-27J Spartan Battlefield Airlift Aircraft assessed the adequacy of Defence’s processes to select the Caribou aircraft replacement, the C-27J Spartan Battlefield Airlift Aircraft. 116 In fact, Defence had 13 aircraft to dispose of as one had been written off following a crash in Papua

New Guinea in September 2008. Since 1964, Defence’s original fleet of 29 Caribou aircraft had been reduced to 13 through attrition. Some were badly damaged or destroyed in crashes and others retired from service. 117 The Minister stated his determination to ‘weed out’ asbestos from the ADF. Minister for Defence, ‘Retirement of the DHC-4 Caribou’, 19 Feb 2009. The Minister specifically directed that his media release, drafted by Defence, address the fact that the Caribou aircraft contained asbestos. 118 Defence’s management of asbestos in disposals, including a case study on the Caribou, is examined in Chapter 5, ‘Managing hazardous substances in disposals’.

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Defence had decided that a total of six of the Caribou fleet of 13 aircraft should  be retained for historic purposes: 

 three aircraft at RAAF bases; 

 one at the Australian War Memorial; and  

 two to non‐Defence historical aircraft organisations.  

4.8 Defence subsequently decided to allocate the two aircraft for historical  organisations  through  the  2011  RFT  process.  As  part  of  that  process,  the  remaining nine Caribou aircraft—that is, those not to be retained by Defence or  transferred to the Australian War Memorial—were to be offered for sale. 

Defence received numerous expressions of interest in the Caribou aircraft

4.9 Following  the  Minister’s  announcement  of  the  retirement  of  the  Caribou  aircraft,  Defence  received  numerous  expressions  of  interest  from  individuals  and  organisations  seeking  Caribou  spare  parts,  the  complete  aircraft  for  display,  or  to  purchase  the  aircraft  as  a  going  concern.  One 

expression of interest, on 5 May 2009, came from an individual purporting to  represent an unnamed resource development group with interests in Papua  New Guinea (PNG), Liberia, Mali and Alaska. The group wanted to purchase  seven or eight Caribou aircraft, four for use in these countries and three or four  to help communities in which the organisation operated.119 

4.10 Once Defence called for tenders, the same individual prepared a tender  response  submitted  to  Defence  in  March  2011  for  the  most  significant  proportion of the Caribou aircraft offered for sale. Defence eventually selected  this  tender  response  in  May  2011  as  the  preferred  response  for  the  seven  aircraft offered for sale as going concerns (paragraphs 4.16 - 4.20). 

Approval of the Caribou disposal strategy (December 2009)

4.11 In December 2009, the then Minister for Defence Personnel, Materiel  and  Science  approved  Defence’s  disposal  strategy  to  sell  nine  aircraft  with  support packages. Specifically, Defence had proposed: 

                                                      

119 Around the same time Defence also received an expression of interest from Omega Air, the purchaser of the RAAF’s B707 aircraft fleet discussed later in this chapter.

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 Two  aircraft  and  support  packages  would  be  offered  for  sale  to  Australian entities that could demonstrate the capacity and intention to  preserve the aircraft in flying condition as items of military heritage;  and demonstrate compliance with relevant legislation, in particular the  replacement of maintenance parts that contain asbestos.120  

 Seven remaining aircraft, support packages and associated unique and  surplus common equipment would be offered for: 

 [sale for] export as going concerns121; 

 sale within Australia for eventual use as going concerns noting  that  the  prospective  recipients  would  be  required  to  identify  and source asbestos‐free replacement components; or 

 sale  as  exhibits  for  static  display  on  the  condition  that  the  prospective recipients undertake to pay for  work involved in  preparing the items for display on a cost‐recovery basis. 

 Those items that could not be sold would be scrapped or recycled. 

Asbestos in the Caribou

4.12 In its December 2009 submission, Defence advised the Minister that the  Caribou airframe contained in situ asbestos122, and a number of replaceable  parts containing asbestos.123 It also advised that the estimated cost of removing  the  known  and  suspected  asbestos‐containing  material  within  the  Caribou  aircraft, and to design and install replacement panels and sections was more  than $500 000 per aircraft. 

                                                      

120 To this end, Defence informed the Minister that entities would be required to demonstrate how asbestos-containing material parts would be replaced or contained if required so the aircraft could be legally flown in Australia. Defence’s subsequent assessment of this requirement in the tender evaluation was based solely on the tenderers’ assertions in their responses. The tender evaluation report contains no evidence that Defence made any independent assessment of those claims to assure itself that tenderers had that capacity.

121 Defence informed the Minister that the Canadian manufacturer of the aircraft had expressed interest in acquiring them and that a sale to the manufacturer was a likely outcome. The manufacturer did not submit a bid in response to the RFT.

122 In situ, in relation to a product that contains asbestos, means that, ‘the product is fixed or installed: (a) in:

(i) a building or any other structure that forms a workplace; or (ii) a plant, a vehicle or any other thing that is for use at a workplace; and (b) in a way that does not constitute a risk to users until the asbestos contained in the product is disturbed.’

Source: OHS Regulations 1994, Part 6, Regulation 6.3. 123 These parts were in brakes, propellers, engine seals, gaskets and linings.

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4.13 External  legal  advice  received  by  Defence  in  October  2010  noted  Defence’s  intention  that  the  successful  tenderer(s)  would  assume  all  responsibility for the management of asbestos and other hazardous substances  in the Caribou aircraft. The legal advice stated that to transfer this compliance  burden effectively, Defence would need to carefully assess, and make available  to  tenderers,  all  information  relevant  to  asbestos  and  other  hazardous  substances contained in the Caribou. The legal advice also noted that there was  a  risk  that  interested tenderers  may  be  discouraged  by  the  costs associated  with asbestos remediation and other obligations such as removing the aircraft  from  Defence  premises.  Defence’s  management  of  asbestos  in  the  Caribou  disposal  is  examined  in  more  detail  in  Chapter  5  ‘Managing  hazardous  substances in disposals’. 

The Request-for-Tender (October 2010)

4.14 Approximately  10  months  after  the  Minister  approved  the  Caribou  disposal strategy, on 28 October 2010, Defence Disposals released an RFT for  the sale of the aircraft, spares packages, spare engines and other items such as  propellers,  with  some  items  to  be  made  available  only  to  heritage  organisations. By the time the RFT closed four months later, on 1 March 2011,  Defence had received 17 tenders.124 

Selection of tenderers (May and June 2011)

4.15 On  11  May  2011,  Defence’s  Tender  Evaluation  Board  (TEB)  for  the  disposal  decided  that  a  bid  from  the  Historical  Aircraft  Restoration  Society  (HARS) was the preferred bid for the two aircraft intended to be preserved as  items of military heritage. A bid from ZIAS Cultural Enhancement Foundation  (ZCEF) was the preferred bid for the seven aircraft (plus spares packages) that  Defence sought to sell as going concerns. The discussion that follows relates  only to the ZCEF tender, as this is the part of the disposal that continues to be  problematic for Defence, nearly four years later. 

Evaluation of the ZCEF tender

4.16 The ZCEF tender submission was prepared by the same individual who  had  expressed  interest  in  the  Caribou  fleet,  in  May  2009,  on  behalf  of  an  unnamed resource development group with interests in PNG, Liberia, Mali and 

                                                      

124 Two tenders were received after the closing date making the total number of tenders 19. One of these was received 24 hours late and accepted into the assessment process.

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Alaska.125 However,  the  ZCEF  tender  submission,  received  on  1  March  2011,  made no reference to resource‐related activities or any operations in Africa or  Alaska.  Rather,  it  stated  that  ZCEF  was  an  Australian‐owned  charitable  foundation  whose  purpose  was  to  provide  humanitarian  assistance  to  PNG,  Pacific Islands and ‘Australian Aboriginal cultural groups in those regions’. 

4.17 ZCEF offered Defence a total of $540 000 for all seven aircraft and six  spare  parts  packages.  According  to  Defence’s  tender  evaluation  report,  the  only other offer received by Defence that included all seven aircraft and six  spare  parts  packages  was  an  offer  of  $150 000.  ZCEF’s  tender  submission  contained claims as to the organisation’s aspirations for the aircraft, including  its intention to upgrade the aircraft to ‘form the basis of a humanitarian aid  delivery capability for use in Australia, PNG and surrounding countries’.126  

4.18 The ZCEF tender submission did not contain any financial information  about  the  organisation,  beyond  a  hand‐written  note  stating  ‘financial  details  available  on  request’.  Defence  Disposals  staff  subsequently  requested  further  information from the representatives of ZCEF to verify the company’s financial  capacity to complete the tender. On 18 April 2011, Defence received an email  from  another  consultant  containing  a  document  purporting  to  be  a  trust  certificate from a bank registered in Bougainville, PNG. The certificate stated  that  the  bank  held  $1.5 million  on  behalf  of  ZCEF  for  the  purposes  of  the  purchase  of  the  seven  Caribou  aircraft.  Further,  the  certificate  included  a  statement that the funds were ‘clean, clear, freely available funds of trustworthy  (non‐criminal) origin, generated from commercial business transactions’. 

4.19 Defence’s Financial Investigation Service staff examined the certificate.  On 21 April 2011, they expressed concern to Defence Disposals staff about the  credibility  of  the  bank,  the  trust  certificate  and,  therefore,  ZCEF’s  financial  capacity to meet, not only the initial purchase price, but the Commonwealth’s 

                                                      

125 See paragraph 4.9. 126 The tender submission also claimed that the organisation planned to establish a training facility for ground crew, technicians, and eventually, pilots; and that PNG and Aboriginal trainees would be accommodated in Brisbane while they were undergoing training. The tender submission indicated that

the foundation planned to establish emergency relief depots in Australia, PNG and adjacent countries and that the aircraft would be available to provide assistance for disaster relief in Australia. Further, the tender submission included the suggestion that the ADF could hire the aircraft back for parachute training or troop transport.

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requirement in the tender that the aircraft be properly maintained.127 Defence’s  Financial Investigation Service staff suggested that the risk to Defence would  be  reduced  by  receipt  of  full  payment  from  the  proposed  purchaser  before  release of the assets.128 However, further information was needed to make any  assessment  of  the  company’s  financial  position.  No  further  checks  were  conducted at this time. 

4.20 On  7 June  2011,  the  then  Minister  for  Defence  agreed  to  Defence’s  recommendation that Defence commence contract negotiations with ZCEF. 

Successful tenderer withdraws and is substituted (June 2011)

4.21 On  21  June  2011,  Defence  received  an  email  from  a  purported  representative of ZCEF stating that the CEO of ZCEF had instructed him to  advise Defence that, effective immediately, ZCEF had no interest, financial or  otherwise,  in  the  above  tender  and  that  ZCEF  was  withdrawing  from  the  tender. Additionally, Defence was advised that: 

[ZCEF] understands and acknowledges that the Tender will continue post its  withdrawal  with  another  humanitarian‐focused  organisation  utilising  alternate funding sources. 

It is clearly understood that in the continued utilisation of the existing Tender  documentation and any and all other information provided in support thereof,  is undertaken strictly on the basis that no liability, direct, contingent, current  or future, will accrue against [ZCEF]. 

[ZCEF]  hereby  authorises  the  ADF  to  retain  and  utilise,  for  its  internal  purposes  only,  copies  of  the  original  Tender  and  other  documents  which  clearly  refer  to  the  Foundation,  notwithstanding  the  Tender  will  continue 

under a name not related to, or associated with, [ZCEF]. 

4.22 This advice provided Defence with a clear statement that ZCEF had  withdrawn from the tender process and that ZCEF recognised that the tender  might  continue  with  another  humanitarian  organisation.  Further,  it  clearly 

                                                      

127 An internal Defence investigation later determined that ZCEF did not have any accounts or funds held with the Commercial Development Bank, let alone possess $1 500 000. ZCEF had only one bank account, being located at the ANZ Morayfield Branch, Queensland, and which only contained a maximum amount of $250 at any one time.

128 The advice provided by a Defence Financial Investigation Service Price and Cost analyst to Defence Disposals stated that ‘It will be a lot less risky if you are able to request all the funds upfront before the Commonwealth hands over the aircraft’.

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stated that ZCEF had no relationship with any future entities that might have  an interest in taking over the tender.  

4.23 On  21  June  2011,  Defence  also  received  an  email  from  a  person  purporting to be the ‘Lead Consultant for a new Humanitarian Fund currently  being  established  …  by  the  AMRock  Group—as  yet  unnamed  officially’  (Amrock). This individual had also been making representations to Defence 

purportedly for and on behalf of ZCEF. 

4.24 In  the  email,  the  consultant  claimed  that  Amrock  had  obtained  the  ‘security deposit’ (trust certificate) for ZCEF that was submitted to Defence  during the tender process. Further, he stated that Amrock would take over the  tender  with  ‘no  material  change  to  the  stated  Asset  Use  Plan  or  the  commitment  to  the  Disaster  Response  Depots  and  the  humanitarian  endeavours/activities  and  disaster  relief  activities’.  The  consultant  then  recommended to Defence that the tender continue because the only change to  the tender was a change in the purchaser’s name. 

4.25 Nine days later, on 30 June 2011, Defence received another email from  the consultant to Amrock129, providing further reasons, including PNG cultural  issues, for the purported name change (from ‘ZCEF’ to ‘Amrock’). This advice  was in contrast to the 21 June 2011 advice that the two entities were unrelated  (see paragraph 4.21). 

Contract signed (September 2011)

4.26 Defence proceeded with contract negotiations with Amrock, based on  the tender submitted in May 2011 by ZCEF and the apparent assumption that  there had been a change only in the organisation’s name. Defence staff did not 

make any independent inquiries or seek any advice on the bona fides of either  company or any individual involved in the tender. 

4.27 On 15 September 2011, the Minister for Defence Materiel announced  the outcome of the RFT process. Defence signed a contract of sale with Amrock  on 23 September 2011 based on the tender submitted in May 2011 by ZCEF.  

                                                      

129 The consultant referred to ‘recent telephone conversations’ between himself and the Defence Disposals staff member responsible for managing the disposal. Defence’s internal investigation into the disposal later determined that ‘inadequate records (or no records) of telephone conversations were made’ by this Defence Disposals staff member and ‘therefore it was not clear what discussions had taken place.’

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Concerns raised, invoice issued and paid (October 2011)

4.28 In October 2011, following a request from Defence Disposals to raise  the  invoice  for  the  sale,  Defence’s  Finance  Business  Centre  raised  concerns  with the then Branch Head of Defence Disposals about the financial viability of  the buyer and the authenticity of the ‘bank guarantee’ provided to Defence. 

4.29 On 4 October 2011, at the request of Defence’s Finance Business Centre,  Defence’s  Financial  Investigation  Service  carried  out  further  checks  on  Amrock. These checks, completed on 6 October 2011, revealed that: 

 Amrock was registered on 24 June 2011, just days after being presented  to Defence as the company to replace ZCEF as the successful tenderer  for the Caribou aircraft and associated spares.130 

 One  of  the  directors  of  Amrock  had  the  same  name  as  the  General  Manager of the Commercial Development Bank of Bougainville who  signed the $1.5 million trust funds certificate previously presented to  Defence as evidence of ZCEF’s financial viability. 

 The  Melbourne  address  of  the  Commercial  Development  Bank  of  Bougainville was the same address as the registered office of Amrock  and  the  premises  were  being  used  for  the  operations  of  another  business. 

 The other director of Amrock was also a director of a number of other  companies that had been deregistered, suspended from the Australian  Stock  Exchange,  or  had  received  a  qualified  audit  opinion  on  their  financial statements as proper financial records were not maintained. 

4.30 Financial  Investigation  Service  staff  expressed  concern  about  the  validity of the Commercial Development Bank documentation, the capacity of  Amrock to honour the sale agreement and, given the financial and reputational  risks  involved,  recommended  further  investigations.  Defence’s  Finance  Business Centre then sought the assistance of the Reserve Bank of Australia  (RBA)  to  verify  the  legitimacy  of  the  Commercial  Development  Bank  of  Bougainville through the Bank of PNG. The RBA advised Defence that this  could take some time. 

                                                      

130 The company had $100 total paid share capital issued and the sole shareholder resided in Hong Kong.

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4.31 The then Branch Head of Defence Disposals requested the invoice be  issued regardless of the concerns about Amrock because, as he explained later,  failure by the buyer to pay the invoice would be the simplest way to terminate  the contract.131 This preferred approach suggests that key Defence staff were  not alert to the reputational risks for the Commonwealth of selling ex‐military  aircraft to an organisation which appeared to have made misrepresentations to  Defence. The only risk that was evidently given serious consideration was the  financial risk of non‐payment of the invoice and Defence’s consequent failure  to realise the expected revenue.132 

4.32 Defence issued the invoice to Amrock on 13 October 2011 and received  payment in full on 27 October 2011. 

Advice from Reserve Bank of Australia (October 2011)

4.33 On  14  October  2011,  the  day  after  Defence  issued  the  invoice  to  Amrock,  Defence’s  Finance  Business  Centre  received  the  following  advice  from the Bank of PNG via the RBA: 

Please be advised that the Central Bank is sole authority in PNG responsible  for licensing of deposit‐taking institutions. The bank has no records, past or  present  of  a  bank  by  the  name  of  ‘Commercial  Development  Bank,  Bougainville’, therefore it is not a legitimate institution. 

4.34 The RBA representative also noted in her email advice that an Internet  search  on  the  director  of  the  bank  indicated  that  ‘it  appears  he  may  be  a  charlatan’. 

4.35 The  Finance  Business  Centre  passed  this  information  promptly  to  Defence  Disposals.  The  Branch  Head,  Defence  Disposals,  responded  to  the  advice by advising the Finance Business Centre that:  

we  have  a  signed  contract  and  in  the  first  instance  will  seek  contract  performance whilst also investigating associated issues such as this. Failure by  Amrock to pay is the simplest way for me to repudiate the contract. 

                                                      

131 The audit has found no evidence that this decision was considered by any more senior management before being made. 132 Defence’s subsequent Inspector-General’s investigation found that the conduct of a number of staff involved in the process was less than satisfactory, including the withholding of some critical

information on the preferred tenderer from others responsible for giving advice and making decisions in the process. While the investigation found no evidence or cause to suspect any criminal conduct, it did identify that the efforts of one individual in particular were focused on ensuring the continuation of the tender process over all other considerations.

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4.36 The  Branch  Head,  Defence  Disposals,  advised  his  superiors  of  the  situation later that day.133 

4.37 On  18  October  2011,  a  representative  of  the  Inspector‐General  of  Defence  (IGD)  approached  Defence  Disposals,  having  been  alerted  by  the  Defence Finance Business Centre to possible irregularities associated with the  Commercial  Development  Bank.  The  Branch  Head,  Defence  Disposals,  responded that: ‘My initial thought is that we hold off on instituting formal  notifications etc until, the due date of the ARI [invoice], when we can determine  if Amrock have paid’. This response is consistent with a perception that the  primary risk facing Defence was that of non‐payment.  

Ongoing management of the transaction by Defence

4.38 Late  on  20  November  2011,  the  CEO  DMO  sought  advice  from  the  Branch Head, Defence Disposals, as to the status of the Caribou disposal. Early  the following morning, he was advised: 

Current status is that Zia (now Amrock Aviation) have paid, the funds are  clear and Amrock are arranging to take delivery of the aircraft. It is expected  that the aircraft will be removed before Christmas. 

4.39 Later that day (21 November 2011), the CEO DMO directed that the  disposal be halted until more was known about the buyers. The Deputy CEO  explained to the Branch Head, Defence Disposals as follows: 

[The CEO’s] issue is not the money; it is understanding who we are actually  selling ex‐Military assets to. If Amrock Aviation is simply a front for another  organisation, then we need to know the end recipient of the asset. 

A name like Ê¹Ziaʹ (think Pakistan) should at least raise the flag to undertake  further inquiries to look behind the corporate veil to determine the ultimate  owner. 

In any event, a full probity check of the successful bidder, including directors,  shareholders and other related parties MUST be a core part of any evaluation,  at least where the company is not well known to us. 

4.40 On 12 December 2011, a member of the public contacted the office of  the  Minister  for  Defence  Materiel  alleging  that  the  individuals  involved  in  Amrock were of ill repute.134 On the same day, Defence was made aware of the 

                                                      

133 These were the Chief Finance Officer, DMO and the Deputy Chief Executive Officer, DMO. 134 The contact was prompted by the person seeing mention of Amrock in the Minister’s press release.

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complaint and allegations. During Defence’s investigation into the disposal,  additional allegations were made about the individuals and the source of the  funds used to purchase the aircraft. On 22 December 2011, Defence informed  the Minister for Defence Materiel’s office by email that Defence would retain  possession of the assets until the matter was resolved. 

4.41 Despite the CEO DMO’s direction that the disposal be halted, Defence  allowed Amrock representatives to collect the Caribou aircraft documentation  from an RAAF base on 4 January 2012.135 While this audit found no evidence  that  the  CEO’s  instruction  was  deliberately  disregarded,  there  had  been  sufficient  time,  since  November  2011,  to  provide  the  necessary  information  within Defence.  

4.42 Further,  on  6 February  2012,  Amrock  representatives  collected  21 Caribou batteries and six spare cells from another RAAF base. It appears  that  some  Defence  Disposals  staff  remained  uninformed  about  the  CEO  DMO’s directive even at this point, with one staff member informing the then  Branch Head of Defence Disposals on 8 February 2012 by email that ‘we will  proceed with arranging the asset removal, and coordinating with [the relevant  SPO] … until we are advised to halt’.136 

Current situation

4.43 Defence  informed  the  ANAO  in  October  2014  that  it  was  still  in  possession  of  the  aircraft  and  the  funds  received  for  the  purchase  of  the  aircraft.  Defence  has  received  demands  from  Amrock,  and  their  legal  representatives, to release the aircraft in accordance with the disposal contract.  As  at  January  2015,  Defence  advised  that  the  sale  to  Amrock  had  been  cancelled and other disposal options for the aircraft were being considered. 

4.44 Defence further informed the ANAO that as at August 2014, the cost of  external legal advice for the Caribou disposal was $99 335. The cost incurred  by  the  SPO  responsible  for  the  Caribou  over  the  period  since  the  disposal  process commenced to 30 June 2014, including in preparing for the disposal,  was estimated to be $743 000. 

                                                      

135 This aircraft documentation is, according to Defence, critical for anyone purchasing aircraft to obtain the relevant clearances from the Civil Aviation Safety Authority. 136 The then Branch Head responded stating that he was happy to continue to engage with Amrock to prepare for removal. However, ‘that said, I have instructed that no removal is to take place without my

express approval’.

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Defence reviews of the administration of the Caribou disposal

4.45 The  Caribou  disposal  has  been  the  subject  of  four  internal  Defence  reviews, specifically: 

 a  ‘Quick  Assessment’,  by  DMO’s  internal  legal  area,  completed  in  September 2012137; 

 an investigation by Defence’s IGD, completed in August 2013138; 

 an  internal  audit  by  Defence’s  Audit  and  Fraud  Control  Division,  completed in November 2013139; and 

 a discussion paper prepared by the IGD for DMO’s internal legal area,  completed in August 2013. 

4.46 Collectively these reviews found that Defence management deficiencies  contributed to the difficulties with the disposal, including that: 

 Defence’s  mandatory  disposals  policy  was  deficient  and  that  reform  efforts had stalled; 

 the conduct of certain Defence staff involved in the Caribou disposal  process was below par;  

 the  Caribou  disposal  process  was  conducted  in  accordance  with  historical practice that did not always reflect or comply with official  policy and process; 

 the  records  for  the  Caribou  disposal  were  in  a  ‘parlous  state’  with  poorly maintained files, and important meetings and conversations not  documented resulting in an insufficient audit trail of the disposal; and

 there  were  shortcomings  in  the  administration  and  oversight  of  the  tender evaluation particularly with regard to the lack of probity checks  on the preferred tenderer. 

4.47 Of particular note, the reviews identified that executive involvement in  disposals was at the strategic oversight level and that the disposals function 

                                                      

137 The purpose of this review was to establish a chronology of key events, identify any probity or ethical issues, and to provide a brief analysis of key issues. 138 The primary purpose of this investigation was to determine whether the conduct of any Defence personnel associated with the disposal of the Caribou aircraft was unsatisfactory or deficient. 139 The primary purpose of the internal audit was to determine whether the disposal of the Caribou aircraft

was conducted in accordance with Defence policies and procedures.

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did not have appropriately skilled staff with sufficient resources. Additionally,  the geographic separation of Defence Disposals (based in Sydney) from central  oversight,  management  and  control  (based  in  Canberra)  needed  to  be  addressed. The disposals function has since been substantially (but not wholly)  moved to Canberra. 

4.48 Defence’s  internal  review  to  determine  whether  there  was  any  misleading  or  deceptive  conduct  on  the  part  of  the  successful  tenderers  observed that it was not reasonable to expect that the Defence staff involved in  the tender assessment could have identified all of the issues uncovered by the  IGD investigation, which was conducted by professional investigators over a  period of almost 12 months. However, aspects of ZCEF’s tender submission  and certain events throughout the tender evaluation process, discussed above,  should have prompted a more cautious approach to the transaction by Defence  Disposals  staff  before  contract  signature  in  September  2011.  Further,  some  aspects  of  the  tender  evaluation  represented  key  points  of  failure  in  the  disposal  process  and,  if  handled  differently,  may  have  given  Defence  an  opportunity to recover the situation. These are considered below. 

Shortcomings in Defence’s administration of the Caribou tender

Connection between the 2009 expression of interest and ZCEF tender

4.49 As noted in paragraph 4.9, in May 2009 Defence received an expression  of interest from an individual purporting to represent an unnamed resource  development group with interests in PNG, Liberia, Mali and Alaska. This same  individual  was  responsible  for  preparing  the  ultimately  successful  tender  response  for  ZCEF  for  most  of  the  Caribou  aircraft.  The  available  evidence  indicates that Defence Disposals staff either did not notice or did not make the  connection between the May 2009 expression of interest and the subsequent  tender process. 

4.50 Had that link been made and given the capabilities of the aircraft140,  even in its demilitarised state, it would not be unreasonable to expect a more  cautious  approach  to  be  adopted  by  Defence  staff  when  dealing  with  an  unknown  organisation  with  an  interest  in  obtaining  Caribou  aircraft  for  operations in remote areas. Further, had that link been made, the fact that the  eventual tender submission focused solely on humanitarian use for the aircraft                                                        

140 The Caribou aircraft can operate from short and rudimentary airstrips; a capability of value for a range of legal and illegal activities.

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within  Australia  and  the  South  Pacific,  should  have  elicited  a  more  circumspect approach to the assessment of the tender. 

Tender submission inadequacies and shortcomings of Defence’s assessment

4.51 Defence’s internal investigation into the Caribou disposal determined  that  the  ZCEF  tender  submission  did  not  provide  sufficient  information  to  meet the tender criteria related to the tenderer’s apparent technical ability and  financial capacity to implement its proposed plans for the use of the aircraft.  

4.52 As  noted  in  paragraph  4.18,  the  ZCEF  tender  submission  did  not  contain any financial information about the organisation to support its claimed  ability to pay for the aircraft, only a handwritten note stating ‘financial details  available on request’. When Defence eventually received the purported trust  certificate  from  the  ‘bank’  registered  in  Bougainville,  PNG,  neither  Defence  Disposals  staff  nor  the  staff  from  Defence’s  Financial  Investigation  Service  made further enquiries about the credibility of the bank or its officials named  on the certificate.141 At the very least, a basic Internet search of the names of  these officials could have provided some information about the nature of their  business  dealings  and  interest  in  the  Caribou  aircraft.  The  lack  of  further  enquiries exposed the Commonwealth to risk. 

4.53 In  October  2010,  Defence’s  internal  legal  team  had  recommended  to  Defence Disposals staff that a full financial check be done on any prospective  tenderers to avoid a repeat of non‐payment issues it had experienced in the  B707 aircraft disposal (paragraph 4.68 - 4.83). Despite this earlier experience  and explicit internal legal advice, Defence Disposals did no full financial check  during  the  tender  process.  Defence’s  internal  investigations  later  concluded  that a more complete check of ZCEF’s finances would have revealed that it had  no funds.  

4.54 Defence  Disposals  staff  also  accepted  at  face  value  information  and  claims contained in the ZCEF tender submission, including assertions about its  humanitarian  role,  its  intention  to  upgrade  the  aircraft,  establish  technical  training  facilities  in  Brisbane  and  emergency  aid  depots  in  the  region 

                                                      

141 As mentioned in paragraph 4.19, staff from Defence’s Financial Investigation Service did express concern to Defence Disposals staff about the credibility of the bank, the trust certificate and therefore ZCEF’s financial capacity to meet, not only the initial purchase price, but the Commonwealth’s requirement contained in the tender that the aircraft be properly maintained. They also suggested that the receipt of full payment from the proposed purchaser before release of the assets may reduce the risk to Defence and advised Defence Disposals staff that additional information was needed to make any assessment of the company’s financial position.

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(including in Australia and PNG—see paragraph 4.17), and the possibility of  the ADF hiring the aircraft back for parachute training or troop transport. To  support  its  claimed  technical  ability  to  maintain  the aircraft,  ZCEF’s tender  submission  listed  the  job  titles  of  staff  supposedly  working  for  the  organisation, without any details of who these staff members were, or relevant  experience  or  qualifications.142 Defence’s  IGD  investigation  determined  that  Defence Disposals staff did not seek any further assurance on the question of  ZCEF’s purported technical abilities.  

4.55 Defence’s  source  evaluation  report  used  to  support  the  decision  to  select  the  successful  tenderer  was  of  poor  quality.  The  report  provided  an  unclear assessment of the tenderers’ claims against the assessment criteria and,  in selecting ZCEF, relied solely on the claims made in the submission about the  capacity  of  the  preferred  tenderer  without  any  verification. 143 Further,  as  identified during Defence’s IGD investigation into the disposal, the evaluation  report did not include all the relevant advice received by Defence Disposals  staff from Defence’s Financial Investigation Service.  

Withdrawal and substitution of the preferred tenderer

4.56 The  June  2011  email  advice  to  Defence  about  the  withdrawal  of  the  successful tenderer (on whom no checks were done) was accompanied by the  proposal to replace that tenderer with another (refer to paragraph 4.21). The  substitution should have prompted a closer look at the entities involved. The  Defence  Procurement  Policy  Manual  offers  the  following  advice  on  substitution of tenderers: 

This  situation  poses  many  risks  to  Defence  and  accordingly  a  thorough  analysis should be undertaken of the new company’s management, relevant  experience and financial capacity to undertake the contractual requirements  adequately before approval for substitution is given.144  

4.57 Defence did not analyse Amrock’s corporate structure or management  to verify that the change from ZCEF to Amrock was in fact a change in name  only. Defence proceeded to contract with Amrock rather than ZCEF on the 

                                                      

142 Defence’s internal investigation concluded that the company did not employ any staff. 143 For example, the source evaluation report states that evidence of the tenderer’s ‘technical ability to maintain the aircraft has also been supplied and includes experience in maintaining and operating Caribou aircraft exceeding 50 years.’ This statement is apparently based solely on an unsubstantiated

claim in the tender submission. 144 Defence Procurement Policy Manual, 2014, Chapter 5.6, p. 16.

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assumption this was only a change of name. However, the IGD investigation  into the disposal found it possible that collusion between Defence Disposals  staff and parties external to Defence had led to characterisation of the change  from ZCEF to Amrock as only a name‐change, rather than a substitution of one  corporate entity for another, unrelated one.145  

4.58 Further,  as  shown  by  Defence’s  Financial  Investigation  Service  (paragraph  4.29)  and  the  RBA  (paragraph  4.34),  the  Governor  of  the  Commercial  Development  Bank  was  potentially  connected  to  Amrock.  This  information could have come to attention from a rudimentary Internet search  and could have prompted Defence staff to conduct additional inquiries.  

Focus on payment risk obscures other risks

4.59 On the face of it, the primary focus of Defence Disposals staff, including  at senior executive level, was on the risk of non‐payment. This attention to  payment risk allowed other risks, such as the risk to reputation resulting from  not knowing the nature of the other entity, to go unnoticed until later in the  transaction.146  

4.60 Defence  Disposals’  decision  to  issue  the  invoice  and  seek  payment,  despite concerns from elsewhere within Defence about the organisations with  which Defence was dealing (see paragraphs 4.28 to 4.32), suggests a lack of  appreciation of the risks to Defence and government other than the risk of not  being paid. The following statements from Defence Disposals staff about the  Caribou disposal, appearing in Defence documents, also support this view: 

I  mean,  you  know,  in  sheer  marketing  terms  I  think  most  in  [Defence  Disposals]—I think everybody in [Defence Disposals] would prefer just to get the  biggest buck, you know. 

                                                      

145 The internal (to Defence) probity advisor, who was responsible for advising Defence Disposals staff on the integrity of the process, believed the assertion made by Defence Disposals staff that there had been a change in name only to the existing entity rather than a change in entities. Nevertheless, had the probity adviser been required to independently verify such claims (as was done once internal investigations and reviews were underway) rather than rely on assertions, the fact that Amrock and ZCEF were two separate legal entities under different ownership would have come to light well in advance of Defence entering into the contract of sale.

146 While concerns had been raised about the validity of the Commercial Development Bank and the capacity of Amrock to honour the sale agreement, the nature of the organisation with which Defence was dealing and their purpose in acquiring the aircraft was not specifically considered until November 2011. It was at this time that the CEO DMO expressed concern based on the organisation’s name which, in his view, warranted further investigation into the organisation. However, this was not until after Defence had received payment for the aircraft, complicating matters for Defence.

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[probity checks] have never been required as part of the commercial sale process  … Besides why would you chase your customers away from a sale contract? 

Other weaknesses in the Caribou disposal process

Gauging market interest

4.61 Expert external advice received by DMO in October 2010 on the Caribou  disposal suggests Defence had not thought through all of the commercial aspects  of  the  disposal  strategy  (that  is,  for  example,  valuing  the  aircraft  at  below  $150 000 while at the same time estimating the cost of removing asbestos to be  about $500 000). In addition, the cost of removing the aircraft in accordance with  contractual requirements, such as a requirement to maintain appropriate liability  insurance when removing the aircraft, was expected to impose further costs on  successful tenderers. The advice received suggested to Defence that, as part of  the planning and RFT development process, Defence would have to consider  how  to  balance  the  need  for  appropriate  contractual  protections  and  requirements with the likely cost impacts to industry (and therefore, impacts on  industry’s  interest  in  the  process).  This  was  considered  to  be  ‘key  to  the  commerciality of the disposal strategy’. 

Management of Caribou unique spares in the SME disposal process

4.62 Defence  generally  acquires  large  numbers  of  spare  parts  for  every  major weapons system or platform it acquires. These spares are often widely  dispersed.147 

4.63 A sound disposal process ideally requires knowledge of the type and  number of spare parts being disposed of.148 This helps to determine whether  there is a market for the assets in question and informs disposal decisions.  Accurate  information  is  also  important  because  the  spares  may  contain  hazardous substances such as radioactive material or asbestos.149  

                                                      

147 Ministers have, on occasions, been surprised at the numbers of items held in stock. For example, in 2010, the then Minister for Defence asked the department ‘given the long, known ramp-down and disposal of the F-111s, why are there so many items (3.8 million items) held in stock?’

148 The required knowledge also includes an understanding about the estimated market value of the goods to be disposed of and the legislation and subsidiary rules governing disposal. 149 Where an item contains radioactive material, Defence is required to obtain prior approval from the Australian Radiation Protection and Nuclear Safety Agency (ARPANSA) before disposal. Defence’s

compliance with ARPANSA requirements and management of asbestos in major disposals is examined in Chapter 5, ‘Managing hazardous substances in disposals’. See also ANAO Audit Report No. 29, 2013-14, Regulation of Commonwealth Nuclear and Radiation Activities.

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4.64 Spares often form a large part of a major SME disposal and, in some  cases, can be a larger potential source of revenue that the major item itself.  Additionally, the disposal of a major piece of SME and associated spares is a  complex and resource intensive process.  

4.65 In  the  case  of  the  Caribou,  Defence  did  not  have  a  complete  understanding of the spares inventory at the time of disposal. Taking stock of  unique  spares  required  considerable  effort  involving  items  in  116  separate  warehouses  around  Australia  recorded  in  multiple  inventory  systems.  This  activity was still in process in mid‐2012, nearly two years after the RFT and  nearly one year from the signing of the contract. Defence estimates the cost of  identifying unique Caribou spares at about $242 000, of which about $226 000  was paid to Defence contractors during financial year 2012-13 to identify and  pack Caribou spares.150 

4.66 Defence did not receive acceptable bids for some of the Caribou spares  offered in the October 2010 request‐for‐tender. In October 2014, these remained  in containers in storage at Macrossan Stores Depot in North Queensland. 

4.67 Despite  the  significant  cost  and  effort  involved  in  preparing  the  inventory of spares for the disposal, Defence has subsequently discovered a  further 35 containers not specifically contemplated nor included in the Caribou  aircraft sale contracts. This suggests that Defence’s inventory records for the  Caribou were unreliable.  

Boeing 707 air-to-air refuelling aircraft disposal

History and early disposals

4.68 From  1978  to  1988,  Defence  purchased  seven  B707  aircraft  that  had  previously been operated by commercial airlines. One was to be used for spare  parts,  leaving  Defence  with  six  aircraft.  Between  1988  and  1992,  Defence  converted  four  of  the  remaining  aircraft  for  use  in  air‐to‐air  refuelling  and  transport. 151  From  2000,  when  the  Government  announced  that  it  was  considering replacing the B707 aircraft, Defence received several expressions of 

                                                      

150 Defence informed the ANAO that as at February 2014, the estimated SPO related costs for the disposal of the Caribou were approximately $743 000, not including any internal staffing costs or legal costs associated with the sale. These costs were expected to reach approximately $750 000 by the end of financial year 2013-14 and $772 000 by the end of financial year 2014-15 due to ongoing storage costs for the aircraft.

151 One aircraft crashed in 1991, leaving Defence with a total of five.

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interest in acquiring them. A company called ‘Omega Air’ approached Defence  in  2003  with  a  view  to  acquiring  one  B707  aircraft.  However,  Defence  subsequently decided to retain this aircraft for spares.152  

4.69 In  November  2005,  Defence  decided  to  withdraw  its  fleet  of  B707  aircraft  from  service  on  1  July  2008  (together  with  a  flight  simulator,  the  remains of a B707 aircraft that had been used for spares since February 2001, a  range of spare parts, ground support equipment and aircraft documentation).  Defence  based  its  withdrawal  decision  on  the  aircraft  no  longer  being  cost  effective and an expectation that the capability provided by the B707 aircraft  would be replaced by multi‐role transport and tanker (MRTT) aircraft from  2009.153 Maintenance  of  the  B707  fleet  had  been  costing  the  RAAF  around  $38 million a year. 

4.70 At  the  time  that  Defence  decided  to  withdraw  the  B707  aircraft,  it  expected a capability gap of about 18 months, which the then Chief of Air  Force (CAF) had expected to fill using tanker aircraft from various sources: 

I have reviewed the planned transition from the B707 tanker aircraft to the  new  A330  aircraft  with  the  aim  of  determining  the  ideal  PWD  [planned  withdrawal date]. In order to prepare for a smooth transition to the new aircraft,  a period of about 18 months will be required between the B707 withdrawal  and  achieving  the  A330  initial  operating  capability  (of  two  fully  mission  capable aircraft and the necessary crews). The first A330 aircraft is planned to  arrive  in  Australia  in  December  2008,  and  the  aircraft  will  become  progressively available initially for airlift, and subsequently for tanking tasks. 

During the interim period I plan to maintain air combat proficiency in air to air  refuelling by using tanker aircraft from a variety of sources including USAF or  Singaporean tanker aircraft, and if necessary, leased civilian tanker aircraft. As  a result I intend to withdraw the B707 from RAAF service on 1 July 2008 ...154 

4.71 In early 2007, a key member of Defence’s MRTT project team joined  Omega Air as its Director of Australian Operations and, thereafter, represented  Omega Air in many of its dealings with Defence in the B707 aircraft matter. 

                                                      

152 In 2006, Defence transferred its single remaining non-converted B707 aircraft to a commercial company in exchange for B707 aircraft spare parts. 153 The Government approved the Multi-role Tanker Transport aircraft - Air-to-Air Refuelling Capability project (project AIR 5402) in May 2003, with delivery of the aircraft expected to commence in 2009.

This has been a project of concern since December 2010. In February 2013, the then Defence Minister announced that the Multi-role Tanker Transport (MRTT) aircraft had reached Initial Operational Capability (IOC). 154 Minute from the Chief Air Force to the CDF and Secretary, 1 November 2005.

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Commercial sale of the B707 aircraft (2008)

4.72 On 11 May 2007, Omega Air wrote to Defence expressing interest in  purchasing the B707 aircraft subject to Omega Air’s representatives being able  to inspect the aircraft.155 In early July 2007, Defence facilitated a visit by Omega  Air  representatives  to  RAAF  Base  Richmond  to  inspect  the  aircraft  in  preparation  for  a  potential  offer  for  purchase.  From  this  point  forward  Defence’s planning activities for the disposal of the B707 aircraft focused on a  sole‐source sale to Omega Air.  

4.73 On 30 July 2007, Omega Air made an unsolicited offer to Defence to  purchase three B707 aircraft, spares, a flight simulator and documentation for  $10.5 million.156 

4.74 By October 2007, Defence was aware that delivery of the replacement  capability—the MRTT aircraft—would be delayed and that the disposal of the  B707 aircraft would result in a longer capability gap. To address this gap, on  3 March 2008, Defence entered into a five‐year US Foreign Military Sales (FMS)  agreement  through  which  Defence  paid  for  air‐to‐air  refuelling  services  provided  by  Omega  Air.157 In  accordance  with  Defence’s  request  to  the  US  Government of 21 December 2007, the FMS agreement specifically required  that Omega Air provide the air‐to‐air refuelling services.158 Defence informed  the ANAO in December 2014 that it had specified Omega Air because it was  both less expensive and more flexible than the other option available under the  FMS arrangement. 

4.75 In February 2008, Omega Air wrote to Defence requesting a reduction  to the price it had offered in July 2007 for the purchase of three B707 aircraft,  spares, a flight simulator and documentation and, in March 2008, the parties 

                                                      

155 Omega Air stated that, subject to inspection of the aircraft by Omega Air representatives, it would be willing to pay Defence between USD $6 million and $9 million (at the time, approximately AUD $7.2 million to $10.8 million) for the three B707 aircraft plus a further amount for the spares which was to be determined once the value of the available spares was known. 156 The offer comprised $6.6 million for the three B707 aircraft plus spares and documentation and, if

Defence was prepared to sell the B707 flight simulator to Omega Air as part of the package rather than disposing of it through sale by open tender, a total of $10.5 million for the total package. The offer included three payment options: (i) Omega Air to pay the $10.5 million to Defence (ii) Omega Air to provide Defence with $10.5 million of air-to-air refuelling services; or (iii) a mix of options (i) and (ii). 157 Omega Air provides air-to-air refuelling services for the US Navy and Marine Corps. 158 As a result, Defence received services from Omega Air using at least one of the B707 aircraft it had

provided to Omega Air. As Omega Air had not yet paid for the aircraft, Defence was, in effect, hiring its own property on occasions between October 2011, when Omega Air took control of the aircraft (see paragraph 4.95) until Defence placed an embargo on its use of refuelling services from the Omega Group around April 2013 (see paragraph 4.108).

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agreed to a reduced price of $9.5 million. In October 2008, Defence entered into  a sole‐source contract, to sell, for $9.5 million (excluding GST)159, three B707  aircraft,  a  flight  simulator,  spares,  training  material  and  documentation  to  Omega Air.  

4.76 Defence has not provided any reason for entering into a sole‐source  contract  rather  than,  for  example,  using  an  open  tender  to  help  ensure  it  obtained value‐for‐money from the disposal. However, at the time, Defence  was of the view that Omega Air’s offer was far in excess of any offer it could  expect from other sources. The response received by Defence to a subsequent  B707 aircraft tender process (see paragraph 4.86) supports this conclusion. It is  not clear whether Defence gave any consideration as to why the Omega Air  offer was so high. 

Offer of services in-lieu of payment

4.77 In July 2008, before a contract was signed, Omega Air wrote to Defence  to  advise  that  it  was  experiencing  financial  difficulties.  Defence  did  not  conduct  any  checks  on  the  financial  viability  of  Omega  Air  at  this  time.  However,  shortly  afterwards,  in  September  2008,  Defence  considered  a  proposal from Omega Air to amend the proposed purchase contract to allow  Defence to accept up to $6.2 million in air‐to‐air refuelling services from the  company in lieu of a cash payment for the aircraft. 

4.78 Defence  originally  viewed  Omega  Air’s  September  2008  proposal  favourably. It saw this approach as potentially supplementing its budget by  obtaining some $6.2 million in services that, if received in cash, would have to  be returned to consolidated revenue rather than being retained by Defence.  The  proposal  would  also  address  its  looming  capability  gap.  Defence  eventually decided not to proceed with this arrangement when it ascertained  that if it were to receive services in lieu of payment it would still have to return  an equivalent value from its budget allocation to consolidated revenue. Thus,  there would be no net benefit to Defence regardless of whether the proceeds  from  sale  were  received  in  cash  or  in  kind.  That  is,  the  total  sale  value  of 

                                                      

159 At the time there was considerable uncertainty around the application of GST to the transaction. Defence eventually determined that GST did in fact apply to the transaction. In April 2013, Defence issued invoices to Omega Air totalling $620 000 for GST on the transaction that had not previously been charged. Omega Air eventually paid the GST in early 2014.

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$9.5 million  amount  would  flow  to  consolidated  revenue  regardless  of  the  payment method.160  

4.79 Under the terms and conditions of the October 2008 contract, Omega  Air was to pay amounts at intervals to Defence over the period to mid‐2009  (see Table 4.1). All amounts were to be paid before removal of the items from  Defence  premises.  Omega  Air  paid  the  $0.5 million  security  deposit  on  27 October 2008 and $1.8 million for the consolidated spares, training material  and documentation on 30 March 2009. 

Table 4.1: Payment schedule for B707 aircraft, October 2008 contract

Item Price and Timing

Security deposit $0.5 million (to be paid within 10 working days of contract execution)

Consolidated B707 aircraft spares, training material and documentation

$1.8 million (to be paid within 50 days after the delivery* of the item but before its removal from Defence premises) Expected delivery date—28 February 2009

B707 flight simulator $1.8 million (to be paid within 50 days after the delivery of the item but before its removal from Defence premises) Expected delivery date—30 April 2009

3 x B707 aircraft $1.8 million each (to be paid within 50 days after the delivery of the item but before its removal from Defence premises) Expected delivery dates: 31 May 2009 15 June 2009 30 June 2009 

Source: Defence documents.

* Under the contract of sale for the aircraft, delivery of an item is defined as when access is given to the purchaser for the purpose of removal.

Purchaser requests delays

4.80 On 9 April 2009, Omega Air requested that the delivery (access) date  for the three aircraft and flight simulator be delayed to 30 September 2009. In  June  2009, Defence  and  Omega  Air  agreed  to  a  contract change  (signed  by  Defence on 30 June 2009 and by the Omega Air representative on 6 July 2009).  The contract change revised the delivery (access) dates for the B707 aircraft and  the flight simulator to 30 September 2009 and, consequently, the due date for                                                        

160 Defence came to this conclusion based on advice it received from the then Department of Finance and Deregulation (DoFD), which indicated that Defence would be required to transfer funds, equivalent to the value of the in-kind air-to-air refuelling services, to consolidated revenue.

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payment to 19 November 2009 (being 50 days after the delivery date, though  still  before  the  removal  of  the  assets  from  Defence  premises).  Further,  an  additional security deposit of $500 000 was to be paid by Omega Air, which it  paid on 24 August 2009.161 

4.81 On 27 June 2009, when the then CEO DMO was informed by DMO  officials of Omega Air’s request, he expressed concern and sought advice on  the security that had been obtained and directed that the disposal transaction  be actively risk managed to ‘avoid a SAFF‐type problem’.162 On 3 July 2009,  Defence Disposals informed the CEO DMO that the situation was not in any  way  similar  to  the  SAFF  issue  as  the  contract  required  payment  in  full  by  Omega Air before collection of any equipment and noted that prior payment  was a requirement under the Disposal Instruction. 

4.82 On  23  September  2009,  Omega  Air  sought  a  further  three‐month  extension of the delivery (access) date because it had been unable to obtain  relevant  US  Federal  Aviation  Administration  (FAA)  approvals.  Defence  rejected this request on 30 September 2009. In October 2009, Defence offered  Omega  Air  an  extension  to  29  January  2010  provided  it  paid  an  additional  $1 million  non‐refundable  security  deposit.  Omega  Air  did  not  accept  this  offer. 

4.83 Subsequent  extensive  negotiations  between  Defence  and  Omega  Air  during February 2010 failed and, during that month, the parties entered into  formal mediation, which did not resolve the dispute. Legal advice obtained  during  the  February  2010  negotiations  and  mediation  recommended  that  Defence  seek  further  information  about  Omega  Air’s  financial  status  and  corporate structure. Defence did not act on this recommendation. 

                                                      

161 This contract change proposal also reduced the purchase price of the flight simulator from $1.8 million to $1.3 million. 162 The then CEO DMO was referring to the disposal by sale of contaminated fuel to the South Australian Farmers Federation (SAFF) between June 2001 and June 2008 by Defence’s Joint Fuels and

Lubricants Agency. The Agency had managed four major sales of fuel to SAFF, each with a value over $1.0 million. SAFF defaulted on payments in all four transactions, requiring lengthy and expensive legal action to recover the debts. The fourth sale, worth over $3.9 million, was the subject of a Defence internal investigation in 2009. The Joint Fuels and Lubricants Agency was the subject of ANAO Audit Report No.44, 2001-02, Australian Defence Force Fuel Management.

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Contract terminated, parties in dispute, new request-for-tender issued (2010)

4.84 Defence terminated the Omega Air contract on 1 April 2010 with a view  to seeking damages for the company’s breaches of the contract.163 At this point  Omega Air had paid Defence a total of $2.8 million (excluding GST) and taken  possession of the B707 aircraft spares and documentation.164 

4.85 After cancelling the contract, Defence conducted a limited review into  the financial status of the Omega Air group of companies. Defence chose not to  conduct further investigations into Omega Air’s financial viability although it  continued negotiations with the company after cancelling the contract.  

Request-for-tender

4.86 On 1 October 2010, Defence issued a new request‐for‐tender (RFT) for  the re‐sale of the remaining B707 assets, which closed on 10 November 2010. It  received four responses with offers ranging from a best offer of $90 000 to a net  cost to Defence of $900 000. 

4.87 There  was  a  marked  difference  between  the  best  offer  received  by  Defence in response to the 2010 RFT ($90 000) and the contracted purchase  price with Omega Air of $9.5 million. The difference may be explained in part  by  the  fact  that  the  B707  assets165 were  offered  for  sale  without  any  spares,  training material and aircraft documentation. These items had already been  sold to Omega Air in early 2009 upon payment of the instalment of $1.8 million  (see paragraph 4.79).  

4.88 In parallel with these activities, on 5 November 2010, Defence received  a letter of offer from Omega Air to settle the dispute. The offer was open until  10 November 2010—the closing date of the tender. On 18 November, Omega  Air extended this offer to 25 November 2010. 

4.89 By  mid‐November  2010,  Defence  was  doubtful  of  the  merits  of  pursuing  legal  action  against  Omega  Air  to  recover  damages,  for  reasons  including the potential ongoing financial costs of legal action. The company’s  financial position was still unknown to Defence. 

                                                      

163 Omega Air denied this claim and counter-claimed that the Commonwealth was in breach and had wrongly terminated the contract. 164 Omega Air had not taken possession of any ex-RAAF B707 aircraft at this point. 165 The remaining B707 assets comprised three B707 aircraft, one B707 flight simulator and one

incomplete B707 airframe.

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4.90 Defence decided not to continue with the tender it had commenced in  October 2010. Defence and Omega Air continued negotiations throughout 2010  both directly, and through their respective legal advisers.  

Dispute settled (January 2011)

4.91 The dispute between Defence and Omega Air was settled on 31 January  2011.  The  settlement  was  effected  through  a  Deed  of  Release,  Deed  of  Guarantee  and  Indemnity,  and  Deed  of  Charge.  The  Deed  of  Charge  was  intended to provide the Commonwealth with security over the aircraft in the  event that Omega Air did not meet its payment obligations under the contract.  However, as discussed in paragraph 4.98, this instrument was ineffective. 

4.92 Under  the  settlement,  the  purchase  price  was  reduced  to  between  $6.2 million  and  $9.2 million  (excluding  GST).  Omega  Air’s  payment  of  the  $3 million  difference  was  conditional  upon  it  obtaining  certain  US  Federal  Aviation Administration (FAA) certifications for the three B707 aircraft before  31 December 2014.166 

4.93 In September 2009, Omega Air had cited its inability to obtain relevant  FAA approvals as justification for an extension of the delivery date and, hence,  the payment date, under the contract. Additionally, during negotiations with  Defence in February 2010, Omega Air claimed it was unlikely that it would  ever  obtain  the  necessary  approvals.  Further,  Omega  Air  stated  it  was  impossible for the aircraft to be certified in the US as the modifications for the  purposes of equipping the aircraft with air‐to‐air refuelling capability had not  been  done  in  accordance  with  FAA  regulations.  These  factors  indicate  that  Omega Air was unlikely to obtain the FAA certifications and be required to  pay the remaining $3 million to Defence.  

4.94 Notwithstanding the history of non‐payment, Defence did not conduct  any further checks into the company’s financial situation before settling the  contractual  dispute.  At  this  juncture,  Defence’s  external  legal  advisor  expressed a ‘strong preference to obtain specialist advice from [its] Banking  and Finance team to inform the settlement negotiations’. However, the legal  adviser was instructed by the then Branch Head for Defence Disposals not to  obtain such advice. 

                                                      

166 The certification is a Supplemental Type Certificate (STC) and relates to the RAAF modifications to the aircraft for the purposes of equipping the aircraft with air-to-air refuelling capability (see paragraph 4.68).

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Ownership and possession transfers without full payment for assets (2011)

4.95 The terms of the January 2011 settlement allowed Omega Air to take  possession  of  the  B707  aircraft  and  flight  simulator  without  paying  the  Commonwealth in full for the assets. On 3 February 2011, Omega Air paid  Defence the $1.4 million (excluding GST) required for the settlement to take 

effect and for title to the three aircraft and the simulator to pass to Omega  Air.167 The three aircraft left Australia under Omega Air’s control between 23  and  25 October  2011.  The  company  took  possession  of  the  simulator  in  November 2011. 

4.96 Allowing  Omega  Air  to  take  possession  of  the  aircraft  without  the  Commonwealth first receiving payment in full is inconsistent with: 

 advice  Defence  received  from  the  then  Department  of  Finance  and  Deregulation  (DoFD)  in  2008168 that  the  assets  could  not  be  released  until payment had been received in full; and 

 the requirements of Defence’s Disposal Instruction, which requires that  the Commonwealth receive payment in full before the purchaser takes  delivery of the assets.  

4.97 The arrangement also removed the primary risk treatment Defence had  in place to address the risk of non‐payment and is contrary to the July 2009  assurances provided by DMO officials to the then CEO DMO (see paragraph  4.81). 

4.98 In Defence’s view, the January 2011 Deed of Charge contained a lien  that was intended to protect the Commonwealth from the risk of any default  on payments due to the Commonwealth under the settlement arrangement. To  give effect to this arrangement, Omega Air was required to register the Deed of  Charge  with:  the  US  Federal  Aviation  Administration  (FAA);  and 

                                                      

167 Omega Air had by this stage paid a total of $4.2 million for the B707 assets including the $1.8 million paid for the spares, training material and documentation in 2009. The full contract price was $9.5 million including the $3 million contingent on Omega Air obtaining FAA certifications. These amounts are exclusive of GST.

168 In August 2008, in discussions concerning the proposed B707 sale, Defence Disposals staff noted specific Department of Finance advice that the assets could not be passed over until the contract was concluded.

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‘internationally under the Cape Town Convention’.169 However, Defence made  no attempt to follow up Omega Air’s obligation to register the Deed of Charge  with the relevant authorities until early 2013. In April 2013, Defence Disposals  obtained confirmation from the FAA that Omega Air had not registered the  Deed  of  Charge  with  the  FAA.  Further,  in  August  2013,  Defence  received  advice from the FAA, via Omega Air, that the Deed of Charge was not valid. In  November 2014, Defence informed the ANAO that it does not believe the Deed  of Charge was registered under the Cape Town Convention either. 

Proposal for deferral of payment (2013)

4.99 In February 2013, Omega Air requested that the due date for the next  payment of $1 million (which had been due in January 2013) be deferred one  year until 1 February 2014 and then be payable by instalments of $250 000 a  month from 1 February 2014 to 1 May 2014. 

4.100 Within Defence, the delegation to approve a proposal for payment by  instalments of a debt of this magnitude rests with the Secretary, CDF or Chief  Finance  Officer  (CFO).170 As  a  consequence,  Defence’s  CFO  Group  became  involved  and  inquired  further  into  Omega  Air’s  financial  situation.  This  revealed that the company was not then able to settle the debt. 

4.101 On  1  May  2013,  Defence’s  CFO  rejected  Omega  Air’s  request. 171  Negotiations continued between Defence and Omega Air in the months that  followed. Defence continued to insist on payment in full and in October 2013,  advised Omega Air that an embargo that Defence had placed on its use of  refuelling services from the Omega Group would continue until Omega Air  met its obligations in full.172 

                                                      

169 In email correspondence with Defence Disposals staff on 26 January 2011, Omega Air stated that it would register the lien before the aircraft departed Australia. This undertaking was not reflected in the 31 January 2011 settlement.

170 The authority to approve the payment of a debt to the Commonwealth by instalments has been delegated from the Finance Minister to the Secretary. The Secretary has, in turn, delegated the authority to various positions within Defence with only the CDF and CFO having the authority to approve the repayment of a debt of this magnitude by instalments.

171 A subsequent offer to pay by instalments was rejected by Defence on 16 October 2013. 172 At this point, the five-year FMS contract signed in March 2008 had expired. Defence’s embargo on Omega Air’s refuelling services is discussed at paragraph 4.108.

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Further payments received (September 2013 to February 2014)

4.102 Between  September  2013  and  February  2014,  Omega  Air  paid  the  remaining  $2.62  million  (including  GST)  invoiced  by,  and  owed  to  the  Commonwealth. Although there was no agreement by Defence for Omega Air  to  pay  by  instalments,  Omega  Air  initiated  instalment  payments  and,  by  28 February 2014, had paid the total reduced purchase price of $6.2 million. 

4.103 In  July  2014,  Defence  informed  the  ANAO  that  the  contractual  provisions  for  payment  to  the  Commonwealth  remained  relevant  until  the  sunset date of 31 December 2014. Therefore, if Omega obtained the relevant  FAA certifications by 31 December 2014, Omega Air would be liable to pay the  Commonwealth $1 million (excluding GST) for each certified aircraft. 

4.104 In February 2014, Air Force’s Technical Airworthiness Regulator noted  that  Omega  Air  could  continue  to  operate  the  B707  aircraft  without  the  relevant  FAA  certification.  Further,  following  discussions  with  Omega  Air,  Defence Disposals formed the view that the company had little incentive to  seek certification and did not intend to do so.173 In the event, Defence did not  receive the remaining $3 million of the original contract price because FAA  certification was not achieved by 31 December 2014. 

Cost of external legal advice for the B707 aircraft disposal

4.105 Defence  informed  the  ANAO  that  it  had  spent  $282 239  on  external  legal  fees  on  the  B707  aircraft  disposal.  Defence  was  unable  to  provide  an  estimate of the cost of internal legal advice. 

Addressing the capability gap after B707 aircraft withdrawal

4.106 As discussed earlier, following the withdrawal of the B707 aircraft fleet,  the  RAAF’s  replacement  air‐to‐air  refuelling  capability  was  to  be  provided  through the MRTT project. However, this project did not deliver the expected  capability from 2008 as scheduled and, as a result, a lengthy capability gap 

arose.174 

4.107 Defence was aware when it decided to withdraw the B707 aircraft that  it would face a capability gap. In the event, to address the capability gap, from  March 2008, Defence paid Omega Air for air‐to‐air refuelling services. Defence 

                                                      

173 See footnote 166. 174 Initial capability for the MRTT project was delivered in 2013.

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did this through the five‐year US Foreign Military Sales (FMS) agreement, with  Omega Air specifically named as the provider of the services to Defence in  accordance  with  Defence’s  request  (see  paragraph  4.74).175 As  discussed  in  paragraph 4.74, Defence advised the ANAO that it had specified Omega Air  because it was both a less expensive and more flexible option than the other  option available under the FMS arrangement. 

4.108 Defence  estimated  that,  as  at  10 April  2013,  it  had  paid  Omega  Air  $24.04 million for these services (not including the cost of the fuel); at times  receiving services from Omega Air using one its own B707 aircraft.176 However,  Defence advised the ANAO that it had received liquidated damages because of  the delays in the new MRTT capability coming into service. This had the effect  of reimbursing Defence for the cost of hiring commercial air refuelling services.  In April 2013, the Secretary of Defence indicated to the RAAF that the FMS  arrangement should cease given Omega Air’s then failure to pay the remaining  amounts under the contract. 

Army B Vehicle fleet 4.109 The Army’s B Vehicle fleet (B Vehicles) comprises about 12 000 trucks,  trailers, motorbikes, quad bikes, and four and six‐wheel drive sedans. Defence  acquired the fleet progressively between 1959 and 1994. By 2008, Army had  determined that 98 per cent of the fleet had exceeded its expected operating life  and was increasingly costly to maintain, repair and operate. 

Disposal strategy approved (June 2011)

4.110 In July 2010, the then Deputy Chief of Army began a program to reduce  the  size  of  the  Army’s  B  Vehicle  fleet  because  of  obsolescence,  a  lack  of  maintenance funding, and its expected replacement through the major capital  acquisition project ‘LAND 121’. On 21 June 2011, the then Minister for Defence  Materiel approved Defence’s proposal for the sale by tender of approximately  12 000 B Vehicles expected to become surplus over the period 2011-20, and the  sale for dismantling and recycling of remaining vehicles that could not be sold  viably  as  working  vehicles.  Defence  informed  the  Minister  that  the  net  proceeds from the sale of the vehicles would be invested in vehicle simulators  for Army. 

                                                      

175 Omega Air provides air-to-air refuelling services for the US Navy and Marine Corps. 176 See footnote 158.

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4.111 Defence further informed the Minister that the potential revenue from  the B Vehicles disposal would be about $70 million.177 However, Defence noted  that under its sale proposal, any potential revenue would be ‘impacted by costs  incurred by the Prime Contractor, such as in remediating hazardous materials  such as asbestos that may be contained within the vehicles.’ 

Evaluating the tender—Army B Vehicles (2012)

4.112 Following an Army B Vehicles request‐for‐proposal process in the latter  half of 2011, Defence invited seven companies to respond to a limited RFT  which opened on 8 March 2012 and closed on 14 May 2012. Defence received  three  responses.  A  tender  evaluation  board  that  included  nominees  from  Defence Disposals and Joint Logistics Command (JLC) evaluated responses.  

4.113 By mid‐2012, Defence’s estimate of the revenue to be raised through  B Vehicle  sales  was  in  the  range  of  $100  million  to  $150 million.  There  is  evidence of differing views within Defence as to whether such revenue could  be retained by Defence for its own purposes—rather than being returned to  consolidated revenue—and, if so, what that purpose should be:  

 An arrangement had been in place in Defence earlier to allow JLC to  retain  revenue  from  its  disposals  to  fund  its  Accelerated  Disposals  Program  (ADP).  JLC  developed  an  expectation  that  some  or  all  the  revenue from B Vehicle disposals would be used to fund the ADP. 

 With  Defence  Disposals’  assistance,  Army  had  sought  agreement  to  retain revenue from the disposal to meet its own funding pressures.  This  ultimately  resulted  in  a  proposal  to  use  the  revenue to  acquire  vehicle simulators to improve efficiency of driver training for Army. 

4.114 Ultimately,  the  choice  in  selection  of  a  tenderer  was  between  a  company  JLC  had  previously  done  business  with  and  another,  newer  participant  in  the  vehicles  disposal  business.  Before  the  source  evaluation  report  recommending  the  preferred  tenderer  was  completed,  a  senior  JLC  member (not part of the tender evaluation board) expressed doubts to Defence  Disposals  as  to  the  capacity  of  the  newer  participant—which  became,  ultimately, the preferred tenderer—to discharge the work under the contract  successfully.  The  JLC  nominee  on  the  tender  evaluation  board  ultimately 

                                                      

177 This was based on the earlier sale by Defence of small numbers of B Vehicles at auction.

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dissented from the board’s conclusions and recommendations and did not sign  its report. 

4.115 The  source  evaluation  report  was  considered  and  approved  by  the  Head, Commercial and Industry Programs Division (HCIP) on 30 August 2012. 

4.116 Subsequent to the tender evaluation, the delegate for contract signature  confirmed to the ANAO that, in his view, ‘JLC representatives at the time had  a  very  sceptical  view  about  going  down  a  tender  process  at  all  for  the  B Vehicles disposal.’ 

4.117 In October 2012, one of the non‐preferred tenderers wrote to Defence  expressing  concern  about  the  conduct  and  potential  outcome  of  the  tender  evaluation.  At  the  time,  Defence  had  not  advised  any  of  the  non‐preferred  tenderers of the outcome. However, the letter showed that the tenderer was  aware  of  details  of  the  tender  process  which  Defence  thought  should  have  been protected by its ‘commercial‐in‐confidence’ nature. 

4.118 In  response,  DMO’s  Contracting  Services  Branch  conducted  an  administrative review (known as a ‘Quick Assessment’ (QA)178) of the tender  process  and  provided  advice  to  HCIP. 179  The  report  identified  several  ‘irregularities’ and stated that: 

In view of the gravity of the above issues, this QA has concluded that the  selection  of  [the  preferred  tenderer]  is  based  on  an  irregular  process  and  therefore negotiations with that company alone should not continue. Further  investigation is warranted to verify the above findings before deciding on a  way forward …180 

4.119 The irregularities comprised: (i) irregularities between senior executive  direction to the tender board and the RFT, and within the RFT; (ii) irregularities 

                                                      

178 A ‘Quick Assessment’ is a Defence term for an administrative review conducted to quickly determine the circumstances around a particular occurrence with a view to informing a decision about what to do next. A Quick Assessment results in a short report which identifies the facts and may make recommendations to the relevant commander or supervisor on a way ahead.

179 The QA was conducted in two parts. The first dealt with the conduct of the tender process; and the second covered the question of whether the tenderer had improperly obtained information about the process and potential outcome, or whether information had been provided by a Commonwealth employee. This second part of the QA led to the issue being referred to Defence’s Inspector-General who, following an initial assessment, referred the matter to the Defence Security Authority in November 2012. Ultimately no investigation took place as DSA concluded that a large number of personnel (about 35) had access to the relevant information and this reduced substantially the likelihood of identifying the person(s) responsible for any unauthorised disclosure.

180 Defence, Quick Assessment Brief for Head, Commercial and Industry Programs, Disposal by Sale of Ex Defence “B” Vehicles, 25 October 2012.

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between the RFT, Tender Evaluation Plan and the Source Evaluation Report; (iii)  inadequate definition of the Tender Evaluation Criteria; (iv) failure to evaluate  against  all  of  the  Tender  Evaluation  Criteria;  (v)  no  assessment  of  value  for  money  of  the  tenders;  (vi)  incorrect  assessment  of  one  of  the  tenderer’s  compliance  with  the  RFT  requirements;  and  (vii)  inequitable  treatment  of  tenderers by the Tender Evaluation Board. 

4.120 The report recommended that HCIP: 

(a) suspend the contracting process pending further investigation of the  above significant assessments; 

(b) initiate a rapid follow‐on independent investigation of the tendering  process irregularities; 

(c) direct that at least interim processes with minimum requirements for  sales by tender be developed by DMO Legal and approved before any  further such disposals are commenced; and 

(d) direct that all Defence Disposals staff likely to be involved in future  disposals  involving  sale  by  tender  be  trained  on  the  minimum  requirements  necessary  to  conduct  a  tender  process  to  ensure  that  disposal transactions are able to withstand public scrutiny in terms of  value for money, probity and ethical conduct. 

4.121 On 26 October 2012, DMO Legal reviewed the QA. It concluded that  the flaws in the tender process identified in the QA report were sufficient to  warrant a re‐tender and that DMO Legal would conduct further investigations  into the complaint.  

4.122 On 2 November 2012, after considering additional documents related to  the tender process, DMO Legal came to a different conclusion. This time it  concluded  that,  while  there  were  deficiencies  in  the  tender  process181,  ‘the  outcome adhered with due process’ and ‘was not sufficiently flawed so as to  render the outcome not legally defensible’.182 DMO Legal then recommended                                                        

181 The deficiencies DMO Legal identified included that: the evaluation criteria released to the market as part of the RFT were not an accurate reflection of the actual requirements of the Commonwealth; the Source Evaluation Report ‘barely justifies and explains the decision’ of the Tender Evaluation Board to recommend the preferred tenderer to the delegate; and that therefore, there was the potential for there to be deficiencies in the merits of the evaluation criteria and Source Evaluation Report.

182 The resulting report noted that the review was not into the merits of the quality of the evaluation against the prescribed criteria or the decision of the delegate to endorse the Source Evaluation Report. It was instead an assessment of whether the process adhered to relevant Commonwealth legislation and departmental policies.

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that Defence Disposals continue with negotiations already under way with the  preferred tenderer. 

4.123 On  5  November  2012,  Contracting  Services  Branch  reviewed  DMO  Legal’s report of 2 November and disagreed with the conclusions. Consistent  with its earlier QA findings, it took the view that the disposal outcome would  not be able to withstand public scrutiny in terms of value for money, probity,  ethical  conduct  and  corresponding  supporting  requirements  in  the  Defence  Procurement  Policy  Manual.  In  its  response  to  DMO  Legal,  Contracting  Services Branch recommended that: 

(a) the current contracting process with the preferred tenderer should be  suspended because it was the result of an irregular evaluation of the  tenders; 

(b) there be a complete re‐assessment of the competing offers against all of  the evaluation criteria in the RFT with the level of detail required of the  resulting  report  being  comparable  to  that  required  for  a  major  procurement;  

(c) the re‐assessment against the RFT evaluation criteria should include a  ranking of the tenderers’ offers against value for money and the net  outcome for the Commonwealth, with those two terms to be clearly  defined; 

(d) the tender re‐assessment team should not contain any staff from the  original tender evaluation process; and  

(e) a  new  probity  adviser  should  be  appointed  from  DMO  Legal  or  Contracting Services Branch. 

4.124 Also on 5 November 2012, DMO sought external (to Defence) advice on  the matter. On 7 November 2012, the resulting advice presented Defence with  four options for a way forward. The preferred option was to re‐conduct the  evaluation with a new team, while the least preferred was to proceed with the  process and enter into a contract with the preferred tenderer chosen in the  original process. Defence ultimately adopted the least preferred option. 

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4.125 The external adviser also proposed that, should Defence adopt the least  preferred option, it should ensure that the document trail was completed to  provide greater detail about the methodology and logic behind its evaluation 

outcomes. 

4.126 Following  advice  from  the  DMO  Special  Counsel,  on  14  November  2012, Defence approached the same external adviser for further advice, this  time providing tender documentation that it had not provided as part of its  earlier request. On this occasion, Defence sought specific advice on whether  the  process  had  been  conducted  in  accordance  with  the  RFT  and  Tender  Evaluation  Plan  and  whether  the  decisions  made  were  defensible.  The  resulting advice, provided on 16 November 2012, concluded that, while there  were some flaws in the process, assuming that the assessment of the tender  submissions was supported by sound analysis (particularly from a financial  perspective),  Defence  would  have  grounds  to  defend  its  decision.  The  assumption here should be noted. 

4.127 As in the first advice, the external adviser focused on helping Defence  develop  a  defensible  process.  The  adviser  indicated  that,  at  a  minimum,  Defence should document its response to the flaws identified by other review  teams (including its reasons for concluding those flaws had not affected the  evaluation outcome). In addition, attention was drawn to the value of training  to  ensure  that  the  identified  shortcomings  did  not  recur  in  future  disposal  processes. The audit found no evidence that Defence had acted on the external  advice to complete the document trail to support the evaluation outcome or  document its response to the flaws identified by the other review teams. 

4.128 On 19 November 2012, Defence Disposals staff presented the delegate  (HCIP) with a written brief recommending that he sign the contract with the  preferred  tenderer.  The  recommendation  was  made  because  the  various  reviews and advice showed that: some of the issues raised in the complaint  were not relevant; Defence had a basis on which to defend its decision; and the  advice  had  ‘not  identified  any  material  that  suggest[s]  that  the  decision  to  proceed with [the preferred tenderer] resulted from bias, favouritism or mistake’.  

4.129 There is no evidence of any attempt to complete the document trail (as  the external adviser had proposed—see paragraph 4.125) so as to inform the  delegate  appropriately  before  execution  of  the  tender.  The  written  brief  received by the delegate immediately before signing the contract for the sale of  the B Vehicles focuses on the complaint by the non‐preferred tenderer, but not  the critique by the subsequent reviews. It highlights the advice that ‘Defence 

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has  a  basis  on  which  to  defend  its  decision  to  set  aside  the  [non‐preferred  tenderer’s] tender.’ It does not mention that this is contingent on Defence being  able  to  fulfil  a  range  of  requirements  nor  state  whether  these  have  been 

fulfilled. This leaves doubt as to whether the delegate was, in fact, fully and  properly advised and informed before making his decision.183 

4.130 The advice to the delegate included the statement:  

The RFT and SER [Source Evaluation Report] do not demonstrate best practice,  however they do meet the required standard and comply with relevant DMO  policies. 

4.131 The delegate had asked for, and obtained a ‘brief sequence of the events  that have occurred re probity’ to be prepared to attach to the decision to sign  the contract with the preferred tenderer, should he do so, so as to document  ‘reasons for the decision.’ That attachment included a reference to the external  advice that ‘if the documented concerns were to come to light ... they would ...  expose  Defence  to  a  significant  risk  of  public  criticism,  loss  of  industry  confidence  and  Ministerial  concern’.  Those  advising  the  delegate  did  not  reconcile the concerns in the attachment with the statement in paragraph 4.130. 

4.132 The delegate agreed with the recommendation to sign the contract. On  the  same  day,  the  delegate  signed  a  letter  to  the  non‐preferred  tenderer  advising that Defence’s review of the process had concluded that the tender  process was ‘sound’. The delegate subsequently advised the ANAO that there  were  two  main  aspects  which  influenced  his  view  in  deciding  to  sign  the  contract: 

 the fact that the cost and risk to schedule of not proceeding to contract  was significant; and 

 he had good reason to doubt the objectivity behind some of the views  expressed by certain participants and advisers in this process. 

4.133 The delegate did not identify the cost and risk to schedule pressures he  referred to. The main cost consideration reflected in internal discussions within  Defence before contract signature was the risk of JLC having to accommodate 

                                                      

183 Defence informed the ANAO that ‘Prior to signing the contract the delegate reviewed documentation previously provided to HCIP in August 12 when the issue of the minority TEB complaint was first reported to the delegate, in particular minutes from the TEB Chair to the delegate of 2 and 21 August 12 as well as the SER documentation. In addition the delegate considered a brief prepared by the TEB Chair noting the review findings and actions to be taken’.

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many ‘parked‐up’ B Vehicles awaiting disposal. As events unfolded, this risk  diminished and reversed, having been replaced by a lack of vehicles to supply  to the contractor for disposal (see paragraph 4.136). 

4.134 If the delegate had reason to doubt the objectivity of some of the advice  received then an appropriate course may have been one of the other options  nominated by the adviser (see paragraph 4.124) or, at a minimum, to set out his  own reasoning, dealing explicitly with any perceived lack of objectivity before  exercising the delegation. 

4.135 The delegate further advised the ANAO that, ‘on review and discussion  with DMO Special Counsel the additional [external] advice of 16 November 2012  was then sought and based on this I was satisfied that there was a defensible  basis to proceed to contract.’ However, this external advice providing assurance  of  the  defensibility  of  Defence’s  proposed  course  of  action  (discussed  in  paragraphs 4.126 to 4.127), and on which the delegate depended to form his  view, was contingent upon completion of recommended actions to remediate  the evaluation process, particularly by documenting it. Moreover, Defence was  advised that—if its evaluation had in fact been sound—it needed to complete the  document trail before executing the contract (paragraph 4.125). Since this was  not done, before or after executing the contract, the defensibility of the course  taken by Defence was not supported in the way the adviser recommended. 

Progress with the B Vehicles contract

4.136 By  May  2014  Defence  Disposals  regarded  the  project  health  of  the  B Vehicles disposal as one of ‘concern’. This was due to the fact that the flow of  surplus  vehicles  from  Army  had  become  constricted  by  delays  in  the  replacement project (Project LAND 121 Phase 3B). The main concerns for the  project were Defence Disposals’ inability to control the outflow of surplus assets  to the contractor and the development of a solution to the shortfall in supply. 

4.137 The  shortfall  in  the  supply  of  vehicles  to  the  company  resulted  in  Defence preparing a contract change for the 2014-15 financial year allowing a  substantial  increase  in  the  proportion  of  revenue  being  retained  by  the  contractor (see paragraph 3.48). 

Conclusion—major case studies 4.138 The audit considered three case studies in detail, comprising the two  disposals whose difficulties gave rise to the request for this audit, the Caribou  and Boeing 707 (B707) aircraft fleets, and a more current disposal, B Vehicles.  

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The Caribou aircraft case

4.139 Defence sought to dispose of its last nine Caribou transport aircraft by  sale, issuing a request‐for‐tender in October 2010. Two aircraft, earmarked for  heritage  purposes,  were  successfully  sold  to  an  historical  aircraft  society.  However, the sale of the remaining seven aircraft proved troublesome. The  preferred tenderer was replaced by another entity, and doubts arose over the  latter’s credibility and financial viability. While Defence proceeded with the  disposal and the purchase of the aircraft by the replacement entity, which paid  for  the  seven  aircraft,  Defence  retained  the  aircraft  until  doubts  about  the  entity could be resolved. In January 2015, Defence informed the ANAO that  the  sale  to  this  entity  had  been  cancelled  and  Defence  was  considering  alternative disposal options for the aircraft. 

4.140 The Caribou disposal process demonstrated three key administrative  shortcomings. Defence:  

 did not observe that the original tenderer was being substituted by a  separate entity and that the change was not merely a change of name; 

 did not seek advice on the financial viability, background and integrity  of the entity it was dealing with; and 

 proceeded  with  the  sale  transaction  (by  issuing  an  invoice  to  the  purchasing  company)  after  becoming  aware  of  concerns  about  the  buyer. Not acting on available information exposed Defence and the  Commonwealth to financial and reputational risk. 

The B707 aircraft case

4.141 After first receiving an offer in mid‐2007, Defence sold its B707 air‐to‐ air refueller fleet to a private company based overseas, Omega Air, with an  initial 2008 contract price of $9.2 million. Selling the B707 aircraft fleet proved  troublesome  to  Defence.  The  disposal  process  demonstrated  three  key  administrative and contractual shortcomings. Defence:  

 did  not  conduct  adequate  checks  on  the  financial  viability  of  the  purchasing company—an issue which also arose in the Caribou aircraft  case; 

 agreed that the payment of $3 million of the purchase price would be  contingent  upon  US  Federal  Aviation  Administration  (FAA)  certification of the aircraft, when it was known to Defence that this was 

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unlikely. In effect, this approach provided the company with a price  reduction; and 

 allowed  the  purchasing  company  to  remove  the  aircraft  from  Commonwealth premises before full payment had been received. This  arrangement was contrary to advice received from the Department of  Finance and Deregulation and left the Commonwealth with reduced  capacity to secure payment. 

4.142 During much of the period over which the B707 transaction took place,  Defence hired air‐to‐air refuelling services from the purchasing company, at a  cost of over $24 million. The refuelling arrangement was cancelled in 2013 on  the advice of the Secretary.  

4.143 The company ultimately paid Defence $6.2 million for the B707 aircraft  and related equipment. Defence did not receive the remaining $3 million of the  original  contract  price  because  FAA  certification  was  not  achieved  by  31 December 2014.   

The B Vehicles case

4.144 B Vehicles comprise about 12 000 Army trucks, trailers and four and  six‐wheel drives, which are beyond their expected operating life. Defence has  sought to dispose of the vehicles through an arrangement with an external  company  to  detect and  remediate asbestos  in brake  linings,  and  on‐sell  the  vehicles to the public. This arrangement is expected to operate over some years  as the vehicles are progressively withdrawn from service.  

4.145 The  B  Vehicles  disposal  was  arranged  through  a  request‐for‐tender  process which, following Defence’s tender evaluation, drew a complaint from  a  non‐preferred  tenderer.  Defence  obtained  several  sets  of  internal  advice  about the tender evaluation process, some of it highly critical (and some of it  contradictory), and twice sought urgent external advice.  

4.146 The  external  advice  noted  that  there  had  been  a  number  of  fairly  significant  concerns  raised  about  the  evaluation  process  by  internal  review  teams within Defence, raising doubt about the defensibility of the evaluation  outcome and process. The reputational risks for Defence included exposure to  criticism,  loss  of  industry  confidence  and  doubt  about  the  integrity  of  the  tender  process.  However,  the  final  external  advice  also  noted  that  Defence  would have a basis to defend its decision provided it demonstrated that the 

Major Case Studies-Caribou and Boeing 707 Aircraft, and Army B Vehicles

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assessments  undertaken  (including  financial  assessments)  were  sound,  factually correct and supported by reliable analysis. 

4.147 Defence persisted with its original tender decision without acting on  the final external advice to demonstrate that its assessments were sound. The  delegate’s decision to proceed with the preferred tenderer did not set out his  reasons  for  not  acting  on  the  external  advice.  Given  the  sensitivities  and  potential  risks  involved  in  proceeding  with  the  original  tender  decision,  it  would have been prudent to escalate the matter to more senior management,  for additional counsel, oversight or decision.184 Defence records indicate that  this course was not adopted. 

Major case studies—common themes

4.148 Each of the major case studies considered in this audit took place in an  environment of disposals reform focused on reducing costs and maximising  revenue.  This  environment  was  due,  at  least  in  part,  to  Defence’s  Strategic  Reform Program (SRP)185 and later reinforced by the disposals reform program  announced mid‐2011. A consistent theme in the case studies has been pursuit  of the disposal option that promised to yield the greatest revenue.  

4.149 The  disposal  of  SME  is  a  complex  undertaking,  requiring  a  broader  understanding  of  the  benefits,  risks  and  costs  of  each  disposal,  and  their  effective  management.  The  focus  on  revenue  has  not  always  been  matched  with appropriate consideration of disposal costs nor of risks of a non‐financial  kind,  such  as  risks  to  reputation.  Further,  Defence  did  not  monitor  the  net  financial position—that is, revenue minus all significant costs incurred by the  Commonwealth  for  each  disposal—to  help  assess  the  overall  benefit  of  its  disposal strategies. Probity and financial checks and identifying non‐financial  risks also received either limited attention or were given reduced weight in  decision‐making.  

4.150 Disposing of SME through an RFT process requires Defence to strike a  balance  between  optimising  sale  proceeds  and  minimising  the  Common‐ wealth’s overall costs and risks. To achieve an effective outcome, Defence must 

                                                      

184 At the time of the decision to proceed to contract the Branch Head, Defence Disposals (Senior Executive Service (SES) Band 1), was acting Head, Commercial and Industry Programs Division (SES Band 2).

185 In 2009, Defence began a decade-long major reform of its business intended to generate savings to be reinvested within Defence. This was known as its ‘Strategic Reform Program’.

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manage disposal activities, including any tender process, openly, fairly and  equitably,  and  in  a  manner  that  will  withstand  scrutiny.  Government  and  industry need to have confidence in the way Defence undertakes disposals,  and the Defence Organisation needs to maintain fairness in its dealings with  industry.  Achieving  these  objectives  necessarily  requires  a  balanced  assessment of risk and a broader, rather than narrower, view of Australian  Government interests when planning and managing the disposal of SME.  

 

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5. Managing Hazardous Substances in Disposals

This chapter considers Defence’s management of hazardous substances in carrying out  its disposal of SME, focusing on asbestos. 

Hazardous substances in Defence equipment 5.1 Defence SME may contain a range of physical and chemical hazards  (hazardous substances) that Defence must manage both when using and when  disposing of such assets. Hazardous substances likely to be found in Defence  equipment include radiation sources, polychlorinated biphenyls (PCBs), lead  and chromate‐based paints186 and asbestos‐containing material.187 For example,  asbestos has been used extensively to make gaskets for use in engines, such as  those  in  the  Iroquois  helicopters  and  the  Caribou  transport  aircraft;  it  was  present in components of Defence’s former Leopard tank fleet and Boeing 707  aircraft; and it is very widespread in the (retired) F‐111 aircraft. 

5.2 Hazardous substances in Defence equipment present risks to the health  of  individuals  and  to  the  environment.  These  risks  occur  both  while  the  equipment  is  in  use  by  Defence  personnel188 and  when  it  enters  the  wider  community through disposal of the assets or their components. This second  aspect is the primary focus here. However, there are two obvious relationships  between  management  of  hazardous  substances  within  Defence  and  the  disposal  of  equipment  that  contains  them.  First,  if  Defence  can  remove  hazardous  substances  or  minimise  their  use  in  its  equipment  then  it  can  manage the disposal of the assets more easily. Second, disposal of equipment  containing hazardous substances is itself a means of addressing the problems  posed by the presence of those substances in Defence as a workplace. Thus, 

                                                      

186 Chromate-based paints were used in naval ships until the early 1990s. 187 ‘Asbestos’ is the term for a group of six naturally occurring mineral fibres. Because of its flexibility, tensile strength, insulation from heat and electricity, chemical inertness and affordability, asbestos has been used widely for insulation and as the key ingredient in products such as asbestos cement

sheeting and roofing, water pipes, fire blankets, fillers and packing, as well as motor vehicle clutches and brake linings, gaskets and pads. Source: Australian Government, Asbestos Management Review Report, June 2012, available from [accessed 18 February 2014]. 188 See, for example, Audit Report No.46, 2012-13, Compensating F-111 Fuel Tank Workers.

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when DMO sought legal advice to help with its management of disposal of  SME containing asbestos, its legal adviser noted that: 

The Defence Materiel Organisation (DMO) is investigating a number of means  by which it may dispose of defence materiel containing asbestos and other  hazardous substances. One of these means is by gifting or selling the materiel  to persons or organisations within Australia.189 

5.3 Legislation governs the handling, storage and disposal of hazardous  substances in Australia and its workplaces. 190 When it disposes of equipment,  Defence must meet legal obligations to address risks to life, health and the  environment.  Defence’s  Disposal  Instruction  (see  paragraph  2.23)  requires  delegates authorising asset disposal to ensure that the disposal complies with  legislation concerning hazardous substances. 

5.4 There is also a duty‐of‐care obligation on Defence to take reasonable  steps to avoid foreseeable harm to any party from hazardous substances when  it disposes of equipment. In the case of transfer, gift or sale this could include  either removing the hazardous substance before disposal or ensuring that the  recipient is aware of its nature and the hazard it presents before the transaction  takes place. 

5.5 This  chapter  focuses  on  asbestos  as  the  most  prominent  hazardous  substance which Defence has had to contend with in recent disposals. Asbestos  has been used very widely in Defence materiel. In examining how Defence has  managed the disposal of equipment containing asbestos the audit considered: 

 the risks of asbestos and the controls in place in Australia since 2003; 

 Defence’s work in recent years to assess the presence of asbestos in its  assets, and to manage or remove it.191 This has involved a number of  reviews both by Defence and consultants; 

 Defence’s governance arrangements for managing asbestos; and 

 selected case studies of recent SME disposals to illustrate how Defence  has  actually  dealt  with  asbestos  in  disposals.  These  disposals  were                                                        

189 AGS advice: ‘The gifting or sale of Defence materiel containing asbestos or other hazardous substances’, 16 November 2009, p. 3.

190 Management of asbestos in Australia is regulated by government agencies at the local, state, territory and Commonwealth level. 191 Earlier work on asbestos in Defence assets had been done. For example, in 1991, a former Public Service Commissioner prepared the Report of the Independent Review of Asbestos in Defence, which

was tabled in Parliament by the then Minister for Defence Science and Personnel.

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under way while Defence was reviewing and remediating asbestos in  its inventory and developing governance arrangements to deal with it. 

5.6 In considering Defence’s management of asbestos when disposing of  SME,  the  ANAO  made  no  assessment  of  the  specific  risks  associated  with  asbestos that might still be in equipment being disposed of by Defence. Rather,  the  chapter  considers  Defence’s  actions  in  light  of  the  governance  arrangements the organisation put in place in 2009 for managing asbestos. 

The risks of asbestos and controls in place since 2003 5.7 Asbestos  is  a  substance  with  hazardous  properties.  In  particular,  it  poses a risk to health by inhalation if the asbestos fibres become airborne and  people are exposed to these airborne fibres. Asbestos‐related diseases (such as  mesothelioma, lung cancer and asbestosis) can be contracted by breathing in  airborne  particles  when  asbestos  is  disturbed.  The  main  risk  factor  for  mesothelioma is asbestos exposure and the disease is fatal and incurable.192 The  mortality  rates  for  other  asbestos‐related  diseases,  such  as  lung  cancer  and  asbestosis, are also very high. Australia has the highest reported per capita  incidence  of  asbestos‐related  disease  in  the  world,  including  the  highest  incidence of mesothelioma.  

5.8 Asbestos  was  used  extensively  in  Australia  in  buildings,  plant  and  equipment and in ships, trains and motor vehicles from the 1950s to the 1980s.  Some uses of asbestos, for example, in gaskets, continued thereafter. Australian  jurisdictions have progressively banned the use of asbestos in workplaces.  

Controls on asbestos and exemptions granted to Defence

5.9 An Australia‐wide ban on the importation, manufacture and use of all  forms  of  asbestos  and  asbestos‐containing  products  took  effect  from  31 December 2003, when the use of asbestos in the workplace was prohibited,  with  very  limited  exemptions.  While  the  ban  did  not  extend  to  the  use  of 

                                                      

192 The average life expectancy of a person diagnosed with mesothelioma is between 10 and 12 months. While only a small percentage of people exposed to asbestos will develop mesothelioma, a small exposure can be enough to trigger the cancer. The World Health Organization has stated that there is no minimum safe exposure level for any form of asbestos fibres. Following exposure to asbestos it can take between 20 and 50 years to develop symptoms of asbestos-related disease. Source: Australian Government, Asbestos Management Review Report, June 2012, available from [accessed 18 February 2014].

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asbestos‐containing items in situ as at 31 December 2003, these items could  only be replaced by items not containing asbestos.193 

5.10 The management of asbestos in Defence as a workplace is overseen by  Comcare as the Commonwealth’s work health and safety regulator.194 Defence  obtained  exemptions  from  Comcare  for  its  continued  use  of  552  types  of  asbestos‐containing parts (not in situ) beyond 31 December 2003 because they  were assessed as being mission‐critical. Further, from 2004 Defence continued  to use asbestos in specified platforms under exemptions made by the Safety,  Rehabilitation  and  Compensation  Commission  (SRCC).195 These  exemptions  were for three air platforms: the F‐111, the Caribou and the Hawk Lead‐In  Fighter. The exemptions were to expire progressively by December 2010 with  the Caribou and F‐111 aircraft scheduled for disposal by then and non‐asbestos  parts having been found to replace asbestos parts in the Hawk aircraft.196 

Defence’s management of asbestos in its assets 5.11 Defence  has  reviewed  the  management  of  asbestos  in  its  inventory  regularly since the prohibition on importation and use of asbestos came into  force in 2003. The important events in recent years have been: 

 contractor  reports  (2008),  which  found  asbestos  items  in  maritime  inventory being used without exemptions; 

                                                      

193 In situ, in relation to a product that contains asbestos, means that, ‘the product is fixed or installed: (a) in:

(i) a building or any other structure that forms a workplace; or (ii) a plant, a vehicle or any other thing that is for use at a workplace; and (b) in a way that does not constitute a risk to users until the asbestos contained in the product is disturbed’. Source: OHS Regulations1994, Part 6, Regulation 6.3.

194 Comcare, established under the Safety, Rehabilitation and Compensation Act 1988, has a number of powers and functions conferred under this act and the Workplace Health and Safety Act 2011 (Cth) (WHS Act) (formerly the Occupational Health and Safety Act 1994 (Cth)). Comcare is also responsible for managing the Commonwealth’s asbestos-related claims liabilities under the Asbestos-related Claims (Management of Commonwealth Liabilities) Act 2005 (ARC Act). Source: Comcare, Annual Report 2012-13, available from:< http://www.comcare.gov.au/annual_report_2012-13/overview/about_comcare#topofcontent> [accessed 21 May 2014]. 195 The Safety, Rehabilitation and Compensation Commission (SRCC) is a statutory body established

under the Safety, Rehabilitation and Compensation Act 1988 (SRC Act) and is responsible for the enforcement of Federal Laws relating to Asbestos. The SRCC has regulatory functions in relation to Comcare and other authorities which determine workers’ compensation claims under the SRC Act. The SRCC has an oversight role under the WHS Act. Source: [accessed 22 May 2014]. 196 The exemptions for the Caribou and Hawk aircraft expired at the end of 2009. The F-111 was the only

platform continuing to hold an exemption for asbestos throughout 2010.

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 an unequivocal directive from the then Minister for Defence to remove  asbestos from Defence by 31 December 2010197;  

 the ‘Report on Options to Accelerate the Remediation of Asbestos from  Defence Equipment and Facilities’ (Orme Review) (August 2008) which  Defence prepared in response to the Minister’s concerns; and  

 a  number  of  Comcare  investigations  of  Defence  including  one  into  asbestos, launched in December 2008. 

Contractor’s report found asbestos being used without exemptions

5.12 In  December  2007,  Defence  engaged  a  contractor  to  investigate  and  instigate  removal  of  items  containing  asbestos  from  Defence’s  maritime  inventory. The contractor, who was particularly critical of Defence’s records,  provided  a  final  report  in  June  2008,  confirming  that  315  items  contained  asbestos and reporting that some 235 723 items ‘might’ contain asbestos, an  estimate which Defence viewed as much greater in number than was likely.  The contractor noted that Defence records indicated some exemptions held by  Defence for certain items were no longer current. Further, the ban on the use of  asbestos had come into effect on 31 December 2003, and Defence had issued  several hundred confirmed asbestos items from its inventory to operational  units in direct contravention of state and federal laws. 

5.13 The relationship between the contractor and Defence broke down. One of  the  contractor’s  reports  was  referred  to  in  press  articles  in  January  2009.  Nevertheless, the contractor’s reports provided a basis for further remediation  work. 

Defence Minister’s directive to remove asbestos from Defence

5.14 In  April  2008,  the  then  Minister  for  Defence  wrote  to  Defence’s  Director‐General Occupational Health and Safety, stating: 

I  regard  the  continued  usage  by  Defence  personnel  and  contractors  of  equipment and facilities containing asbestos to be unacceptable ... I will not be  considering supporting extensions to exemptions prohibiting the importation  of equipment and parts containing asbestos beyond 2010 ... 

                                                      

197 In June 2010, a Defence internal audit on progress in implementing the Minister’s directive concluded that ‘the eradication of [asbestos-containing material] from Defence inventory by 31 December 2010 will not be achieved’.

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The continued exposure of people to asbestos is something that is no longer  accepted  by  the  Australian  community,  nor  this  Government,  and  I  expect  Defence to change its attitude to reflect this position. 

5.15 The  Minister  directed  Defence  to  ‘produce  an  active  strategy  for  ensuring that by no later than 2010 no Defence facilities or equipment contain  asbestos.’ This raised concerns within Defence because of the capability and  financial implications of meeting the deadline. In response, Defence proposed  to  provide  the  Minister  a  report  scoping  the  extent  of  asbestos  in  Defence  equipment  and  facilities,  with  the  capability  and  cost  implications  of  accelerated remediation. The Minister agreed and the review that ensued was  known as the ‘Orme Review’. 

The Orme Review

5.16 Defence  completed  the  ‘Report  on  Options  to  Accelerate  the  Remediation  of  Asbestos  from  Defence  Equipment  and  Facilities’  (Orme  Review)  in  August  2008.  As  part  of  the  review,  the  Defence  Science  and  Technology  Organisation  (DSTO)  provided  advice  on  materials  suitable  for  asbestos replacement in Defence equipment. It found that there was now ‘a  wide  range  of  commercially  available  materials  as  alternatives  to  asbestos‐ containing  parts’  and  ‘no  apparent  reason  why  satisfactory  physical  performance  cannot  be  obtained  from  current  alternatives  to  asbestos.’  Therefore,  it  concluded,  ‘efforts  must  continue  with  prime  contractors  to  identify suitable alternatives to asbestos‐containing parts.’ 

5.17 The Orme review found that Defence’s records of asbestos in inventory,  platforms and the Defence estate were incomplete and that remediation was  not practicable in the timetable the Minister had set. In December 2008, the  Minister noted the Orme Review but did not agree to a recommendation that  he reconsider his directive to remove all asbestos from Defence by 2010. In  effect, this reaffirmed the Minister’s earlier directive. 

5.18 The Orme Review did not consider the implications of in situ asbestos  in equipment and platforms for their eventual disposal. 

Comcare investigation

5.19 On 21 November 2008, Defence wrote to the SRCC and Comcare. It  informed them that reports from the contractor’s review (see paragraphs 5.12  to 5.13), would be released to a journalist in late November 2008 under the  Freedom of Information Act 1982. The reports identified that asbestos items, not 

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covered  by  an  exemption,  had  been  inadvertently  supplied  to  Navy  units  between  2004  and  2007.  In  December  2008,  Comcare  commenced  an  investigation into Defence’s use of asbestos in Commonwealth workplaces to  determine  its  compliance  with  occupational  health  and  safety  laws  and  regulations.198 

5.20 The  July  2010  report  of  the  Comcare  investigation  concluded  that  Defence had breached the Occupational Health and Safety Act 1991 citing, among  other things, significant deficiencies in implementing occupational health and  safety systems at multiple Defence worksites in handling, storing and disposing 

of asbestos in the workplace. 

5.21 Comcare found that while Defence had policy guidance for managing  asbestos parts, the policies were not being applied consistently. The report also  concluded that ‘It is beyond Defence to guarantee or confirm that all asbestos  items, known and unknown, remaining in the Defence system … are low risk.’ 

Defence’s governance arrangements for asbestos 5.22 In light of the foregoing events and during the course of the Comcare  investigation,  in  January  2009  the  VCDF  announced  revised  asbestos  governance arrangements in Defence to ‘ensure expedient implementation of  the Minister’s directions.’199 The VCDF identified himself as the single point of  authority  and  accountability  across  Defence  and  issued  directives  to  the  Service Chiefs, CEO DMO and Deputy Secretary Defence Support.  

5.23 Under  the  VCDF’s  directive,  DMO  was  assigned  portfolio  responsibility for asbestos in inventory.200 Consistent with the Orme review,  the Director‐General Defence Assets and Inventory Management (DGDAIM)  was assigned to lead a Defence‐wide ‘tiger team’ (the Asbestos Inventory Tiger  Team, AITT) to accelerate remediation for items in inventory. The AITT’s first  priority was to ‘establish a complete record of all accessible in situ asbestos.’ A 

                                                      

198 In December 2008, Comcare granted Defence exemptions for 123 mission-critical items, all held by DMO SPOs for RAAF platforms. Of these, six exemptions were granted for new items and 117 for items for which exemptions had previously been granted. All 123 exemptions ceased by 31 December 2009. By July 2010, Defence again held exemptions for 34 items, all of which applied to the F-111 aircraft. All of these exemptions ceased on 31 December 2010.

199 Defence, VCDF Minute (VCDF/OUT/2009/8), ‘Revised Asbestos Governance Arrangements within Defence’, 14 January 2009. 200 In December 2009, DMO issued a Departmental Procurement Policy Instruction to promulgate the VCDF’s instruction and a statement that the relevant chapter of the Defence Procurement Policy

Manual would be updated in due course.

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similar  record  would  be  made  for  in  situ  asbestos  that  was  not  accessible.  These records would then ‘inform eventual platform disposal decisions.’ The  AITT later identified the impetus for its work as ‘the confluence of the need to  accelerate  the  removal  of  asbestos  items  from  Defence’s  inventory  and  increased media and regulatory scrutiny of asbestos within Defence.’201 

The work of Defence’s Asbestos Inventory Tiger Team

5.24 Early in its program of work, the AITT inspected 16 Defence worksites for  asbestos (Navy, Army and Air Force) and found unaccounted for or unidentified  asbestos components at each one. A notable example was where a gasket for an  RAAF  aircraft  had  been  withdrawn  from  use  by  the  manufacturer  in  1993  because it contained asbestos. The manufacturer had issued a warning about the  asbestos and had identified a suitable non‐asbestos part. However, in the 16 years  after the manufacturer’s advice until the AITT inspection in 2009, Defence had  not removed the asbestos‐containing item from inventory. During an inspection,  the AITT detected the asbestos‐containing item being installed in an airframe  during monthly servicing. 

5.25 The AITT’s final report, completed in March 2011, noted that: 

The number of ACM [asbestos‐containing material] items remaining for disposal  as at 31 March 2011 stands at 10 732 items all of which are in the disposal  pipeline, and being processed for disposal. Of this total number 10 201 items  relate  to  the  F‐111  and  Caribou  aircraft  fleets  which  have  been  decommissioned.  These  items  are  subject  to  bulk  disposal  with  the  final  Request for Tender due to close on 31 March 2011. It is anticipated that the  subsequent disposal action will be completed by the end of 2011. Excluding F‐ 111 and Caribou ACM items, there remains a small tail of some 531 identified  ACM  items  which  will  require  disposal  by  the  existing  Defence  disposals  organisation following closure of the AITT Project.202 

5.26 In light of the progress the AITT made, Comcare decided to close its  investigation without further enforcement action against Defence, but with the  intention of monitoring Defence’s asbestos control arrangements. The DMO  Bulletin  reported  the  AITT’s  work  as  a  ‘life‐saving  project’203 which,  to  that 

                                                      

201 Defence, Asbestos Inventory Tiger Team, Final Report, 31 March 2011, p. 2. 202 Defence, Asbestos Inventory Tiger Team, Final Report, 31 March 2011, p. 3. 203 Defence estimates that the cost of the inspection program was $8.6 million. This does not include the costs incurred by the ADF Services and Defence Groups in supporting the inspection and eradication

program or the cost of finding substitutes for and replacing asbestos in weapons systems.

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time,  had  identified  and  removed  more  than  67 000  of  the  76 500  asbestos‐ containing  catalogued  items  in  Defence’s  inventory  as  well  as  a  substantial  number of miscellaneous asbestos items: 

Just over 10 700 items still need to be disposed of, 96 per cent of which are  F‐111 aircraft and Caribou aircraft parts and have disposal plans which will be  actioned by the existing Defence Disposals Agency.204  

5.27 The report indicated that Defence expected that it would remove most  of  its  remaining  asbestos  items  through  disposal  of  the  Caribou  and  F‐111  aircraft. 

Directive on disposal of assets and inventory containing asbestos

5.28 During the work of the AITT, in October 2009, the VCDF also issued a  directive  on  the  disposal  of  assets  and  inventory  containing  asbestos.  The  DGDAIM, the branch head responsible for the AITT and Defence Disposals,  had sought VCDF guidance and the directive was the response. 

5.29 The  VCDF  noted  that  Defence  had  received  Australian  Government  Solicitor (AGS) legal advice that there were no laws in Australia that absolutely  prohibited dealing in or disposing of goods containing asbestos. Nevertheless: 

the potential to adversely impact the health of future users of these items and  the resultant impact on Defence is significant. Accordingly, I have determined  that  those  assets  and  inventory  items  that  contain  asbestos  should  only  be  disposed of by sale or gift if the asbestos contained within the item cannot be  accessed by future users of the item, and as such does not pose a health risk to  those future users.205 

5.30 The  directive  gave  an  illustrative  example  of  an  item  with  asbestos  whose disposal by sale or gift was permissible and also an example whose  disposal would be prohibited. An allowable disposal was the Leopard tank  being made available to Returned and Services League (RSL) clubs and similar  community bodies for display: ‘The tanks are deemed to be safe as the asbestos  is  contained  within  the  tank  and  the  tank  will  be  sealed  and  welded  shut,  preventing access to the asbestos.’ In contrast, an item which could not be sold  or gifted was the 10kVa generator then held for disposal. This was because ‘the 

                                                      

204 Defence, DMO Bulletin, April 2011, p. 10. 205 Defence, VCDF Minute (VCDF/OUT/2009/704), ‘Defence Management Position on the Disposal of Assets and Inventory Containing Asbestos’, 14 October 2009.

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generator contains asbestos gaskets that can be accessed by future users and  may become friable during any removal/replacement activity.’206 

5.31 Notably,  where  uncertainty  existed,  the  directive  required  that  DGDAIM  ‘take  a  cautionary  approach  and  must  not  dispose  of  by  sale  or  gift.’207 In April 2014, Defence’s VCDF Group confirmed to the ANAO that this  directive had not changed nor had it been replaced.  

Case studies on management of asbestos in Defence SME disposals 5.32 The audit examined five case studies to identify how Defence had, in  practice, managed asbestos items in SME being disposed of in recent years: 

(1) Leopard tanks; 

(2) Caribou transport aircraft; 

(3) F‐111 aircraft;  

(4) B Vehicles; and 

(5) Bell UH‐1H Iroquois helicopters. 

5.33 Additionally, as an example of enduring consequences for Defence of  disposal of SME containing hazardous substances, the audit briefly considered  the  current  status  of  an  item  of  SME,  no  longer  in  the  possession  of  the  Commonwealth, which is presenting a major asbestos hazard. 

Management of asbestos in the Leopard tank disposal

5.34 Defence advised ministers in September 2005 that it was commencing  the disposal of Defence’s Leopard 1 tank fleet. These 103 vehicles had been  acquired in the 1970s and were being replaced by M1A1 Abrams tanks.208 

5.35 In  July  and  September  2007,  Defence  advised  the  then  Minister  for  Defence  of  the  potential  for  the  Leopard  tanks  to  contain  hazardous  polyurethane paint, which (according to the advice) was toxic under specific 

                                                      

206 ibid. 207 ibid. 208 The Leopard tank fleet comprised 75 Leopard main battle tanks, 15 main battle tank dozers, eight armoured recovery vehicles medium, and five armoured vehicle launched bridges. Source: ANAO

Audit Report No.1 2007-08, Acquisition of the ABRAMS Main Battle Tank, p. 11.

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conditions,  such  as  when  the  paint  was  heated  or  sanded.209 Further,  the  ‘Leopard  Disposal  Plan  Synopsis’  given  to  the  Minister  in  September  2007  stated the Commonwealth’s duty of care in the disposal of vehicles and an  obligation  to  remove  hazardous  substances  from  them.  Where  this  was not  reasonable, Defence would provide full disclosure to the end‐user, identifying  hazardous substances and residual risk. There was no mention of asbestos in  any advice to the Minister at this time. 

5.36 In  September  2007,  the  Minister  for  Defence  issued  a  press  release  entitled ‘Get yourself a Leopard’ announcing that the Leopard tanks would  soon be available for gifting to veteran and historical organisations. The press  release invited interested organisations to register their interest. In November  2007,  the  Minister  issued  a  further  press  release  entitled  ‘New  Homes  for  Retired Tanks’ announcing a list of 30 successful applicant organisations.210 

5.37 When the disposal plan for the Leopard tanks had been fully developed  and  approved  (February  2009),  asbestos  was  identified  as  a  hazardous  substance requiring attention. However, the plan expressed a sanguine view:  

Asbestos‐free replacement parts were generally available from about 1990 and  it is likely that any replacement since that time will have been with a non‐ asbestos  part.  The  nature  of  these  items  is  that  they  are  contained  within 

assemblies  that  will  either  be  removed  during  decommissioning  or  are  inaccessible  without  tools  and  maintenance  equipment.  Therefore  it  is  considered  that  any  remaining  asbestos  items  pose  no  environmental  hazard.211 

5.38 Defence’s  intentions  regarding  asbestos  in  the  Leopard  tanks  were  reviewed after discussion between the DGDAIM and VCDF in June 2009. The  VCDF stated that he preferred to be ‘conservative on this issue and therefore  [I] favour removing the asbestos’. The Deputy Chief of Army subsequently 

took the view that ‘This is a case ... where a perfectly well‐developed Disposal  Plan needs now to be reviewed in light of asbestos implications.’ The estimated  cost of removing asbestos was $20 000 for each tank. This would amount to 

                                                      

209 Later advice from DSTO indicated that this paint presented a risk only during spray application due to its isocyanate content, and that once cured, it was free of this substance and no more hazardous than other types of paint.

210 Minister for Defence, press release, ‘Get yourself a Leopard’, 14 September 2007 and ‘New Homes for Retired Tanks’, 13 November 2007. The second press release was issued during the campaign period for the 2007 federal election.

211 Defence, Leopard Tank Disposal Plan, February 2009, p. 5.

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$600 000 for the 30 tanks to be gifted to RSL clubs and a further $540 000 for the  27 tanks intended for Defence displays. 

5.39 A  brief  prepared  in  August  2009  for  Defence  officers  for  a  Senate  committee hearing indicated that ‘Asbestos removal has become a major issue.  To remove asbestos from all vehicles ... would incur a cost of $1.5 million and  add  one  year  to  the  disposal  schedule.’  However,  funding  for  the  Leopard  tanks disposal had been allowed for within the project to replace them (Land  907), and this included sufficient funds to remove asbestos from all tanks if  required. The following text box presents the AGS’s understanding, based on  Defence  advice,  of  where  the  asbestos  lies  in  the  Leopard  tanks  and  its  treatment. 

Where the asbestos lies in the Leopard tanks

When DMO sought legal advice on disposing of the Leopard tanks with asbestos components, the adviser summarised its understanding of the asbestos contents of the vehicles as follows:

Defence proposes gifting leopard tanks to various RSL clubs.

The tanks will be decommissioned, and part of this will involve the removal of the power packs [engines] (which contain asbestos).

After decommissioning, the tanks will still contain asbestos in the exhaust wrapping and gasket seals. However:

• for tanks which are gifted to a museum for display, the asbestos wrapping on the exhaust will be removed. All other asbestos is integrated in, or as a part of, an intact functioning element of the tank and does not exist in the form of airborne particles, e.g., the asbestos in the gaskets is actually mixed in the gasket itself and so long as the gasket remains intact the asbestos cannot become fibrous; and

• the tank hull in which both the gaskets and wrapping will be contained is metal, is five inches thick, and will be welded shut when being gifted to RSL Clubs. It will be impossible to enter the hull without heavy machinery, and therefore it will be very difficult for people to have contact with the gaskets or wrapping, or for any fibre or particle (should it develop) to escape the tank.

Source: AGS advice to DMO, ‘The gifting or sale of Defence materiel containing asbestos or other hazardous substances’, 16 November 2009.

5.40 Defence briefed its ministers in August 2009, noting that ‘the principal  issue relates to the extent of asbestos removal required and the extent of the  associated  Defence  costs  for  a  capability  that  is  no  longer  sustained.’  This  wording  suggests  concern  at  devoting  resources  to  remediating  equipment 

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that was no longer needed. Defence undertook to recommend specific disposal  action once all issues had been finalised. 

5.41 The  Minister  for  Defence  Personnel,  Materiel  and  Science  sought  prompt further advice on the asbestos strategy and directed that ‘Tanks should  only be gifted if there is absolute confidence of the containment [of asbestos],  otherwise the wrapping products in particular should be safely removed.’212  On  receipt  of  that  further  advice,  the  Minister  directed  that  the  ‘asbestos  strategy must be finalised before decommissioning.’213 

5.42 By the time the Minister for Defence Personnel, Materiel and Science  approved  the  completed  strategy  in  March  2010,  the  VCDF  had  issued  the  directive  referred  to  earlier  (see  paragraphs  5.28  and  5.29).  The  ministerial  submission  referred  to—and  quoted—that  directive,  which  specifically  described the Leopard tanks as safe and to be an allowable disposal because  the remaining asbestos lay in areas welded shut and inaccessible. 

5.43 The  ministerial  submission  also  contained  a  table  indicating  the  proposed approach to managing the asbestos content according to the intended  future  use  of  the  tanks.  Thus,  for  example,  vehicles  to  be  used  for  Defence  displays or gifted to RSL clubs would be welded shut; vehicles to be used as  range targets by Defence would have all asbestos removed. However, VCDF  queried the proposed approach for the 16 vehicles allocated to the Army History  Unit (AHU) and for use as training aids, where the vehicle interior would be  accessible  and  asbestos  was  to  be  ‘managed  in  accordance  with  Defence  Instructions’. Defence Disposals subsequently advised  the  VCDF that  ’Whilst  originally intended to be managed as in situ, all [asbestos‐containing material] will  now be removed. Note also, that the AHU are intending to appeal to CA re the  decision not to give them operable tanks.’ In the event, the AHU was provided  with  13  Leopard  tanks.  At  the  direction  of  Army  headquarters,  these  were  provided ‘in operational condition’, and the asbestos was not removed.  

                                                      

212 Defence, Ministerial Submission, ‘Disposal of Leopard Tanks Background Brief & Options for Asbestos Management’, 31 July 2009. The reference to ‘wrapping products’ was to asbestos contained within wrapping around exhaust manifolds and similar items that emit heat.

213 Defence, Ministerial Submission, Supplementary advice on disposal of Leopard Tanks—Asbestos Strategy’, 14 September 2009.

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Warnings to recipients and users about asbestos

5.44 As mentioned earlier, in 2009, DMO sought legal advice on ‘The gifting  or sale of Defence materiel containing asbestos or other hazardous substances’,  which encompassed the Leopard Tanks. Among other things, it was advised: 

Regardless of the approach taken by Defence, we recommend that Defence  ensure that as much information as possible is provided to the recipient in the  deed of gift in relation to the asbestos or other hazardous materials contained  in ... any gifted or sold item. Further, ... it would also be prudent for Defence to  affix a warning about the asbestos to any items it gifted or sold.214  

5.45 The deed of gift for the Leopard tanks includes the following: 

9.3 The RSL acknowledges the possible presence of asbestos in the Leopard  Tanks and agrees that in the Leopard Tankʹs delivered form, the asbestos is  contained in such a manner so as not to present a danger or risk to the health  of  the  public.  The  RSL  acknowledges  and  agrees  that  any  deterioration  or  damage to the Leopard Tanks may expose an asbestos hazard to the public. 

9.4 The responsibility and risk of ensuring that the public is not exposed to an  asbestos hazard lies with the RSL from Delivery.215 

5.46 It is not known how the services clubs formed a view that any asbestos  in the tanks is safely contained and to what extent they may have relied on  Defence’s assurances about that. However, oral advice from Defence is that: ‘as  the tanks were welded shut and any asbestos‐containing material (ACM) parts  are inaccessible ... it was deemed not necessary to detail the ACM components  to the recipient organisations.’ This is not consistent with the recommendation  in  the  legal  advice  Defence  received,  relating  to  the  provision  of  as  much  information as possible (see paragraph 5.44). 

5.47 Defence also advised the Minister that: 

as a part of the Asbestos Notification and Mitigation Plan to be developed and  issued with each vehicle, all vehicles, other than vehicles allocated as range  targets, will be fitted with appropriate notification plates identifying in writing  that asbestos is contained within the vehicle.216 

                                                      

214 AGS advice, 16 November 2009, paragraph. 10.29. 215 This is quoted from the copy of the deed used for gifting the tanks to the RSL New South Wales Branch. Defence stated that all the gifted Leopard tanks were provided under very similar terms. 216 Department of Defence, Ministerial Submission, ‘Disposal of Leopard Tanks Background Brief &

Options for Asbestos Management’, August 2009.

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5.48 The  ANAO  found,  upon  inspection,  that  the  notification  plate  on  a  Leopard  tank  gifted  to  a  services  club  does  not  mention  asbestos,  instead  indicating  that  ‘components  within  this  vehicle  may  contain  hazardous  substances’  (Figure  5.1).  This  is  contrary  to  Defence’s  undertaking  to  the  Minister and inconsistent with the recommendation in the legal advice (see  paragraph 5.44). It is also inconsistent with Defence’s selection of suitable signs  for equipment containing asbestos remaining on its own premises.217 

Figure 5.1: Hazardous substances sign on Leopard tank

 

Source: ANAO. The warning sign on the Leopard Tank, Canberra Services Club, Manuka, ACT, June 2014.

5.49 The sign on the Leopard tank refers the reader to a data pack ‘provided  with this vehicle’ for further information. However, Defence advised the ANAO  that it supplied no data pack to the RSL clubs that received a Leopard tank. 

5.50 Defence received further legal advice in 2014 relating to an asbestos  hazard in former Defence equipment gifted to a community group. This legal  advice  put  the  view  that  Defence’s  potential  liability  for  damage  incurred  because  of  the  asbestos  would  be  significantly  reduced  to  the  extent  that  records  could  be  located  which  demonstrate  that  Defence  did  inform  the  recipient of the equipment. 

                                                      

217 Defence informed the ANAO that the Caribou heritage aircraft on Defence premises are affixed with highly visible ‘Contains Asbestos’ warning signs.

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Management of asbestos in the Caribou aircraft disposal

Withdrawal of the Caribou aircraft

5.51 As mentioned in the case study on the disposal of the Caribou aircraft  (see  paragraph  4.5),  a  January  2008  brief  advised  the  CAF  that  Caribou  availability  was  satisfactory  but  there  was  doubt  about  ‘future  Caribou  viability’  due  to  asbestos  within  the  aircraft.  When  the  then  Minister  for 

Defence announced the earlier‐than‐planned retirement of the Caribou aircraft  on 19 February 2009, he cited asbestos, corrosion, fatigue, and obsolescence as  reasons. 

Identifying and replacing the asbestos in the Caribou aircraft

5.52 As part of Defence’s work to remove asbestos from its inventory and  equipment,  DMO’s  Air  Lift  Systems  Program  Office  (ALSPO)  had  replaced  some of the Caribou’s asbestos‐containing items. In January 2009, the DMO’s  Head  of  Human  Resources  and  Corporate  Services  assured  the  VCDF  that  DMO  was  replacing  all  asbestos  parts  with  non‐asbestos  alternatives.  In  February 2009, while the Minister’s announcement of the early retirement of  the  Caribou  was  being  drafted,  the  Director‐General  Airlift  Training  and  Systems stated that Caribou asbestos remediation would continue regardless  of any decision to retire the aircraft early, as Defence had an obligation to fix  the asbestos issue before the aircraft were placed on the second hand market. 

5.53 Notwithstanding  this  assurance,  Defence  discontinued  asbestos  remediation on the Caribou aircraft. The Director‐General Aerospace Materiel  Management stated that ALSPO ceased work because ‘the cost ... no longer  presents a valid business case’ given the approaching planned withdrawal date  of December 2009.218  

5.54 ALSPO decided not to remove in situ asbestos from the aircraft. It also  decided not to remove asbestos parts fitted to the aircraft. While Defence held  exemptions for those parts, it had non‐asbestos alternatives available and had  intended  to  replace  the  parts  only  when  they  needed  to  be  disturbed  for  maintenance. ALSPO anticipated that by the time the platform was retired at  the end of 2009, it would still have on hand about 40 asbestos items, mainly 

                                                      

218 This is based on advice to DGDAIM, 25 and 26 May 2009. In 2008, Naval Aviation Systems Program Office (NASPO) took a similar view arguing that, given the ‘Sea King [helicopter] will be progressively replaced by MRH90 from 2010 until its final planned withdrawal in 2012, NASPO does not consider an asbestos removal program for the Gnome engine/Sea King fleet to represent value for money.’

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spare engines and engine components, with a larger number of in situ asbestos  items still fitted to the fleet. 

5.55 In October 2009, internal advice to the DGDAIM stated that removing  the  asbestos  from  the  Caribou  engines  would  make  them  totally  unviable  (except  for  scrap).  This  would  prevent  Defence  from  selling  the  aircraft  as  operational.  Further,  as  Defence  no  longer  had  a  contract  to  maintain  the  engines, it would now cost in the vicinity of $5 million to replace the asbestos  in the engines. 

Approval of Caribou disposal strategy

5.56 In December 2009, the then Minister for Defence Personnel, Materiel  and Science approved Defence’s disposal strategy for the Caribou aircraft (see  paragraph  4.11).  In  proposing  the  strategy  to  the  Minister,  Defence  stated  unequivocally that the Caribou airframe contains in situ asbestos and that the  aircraft also has a number of replaceable parts that contain asbestos. Defence  also advised the Minister that the estimated cost to remove the known and  suspected  asbestos  within  the  Caribou  aircraft,  and  to  design  and  install  replacement panels and sections, was more than $500 000 per aircraft.  

5.57 The advice to the Minister did not mention the October 2009 VCDF  direction effectively banning the disposal of items containing asbestos through  gifting or sale where the asbestos could be accessed by future users of the item  (see paragraphs 5.28 and 5.29). Given the aircraft were proposed for sale as  going concerns and maintaining some of the aircraft in flying condition was a  condition of sale, there was a strong possibility of future users accessing the  asbestos‐containing items to maintain the aircraft. 

5.58 Defence also informed the Minister that in situ asbestos would either be  removed at the sole expense of the proposed recipients or safely contained so  that  it  would  not  present  a  hazard  to  users.  For  its  part,  Defence  did  not  remove the in situ asbestos nor safely contain it before disposal commenced.  

Request-for-Tender did not directly disclose the presence of asbestos

5.59 Legal advice obtained by Defence on the Caribou disposal included the  following statement in relation to the asbestos content of the aircraft: 

We  note  that  based  on  the  Disposal  Strategy,  it  appears  that  Defenceʹs  intention is to ensure that the successful tenderer(s) assume all responsibility  for  the  removal/containment  of  asbestos  and  other  hazardous  substances  subsisting  in  the  Assets.  To  effectively  transfer  this  compliance  burden,  Defence  will  need  to  carefully  assess,  and  make  available  to  tenderers,  all 

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information relevant to asbestos and other hazardous materials subsisting in  the Assets. This may require providing tenderers with access to information/  data (such as Materiel Data Sheets) as well as the ability to physically inspect 

the Assets to determine the extent of any compliance burden that they will be  assuming. 

5.60 On 28 October 2010, Defence Disposals released an RFT for the sale of  the aircraft, spares packages, spare engines and other items. This included two  aircraft  to  be  made  available  only  to  heritage  organisations.  Even  though  Defence was aware of the prevalence of asbestos in the Caribou aircraft, the  high  cost  of  removing  it  and  the  legal  advice  on  notification  to  tenderers,  neither the body of the RFT nor the accompanying draft contract specifically  mentioned asbestos.  

5.61 The RFT did state that the assets ‘may contain hazardous substances’. It  referred  tenderers  to  hazardous  substances  information  at  ‘Attachment  A,  Appendix  9  which  [was]  provided  for  information  purposes  only’.  This  document  was  a  copy  of  a  chapter  from  what  was,  at  the  time,  Defence’s  manual about aircraft accident safety.219 The normal purpose of this manual is  to give Defence personnel general information necessary to provide a safe and  healthy workplace at an aircraft accident site. However, it does list hazardous  substances,  including  asbestos‐containing  items  within  each  aircraft  type,  including the Caribou. 

5.62 Under the terms of the draft contract of sale, Defence was to provide  tenderers with a hazardous substances register before the ‘effective date’ (the  date the contract is signed). However, the wording in the draft contract of sale  cast  doubt  on  the  value  of  any  such  register  provided  by  Defence.  The  purchaser  was  to  acknowledge  that  any  information  about  the  aircraft  provided  by  Defence  before  contract  signature,  including  the  presence  of  hazardous substances, could not been relied upon because:  

the  Commonwealth  has  not  made  and  does  not  make  any  representation,  warranty  or  commitment  that  the  description  of  the  Asset  (or  any  other  information) communicated or provided to the Purchaser prior to the Effective  Date was or is accurate, current, complete or fit for any purpose; ... 

the  Commonwealth  does  not  represent,  warrant  or  commit  that  any  information communicated or provided by virtue of or in connection with the 

                                                      

219 SAFETYMAN, volume 3, Defence Aviation Safety Manual, Part 2, Aircraft Accident OHS Manual, Chapter 4 - Caribou, May 2005.

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Asset, its sale or this Contract was prepared by the Commonwealth with any  due care, skill or diligence. 

5.63 While  these  contract  provisions  were  designed  to  protect  the  Commonwealth, they do not reflect the substance of the proposed transaction,  involving  a  wholly  Commonwealth‐owned  and  operated  asset.  In  circumstances where it was clear that the equipment contained asbestos, this 

should have been explicitly referenced as a material fact about a Defence asset.  There  would  be  benefit  in  Defence  reviewing  the  use  of  such  contract  provisions. 

5.64 In the event, Defence is still in possession of the seven Caribou aircraft  that Defence sought to sell as going concerns (see paragraphs 4.11 and 4.15)  and  the  funds  received  for  their  purchase  of  those  aircraft  (see  paragraph  4.43). 220 In  October  2014,  Defence  informed  the  ANAO  that  the  asbestos  remains in the Caribou aircraft. 

Management of asbestos in the disposal of the F-111s

5.65 On 6 March 2007, the then Minister for Defence announced that the  RAAF’s fleet of F‐111 aircraft would be retired from service. The bulk of the  fleet,  comprising  F/RF‐111C  aircraft,  underwent  a  staggered  withdrawal  through to the planned withdrawal date of December 2010. The F‐111G fleet,  acquired  in  the  1990s  to  help  sustain  the  existing  aircraft,  was  retired  on  3 September 2007. The following text box discusses the make‐up and disposal  of the F‐111 aircraft fleet. 

                                                      

220 Defence is no longer in possession of the two aircraft sold to the Historical Aircraft Restoration Society in May 2011 (see paragraph 4.15).

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The RAAF F-111 aircraft fleet

The RAAF F-111 supersonic long-range strike aircraft entered service in 1973, when the first four F-111C aircraft were based at the RAAF Base Amberley, Queensland. To begin with, 24 aircraft were acquired, supplemented by a further four F-111A aircraft for attrition replacement (these four were modified to match the F-111C). Over the years, the RAAF lost seven F-111C aircraft in flying accidents. Of the remaining 21 aircraft, 17 were modified with Pave Tack capability (a targeting system for precision-guided weapons) and four converted into the RF-111C reconnaissance variant.

In 1994, Defence acquired 15 F-111G aircraft to supplement the fleet and extend its operating life. Eight were brought up to RAAF airworthiness standards. The remaining seven never again took flight. Five were placed in long-term storage and two were designated to provide spares. However, in practice, all were ‘cannibalised’ for spares. One F-111G was lost in a flying accident in 1999.

Defence prepared separate disposal plans for each of the two types of aircraft. Those plans mention hazardous substances within the aircraft but do not specifically mention asbestos.221 In August 2008, the then Minister approved the disposal of the F-111G fleet by destruction. However, actual destruction was delayed until some of the F-111C aircraft were also destroyed. Defence attributed the delay partly to the presence of hazardous substances throughout the aircraft.

Ultimately, the ubiquity of asbestos-containing items in the aircraft had a major bearing on their disposal. Twenty-three aircraft and 128 engines were disposed of by destruction. Six aircraft, five crew modules and five engines were retained and transferred to RAAF bases. Six de-militarised aircraft were retained and loaned to Australian historical organisations for display. One demilitarised aircraft was gifted to the US Pacific Aviation Museum, Pearl Harbour, Hawaii.

Primary sources: Defence, Disposal Plan F-111G Aircraft, August 2008; F/RF-111C Weapon System Disposal Plan, April 2009; DMO, Final Disposition: F-111 Items and Components, 4 November 2013.

5.66 Defence  mentioned  asbestos  as  an  aspect  of  F‐111  disposal  in  a  ministerial submission in May 2010, which proposed a disposal strategy for the  F‐111C aircraft. The then Minister for Defence noted Defence’s estimated cost  of up to $2.5 million to ‘demilitarise and remediate each aircraft for potential  use  as  an  exhibit  by  non‐Defence  entities’. 222 He  approved  a  strategy  of 

                                                      

221 The ‘F-111 Public Display Risk Assessment Final Report’, March 2012, p. 23, identifies asbestos, beryllium, boron fibres, chromates, lead, zinc and low level radioactive materials as the hazardous materials that ‘may exist’ within the display. It rated asbestos as the most common potentially hazardous substance in the aircraft.

222 Subsequent Defence records indicate that this estimate was developed without a full understanding of the extensive presence of asbestos in the aircraft.

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retaining one F‐111C aircraft at RAAF Museum, Point Cook, and up to six more  within Defence for display, training and test, with hazardous substances to be  managed by Defence. The Minister also approved a strategy of sale by tender of  the remaining aircraft and equipment provided they could be demilitarised and  asbestos could be safely removed, and prospective recipients would pay for this.  Those items that could not be sold would be scrapped or recycled. 

5.67 The  Minister  was  also  advised  that  asbestos  removal  could  prove  prohibitively costly for most interested entities.223 Defence mentioned its legal  advice  that  aircraft  containing  asbestos  could  legally  be  sold  in  Australia.  Nevertheless,  Defence  was  observing  a  higher  standard  of  treatment  than  required by law and any accessible asbestos would be removed as hazardous  waste and not sold or gifted (it cited the VCDF’s directive (see paragraphs 5.28  and 5.29). Defence also advised the Minister that there may be some public  concern  over  Defence  placing  asbestos‐containing  items  such  as  the  F‐111  aircraft into the public domain, even if only for display. 

5.68 About a year later, in March 2011, Defence advised the Minister for  Defence Materiel that a recent technical assessment had shown that asbestos  could  not  be  removed  from  the  F‐111  aircraft  (see  the  following  text  box,  ‘Asbestos in the F‐111 aircraft’). Therefore, Defence stated, for safety reasons it  did not intend to make them available to non‐Defence organisations. 

                                                      

223 In 2009, there had been about 11 ministerial representations making enquiries about or asking for F-111 aircraft for display.

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Asbestos in the F-111 aircraft

Testing during 2010 confirmed the presence of asbestos (white chrysotile) within adhesive used in the [the F-111] aircraft structure and bonded panels.

The adhesive was used within the F-111 as an adhesive or potting compound during the manufacture and/or repair of bonded panels and aircraft structure [and] as a liquid shim to align panels and aircraft structure during assembly. The adhesive is present in removable bonded panels and flight control surfaces [and] fixed bonded structural components

There are 200 to 300 individual bonded panels in the aircraft ... The F-111 includes heavy use of bonded panel structures in its design. Not all panels are removable. While not every bonded panel will contain asbestos as a result of either manufacture or repair, there is no record through design, manufacture or repair data that can be used to verify the asbestos status of an individual panel ... Therefore it must be assumed that all panels/liquid shim applications potentially contain asbestos.

It is not practical to remove all asbestos from an F-111 and certify the aircraft as asbestos free. This is due to potential presence of asbestos-containing adhesive within all bonded panels and primary structure of the aircraft.

Advice of $1 million to demilitarise an aircraft and up to $1.5 million to remove and remediate asbestos was developed prior to having an understanding of the true extent and nature of asbestos-containing adhesive within the aircraft ... The large number of bonded panels (removable and non-removable) and primary non-removable structure that may contain asbestos, the semi-destructive nature of any testing regime, and the significant effort to manufacture replacement panels makes it an utterly impracticable undertaking within currently available Defence and Defence industry capability and capacity. An F-111 aircraft can only practicably be preserved on the basis that it still contains in situ asbestos.

Source: Abbreviated from advice provided by the Manager, F-111 Disposal Project to the acting Head of Acquisition Sustainment and Reform Division, DMO, 9 March 2011.

5.69 Defence records indicate that ministers were concerned at the potential  for perceived inequity between, on the one hand, Defence being able to display  the aircraft but, on the other, museums external to Defence not being able to do  so.  The  Minister  for  Defence  Materiel  directed  that  options  be  provided  to  inform a decision. A range of options was prepared: 

(1) not  making  the  aircraft  available  outside  Defence  (which  remained  Defence’s preferred position);  (2) sale to non‐Defence entities with the recipient paying for demilitaris‐ ation and preparation; 

(3)  gifting  to  non‐Defence  entities  with  the  Commonwealth  paying  for  demilitarisation and preparation; and 

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(4)  loaning  to  non‐Defence  entities  with  the  Commonwealth  paying  for  demilitarisation and preparation. 

5.70 The  fourth  option,  Defence  advised,  would  require  a  regime  of  compliance,  assessment  and  monitoring  estimated  to  cost  up  to  $100 000  a  year,  for  which  no  specific  funds  had  been  provided.  Maintenance  of  the 

aircraft would cost a further $100 000 a year, which was also not specifically  funded. 

5.71 On 31 May 2011, the Minister for Defence Materiel selected the fourth  option, with up to eight F‐111 aircraft to be made available to non‐Defence  entities.  The  Minister  also  sought  more  detailed  advice  on  how  the  option  would be implemented and asbestos managed. Defence set about preparing a  strategy  and  risk  assessment  for  the  display  of  the  aircraft  and  also,  in  particular, a risk assessment for placing them in non‐Defence sites. 

5.72 In August 2011, Defence advised the Minister for Defence Materiel of  its set of mandatory requirements for aircraft display, including housing the  aircraft in a completely enclosed facility, restrictions on public access, and the  recipient accepting Commonwealth auditing and reporting requirements. The  Minister subsequently issued a press release, announcing that up to seven F‐ 111  aircraft  would  be  available  to  aircraft  museums  and  other  historical  organisations.224  

Asbestos becomes the major concern in organising F-111 display

5.73 An  answer provided  by  the  Minister  to  a  Parliamentary  question  in  August 2011 nominated ‘finding a way to deal effectively with the asbestos on  the aircraft’ as an essential step in making them available to museums. Defence  Disposals, in its monthly report to the CEO DMO mentioned that the tender  for  obtaining  an  F‐111  for  display  was  shortly  to  be  issued  and  identified  asbestos as a risk: 

One risk area for Defenceʹs reputation will be asbestos, in that we are placing  these  aircraft  into  the  community  with  asbestos  pervasive  throughout  the  aircraft. Background is that Defence advised against placing aircraft outside  Defence  but  Government  decided  on  the  current  process.  Response  to  any  adverse public or media comment will need to focus on the controls etc that 

                                                      

224 The Minister for Defence Materiel also directed that costs incurred in transporting the aircraft to the recipients’ sites (then estimated at about $600 000) be incurred by Defence. Defence advised the Minister that this had not been budgeted for.

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we are putting in place to ensure that the aircraft do not present a risk to the  public. 

5.74 A further press release in November 2011 announced the release of the  request‐for‐offer  (RFO)  to  potential  hosts  of  the  aircraft  to  be  loaned.  By  September  2012,  an  evaluation  of  RFO  responses  was  complete  and  the  Minister announced six successful organisations. One aircraft remained. The  Minister  subsequently  agreed  to  a  proposal  from  Defence  to  gift  the  final  aircraft to the Pacific Aviation Museum, Hawaii. It was delivered in 2013.225 

5.75 A  53‐page,  F‐111  Public  Display  Risk  Assessment  Final  Report  was  completed by contractors in March 2012. It set out detailed asset recording,  reporting, monitoring and auditing requirements to manage the asbestos risk.  Defence informed the ANAO that the report cost $410 624. 

5.76 There are six F‐111C airframes and three F‐111C crew escape modules  on  loan  and  on  display  at  nine  Australian  historical  organisations  (AHOs)  around the country. Most of the aircraft were delivered between April and  August 2013. Defence stated (March 2014) that the annual audit/review for the  F‐111 display items at AHOs had not yet started. It had budgeted $15 000 for  one visit to each location next financial year. A small number of Defence staff  have  duties  involving  management  of  the  F‐111  loan  agreements  and  refurbishing  and  repairing  the  static  display  fleet  under Air  Force  Heritage  control.  The  performance  of  the  AHOs  in  displaying  their  F‐111  (or  crew  escape module) is to be assessed against the loan agreement criteria, including: 

 safety management; 

 security management; 

 environmental management; 

 the approved display management plan; 

 visitor numbers; and 

 financial performance of the museum. 

5.77 Defence did not provide an estimate of staff costs to manage the F‐111  loan agreements and refurbish and repair the static display fleet. The extent of 

                                                      

225 The ‘Asset Gift Agreement’ for this arrangement provided extensive detail of the hazardous substances in the aircraft and their management.

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these costs, and the performance of the custodian organisations, may not be  apparent until some experience has been gained. 

The possibility of injury relating to F-111 asbestos exposure

5.78 Following  the  Minister’s  announcement  of  the  loan  arrangements,  a  senior ADF member (a former F‐111 pilot) expressed concern to DMO senior  management at the prospect of claims for compensation relating to asbestos  exposure. This was based on the possibility of heightened sensitivity to such  hazards following the deseal/reseal experience with the F‐111 aircraft.226  

5.79 Defence informed the ANAO in June 2014, that it held ‘limited useful  information’  on  claims  for  compensation  attributed  to  asbestos  exposure.  Defence was aware of only one record of an RAAF member who submitted a  compensation claim for exposure to asbestos, but the claim was denied by the  Department of Veterans’ Affairs (DVA). Defence does not know the member’s  work history and, therefore, cannot say whether it was connected with the F‐ 111 aircraft. 

5.80 Comcare has no arrangements for access to ADF compensation claims  as they are processed by DVA. Comcare has stated that ‘this is an anomaly in  the  Comcare  scheme.’ 227 However,  Comcare  did  state  in  its  report  on  its  investigation of Defence that ‘there have been a large number of incidents and  near misses involving hazardous substances.’228 

                                                      

226 From 1997 to 2000 Defence conducted various deseal/reseal programs to remediate deteriorating sealant in the fuel tanks of its F-111 aircraft. Specifically, this involved removing the sealant (deseal) and replacing it (reseal). Concerns over the adverse health effects experienced by F-111 fuel tank maintenance workers and their families gave rise to a range of inquiries and support measures by the Australian Government. A 2001 Defence Board of Inquiry found that more than 400 people had suffered long-term damage to their health as a result of exposure to hazardous substances while undertaking the repair work. The number of workers potentially affected by exposure to hazardous substances from the deseal/reseal programs has since risen to an estimated 3100. The Joint Standing Committee on Defence, Foreign Affairs and Trade conducted an inquiry, and tabled its report Sealing A Just Outcome: Report from the Inquiry into RAAF F‐111 deseal/reseal workers and their families in June 2009. ANAO Performance Audit Report No.46, 2012-13, Compensating F-111 Fuel Tank Workers examined the Department of Veterans’ Affairs and Defence’s administration of the Australian Government’s $55 million support package announced in the May 2010 Budget. 227 Comcare, Report of Investigation to assess compliance with the Occupational Health and Safety Act

1991 and Part 6 of the Occupational Health and Safety (Safety Standards) Regulations 1994, (Report No. 4143), January 2010, p. 5. 228 Over the 22 month period, January 2007 to November 2008, Defence made 580 notifications to Comcare concerning hazardous substances. These comprised no deaths, three cases of incapacity,

26 cases of serious and permanent incapacity and 551 dangerous occurrences. These last instances are interpreted by Comcare as ‘near misses’.

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Management of asbestos in the disposal of the Army B vehicle fleet

5.81 As  discussed  earlier  (see  paragraph  4.109),  Defence  is  disposing  of  about  12 000  B  Vehicles  between  2011  to  2020  because  the  fleet  is  old  and  increasingly costly to maintain, repair and operate. 

5.82 In 2008, DMO’s Head of Land Systems Division had advised the Orme  Review  that  the  only  way  to  create  a  definitive  list  of  asbestos  in  all  its  platforms  would  be  to  disassemble  at  least  one  of  every  vehicle  type  it  managed. Further, the level of identification and remediation effort implied  would require in excess of $200 million and 2.2 million hours of effort. 

5.83 In May 2009, as part of Defence’s efforts to identify and then dispose of  asbestos items from Defence stockholdings, the AITT identified a number of  B Vehicle parts that contained asbestos, including parts previously assumed to  be  asbestos  free.  The  inspections  also  identified  that  some  suppliers  of  B Vehicle  repair  parts  were  inadvertently  supplying  asbestos  parts  by  repackaging  them  into  repair  kits  that  were  subsequently  assumed  to  be  asbestos‐free. Defence noted the potential ramifications were ‘quite serious’.229 

5.84 In July 2009, the Project Director of the AITT (see paragraphs 5.23 and  5.24) explained why he was advocating a conservative approach to testing for  asbestos in the B Vehicles and their repair parts: 

The problem the teams are having on the ground is that they cannot identify  one way or the other, especially when the part is in its supplied packaging and  it still fails to clearly indicate asbestos free. Brakes, as you know, are a friction  item and have a nasty dust hazard that can be inhaled. These cannot be left to  chance so we have been, and will continue to need to test, suspect items.230  

5.85 Compounding the problem of recontamination of the spares chain was  the identification of the parts in Defence’s inventory system as ‘asbestos‐free’.  Defence could not rely on its inventory system because the inspectors were  finding that such items could still contain asbestos: 

Unfortunately,  as  this  is  a  very  emotive  environment  and  unless  we  have  positive proof to the contrary, every suspect item must be treated with caution  and the AITT will have to make a decision to send for testing or collect for 

                                                      

229 Defence internal correspondence, May 2009. 230 The explanation was in response to a view expressed by a senior ADF officer in Land Systems Division (the DMO division within Defence responsible for the sustainment of the B Vehicles) that there had been an overreaction to the discovery of asbestos in the B Vehicle fleet and spares inventory.

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disposal. This is especially so with brake shoes that have a long history of  containing  asbestos.  We  have  already  had  a  number  of  instances  where  caution wasnʹt applied and the next action is staff filling in [incident forms] and  [Defence units] calling in commercial decontamination firms.231 

Commencement of planning for the B Vehicle disposal

5.86 When,  by  mid‐2010,  Defence  had  started  planning  to  dispose  of  its  B Vehicle  fleet,  one  option  was  to  sell  them,  which  would  not  only  reduce  sustainment costs but could generate revenue, which Defence might be able to  access.  A  complicating  factor  was  the  presence  of  asbestos  and  VCDF’s 

direction  of  October  2009  not  to  dispose  of  assets  or  inventory  containing  accessible  asbestos  by  gifting  or  sale.  Defence’s  disposal  directives  for  the  B Vehicles  clearly  identify  a  recorded  in  situ  asbestos  risk  for  nearly  all  B Vehicles other than motorcycles and small trailers. 

5.87 Before  entering  into  the  disposal  arrangement,  Defence  Disposals  understood  that  some  of  the  B  Vehicles  fleet  contained  asbestos  in,  for  example, brake linings, engine, gearbox and differential, and possibly in the  exhaust  and  engine  firewall.  This  was  known  within  Defence  in  2008  and  possibly  earlier.  Defence  had  estimated  that  the  asbestos  remediation  cost  could  greatly  reduce  the  net  revenue  from  sales. 232  Defence  Disposals  developed an option in which the B Vehicles would be ‘tendered for sale to  companies  that  can  demonstrate  the  capacity  and  intention  to  remediate  accessible asbestos, such as in the brake linings.’ 

5.88 On 30 August 2010, the Head of Land Systems Division and the branch  head of Defence Disposals233 met to discuss a strategy to sell the B Vehicles.  They agreed that proceeding along the lines proposed by Defence Disposals  ‘could be done in compliance with the intent of the VCDF’s directive’. Defence  saw this approach as a way of generating revenue and transferring its risk. In  light of this agreement, work began on a submission setting out the disposal  strategy for ministerial approval. 

5.89 In October 2010, DMO’s Head of Acquisition and Sustainment Reform  Division (HASRD) obtained agreement from Defence’s CFO that any revenue 

                                                      

231 Defence internal correspondence, July 2009. 232 Defence’s LAND 121 project, which was providing replacement vehicles, recorded a risk that asbestos remediation costs for the B Vehicles could be up to $200 million. 233 The branch head of Defence Disposals was acting Head of Acquisition and Sustainment Reform

Division (HASRD) at the time.

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from  the  proposed  sale  of  the  B  Vehicle  fleet  could  be  retained  by  the  department rather than returning the funds to the Commonwealth.234 Within  Defence it was agreed that the proceeds would be retained by Army. Army  therefore had a more direct interest in selling the B Vehicles for the maximum  revenue obtainable. 

5.90 The tension between observing the VCDF’s direction and the desire to  generate revenue caused reluctance, in some areas of Defence, to follow the  proposed strategy. Defence Disposals staff lamented they had been ‘unable to  convince  [Land  Systems  Division  staff]  to  look  beyond  the  “cautionary  approach”’  given  the  widespread  locations  in  the  vehicles  where  asbestos  could lie: 

In  this  case,  some  officers  within  [Land  Systems  Division]  are,  perhaps  understandably, reluctant to follow an interpretation of the VCDF policy, for  fear  that  this  might  alternatively  be  viewed  as  failing  to  follow  (VCDF)  direction. 

The  VCDF  direction  …  from  2009  is  quite  clear  in  setting  out  the  Defence  requirement  to  maintain  a  standard  above  that  which  is  dictated  in  law.  [Defence Disposals] have set about implementing and extrapolating this policy  for various scenarios and equipment types that contain asbestos, as well as  hazardous materials in general. While most of this advice has been accepted,  some  elements  within  DMO  and  Defence  have  been  reluctant  to  use  it  as  authoritative interpretations of the VCDF policy. 

5.91 Staff in Defence Disposals and Land Systems Division developed an  expectation that Defence Disposals would seek a waiver or exemption from the  VCDF to allow the vehicles to be sold. HASRD arranged a meeting with the  VCDF ‘to discuss his tolerance on the asbestos issue’. That meeting took place  on 7 March 2011, and afterwards HASRD stated on several occasions that the  VCDF was ‘still of the view that no asbestos goes out into the community.’  These statements reinforced the VCDF’s original position.235 

                                                      

234 The CFO concluded that ‘the amounts received in relation to the disposal of B Vehicles and trailers could be identified as relevant agency receipts for the purpose of FMA Regulation 15, and therefore treated as s. 31 receipts’ because each vehicle was considered by Defence to meet the definition of a 'minor departmental asset' with a purchase price less than $10 million and therefore the revenue from any sale of the vehicles could be retained by Defence.

235 A week later, when the Director of Defence Disposals stated in an email that the ‘intention is to tender the [B] vehicles for sale to organisations that can remediate accessible asbestos (e.g. brake linings) prior to on-selling in Australia or to export’, the acting HASRD responded: ‘One point—VCDF requirement is to remediate all asbestos ...’.

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Disposal strategy and assurances provided to the Minister on asbestos

5.92 On  21  June  2011,  the  then  Minister  for  Defence  Materiel  approved  Defence’s  recommended  strategy  for  the  disposal  of  approximately  12 000  Army B Vehicles over 10 years (2011-20), through: 

sale of the vehicles to companies or entities that can demonstrate the capacity  and  intention  to  remediate  any  accessible  asbestos  (such  as  in  gaskets  and  brake linings) as part of a process to repair and upgrade the vehicles, prior to  their on‐selling them in Australia or overseas.236 

5.93 In support of this recommendation, Defence advised the Minister that  this approach would allow: 

a holistic approach to marketing the capability represented in the vehicles, and  would appear to offer the greatest opportunity for value creation, while at the  same  time  meeting  the  spirit  and  intent  reflected  in  the  Enforceable  Undertaking to Comcare of 4 June 2010, which requires Defence to not only  meet  but  exceed  the  requirements  of  the  Occupational Health and Safety Act  1991.237 

5.94 Defence had earlier advised the Minister in  May 2011 that while an  alternative disposal option was the sale of vehicles by auction, this option was  not  recommended,  as  it  would  ‘not  meet  with  the  spirit  and  intent  of  the  [Comcare]  Enforceable  Undertaking’  unless  the  asbestos  in  the  vehicles  was  removed before sale. Defence advised the Minister that: 

Where the vehicles do contain asbestos, this is considered by Defence to be in situ  and  in  compliance  with  the  Occupational  Health  and  Safety  (Safety  Standards)  Regulations  of  1994. 238 While  most  vehicles  (95  per  cent)  are  assessed by Defence to be asbestos free, the assessment of each vehicle in order  to determine the existence or otherwise of asbestos would be costly and in any  case may not be determined without their being dismantled.  

The cost of doing so could reduce their value to that of parts and scrap. 

                                                      

236 Defence, Ministerial Submission, Disposal Strategy for Surplus Army B Vehicles, 25 May 2011. 237 Defence, Ministerial Submission, Disposal Strategy for Surplus Army B Vehicles, 25 May 2011. 238 ANAO comment: ‘In situ’ asbestos is defined in Regulation 6.3 of the Occupational Health and Safety (Safety Standards) Regulations 1994 as being asbestos that was already installed at 31 December

2003 and ‘fixed or installed in a way that does not constitute a risk to users until the asbestos contained in the product is disturbed’. Discussions within Defence in 2009 had determined that items such as brake linings would not meet the legislative requirements of ‘in situ’ as they are not safely contained in a way that does not present a hazard to users.

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Vehicles may contain in situ asbestos, in … brake linings, in the engine (in  such as gaskets), gearbox and differential and possibly in other parts of the  vehicles, notwithstanding that 95 [per cent] of vehicles are assessed by Defence  to be asbestos‐free.239 

5.95 In addition to misunderstanding that brake linings containing asbestos  could not be treated as being in situ, the submission did not explain to the  Minister why, on the one hand, it would be prohibitively costly for Defence to  detect and remove all asbestos from the vehicles but, on the other, it would be  economical for third parties to do so. Defence has been unable to advise the  basis for its advice to the Minister that 95 per cent of the vehicles were asbestos  free.  

5.96 In  its  May  2011  submission,  Defence  provided  the  Minister  with  assurances  about  the  overall  risk  posed  by  the  presence  of  asbestos  in  the  vehicles being disposed of by sale to the public:  

Land Systems Division has completed risk assessments for each platform type  or  fleet  of  vehicles  and  risk  assessments  for  each  with  regard  to  asbestos  contained  within  the  vehicles.  Overall  these  consider  the  risks  posed  by  asbestos‐containing material, and the possibility that asbestos may be accessed  by future users of vehicles sold or gifted by Defence (such that it could become  friable during removal or replacement), to be low. 

5.97 During  the  drafting  of  this  advice  to  the  Minister,  Land  Systems  Division informed Defence Disposals that the risk assessments: 

were completed to provide assurance to [the Chief of Army] that the platforms  that contained in situ items were safe for his soldiers to operate to the end of  their  service  life.  The  assessments  were  not  primarily  completed  for  the  disposal or for the ‘Public Punter’.  

5.98 While  Defence  referred  to  the  VCDF’s  directive  in  the  background  information attached to the May 2011 ministerial submission and provided the  Minister with a copy of it, Defence made no comment on the extent to which  the recommended option complied with the direction. Moreover, it was not  made clear to the Minister that a decision to approve the recommended option  had the effect of arbitrating between competing views within Defence as to the  interpretation of the VCDF’s directive (see paragraphs 5.90 and 5.91). 

                                                      

239 Defence, Ministerial Submission, Disposal Strategy for Surplus Army B Vehicles, 3 June 2011.

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5.99 After the Minister approved the B Vehicles disposal strategy in June  2011,  a  senior  officer  from  each  of  JLC  and  Defence  Disposals  met  and  discussed  the  problem  of  asbestos  in  the  B  Vehicles.  The  JLC  officer  subsequently advised the Defence Disposals officer that he had instructed a  staff member to ‘put some words in an email ... that may suit our collective  cause  better  than  the  “strip  ACM  [asbestos‐containing  material]”  mentality  currently in vogue as a result of old (my view) VCDF guidance.’ The email the  JLC officer referred to included the following statement: 

A  number  of  BVRP  [B  Vehicle  reduction  program]  equipments  have  been  identified  as  containing  asbestos.  As  we  witnessed  at  [Joint Logistics Unit -  Victoria], these equipments are having the asbestos affected items removed, 

and the remaining items which do not contain asbestos are being put into a  scrap metal bin, including the equipmentʹs carcass—I am guessing Defence is  getting  a  return  of  about  $150  per  tonne  for  the  scrap  metal.  Given  the  experience gained from your visit with [the branch head of Defence Disposals] to  the UK last month, I suggest this process is not representing very good value  for money for the Commonwealth. 

On 26 May 11, MINDM [Minister for Defence Materiel] approved a MINSUB  [Ministerial Submission]—Disposal Strategy for Surplus B Vehicles. One of the  recommendations of that MINSUB is that B Vehicles be sold to companies that 

can demonstrate the capacity to remediate accessible asbestos. As a result of  this MINSUB, the position in the VCDF minute has now been altered. 

5.100 There is no evidence that the VCDF (whose minute was a directive, not  merely guidance) was consulted on this position. It is also apparent that the  common  cause  between  JLC  and  Defence  Disposals  was  obtaining  the  best  revenue  from  the  B  Vehicles  disposal  without  necessarily  ensuring  that  all  asbestos  content  was  identified  and/or  removed  before  the  vehicles  left  Defence, an objective not likely to be realised while adhering to the VCDF’s  directive—the  ‘strip  asbestos‐containing  material’  approach.  Further,  and  as  discussed  in  paragraph  5.95,  there  was  a  continued  assumption  that  third  parties  could  economically  remove  asbestos  from  the  B Vehicles  where  Defence could not. 

Defence tender assessment was deficient

5.101 Having given the Minister assurances that the vehicles would be sold to  an entity that could ‘demonstrate the capacity and intention’ to remove asbestos  prior to the entity then on‐selling them, it would be reasonable to expect to see 

that requirement reflected in the process of evaluating the tenderers.  

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5.102 An  internal  review  of  the  tender  evaluation  and  selection  process  concluded  that  the  selection  of  the  preferred  tenderer  was  based  on  an  irregular  process. 240  The  review  recommended,  among  other  things,  that  negotiations  with  the  preferred  tenderer  should  not  continue  until  further  investigations  were  conducted.  Further  review  was  undertaken  but,  in  the  event, the process continued.241 

5.103 One of the ‘significant’ issues identified by the internal review was the  Tender Evaluation Board’s failure to evaluate against all the tender evaluation  criteria, describing the resulting evaluation report as ‘very thin with respect to  evaluation  of  criteria  other  than  the  cost  model’.242 Despite  Defence  having  highlighted removal of asbestos in its assurances to the Minister, there is no  evidence of any specific assessment of the tenderers’ demonstrated capacity to  undertake asbestos removal.  

Costing asbestos remediation

5.104 In July 2012, Defence arranged for its Financial Investigation Service  (FIS) to conduct a financial review of DMO’s preferred tender response. The  focus  of  the  review  was  on  the  summary  profit  and  loss  of  the  submitted  proposal and the viability of the proposed business model. 

5.105 The  subsequent  analysis  noted  that  the  tenderer’s  proposal  on  hazardous  waste  disposal  represented  ‘the  costs  incurred  to  dispose  of  asbestos brakes and possible fluids.’ This is consistent with there being either  no plans to identify and address asbestos in any other part of the vehicles or, at  least, none having been costed in the business proposal.  

5.106 The FIS analysis also stated, for the hazardous waste item, that: ‘It is  acknowledged that savings might be achieved. This item has been calculated at  five percent of vehicles @ $400 per vehicle.’ This is broadly consistent with the  advice provided to tenderers that ’95 per cent of vehicles are asbestos free’ in 

                                                      

240 The evaluation of tenders is discussed in more detail in Chapter 4. 241 Defence subsequently sought external legal advice and then determined that there was no legal impediment to proceeding to contract signature with the preferred tenderer and, while the quality of the RFT and the Source Evaluation Report did not demonstrate best practice, they did meet the required

standard and complied with relevant DMO policies. The reviews of the tender process are considered in more detail in Chapter 4. 242 The review also found that there was: no assessment of value for money of the tenders submitted; inadequate definition of the tender evaluation criteria; incorrect assessment of one of the tenderer’s

compliance with the tender requirements; inequitable treatment of tenderers by the Tender Evaluation Board and a number of irregularities between the RFT, the Tender Evaluation Plan and the Evaluation Report.

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the earlier industry briefing for the tender. It is also notable that Defence had  earlier estimated the costs of remediating the brakes on the vehicles as much  more expensive: between $879 and $1323, according to the vehicle. 

Minister announces vehicles will be available to the public

5.107 On 31 January 2013, the Minister for Defence Materiel announced the  successful tenderer and that ‘sale of the vehicles gives Australians a chance to  buy their own part of Australian military history’. 

5.108 ANAO examined a copy of the contractor’s asbestos testing process; the  document used by the contractor to certify that each vehicle has been checked  for asbestos‐containing material; and a report provided by the contractor to  Defence on the project. The last item includes a list of vehicles the contractor  has  received  from  Defence  during  the  month  and  checked  for  hazardous  substances.243 The documents provided to Defence show that only brakes are  checked for asbestos.244 

5.109 Defence  advised  the  ANAO  in  January  2015  that,  as  a  result  of  the  findings of this performance audit, Defence had again reviewed the controls  relating to B Vehicle disposal. 

Management of the Bell UH-1H Iroquois helicopter disposal

5.110 The RAAF commenced acquisition of Iroquois helicopters in 1961. They  were  deployed  in  Vietnam  and  many  other  places  overseas  over  a  45  year  period. The capability, with a fleet of 25 aircraft, passed to the Army in 1989.245  The Chief of Army decided, in May 2007, to withdraw the helicopters in view of  the  imminent  need  to  train  support  personnel  to  maintain  the  new  MRH90  helicopters. The Iroquois aircraft were to cease operation on 1 October 2007 and  the last of the type was to be withdrawn from service on 31 December 2007. 

5.111 A first draft of the disposal plan for the Iroquois aircraft was completed  in September 2007 and a completed plan endorsed in March 2008. The plan 

                                                      

243 DMO stated (30 June 2014) that there had been 12 instances where hazardous substances had been located in the 2300 vehicles and trailers sold as at April 2014. 244 A table listing 79 vehicles and which includes a column ‘ACM’ [asbestos-containing material] with an entry for each vehicle contains only the values ‘No ACM’, ‘ACM detected’ and ‘No brakes’ in that field.

Defence is dependent on the contractor for reports on its performance and has no independent method of verifying the contractor’s remediation of asbestos. 245 The Royal Australian Navy also operated Iroquois helicopters from 1967, with the type being withdrawn from Navy service in 1989.

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stated that it was intended that all hazardous substances would be identified,  located and advised to those who purchase the aircraft: 

Identification  of  Hazardous  Material.  All  hazardous  material  used  in  the  construction or support of the Iroquois aircraft and its components are to be  identified and consolidated in a single document which is to be made available  to  purchasers  of  the  Iroquois  aircraft  and  its  components.  Maintenance  publications are to be amended to reflect the location and type of hazardous  material evident within the aircraft and its components.246 

5.112 In October 2008, DMO prepared an options paper on disposal of the  Iroquois aircraft for the Chief of Army. This paper identified the duty of care in  relation  to  asbestos  as  extending  principally  to  notification,  presumably  meaning that it would be incumbent on Defence to notify the recipient of the  aircraft of the presence of the material, as contrasted with removing it before  transferring custody: 

Asbestos Removal. The Iroquois contains Chrysotile Asbestos and you have  some  duty  of  care  with  regard  to  its  treatment.  Because  the  asbestos  components are Ê¹in situʹ within the engine (ie persons are unlikely to come into  contact with the asbestos‐containing parts) this duty of care would principally  extend to notification. While you have no duty of care in regard to foreign  governments,  you  could  also  gift  to  them  the  replacement  non‐asbestos  components that are in stock along with each engine as a good will gesture.  Even  though  the  likelihood  of  exposure  is  remote,  the  presence  of  in  situ  asbestos adds weight to the cost reasons for removal of the engines from static  display Ê¹shellʹ aircraft. The only real risk applies to the Iroquois intended for  loan to the [a private Australian museum external to the Commonwealth] and this  can be mitigated by requiring [the CAF] to control usage and supplying non‐ asbestos replacement parts with the aircraft.247 

5.113 A  range  of  options  for  the  disposal  of  the  Iroquois  aircraft  was  considered over the period from 2008 forward. Ultimately, most of the fleet  was kept by the Commonwealth (sixteen by Defence for display and training,  and  one  transferred  to  the  Australian  War  Memorial).  However,  the  RSL  National Headquarters and National Vietnam Veterans’ Museum were offered  one  each.  The  last  six  were  made  available  for  static  display  to  historical  organisations through a request‐for‐offer process which commenced in 2011. 

                                                      

246 Defence, Iroquois UH-1H Disposal Plan, April 2008, p. 33. 247 Defence, Disposal of UH-1H Iroquois Helicopters, An Options Paper for CA Consideration, October 2008, p. 3.

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5.114 The  conditions  of  contract  offered  by  DMO  to  the  prospective  purchasers of the Iroquois aircraft differed in important respects from earlier  commitments in relation to asbestos and other hazardous substances: 

 Contrary to the VCDF directive, accessible asbestos was to remain in  the equipment sold, in particular, in gaskets. 

 The intention was to leave the asbestos items in place and contractually  prohibit  the  purchaser  from  disturbing  any  component  containing  problematic substances. In contrast, in the case of the B Vehicles, the  VCDF’s  directive  was  ‘interpreted’  to  permit  sale  ‘to  companies  or  entities that can demonstrate the capacity and intention to remediate  any accessible asbestos’. 

5.115 The  contract  required  the  Commonwealth  to  provide  a  register  of  problematic substances. However, it provided no assurance of its accuracy and  required the purchaser to assume all risk for identifying such substances. This  approach stands in contrast to the commitment in the March 2008 disposal  plan to identify, locate and advise all hazardous materials to purchasers (see  paragraph 5.111). 

5.116 Defence’s approach to the sale of the Iroquois aircraft and B Vehicles  suggests that it has moved by increments from the VCDF’s original position of  allowing  no  accessible  asbestos  to  be  gifted  or  sold.  As  mentioned  earlier  (paragraph  5.31),  Defence  informed  the  ANAO  during  the  audit  that  the  directive remains in place. 

Management of an old case

5.117 Towards the end of the fieldwork for the audit, DMO drew attention to a  case of a former major item of Defence SME which has long been outside the  control of Defence, but which now presents an asbestos management problem to  the current owners. The owners have estimated the cost of asbestos removal at  $1 million to $1.5 million, and sought Australian Government funding to do so. 

5.118 Several decades ago, the Government decided to gift the item of SME  on an ‘as is, where is’ basis and on the condition that it be properly maintained  at  no  further  cost  to  the  Australian  Government.  Contemporaneous  correspondence shows no evidence that risks of asbestos were considered at  the time. The owners have now found that the asbestos‐containing material is  deteriorating and may present a risk which the organisation cannot manage. In 

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December 2014, DMO advised the Minister of its intention to deny a request  from the owners for funding assistance to remove asbestos containing material.  

5.119 The ANAO sought to identify how many other former Defence SME  assets are now residing in locations not under Australian Government control.  A  register  of  such  items  would  enable  Defence  to  assess  risk  flowing  from  similar items elsewhere. However, Defence has no systematic record of SME  assets gifted or sold.248 In the absence of such records it is difficult to assess  whether other legacy cases could arise or the magnitude of that risk. If Defence  had maintained such a register, it might be possible, for example, for it now to  advise others with custody of ex‐Defence equipment about the likelihood of  the presence of asbestos. 

5.120 In December 2014, DMO also advised the then Minister for Defence  that  it  was ‘proposing  to  undertake  a  review  of  a  number  of  past  disposal  activities  to  identify  those  items  that  contain  hazardous  substances,  in  particular asbestos containing material, that may give rise to potential future  liabilities’.  DMO  did  not  indicate  when  that  review  was  expected  to  be  complete nor what action it proposes should the review identify further risks  related to past disposal activities. 

Conclusion—managing hazardous substances in disposals 5.121 Hazardous materials, in particular, asbestos, have been used widely in the  manufacture of Defence SME. Over the last decade, Defence has put substantial  effort and resources into remediating asbestos in its inventory and its SME.  

5.122 A major decision in the management of asbestos in disposals was the  VCDF’s clear directive to the Defence Organisation in October 2009: items that  contain asbestos should be disposed of by sale or gift only where any asbestos  contained within the item cannot be accessed by future users, and as such do not  pose a health risk to those future users. A tension subsequently arose between  the VCDF’s directive and the approach within Defence to maximise revenue  from major equipment disposal.  

                                                      

248 In response to ANAO enquiries about the existence of such registers, Army advised that ‘the short answer is “No”.’; Air Force advised it has a formal register for the F-111 artefacts on loan to [Australian Historical Organisations] but does not have any registers or other systematic records of previous disposals outside national collections; and Navy advised only of a record going back 15 years of loans (but not gifts or sales).

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5.123 In several cases examined by the ANAO—in  particular, the Caribou  aircraft and B Vehicles fleet—Defence has struggled in its efforts to manage the  risks posed by asbestos in equipment intended for disposal. In the case of the  Caribou  aircraft,  equipment  disposal  was  a  trigger  to  cease  asbestos  remediation. The sale of the majority of the Caribou was not completed and  asbestos components remain in place, and it is now a matter for Defence to  decide a future course of action. The two aircraft sold to an historical aircraft  society retained any asbestos items previously contained in them.  

5.124 Defence has not always provided appropriate information to potential  purchasers or recipients about the asbestos content of SME subject to disposal,  notwithstanding  legal  advice  to  do  so,  senior  leadership  expectations  and  undertakings to government. This is the case, for example, with the B Vehicles. 

5.125 The  B Vehicles  may  contain  accessible  asbestos  in  various  locations  such as brake linings and gaskets. The vehicles are on‐sold to the public by a  company established for this purpose which, after receiving them, only reports  back to Defence on the results of its checking for asbestos in the vehicle brakes,  and  remediating  these  components  where  necessary. 249  This  disposal  is  ongoing.250  

5.126 The  F‐111  aircraft  disposal  was  largely  managed  by  the  DMO’s  Disposal  and  Aerial  Targets  Office.  Defence’s  preference,  given  the  use  of  asbestos throughout the aircraft, was to destroy most of them and retain only a  few for Defence museums. Ministerial preferences led to a small number of  aircraft  also  being  retained  for  display  outside  Defence’s  direct  control  in  private museums, but with ongoing Defence involvement in monitoring and  reporting on risks. Defence has based its management of this arrangement on a  professional assessment of the risks, but the costs of ongoing monitoring and  reporting by Defence are yet to be assessed.  

5.127 Defence’s approach to some more recent disposals suggests that it has  moved  by  increments  from  the  VCDF’s  original  position  of  allowing  no  accessible asbestos to be gifted or sold. Defence informed the ANAO during  the audit that the directive remains in place.  

                                                      

249 Defence advised the then Minister for Defence Materiel in 2011 that 95 per cent of the B Vehicles were free of asbestos components. However, it has been unable to provide evidence for this estimate. 250 Defence advised the ANAO in January 2015 that, as a result of the findings of this performance audit, Defence had again reviewed the controls relating to B Vehicle disposal.

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5.128 The  potential  long‐term  risks  of  SME  containing  asbestos  have  been  highlighted  by  a  request  for  Australian  Government  assistance  from  an  external  organisation.  The  organisation  was  gifted  a  major  item  of  Defence  SME  by  the  Australian  Government  several  decades  ago.  The  item  has  asbestos‐containing material that is widespread through its structure and the  organisation has advised Defence that the asbestos is now posing a hazard.  While the SME is no longer owned by the Commonwealth and the issue of  Defence  or  Commonwealth  assistance  is  yet  to  be  determined,  it  raises  the  question of whether other legacy cases exist and what action may be needed to  address any risks posed. 

 

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6. Gifting Defence Specialist Military Equipment

This chapter examines the Australian Government’s gifting rules and how Defence has  set about gifting SME assets that are no longer required. 

How Defence specialist military equipment is gifted 6.1 An  option  for  disposing  of  Defence  specialist  military  equipment  is  gifting the asset to a party outside the Commonwealth. In the past 20 years, for  example, many de‐commissioned naval ships have been gifted to Australian  states to be sunk deliberately to form recreational diving attractions, and some  30 of the Army’s former tank fleet of 103 Leopard I vehicles have been gifted to  Returned  and  Services  League  (RSL)  clubs  and  similar  community  bodies  around Australia for display. 

6.2 Disposal of Defence equipment often has a high public profile which, in  turn,  makes  it  more  likely  that  ministers  will  become  involved.  When  the  public becomes aware of the prospect of Defence items becoming available for  disposal, ministers and the department may receive many enquiries about the  prospective disposal, usually seeking advice about how a group or individual  can secure an item. The DMO branch responsible for disposals noted an ‘ever  increasing Ministerial involvement in disposals’ in mid‐2011. 

6.3 During the period under consideration in this audit, the former FMA  Act  strictly  controlled  the  gifting  of  public  property.  Section  43  of  the  Act  expressly  prohibited  making  a  gift  of  public  property  except  under  certain  defined  circumstances.  The  clause  reflected  long‐standing  arrangements.251  Moreover,  these  arrangements  have  more  recently  been  reaffirmed  by  the  adoption of very similar rules in the PGPA Act, which replaced the FMA Act. 

                                                      

251 The explanatory memorandum for the FMA Act stated: ‘The inclusion of the clause [that became s. 43] is to put beyond doubt the basis on which the Commonwealth may give away its property. No equivalent provision exists in the Audit Act 1901, although it has long been interpreted that the Finance Minister's act of grace and waiver powers under that Act served to make the Minister the source of authority to approve gifts of stores. Finance Direction 26F reflected this view and [s. 43] is based on that Finance Direction. It also creates an offence of unauthorised gifting of public property by any minister or official, with a maximum penalty of seven years imprisonment. Gifting is allowed where the Finance Minister has given written approval under a specified set of conditions’.

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6.4 This chapter considers: 

 the rules that apply to gifting of Defence assets and whether those rules  are adequately reflected in Defence’s internal instructions, guidelines,  templates and associated material; 

 whether  gifting  is  adequately  defined.  In  some  cases,  arrangements  have been adopted that could be viewed as providing a gift but which  did not invoke the gifting rules; and 

 whether the gifting rules have generally been followed. Specifically, the  audit sought to identify whether some prominent instances of gifting  had been carried out with appropriate authority. Three case studies are  considered: 

 the gifting of Navy ships as dive wrecks; 

 the gifting of the Leopard tanks to RSL clubs; and  

 gifting an F‐111C aircraft to the Pacific Air Museum in Hawaii  for display. 

The rules for gifting Defence assets

Authority to gift Commonwealth assets

6.5 Section  43 of  the  FMA  Act  prohibited  the  gifting  of  public property  except  in  defined  circumstances,  including  where  the  Finance  Minister  had  given  written  approval  to  the  gift  being  made. 252  The  Finance  Minister  delegated to Chief Executives the power to give written approval for gifts of  public  property,  under  the  FMA  (Finance  Minister  to  Chief  Executives)  Delegation,  Part  17.  This  instrument  required  delegates  to  observe  specific  conditions when considering making a decision to gift public property. 

6.6 The Secretary of Defence (as the Defence chief executive) had, in turn,  delegated this power to various Defence officials (both APS and ADF). The  delegation  was  based  on  dollar  values  with  the  CDF  having  unlimited  delegation  and  other  Defence  officials  up  to  $500 000.  The  limit  of  the  delegation was based on the value of the gift. 

                                                      

252 See also paragraph 2.9 and footnote 36.

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Conditions placed on gifting Commonwealth assets

6.7 The Finance Minister’s Delegation required, among other things, that  ‘property  is  generally  to  be  disposed  of  at  market  price’  and  placed  the  following conditions on gifting:  

(1) If a gift of property is being contemplated, the delegate must have regard to  the  requirement  to  adhere  to  the  Commonwealth’s  general  policy  for  the  disposal of Commonwealth property, namely, that, wherever it is economical  to do so, the property being disposed of should:  

(a)  be  sold  at  market  price,  in  order  to  maximise  the  return  to  the  Commonwealth; or  

(b)  otherwise,  should  be  transferred  (with  or  without  payment)  to  another Commonwealth Agency with a need for an asset of that kind.  

(2)  A  departure  from  the  Commonwealth’s  general  policy,  encompassing  disposal by gift, is permitted if the Commonwealth property in question:  

(a) is:  

(i) genuinely surplus to the Agency’s requirements; and  

(ii) of historical or symbolic significance in relation to the proposed  recipient; or  

(b)  holds  other  special  significance  for  the  proposed  recipient,  and  there are compelling reasons to justify its gifting to that recipient.253 

6.8 Part  (2)  of  the  Minister’s  Delegation  (above)  covered  any  departure  from sale at market price or transfer to another Australian Government entity.  This explicitly encompassed disposal by gifting but also included disposal of  an asset for a price less than the market price. 

6.9 The  Finance  Minister’s  Delegation  also  specifically  prohibited  the  gifting of military firearms and gifts prohibited by law. This latter category  included  those  items  where  sale  was  prohibited  by  intellectual  property  considerations or contractual obligations (such as those in arrangements with  the US under ITAR). 

6.10 Where disposal of an asset by way of gifting was being considered, the  delegate  was  required  to  obtain  a  reasonable  estimate  of  the  value  of  the 

                                                      

253 FMA (Finance Minister to Chief Executives) Delegation 2013, Part 17.2 (2). This text is reproduced here in detail as a point of reference for later discussion and comparison.

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Commonwealth  property  proposed  to  be  gifted,  and  where  this  was  not  possible, the delegate had to use his or her discretion in assigning a notional  value, and record the basis for determining the value of the property.254    

6.11 Additionally, where gifting was being contemplated the delegate was  required to consider whether approval in a particular case would have created  an  onerous  or  undesirable  precedent.  If  the  gift  would  have  created  that  precedent,  it  had  to  be  refused.255 For  this  reason,  the  delegate  would  need  publicly defensible and objective grounds to justify favouring the person or  organisation  with  the  gift,  ahead  of  other  potential  recipients. 256 In  these  circumstances,  to  achieve  transparent  and  defensible  decision‐making,  the  delegate would need to set out their reasoning in any decision to make a gift of  public property.257 

Gifting rules to be interpreted narrowly

6.12 The Department of Finance advised Defence (citing AGS advice) that,  from a policy perspective, the gifting delegation should be read narrowly: 

Finance  regularly  advises  agencies  that  they  should  read  the  direction  ‘historical  or  symbolic  significance  to  the  proposed  recipient’  to  have  its  natural meaning (i.e. the item relates to the past of an individual or organis‐ ation or has particular unique and identifiable meaning to that recipient). 

For example, this delegation has been relied on to gift a particular desk to a  retiring  senior  Defence  official  who  had  used  that  particular  desk  for  over  30 years. Similarly, the direction that the item hold ‘other special significance  for  the  proposed  recipient,  and  there  are  compelling  reasons  to  justify  its  gifting to that recipient’ should be read narrowly. We would advise agencies 

                                                      

254 ibid. Part 17.4. 255 The directions within the Finance Minister’s Delegation explained an undesirable precedent as one where ‘it would be difficult, in equity, for the Commonwealth not to approve other requests for such gifts and which would in that way lead to significant losses of Commonwealth revenues’.

256 FMA (Finance Minister to Chief Executives) Delegation 2013, Part 17.3. 257 The Public Governance, Performance and Accountability (Finance Minister to Accountable Authorities of Non-Corporate Commonwealth Entities) Delegation 2014 contains very similar requirements. The delegation (Part 10, Delegation under s. 66 of the Act—Gifts of relevant property) is slightly broader in

scope in that it allows Accountable Authorities to gift low value, surplus items where it is either uneconomical to otherwise dispose of them or the gifting is consistent with Commonwealth policy objectives. However, it maintains the requirement for the delegate to consider whether approval to gift in a particular case would create an onerous or undesirable precedent, and if so, the gift must be refused. The delegation also maintains the requirement for the delegate to have publicly defensible and objective grounds to justify favouring the person or organisation with the gift, ahead of other potential recipients.

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to consider this on a case by case basis, taking into account the personal unique  meaning for the specific proposed recipient.258 

Rules reflected with varying fidelity in Defence instructions and guidelines

6.13 The  audit  found  that  the  gifting  rules  under  the  FMA  Act  were  reflected in Defence’s FINMAN 2 (Financial delegations manual). They also  appeared  in  Defence’s  FINMAN  5  (Financial  management  manual),  Chapter 6.2.  

6.14 The latter manual, FINMAN 5, also included a Defence requirement  which  was  additional  to  the  rules  derived  from  FMA  sources:  that  is,  that  ‘Defence’s  policy  for  the  disposal  of  public  property  is  that  the  most  economical  means  is  to  prevail,  wherever  practical.’  This,  on  the  face  of  it,  imposes an obligation on those managing a disposal to take account of both the  financial costs and the benefits of that disposal. This is a principle that accords  with  the  requirement  in  s. 44  of  the  FMA  Act  to  promote  proper  use  of  Commonwealth resources. 

6.15 However, the gifting rules are also reflected in a range of other Defence  documents  providing  instruction  or  guidance  to  Defence  staff,  but  with  varying fidelity. The problematic aspects are explained below. 

Defence Chief Executive’s Instructions

6.16 The  gifting  rules  were  reflected  in  the  Defence  Chief  Executive’s  Instructions  (CEI,  6.2.11).  However,  the  CEIs  also  contained  additional  guidance  purportedly  on  gifting  in  an  another  section  (CEI  6.1,  Asset  Management):  

Disposal by way of ... a gift, must be in accordance with DI(G) PERS 25‐7 Gifts,  Hospitality and Sponsorship.259 

6.17 The DI(G) referred to was not directed at the disposal of Defence assets  and did not mention disposal. Rather, it provided instructions to staff on how  to  manage  conflicts  of  interest  and  the  provision  of  personal  gifts  and  hospitality to parties with whom Defence staff may be dealing in the course of 

                                                      

258 Advice from the Department of Finance to Defence, April 2014. 259 Defence, CEI 6.1 Asset Management (Non-Financial Assets), 6.1.1.4.

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Defence business, such as suppliers and contractors.260 The reference at s. 6.1 of  the CEIs was potentially confusing. 

DMO Chief Executive’s Instructions

6.18 DMO’s CEI concerning the gifting of Commonwealth assets included  statements that were inconsistent with the Finance Minister’s Delegation: 

Proposals for public property to be presented as a gift must demonstrate that it  is in the interests of the DMO and the wider community.261 

6.19 Whether a gift meets the interests of DMO or the wider community  were not tests set out in the gifting rules (see paragraph 6.7, above). The source  of these elements in the DMO CEI is not clear. Moreover, DMO is part of the  Commonwealth and it is not clear how the reference to ‘DMO’s interests’ is to  be  interpreted,  as  these  cannot  properly  be  separate  from  those  of  the  Commonwealth. 

DMO Disposal and Sales Directorate Disposal Guide

6.20 The DMO Disposals and Sales Directorate Disposal Guide included a  table describing possible disposal methods. A note appended to the table read: 

The authority to Gift or Transfer an Asset can only be exercised by persons  holding  appropriate  financial  delegations  to  be  exercised  after  Ministerial  Approval (Minister of Finance under FMA Act Sect 43) to proceed has been  provided.262 

6.21 However, transfer of an asset can be done without the exercise of a  gifting  delegation  and  so  should  be  treated  separately  from  gifting.  The  wording is also confusing as it could give the impression that the delegate can  make a decision only after ministerial approval, which would be contrary to  the purpose of having a delegation arrangement and not consistent with the  responsibilities of a delegate.263 

                                                      

260 The DI(G) included a reference to FINMAN2 and CEI 6.2 in an appendix, but this is at the least an arduous path to the guidance. 261 DMO, CEI 6.2 Gifting Public Property, issued July 2010. 262 DMO, Disposal Guide, Disposals and Sales, AMSO, Table 5, pp. 14-16, May 2013. 263 Under s. 34A of the Acts Interpretation Act, a person exercising a delegated power acts in their own

right and with their own discretion. They cannot generally be subject to direction by the party who delegated the power.

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Other manuals

6.22 The ANAO examined other Defence material providing guidance on  disposals, including:  

 the DMO Standard Operating Procedure: Manage Major Disposals; and 

 the  Electronic  Supply  Chain  Manual  (ESCM)  (various  editions,  including August 2013). 

6.23 Each of these contained errors in their accounts of the rules set out in  the  Finance  Minister’s  Delegation  (see  paragraph  6.7).264 The  ANAO  under‐ stands that Defence is seeking to correct these errors.265 

Whether gifting is defined adequately 6.24 Casual use of the term ‘gifting’ is clearly a source of confusion within  Defence. The term ‘gifting’ is sometimes used to encompass disposal options  that have the appearance of a gift but may not technically be one. For example,  Defence internal documents sometimes refer to assets being ‘gifted’ to Defence  museums.  This  may  seem  functionally  equivalent  to  gifting  to  a  non‐ Commonwealth recipient, such as a private museum. However, from a legal  perspective,  the  former  options  involve  the  Commonwealth  retaining  ownership of the asset and simply transferring the asset for another purpose  either within Defence or to another entity within the Commonwealth.266  

6.25 Another  disposal  option  that  may  have  the  appearance  of  gifting  is  where  Defence  makes  items—such  as  the  F‐111  aircraft—available  for  loan.  The recipients may perceive the loan as indefinite and broadly equivalent to a 

gifting  arrangement,  even  though  they  are  required  to  meet  particular  obligations to continue to have custody of, and display the asset. However, this  too, is not gifting as the assets remain in Commonwealth ownership. 

                                                      

264 For example, the ESCM introduces a condition that allows gifting where (subject to other conditions also being met) ‘the charitable significance outweighs the financial return that would accrue to the Commonwealth by selling the items.’ The origin of this condition is unclear. Details of these errors were provided to Defence in the course of the audit. 265 Errors in interpretation of the gifting rules are also encountered in disposal plans. For example, several

disposal plans incorrectly state: ‘The Minister for Finance and Deregulation has delegated the gifting of property to the Minister for Defence and the Minister for Defence Science and Personnel.’ This appears to reflect an error in the Defence disposal plan template. 266 For example, the Caribou disposal strategy refers to ‘gifting’ of aircraft to Defence force museums.

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Providing a grant to assist with purchasing from Defence

6.26 Questions about the adequacy of how gifting is defined arise where the  asset is purchased with the assistance of a separate grant made to the recipient.  Such grants are intended to help the recipient pay the Commonwealth for that  asset, to help them take possession of it, and/or fund the use to which the  recipient  will  put  the  item.  This  is  a  case  where  the  arrangement  does  not  invoke the gifting rules, but the effect is very similar to making a gift and the  public  may  generally  perceive  it  as  such.  An  instance  is  the  sale  of  the  ex‐HMAS Otama, an Oberon‐class submarine, to a community group in 2001  (see text box below). 

Disposal of the ex-HMAS Otama

The HMAS Otama was an Oberon-class submarine in RAN service from April 1978 to December 2000. Defence disposed of the submarine in 2001.

A community group called the ‘Western Port Oberon Association’ developed a plan in 2001 for a Naval Memorial Park at Hastings, Victoria, which it envisaged would include the ex-HMAS Otama, if it could acquire the submarine from Defence. In a submission to Defence, the Association estimated the cost of the park at over $2.3 million. The Association stated that the region of Hastings had a strong military history with particular links to submarines and submariners, with 3500 retired naval service personnel in area. The local member made three representations to the Minister for Defence in support of the plan.

By the time a decision was made on disposal, the local member had become the Minister for Defence. Executive authority for the disposal was exercised by the Parliamentary Secretary ‘to avoid a conflict of interest’.

Defence invited the Greater City of Geelong and the Western Port Oberon Association to bid to acquire the submarine. Only the Association submitted a bid and, ultimately, it was successful and paid $55 000 including GST. The Association’s bid was for $60 000 excluding GST. The sale price was reduced to $50 000 (excluding GST) by the Parliamentary Secretary to the Minister for Defence.

The Western Port Oberon Association's submission of March 2001 estimated the cost of towing ex-HMAS Otama from HMAS Stirling in Western Australia to Victoria, in April 2002, to be $250 000. When the Parliamentary Secretary approved the disposal of ex-HMAS Otama, he also announced the sale of the boat to the Association, and a Centenary of Federation Grant of $500 000 to the Association for the Naval Memorial Park incorporating the submarine. Some of these funds were used to purchase ex-HMS Otama and to help with the cost of towing the submarine to Victoria.

Source: Hansard, 4 November 2003, pp. 22039-40, Question No. 2391 and Defence, Question Time Brief, December 2003, ‘The Disposal of Ex-HMAS Otama’.

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6.27 The  disposal  of  the  ex‐HMAS  Otama  to  the  Western  Port  Oberon  Association was referred to by the local member of Parliament as ‘a gift from  the Commonwealth’.267 In fact, the transactions were more complex than that.  The Association: 

 had offered the Commonwealth $60 000 for the submarine; 

 but was charged $50 000 by the Parliamentary Secretary to the Minister  for Defence (to which $5000 GST was added); 

 faced fees of about $250 000 for towing the submarine to its proposed  Victorian location from Western Australia; and 

 was granted $500 000 to help meet the costs of acquiring the submarine,  and moving it to its waterfront land‐based display.  

6.28 A permanent location for the display had not been settled in advance of  the  transaction  and  the  submarine  has  subsequently  deteriorated.  By  2011,  Defence was concerned that this could become a reputational issue for Navy,  even  though  Defence  had  sold  the  boat  in  2002.  A  location  was  reportedly  found in 2013 and, at the time of the audit, the proposed maritime centre to  display the submarine was yet to be constructed. 

6.29 The case shows that, on occasions, a combination of decisions—in this  case  a  sale  accompanied  by  a  simultaneous  grant—may  have  the  effect  of  gifting while not invoking the rules on gifting of Commonwealth assets.268 In  the  circumstances  there  would  have  been  benefit  in  Defence  seeking  Department  of  Finance  advice  on  gifting  policy  and  the  application  of  the  Finance Minister’s Delegation. 

Three case studies of gifting Defence equipment 6.30 The ANAO examined three case studies to assess Defence’s application  of the gifting delegation. The three case studies relate to: 

 the gifting of ships as dive wrecks; 

 the gifting of Leopard tanks to RSL clubs; and                                                        

267 The relevant media article is available at: http://greghunt.com.au/Media/Speeches/tabid/87/articleType/ArticleView/articleId/57/Commending-the-Western-Port-Oberon-Association-for-their-efforts-to-establish-the-Otama-Sub-display.aspx, [accessed 29 April 2014]. 268 The decisions in this case were made a decade and a half ago and the ANAO has not sought to

retrieve advice provided to ministers on relevant matters.

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 the gifting of an F‐111C to a museum. 

Gifting of ships as ‘dive wrecks’

6.31 Defence has disposed of some half dozen major Navy ships over the  last  two  decades  by  gifting  them  to  state  governments  for  sinking  as  ‘dive  wrecks’ or artificial reefs.269 The first was the ex‐HMAS Swan, which was sunk  on  18 October  1996  at  Dunsborough,  off  the  south‐west  coast  of  Western  Australia. It is not known if any consideration was given at the time to whether  this gifting would create a precedent. However, use of old and surplus ships as  dive wrecks is an option that has been considered regularly since that time.  The two most prominent and recent cases have been the ex‐HMAS Canberra  and ex‐HMAS Adelaide. 

Decommissioning of HMA Ships Canberra and Adelaide

6.32 In  January  2004,  the  Chief  of  Navy  notified  the  then  Minister  for  Defence that HMA Ships Canberra and Adelaide would be decommissioned in  November  2005  and  September  2006.270 Although  HMAS  Canberra  was  the  newer ship, in the Chief of Navy’s view, its earlier decommissioning would be  the most effective use of resources. 

6.33 For the HMAS Canberra, a detailed ministerial submission in August  2005 showed that Navy had considered a range of disposal options. It set aside  most,  with  reasons,  as  impractical  or  inexpedient.  It  proposed  selective  inventory  and  system  removal  for  re‐use  within  Defence  as  the  most  cost‐ effective strategy. DMO had estimated that the financial benefit of this option  was  of  the  order  of  $100 million.  Only  a  limited  range  of  options  for  the  residual hulk would then remain, including gifting for a dive wreck or sale for  scrap. 

Disposing of ex-HMAS Canberra

6.34 In October 2005, DMO recommended to the Minister for Defence that  he write to state premiers and territory chief ministers offering the ex‐HMAS 

                                                      

269 Before the disposal of the ex-HMAS Canberra and ex-HMAS Adelaide arose for consideration, respective Ministers for Defence gifted the ex-HMAS Swan (October 1996) and ex-HMAS Perth (August 1999) to the Western Australian Government; the ex-HMAS Hobart (June 2000) to the South Australian Government and the ex-HMAS Brisbane (September 2001) to the Queensland Government. All were gifted for use as dive wrecks.

270 In the event, the decommissioning of the HMAS Adelaide was delayed so as to mitigate the effect on Navy capability of delays in the FFG frigate upgrade program and so that sufficient platforms would be available to meet potential tasks.

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Canberra as  a gift for  use as a dive wreck or  artificial reef. If there was no  interest from states or territories, the remainder of the ship would be sold for  scrap.  DMO  advised  the  Minister  that  lobbying  for  the  ship  was  already  underway and that the value of the ship to state governments as a dive wreck  could be ‘significant in terms of tourism outcomes’. Further, the Queensland  Government had estimated ‘benefits in the order of $22 million per year will  accrue from the use of ex‐HMAS Brisbane in this manner.’ 

6.35 The Minister decided that the ship should be offered to states and a  territory  that  had  not  been  gifted  a  ship  and  wrote  on  9  November  2005,  offering the ship as a gift to Victoria, Tasmania, New South Wales (NSW) and  the Northern Territory. The offer was noted in Parliament.271 The Minister’s  letters stated that Defence would not help with costs once the ship had been  handed over from its base in Western Australia. Defence estimated that the  cost of towing the hull from Fleet Base West to one of the eastern states or  Northern Territory was about $500 000, excluding insurance. 

6.36 Responses  from  states  were  considered  ‘disappointing’  as  those  that  had responded would not accept the gift without an additional grant of funds  to  prepare  it  for  sinking  as  a  dive  wreck.272 DMO  recommended  and  the  Minister  agreed  (in  May  2006)  to  write  to  the  remaining  states  to  gauge  interest. Once again, DMO advised the Minister of the perceived benefits to  states of dive wrecks: 

State governments that have previously undertaken projects to establish dive  wrecks  of  ex‐HMA  Ships  Brisbane,  Hobart,  Perth  and  Swan,  have  variously  reported annual revenue ranging from $2.4 million to $23 million, attributable  to tourism prompted by these dive wrecks. 

6.37 All state leaders who replied referred to the precedent of the ex‐HMAS  Brisbane. The Commonwealth had provided no additional funding with earlier  such  gifts  but  it  had  made  an  exception  for  the  ex‐HMAS  Brisbane  and 

provided $3 million. In that case, a decision to absorb costs of preparation had  been  reflected  in  a  letter  of  26  September  2001  from  the  then  Minister  for 

                                                      

271 The Member for Flinders and Parliamentary Secretary to the Minister for the Environment and Heritage stated, on 8 December 2005: ‘I take this opportunity to call on the Victorian Premier, in a spirit of bipartisanship, to make a bid for the HMAS Canberra. The HMAS Canberra is an Adelaide class guided missile frigate which has been recently decommissioned. It has been offered by the Minister for Defence, Robert Hill, to four states and territories—Victoria, New South Wales, Tasmania and the Northern Territory—as a vessel to be sunk so as to create an artificial reef and diving centre.’ 272 By the time Defence received responses from states a new Defence minister had been appointed.

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Defence  to  the  Premier  of  Queensland.  That  commitment  had  only  been  capped at $3 million by a subsequent Minister for Defence in another letter to  the Queensland Premier, in April 2002.273  

6.38 In  June  2006,  the  Minister  decided  to  offer  Commonwealth  funding  assistance with the ex‐HMAS Canberra of up to $3 million. After considering  business cases put forward by Victoria and NSW, Defence recommended the  selection of Victoria. After some further correspondence, the Victorian Premier  confirmed his expectation of a Commonwealth contribution of $2.8 million for  his  state’s  bid  and  the  NSW  Premier,  a  Commonwealth  contribution  of  $4.835 million. Defence again recommended that Victoria be selected. It also  suggested  that  NSW  Government  interest  could  be  directed  to  the  HMAS  Adelaide, then expected to be decommissioned towards the end of 2007. 

6.39 In  July  2007,  the  Minister  advised  the  Victorian  Premier  that  management  of  the  project  would  be  passed  to  DMO,  and  he  approved  Commonwealth funding of up to $7 million to complete the project. In October  2007, the Minister further agreed to a request from the Victorian Premier that  the Commonwealth be responsible for all project costs beyond the Victorian  contribution of $1.5 million. Subsequently, the Deed of Gift was signed by the  Victorian Premier and the Minister for Defence. At that point, DMO advised  the Minister that preparing the ship for sinking off the Victorian coast would  take 10 to 12 months and the total cost of the contract was not expected to  exceed $6.2 million (including $1.1 million in towing costs). 

6.40 A lengthy process of discussion about the proposed site for sinking the  ship ensued, involving Defence, the contractor, several Victorian Government  agencies  and  the  then  Commonwealth  Department  of  Environment,  Water,  Heritage and the Arts (DEWHA, responsible for administering the Environment  Protection  (Sea  Dumping)  Act  1981).  DEWHA  considered  the  site  originally  nominated by the Victorian Government to be too shallow, making the wreck  prone to being unstable and broken up by wave action. The cost of holding the  ship while awaiting Victorian Government nomination of a suitable site was  estimated by DMO’s contractor to be between $120 000 and $230 000 a month,  and Defence began considering other options for disposing of the hulk. 

                                                      

273 Towing, preparation and sinking of ex-HMAS Brisbane was reported as having cost the Queensland Government $5 million, of which the Commonwealth contributed $3 million.

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6.41 Finally, agreement was reached following receipt of DEWHA approval  for sea dumping on 5 August 2009, and Victorian State ‘Coastal Management  Act Consent’ approval, granted on 10 July 2009. The ex‐HMAS Canberra was  scuttled off Barwon Heads, Victoria, on 4 October 2009. Defence informed the  ANAO  that  the  ultimate  cost  of  the  project  to  the  Commonwealth  was  $7 million. 

Scuttling ex-HMAS Adelaide

6.42 In October 2006, the Minister for Defence wrote to the NSW Premier to  let him know that the Victorian Government’s bid for the ex‐HMAS Canberra  had  been  successful,  and  to  draw  the  NSW  Government’s  attention  to  the  expected availability of the ex‐HMAS Adelaide ‘toward the end of 2007’. The  Chief  of  Navy  had  agreed  to  move  the  ship  to  the  east  coast  shortly  after  decommissioning.  The  Minister  was  advised  that  this  would  reduce  significantly the cost to the NSW Government (or any other recipient). 

6.43 In  December  2006,  the  NSW  Premier’s  Department  wrote  to  the  Minister  for  Defence  with  a  revised  business  plan,  estimating  the  cost  of  preparing  and  scuttling  the  HMAS  Adelaide  at  $3.2 million.  The  proposal  indicated that $3 million would be sought from the Commonwealth. 

6.44 In  February  2007,  DMO  obtained  the  Minister’s  approval  to  gift  the  ship  to  the  NSW  Government.  The  talking  points  provided  to  the  Minister  indicated that ‘Commonwealth funding for a proportion of the projected costs  was  offered  in  pursuit  of  joint  state  and  federal  tourism  outcomes.’  The  Minister then wrote to the NSW Premier, notifying him of the approval. 

6.45 A  deed  of  gift  was  signed  by  the  Minister  for  Defence  and  NSW  Premier  for  ex‐HMAS  Adelaide  in  June  and  July  2008  identifying  a  Commonwealth contribution of $3 million. 

6.46 In June 2009, the Minister for Defence responded to a request from the  NSW Premier for a further contribution to the costs of scuttling the ex‐HMAS  Adelaide with an offer of Commonwealth funding of up to $5.8 million. Court  action by a community group opposed to the scuttling had led to delays in the  project and substantial additional costs being incurred. A final payment by the  Commonwealth  of  $1.082  million  was  made  in  March  2011,  bringing  its  contribution to $5.8 million. A NSW request for further funds was refused. 

6.47 The ex‐HMAS Adelaide was scuttled on 13 April 2011 off Avoca Beach  near Terrigal, New South Wales. 

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Analysis of the gifting of HMA Ships Canberra and Adelaide

6.48 As indicated in paragraphs 6.35 and 6.44, the then Minister for Defence  had offered ex‐HMAS Canberra as a gift in November 2005 and a later Minister  for  Defence  approved  the  gifting  of  HMAS  Adelaide  in  February  2007.  The  earliest  record  provided  to  the  ANAO  that  considers  the  question  of  the  exercise of a delegation to gift the ex‐HMA Ships Canberra and Adelaide is dated  31 January 2008, when Defence Disposals staff sought advice on the value of  the ships so as to help determine who would exercise the gifting delegation.  On 18 February 2008, the CEO DMO provided an instrument of delegation to  the CDF as an ‘appropriate level at which the delegation may be exercised,  given the level at which decisions have previously been made regarding the  ships.’ 

6.49 Approval was provided by the CDF on 21 February 2008 for the gifting  of ex‐HMAS Canberra to the Victorian Government and ex‐HMAS Adelaide to  the NSW Government. The approval document included an estimate of the  market value of the items. Each would cost the Commonwealth $3.5 million to  scrap,  including  any  revenue  from  selling  the  scrap. 274 It  also  noted  the  additional costs flowing from funds provided in the respective cases by the  Commonwealth to the state governments: 

 for the ex‐HMAS Canberra, the approval noted a cost of $6.2 million for  the  scuttling,  of  which  $1.5  million  was  being  contributed  by  the  Victorian  Government.  This  meant  that  the  disposal  would  cost  the  Commonwealth $4.7 million, an estimated $1.2 million above the cost  of scrapping ($3.5 million); and 

 for the ex‐HMAS Adelaide, the estimated contribution (at that stage) of  $3 million from the Commonwealth meant that the disposal would cost  $0.5 million  less  than  scrapping  ($3.5 million).  However,  this  calculation does not include the cost of bringing the ship from Fleet  Base West to the east coast, which was done at Navy’s expense with the  apparent intention of lowering the costs to be incurred by the recipient. 

6.50 To  lawfully  make  a  gift  of  public  property  requires  either  written  approval by the Finance Minister or by that Minister’s delegate, subject to the  directions in the Finance Minister’s Delegation. The exercise of the delegation 

                                                      

274 The source and reliability of these estimates is not made clear in the relevant Defence documentation.

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to  gift  the ex‐HMA  Ships  Canberra  and  Adelaide  occurred  in  February  2008.  However,  Defence  had  proposed  gifting  of  the  ships  to  the  Minister  for  Defence in October 2005. The advice to ministers on making gifts of these ships  did  not  refer  to  the  legal  requirements  for  such  a  decision.  The  ministerial  submissions  mentioned  neither  the  FMA  Act  nor  the  Finance  Minister’s  Delegation. 

6.51 The Minister for Defence offered the ex‐HMAS Canberra as a gift well in  advance of any decision by an authorised delegate to dispose of the ship this  way. There is no record that Defence explained to the Minister that he did not  hold the formal authority to make gifts of Commonwealth property, and that  decision‐making  required  the  involvement  of  the  Finance  Minister  or  authorised delegates.  

6.52 In light of the progress of the gifting proposals by February 2008, the  exercise  of  discretion  by  the  delegate  was  severely  constrained  and  the  consideration of other options, for example, to scrap rather than gift the ship so  as to maximise the return to the Commonwealth (or minimise the loss) was, for  all practical purposes, closed to the delegate.  

6.53 The delegate’s approval to make a gift did include an assessment of the  market  price  and  a  view  that  each  ship  was  worth  minus  $3.5 million  as  scrap.275 The cost of each gifting arrangement was also set out. In one case the  known cost of gifting (and the eventual cost of gifting in the other) was greater  than  the  cost  of  scrapping.  Gifting  was  therefore  unlikely  to  maximise  the  return to the Commonwealth. It is not clear how or whether the delegate took  account of this.  

6.54 To  make  a  gift,  the  Finance  Minister’s  Delegation  required  that:  the  property in question be of historical or symbolic significance in relation to the  proposed  recipient;  or  hold  other  special  significance  for  the  proposed  recipient, with compelling reasons to justify its gifting to that recipient (see  paragraph 6.7). Based on the available evidence, it was not apparent that there  was  any  historic  or  symbolic  significance  of  the  ships  in  relation  to  the  proposed recipients, nor any special significance for the proposed recipients  with compelling reasons to justify gifting the ships to those recipients. There is  no reference in the approval document to any reasoning on these grounds. On 

                                                      

275 This is understood to be the net cost of scrapping, that is, the estimated expense of sending the ship to the scrapyard less the revenue from the sale value of the scrap.

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the contrary, the explicit purpose of the gifting of both ships was for them to  ‘provide opportunities for tourism and revenue’ as dive wrecks, as stated by  the Minister for Defence in an answer to a Parliamentary question.276 

6.55 The decisions in the 1990s to gift surplus naval ships to the states were  a  clear  precedent  for  subsequent  gifting  of  ships.  However,  the  more  significant decision was that made by the then Minister for Defence in 2001 to  provide $3 million to the recipient state to help with the scuttling of ex‐HMAS  Brisbane. The potential public expectation of equitable treatment of states then  led the Commonwealth to act similarly when subsequently gifting ships, by  providing substantial funding on each occasion. 

6.56 An answer to a Parliamentary question on notice in 2012 shows that  Defence is wary of future proposals to use surplus ships for dive wrecks. In  answer  to  a  question  specifically  enquiring  about  ships  that  will  be  decommissioned that may be available for  use as an artificial reef,  Defence  stated: 

Any proposal for a former [Navy] vessel to be sunk as a dive wreck would  require  a  detailed  analysis  of  technical,  environmental,  resourcing  and  licensing issues related to the application for a permit under the Sea Dumping  Act.  This  would  be  required  to  be  undertaken  by  the  proposer  or  State  Government managing that activity ... 

For a proposal to allocate a decommissioned ship for sinking as an artificial  reef to be considered for endorsement by Defence, the proponent must be able  to  demonstrate  that  they  have  the  financial  resources  and  managerial  capabilities  to  successfully  complete  what  is  a  complex  and  challenging  preparation process ... 

The full cost of a dive wreck is estimated to be around AUD $10 million based  on previous experience, but may vary depending on specific circumstances.277 

6.57 Ministers continue to receive representations about the possibility of  using  further  surplus  naval  ships  as  dive  wrecks. 278 Defence’s  advice  in  response to such representations has been cast in similar, cautionary terms.279 

                                                      

276 Hansard, Senate, Wednesday, 21 March 2007, p. 72. 277 Senate Standing Committee on Foreign Affairs, Defence and Trade, Questions on Notice, Senate Budget Estimates 28-29 May 2012, Answer to Question 50, ‘De-commissioning of ships’. 278 Correspondence seeking advice on the availability of a decommissioned ship was received by the

Parliamentary Secretary to the Minister for Defence from a Member of Parliament in May 2014.

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Gifting of ships as dive wrecks—conclusion

6.58 The delegate’s decisions to gift the ex‐HMA Ships Canberra and Adelaide  as dive wrecks to Victoria and New South Wales were made after the offer of a  gift was made to the states by the Defence Minister. The delegate’s decision  was therefore constrained by preceding events and ministerial decisions made  without the benefit of departmental advice on the requirements of the gifting  delegation.  It  also  did  not  meet  in  full  the  requirements  of  the  Finance  Minister’s  Delegation  for  gifting  of  Commonwealth  assets;  particularly  the  requirement  that  the  items  have  historic  or  symbolic  significance  to  the  proposed recipients or special significance with compelling reasons to justify  gifting to those recipients. The gifting of ex‐HMA Ships Canberra and Adelaide  has also resulted in significant Australian Government costs to support the  states in preparing and scuttling the ships. The experience serves to reinforce  the long‐standing advice in the Finance Minister’s Delegation to have careful  regard to precedents which may be established through gifting. 

Gifting of Leopard tanks to RSL clubs

6.59 In September 2005, Defence advised the then Minister for Defence that  a disposal strategy for its 103‐vehicle Leopard tank fleet was being finalised.  The strategy: 

proposes  to  donate  a  small  number  of  vehicles  to  museums  for  heritage  preservation and to seek to sell the remainder. Vehicles which cannot be sold  would be converted to scrap. 

6.60 The advice also stated that it was likely that Australia would be unable  to sell its Leopard main battle tanks (the bulk of the fleet) as other countries  were  also  disposing  of  similar  vehicles.  In  the  meantime,  Defence  was  withdrawing its Armoured Vehicle Launch Bridge (AVLB) Leopard vehicles  from service with a view to exploit the then present demand for those vehicles  before the market declined further.  

6.61 In  April  2007,  Defence  advised  its  Minister  that  although  there  was  growing  interest  from  the  public  and  organisations  in  acquiring  a  surplus 

                                                                                                                                             

279 Defence informed the ANAO in January 2015 that it had recently advised the Parliamentary Secretary of the potential work health and safety (WHS) liabilities applicable to the disposal of decommissioned ex-Navy vessels as dive wrecks. In summary, Defence is required to do all that is possible and reasonable to ensure the creation and use of dive wrecks is without risk to the health and safety of both workers and members of the public.

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Leopard  tank,  there  had  been  no  interest  in  the  AVLB  vehicles  from  any  current users. It was thought unlikely that it would find a single buyer for the  fleet and proposed now to sell the Leopards by public tender or as scrap. A  small quantity would be ‘gifted to domestic Defence and related organisations  for historical and instructional purposes.’ 

6.62 By  July  2007,  Defence’s  disposal  plan  proposed  that  Defence  retain  66 Leopard  vehicles  for  museums,  displays  and  target  practice,  leaving  37  available for sale or gifting. 

Request to Finance Minister for gifting approval

6.63 On 21 August 2007, Defence submitted its disposal plan (in synopsis)  for the Leopard tanks to the Minister for Defence for his approval. Defence  advised  the  Minister  that  ‘Defence’s  priorities  for  disposal  are  to  meet  its  internal needs, followed by gifting to veterans’ organisations and finally to sell  any remaining vehicles at public auction.’ It also stated that Defence was able  to  gift  surplus  equipment  to  approved  organisations  subject  to  approval  in  writing from the then Minister for Finance and Administration. 

6.64 On 14 September 2007, the Minister for Defence wrote to the Finance  Minister, in the terms recommended by Defence, requesting approval to gift  Leopard tanks to veterans’ organisations. The Minister for Defence also issued  a press release on that day, entitled ‘Get Yourself a Leopard’ in advance of  receiving  approval  from  the  Finance  Minister.  This  invited  relevant  organisations  to  express  interest  provided  they  could  demonstrate  some  historical or cultural significance of the tank to them.  

6.65 The Defence Minister’s letter to the Finance Minister sought approval  to  gift  a  number  of  Leopard  tanks  to  veterans’  organisations  for  display  purposes. The letter set out the basis on which the gifting was proposed to take  place: 

policy provides that public property may be gifted if the property has cultural,  historical or environmental significance to the proposed recipient, and that the  charitable significance outweighs the financial return which would accrue to  the Commonwealth through the sale of the items.280 

                                                      

280 Letter from the Minister for Defence to the Minister for Finance and Administration, 14 September 2007.

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6.66 This  requires  two  comments:  first,  gifting  of  public  property  has  its  basis in law. Second, the basis for gifting reflected the errors discussed earlier  in this chapter (paragraph 6.13 forward), in internal Defence documentation. 

6.67 The then Department of Finance and Administration provided a brief  and a draft reply to its Minister but that reply was not sent.281 The brief pointed  out that the Finance Minister had delegated the ability to gift public property.  However,  the  sponsoring  organisation  within  Defence  was  unaware  of  this  delegated authority. The brief also stated that: 

The pre‐empting of your approval by the [Defence Minister’s] press release of  14 September 2007 would have provided scope for embarrassment should any  issues  within  your  responsibilities  have  arisen  which  compromised  the  proposal. Needless to say, the release should have been withheld until you  had advised Defence on the request. 

Announcement of the allocation of gifted tanks

6.68 Although  no  reply  had  been  received  granting  approval  for  the  proposed gifting, the Minister for Defence issued a further press release on  13 November 2007, entitled ‘New Homes for Retired Tanks’. This announced  that  ‘a  re‐elected  Coalition  Government  [would]  provide  thirty  de‐ commissioned  Leopard  tanks  to  RSLs  and  veterans’  associations  around  Australia.’ The press release included a list of thirty successful organisations,  selected  (according  to  the  release  itself)  on  the  order  in  which  applications  were received, with state allocations based on relative population size. 

6.69 Following  the  change  of  government  in  November  2007,  an  internationally‐based initiative arose to have a range of countries, including  Australia, gift Leopard tanks to a particular overseas country. Defence advised  the new Minister (in February 2008) that it intended to defer disposal of the  Leopard tanks until a decision was made on this initiative. 

6.70 The Defence submission also obtained the new Minister’s approval to  gift the surplus Leopard tanks to the organisations selected by the previous  Minister. It repeated the advice that the gifting would require approval from  the Finance Minister. 

                                                      

281 The brief was received in the Minister’s office on 11 October 2007. The 2007 federal election was called on 14 October 2007.

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Approval to gift the surplus Leopard tanks

6.71 In  the  event,  the  CDF  approved  the  gifting  of  30  decommissioned  Leopard tanks on 21 April 2008. The sequence of events leading to this decision  is not clear from Defence records. 

6.72 The approval document noted that the tanks had a ‘book value of zero’,  were genuinely surplus to Defence’s requirements and were of historical or  symbolic significance to the recipients. 

6.73 The  approval  broadly  followed  the  required  form  for  gifting  but  warrants two comments: 

 As  pointed  out  above,  approval  for  gifting  should  have  been  given  before the Minister invited expressions of interest, and certainly before  announcing  an  allocation,  albeit  contingent.  Further,  this  approach  suffered  from  the  same  problem  raised  earlier  in  relation  to  gifting  ships for dive wrecks (see paragraph 6.52): once the Minister had made  a  decision,  the  delegate  was  effectively  constrained  in  his  decision‐ making and capacity to have full regard to the expectations set out in  the Finance Minister’s Delegation. 

 The relevant value to take account of is not the book value, but the  market value. This would have been greater than zero, even as scrap. 

Gifting an F-111C aircraft to the Pacific Air Museum

6.74 The possibility of US interest in receiving a gift of an F‐111 was noted in  the  Chief  of  Air  Force’s  statement  of  RAAF  preferences  for  F‐111C  preservation, in February 2010. In April 2011, and again in July that year, the  US  Commander  Pacific  Air  Forces  wrote  to  the  CAF  requesting  a  decommissioned  RAAF  F‐111  for  the  Pacific  Aviation  Museum  (PAM),  Hawaii.282 Defence was inclined to favour the request because the US had a  number  of  its  military  aircraft  on  loan  or  gifted  to  Australian  museums.  Defence, which was seeking to maintain strong bilateral relationships, could  help by providing the F‐111 to the PAM. 

6.75 In November 2012, the then Minister for Defence agreed. The approved  proposal involved offering the aircraft on an ‘as is, where is’ basis, leaving the  US to fund any disassembly, transport and reassembly in Hawaii. However, 

                                                      

282 Earlier informal enquiries on behalf of the PAM had been received in late 2010.

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upon receipt of the offer, the US Air Force advised that it could not take legal  ownership of the aircraft to transfer it to the PAM. The RAAF subsequently  agreed  in‐principle  to  disassemble,  deliver  and  reassemble  the  aircraft  in  Hawaii at Defence expense. It proposed this to the Minister for Defence, in  June 2013, and the Minister approved the gifting.283 

6.76 Defence  has  represented  a  document  entitled  ‘DATO  Disposal  Authority  114/2013’  signed  by  the  F‐111  Disposal  Project  Manager  on  30 August  2013  as  the  gifting  decision  document.  The  document  lacks  any 

consideration of the issues required by the Finance Minister’s Delegation and  provides  no  reasoning  for  making  the  gift. 284  Moreover,  the  substantive  decision  had  clearly  already  been  made  by  the  Defence  Minister,  raising  further doubt as to whether the actions recorded in this document could be  considered a proper exercise of the relevant delegation. 

Conclusion—gifting Defence specialist military equipment 6.77 Gifting of public property was prohibited under the FMA Act except in  certain defined circumstances, including where the Finance Minister had given  written  approval  to  the  gift  being  made.  The  Finance  Minister  had  sole  ministerial  authority  over  gifting,  and  had  delegated  that  power  to  Chief  Executives under the FMA (Finance Minister to Chief Executives) Delegation,  Part  17.285 This  instrument  required  delegates  to  observe  specific  conditions  when considering making such a decision. These long‐standing arrangements  have largely continued under the PGPA Act.  

6.78 The gifting rules have not been reflected accurately nor consistently in  many instructions and guidelines for Defence staff. This may be due, in part, to  the proliferation of such sets of instructions and guidelines. Defence should  give prompt attention to the drafting of Defence instructions and guidelines to  bring  its  documentation  into  alignment  with  the  Australian  Government’s  resource management framework.  

                                                      

283 Defence stated to the Minister that the staff costs for the trip to Hawaii would be $35 000. Delivery would be effected by up to three C-17 Globemaster aircraft movements and could be done through a combination of programmed and ‘opportunity’ tasking. This is taken to imply that Defence would incur minimal additional costs.

284 It may have been possible, for example, to set out an argument that the asset held special significance to the recipient and that there were compelling reasons to justify its gifting to that recipient. 285 The Finance Minister’s delegation was to officials, not ministers.

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6.79 The audit identified instances when Defence did not approve gifting of  SME  in  accordance  with  applicable  Commonwealth  legislative  and  policy  requirements. For example, when DMO recommended to the then Minister for  Defence in 2005 that he write to state premiers and territory chief ministers  offering the ex‐HMAS Canberra as a gift for use as a dive wreck, DMO did not  advise  the Minister  that  he  did  not  have  the  authority  to  make  such  a  gift  under long‐standing legal arrangements286, nor of the requirements set out in  the gifting delegation. Similarly, the ADF’s Leopard tanks were offered by the  Minister for Defence as a gift to RSL branches in 2007, before a request was  made to the Finance Minister seeking formal approval of the gifting. 

6.80 Invariably,  when  items  of  SME  are  to  be  withdrawn  from  service,  Defence  will  offer  early  advice  to  the  Minister  for  Defence  on  proposed  disposal arrangements. In that context, where any options for gifting are to be  contemplated, Defence should advise the Minister that the Minister does not  have  authority  to  approve  a  gift,  and  of  the  specific  requirements  of  the  Finance Minister’s gifting delegation, including the requirement placed on the  Finance Minister’s delegate to adhere to the Commonwealth’s general policy  for  the  disposal  of  Commonwealth  property,  and  to  avoid  establishing  an  undesirable precedent.  

6.81 Further, experience has shown that gifting items of SME can involve  substantial costs for Defence. For example, the disposal of the two RAN ships,  ex‐HMA  Ships  Canberra  and  Adelaide  by  gifting  them  to  Victoria  and  New  South Wales cost Defence at least $13 million.  

Recommendation No.4 6.82 To bring its instructions and guidelines that address gifting of Defence  assets  into  alignment  with  the  requirements  of  the  resource  management  framework, the ANAO recommends that Defence promptly review all such  material.  This  could  be  undertaken  as  part  of  the  review  recommended  in  Recommendation No. 1. 

Defence response: Agreed  

                                                      

286 Authority to gift Commonwealth assets lies with the Finance Minister, who has delegated it to the Defence Secretary. The Secretary has sub-delegated his authority to the Chief of the Defence Force and other members of the Defence Organisation.

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7. Managing Other Risks

This  chapter  considers  Defence’s  treatment  of  specific  risks  in  managing  certain  disposals, including restrictions imposed on arms purchased from the US, conflict of  interest risks, and disposal of non‐ADF equipment. 

Risks in specialist military equipment disposals 7.1 During the course of the audit, a range of specific risks in managing  disposals  became  apparent,  other  than  those  considered  in  detail  in  earlier  chapters. The audit considered a selection of these risks: 

 management of trailing obligations. Most specifically, disposal of Defence  military  equipment  is  affected  by  US  International  Traffic  in  Arms  Regulations  (ITAR),  which  limit  how  Defence  can  dispose  of  this  equipment when it has been obtained from the US287; 

 conflicts  of  interest.  This  is  the  risk  of  placing  private  before  public  interest, which can arise in the management of Defence disposals; and 

 disposal of non‐ADF equipment. In a small number of cases, a need to  dispose  of  SME  has  arisen  where  that  equipment  is  not  ex‐ADF  equipment,  but  nevertheless  is  to  be  disposed  of  by  Defence.  This  introduces  additional  challenges  to  the  disposal  function  including  identifying a source of funding for the disposal. 

Managing trailing obligations

International Traffic in Arms Regulations

7.2 The  US  Government  controls  access  to  its  defence  technology  (including  data)  through  the  US  Arms  Export  Control  Act  (AECA).  It  administers  this  access  through  its  ITAR.288 Defence’s  access  to  US  defence  technology is provided on the condition that Defence uses such material only 

                                                      

287 A similar issue can arise with equipment sourced from other countries. For example, Defence’s Leopard tanks could not be sold, gifted or released to a third party without the written approval of the German Government. This agreement was included in the 1975 Leopard Tank acquisition contract between the Commonwealth of Australia and the West German Government. German Government approval was given in February 2009. 288 ITAR controls cover physical equipment, services and related technical data. ITAR restrictions also

apply when ITAR-controlled items have been incorporated into a product manufactured outside the US.

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for the purpose authorised under the original agreement and does not transfer  it to a third party without prior approval of the US Government.289 Disposal of  military equipment that is, or contains, ITAR‐controlled material requires prior  approval of the US Government, as it involves a change in the authorised end‐ use and/or end‐user.290 

7.3 Obtaining ITAR approval from the US Government for disposal has  taken as long as 18 months or several years, and sometimes approval is not  granted. If these issues are not properly anticipated and managed, there can be  adverse consequences for the outcome of a disposal. For example, delays may  result in Defence incurring additional storage or mooring costs. On the other  hand,  breaches  of  ITAR  may  cause  embarrassment  to  the  Australian  Government  and  to  Defence,  and  may  restrict  future  access  to  foreign  technology and equipment. 

7.4 The ANAO sought Defence advice that it had obtained US Government  approval  for  12  major  equipment  disposals  undertaken  in  recent  years  (see  Table 7.1). 

                                                      

289 A transfer can be temporary or permanent and includes a transfer for the purposes of repair, loan, maintenance, demilitarisation, or disposal by destruction, scrapping, sale or gifting. A third party means any entity or individual who is not an employee of the Commonwealth, APS or ADF.

290 For example, transferring a Defence helicopter from operational service to a static display item in an Australian Government-operated museum is a change in end-use.

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Table 7.1: Selected SME disposals and ITAR requirements

Equipment Year of disposal ITAR approval obtained where

applicable

1

Lighter, amphibious resupply, cargo (LARC) 2005 and 2008 Defence able to provide evidence

of approval for the 2008 case.a

2

Fremantle Class Patrol Boat

2008 ITAR do not apply.b

3 Ex-HMAS Canberra 2009 Yes, in 2008.

4 Caribou aircraft Ongoing from 2011

Canadian origin. ITAR do not apply.b

5 Boeing 707 aircraft 2011 Yes, in 2008.

6 Leopard tanks 2011

ITAR do not apply. German Government approval required and obtained.b

7 Ex-HMAS Adelaide 2011 Yes, in 2009.

8 F-111 fighter jets 2011 to 2014

Approvals (x 8) for various components and aircraft loans and destruction from 2011 to 2014.

9 Army B Vehicles Ongoing from 2012 ITAR do not apply.b

10

Landing Craft Mechanised (LCM2000) watercraft vessels 2012 ITAR do not apply.b

11 Ex-HMAS Manoora 2013 Yes, in 2013.

12 Ex-HMAS Kanimbla 2013 Yes, in 2013.

Source: Compiled by the ANAO from Defence documentation. This table relies on Defence assurances about the completeness of ITAR approval for any individual disposal. In some cases, an item of equipment comprising major sub-components may require ITAR approval for each sub-component. The ANAO has not sought to verify that all ITAR-controlled items associated with these disposals were correctly identified by Defence.

Note a: Defence was unable to locate the approval letter for the 2005 disposal. However, two further LARCs were disposed of to the same recipient in 2008 and the approval letter for that disposal has been identified. Further vessels have been disposed of since 2005 by scrapping. Defence provided approval letters for vessels destroyed in 2013.

Note b: Based on Defence advice to the ANAO.

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7.5 Defence advised the ANAO that ITAR did not apply to five disposals.  Defence  provided  the  ANAO  with  copies  of  the  US  Government  approval  letters for six disposals. It was not able to supply a copy of approval for the  gifting of a LARC to a NSW High School in 2005. However, it did supply a  copy of an approval for the later supply (2008) of two further LARCs to the  same recipient and other documentation surrounding the 2005 disposal. In this  light, Defence’s inability to locate the specific approval for the 2005 disposal is  not considered a significant omission. 

7.6 With effect from March 2014, Defence transferred the responsibility for  managing  ITAR  applications  from  the  Defence  Export  Control  Office  in  Defence to AMSO. While AMSO now coordinates the ITAR approval process,  the responsibility for identifying the relevant items to which ITAR apply rests  with the relevant DMO SPO. In November 2012, AMSO released a standard  procedure to provide guidance on the ITAR approval process.291 

Managing ITAR

7.7 Trailing  obligations  such  as  ITAR  can  be  difficult  for  Defence  to  manage  during  the  disposals  process  as  the  equipment  may  have  been  purchased  many  years—even  decades—earlier.  Defence  does  not  have  a  centralised or systematic record of these obligations and relies on the relevant  area in Defence to retain appropriate records. 

7.8 A step that could help Defence manage ITAR arrangements in future  would be to establish a centralised record of relevant obligations, provided this  can be done cost‐effectively.  

Blanket Demilitarisation and Disposal Agreement

7.9 A large proportion of Australian military equipment is of US origin and  Defence has to seek case‐by‐case approval before a change in ownership or end  use.  As  at  mid‐2009,  DMO  stated  that  the  average  time  taken  for  ITAR  approvals was 145 days (having reportedly declined from an earlier average of  200‐plus  days).292 However,  the  time  taken  in  individual  cases  was  highly 

                                                      

291 Defence Materiel Standard Procedure, ‘DMSP (IND) 05-0-002 Re-transfer & re-export of United States Defence Technology and Equipment to Third Parties’, November 2012. 292 Defence informed the ANAO that it currently expects ITAR re-transfer approval from the US Government to be granted within 90 calendar days.

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variable.  The  age  of  equipment  or  currency  of  technology  has  not  been  grounds for a relaxation of the rules by the US Government. 

7.10 The  lengthy  ITAR  approval  processes  led  to  work  on  a  proposed  Blanket  Demilitarisation  and  Disposal  Agreement  (BDDA)  with  the  US  Government  as  an  element  of  reform  in  the  disposals  function.  Defence  intended the BDDA to satisfy the ITAR on military equipment of US origin in a  more streamlined way and, thereby, expedite disposals and save costs. 

7.11 Primarily,  the  BDDA  would  allow  Defence  to  dispose  of  equipment  under  previously  agreed,  standard  conditions,  rather  than  considering  each  case separately.293 This would save Defence the cost of storing equipment while  awaiting each individual approval. 

7.12 The BDDA proposal was put to the US Government in December 2009,  and it required the approval of the US Congress. 

7.13 Defence subsequently gained assurance letters from industry and state  and territory governments, and made personal representations on the proposal  to  the  US  State  Department  in  Washington  and  to  its  representatives  in  Australia. In particular, it provided advice to the US State Department in 2011  on the avoidable costs it was incurring under the existing arrangement while  awaiting  ITAR  approval.  Among  the  examples  cited  by  Defence  were  its  estimates that: 

 the cost of storing the Iroquois helicopters while awaiting approval of  the BDDA was up to $225 000 a year; and  

 the  cost  of  awaiting  approval  for  the  F‐111  aircraft  was  up  to  $1.07 million a year. 

7.14 Defence’s BDDA proposal did not succeed. Discussions in April 2014  between representatives from the Australian Embassy in Washington D.C. and  officials at the US Office of Regional Security and Arms Transfers resulted in a  recommendation  that  Defence’s  BDDA  application  be  withdrawn.  In  June  2014, Defence wrote to the US State Department, formally seeking to withdraw  its proposal of December 2009 for a BDDA. 

7.15 Following  the  April  2014  discussions,  Defence  was  to  consider  development of a number of separate, smaller applications to address ITAR                                                        

293 The aim of the BDDA was fast-tracking disposal and demilitarisation. No other scenarios (such as sale of ITAR equipment to foreign governments) were included.

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requirements. Defence informed the ANAO that, in conjunction with the US  State  Department,  Defence  was  attempting  to  establish  a  reduced  scope  submission that would cover disposal by destruction. 

Conflict of interest 7.16 A  conflict  of  private  (personal)  interest  is  a  situation  in  which  the  impartiality of an officer in discharging their public duties could be called into  question because of the influence of personal considerations, financial or other.  The conflict in question is between official duties and obligations, on the one  hand, and private interests on the other. Conflicts of interest may be: 

 Actual:  a  real  conflict  between  an  officer’s  public  duties  and  their  private interests or other professional responsibilities. 

 Potential: a situation in which an officer has a private or professional  interest that, in the future, could conflict with their public duties. 

 Perceived:  exists  where  a  third  party  has  the  view  that  an  officer’s  private interests could improperly influence the performance of their  duties.294 

7.17 The audit observed a number of situations in the disposals it examined  where a conflict of interest could arise. Generally, these involved individuals  working  for  Defence  subsequently  taking  up  positions  with  external  organisations doing business with Defence. 

7.18 Conflicts of interest can be difficult to deal with. For example, it is not  possible to prohibit an employee from resigning and taking up employment  with another organisation where the knowledge they have gained may be of  commercial  value.  Where  an  employee  is  contemplating  such  an  offer  it  is  appropriate  for  them  to  declare  that  interest  and  be  precluded  from  participation in any further decision‐making or activity that could be seen to  advantage their future employment with the other organisation. However, this  strategy relies on the employee declaring their potential conflict of interest.  

7.19 Defence’s post‐separation employment policy requires ADF members  and  Defence  APS  employees  wishing  to  take  up  employment  with  private 

                                                      

294 ANAO Audit Report No.47 2013-14, Managing Conflicts of Interest in FMA Agencies. Conflicts of interest can also arise when an officer is required to fulfil multiple roles that may be in conflict with each other to some degree. That circumstance was not identified during the current audit.

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sector  organisations  to  consider  whether  there  might  be  potential  for  a  perceived or actual conflict of interest. Where a conflict exists or is perceived to  exist,  the  member  or  employee  must  fully  inform  Defence  of  the  situation  before accepting employment. The CDF, Secretary of Defence or CEO DMO  will then consider what measures, if any, should be put in place to manage any  perceived or actual conflict of interest.295  

Ex-ADF personnel and disposal projects

Case 1

7.20 In the case of one disposal project that came to attention during the  audit,  an  ADF  member  who  had  been  the  director  of  a  major  Defence  acquisition  project  joined  a  private  company  as  its  director  of  Australian  operations soon after retiring from full time service duty but while remaining a  Reservist. 

7.21 Some  six  months  after  separating  from  Defence  the  former  ADF  member  approached  Defence,  as  the  private  company’s  local  director  of  operations, offering to buy surplus equipment and related items. The former  ADF member subsequently signed a contract with Defence on behalf of the 

company.  

7.22 As the former director of the Defence project, it is very likely that the  former ADF member would have developed expertise highly relevant to his  new role working for the private company. Such expertise would have been of  value to a company specialising in that field. 

7.23 The ADF member, having left Defence to join the company, remained a  Reservist, which provided a range of access privileges to Defence, including  physical  and  electronic,  while  he  was  working  as  the  company’s  representative.  

7.24 The ADF member’s access appears to have been common knowledge in  relevant  circles  in  Defence. For  several  years  after  leaving  full‐time  employment in Defence, the ADF member had access to and was using his 

                                                      

295 These measures could include allocating alternative duties, the restriction of the flow of information to the Defence member/employee, a review or audit of access that the Defence employee/member has, or has had, to specific information with relevance to their future employment; and restrictions on access by the Defence employee/member to information systems.

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Defence  email  account  to  conduct  private  business  with  Defence,  generally  concerning the company’s acquisition of the surplus equipment.  

7.25 Moreover, the problem was drawn to the attention of the DGDAIM (the  branch  head  responsible  for  major  equipment  disposals)  by  Defence’s  legal  advisers. They recommended that the ADF member’s access to a particular  Defence base be withdrawn.296 Defence has no record of whether it took any  action on this recommendation.  

7.26 Defence can find no record of the ADF member having declared any  perceived or actual conflict of interest relating to employment with the private  company at any stage during employment with Defence or as a Reservist. 

Case 2

7.27 Defence’s review of a separate disposal determined that some of the  content  of  the  successful  tender  submission  had  been  influenced  by  information  obtained  through  former  ADF  members.  The  former  ADF  members were part of the loose consortium of organisations involved in the  successful tender for the purchase of the equipment and were to play key roles  in  the  successful  tenderer’s  future  plans.  Defence’s  internal  review  of  the  disposal identified three ex‐ADF members, all former members of the ADF  unit that had operated the equipment, who were assisting the private company  which became the successful tenderer with the purchase of the equipment.  

7.28 A potential conflict of interest was identified by DMO. A former ADF  member performed the role of chief engineer for the successful tenderer and as  such,  represented  that  company  on  a  number  of  occasions  during  the  sale 

process. 

7.29 The  ADF  member  was,  apparently,  discharged  from  the  Reserves  before Defence’s RFT for the sale of the equipment was released. However, this  was  well  after  the  disposal  planning  work  and  ministerial  approval  of  the  disposal strategy and subsequent RFT preparation. As a Reservist in the ADF  unit responsible for the equipment during this time, the member would have  had substantial knowledge of Defence’s plans, and the state of the equipment  and related items. 

                                                      

296 The legal adviser believed that the ADF member had been using his access to the base, gained by virtue of his reservist status, to perform maintenance work on the equipment on behalf of his private employer.

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7.30 Around this time, Defence Disposals staff were dealing with the ADF  member  as  a  current  Reservist  who  was  going  to  be  employed  by  the  company. There is no evidence that, at the time, any Defence staff identified  this as potentially problematic, on the grounds of a perceived or actual conflict  of interest. 

Requests for favours

7.31 Another way in which conflicts of interests can arise is where a party  external to Defence (possibly a former ADF member) seeks favours or other  consideration from currently serving members personally known to them. An  instance that came to light in the course of the audit was a request from a  successful recipient of surplus Defence equipment to a (then) serving three‐star  officer. The request sought Defence assistance with the transport of equipment  and related items that the recipient had purchased, to bring the materiel closer,  at least, to its destination and save the recipient transport costs. 

7.32 The original request was handed down the ADF chain of command for  further investigation into Defence’s capacity to assist. There was no suggestion  in this communication that such assistance might not be an appropriate use of  Defence—that is, public—resources. There is a risk, in circumstances such as  these, that the more junior personnel might interpret such a communication as  an implied instruction. 

7.33 In  the  event,  the  request  was  denied.  A  condition  of  the  disposal  contract between the external party and Defence was that the equipment was  provided on an ‘as‐is‐where‐is’ basis.297 Defence denied the request because of  this condition. 

7.34 Another instance that came to light during the course of the audit was a  request  from  a  Defence  contractor  involved  with  the  maintenance  of  the  Caribou  aircraft  to  staff  at  the  relevant  RAAF  Base,  to  buy  two  Caribou  propeller blades and barrels. 

7.35 A formal request and bid was made in September 2010 following an  informal request earlier that year. The formal request was made the month  before the Caribou sale RFT was released in October 2010. A staff member 

                                                      

297 The point is that, if assistance with transport had been offered to all tenderers for the equipment, other parties might then have bid who had not in fact done so because of the stated conditions including the need to collect the materiel from its ‘where is’ location.

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from  the  RAAF  Base  forwarded  the  request  to  Defence  Disposals  staff  in  Sydney,  stating  that  the  contractor  had  ‘provided  exceptional  service  to  Defence’  and  supported  the  sale  ‘as  a  gesture  of  goodwill’.  The  sale  was  eventually  authorised  by  the  Defence  Disposals  staff  member  in  November  2010, before the closing date of the Caribou sale RFT in March 2011. 

7.36 As  an  open  RFT  was  underway  during  this  period  to  sell  Caribou  spares, which included propellers, it is not clear why Defence staff did not  direct the contractor to the formal RFT process. Granting requests for items  outside  of  an  open  RFT  process  undermines  public  confidence  in  the  way  Defence undertakes business and is at odds with Defence’s own requirement  to manage disposal activities, including the tender process, openly, fairly and  equitably,  and  in  a  manner  that  will  withstand  government,  public  and  international scrutiny (see paragraph 2.25). 

7.37 The cases observed indicate that, although Defence has a post‐separation  policy, there is a need for increased alertness to the potential for conflicts of  interest to arise, particularly where ADF members join private companies which  are  likely  to  do  business  with  Defence.  Another  matter  for  consideration  by  Defence is the access rights of Reservists working for a company on Defence  business. It would also be desirable that senior Defence officers, in particular,  exercise great care in responding to external requests for assistance. 

7.38 In  addition  to  reinforcing  the  conflict  of  interest  and  post‐separation  policies with ADF members and APS staff, Defence should establish measures to  strengthen adherence to the policies. For example, periodic internal audit reviews  could be used to assess whether departing personnel informed Defence about  potential conflicts of interest before accepting private sector employment offers. 

Recommendation No.5 7.39 The ANAO recommends that Defence: 

(a) reinforce its conflict of interest and post‐separation policies to all ADF  and  APS  staff,  particularly  in  relation  to  future  private  sector  and  Defence Reservist employment; and  

(b) introduce  practical  measures  to  achieve  consistent  application  of  the  policies across the Defence Organisation. 

Defence response 

7.40 Agreed. 

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Disposal of non-ADF SME 7.41 Most SME that Defence must dispose of has been part of an Australian  Defence capability and used by Navy, Army or Air Force. However, instances  may arise of a need to dispose of other military equipment. While unusual and  unpredictable, these impose a workload on Defence, and require planning and  funding, in common with more conventional disposals. 

7.42 Two instances of non‐standard disposals came to light during the audit: 

 The first was the disposal of patrol boats that had been provided some  years ago to Pacific countries but which were approaching the end of  their useful working life. 

 Second was the disposal of two Russian‐made Mi‐24 attack helicopters  which have been at the Air Force’s Tindal base since 1997. 

Pacific Patrol Boats disposal

7.43 Australia’s  Pacific  Patrol  Boat  Program  provided  22  patrol  boats  to  12 Pacific countries. It was announced in August 1983, with the first patrol boat  delivered  to  Papua  New  Guinea  (PNG)  in  1987  under  the  auspices  of  Australia’s Defence Capability Plan.  

7.44 The program has been considered successful in providing Pacific island  nations with a means of patrolling their own exclusive economic zones. It has  provided a means of countering illegal fishing, improving regional security  cooperation and contributing to South Pacific nation‐building in general. 

7.45 The patrol boats were gifted to the Pacific countries, are owned by the  recipient countries and do not form part of any Australian Defence capability.  However, in April 2012, Defence’s International Policy Division drew Defence  Disposals’ attention to the Pacific Patrol Boat Program and a possible need to  help dispose of the original 22 patrol boats. With a few years remaining before  the end of the boats’ service life, there would be merit in planning for any  disposal action. 

7.46 The 2013 Defence White Paper confirmed Australia’s commitment to  replace the current patrol boats as they progressively reach their end of service  life from 2018-26. In June 2014, Ministers announced a new Pacific Patrol Boat  Program, with a capital cost of $594 million and through life sustainment and  personnel costs estimated at $1.38 billion over 30 years. 

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Russian-made military attack helicopters

7.47 Two  Russian‐made  military  attack  helicopters  (Mi‐24,  code‐named  ‘Hind’)  formed  the  most  unusual  item  on  the  forward  work  program  for  Defence military equipment disposals at the commencement of the audit. An  explanation for the presence of these helicopters is set out in the text box below. 

Disposal of the Sandline Mi-24 ‘Hind’ attack helicopters

Two Russian-made Mi-24 ‘Hind’ attack helicopters came to Australia as part of a shipment of

military equipment in 1997. A United Kingdom-based private military company, Sandline

International (Sandline), had assembled the equipment for use under contract to the PNG

Government. However, changed circumstances led to the equipment being brought to

Australia aboard a Russian Antonov transport aircraft, which landed at Tindal RAAF base,

near Katherine, in the Northern Territory in March 1997. There its contents were unloaded

and the transport aircraft and crew left.

The nature of the equipment was not disclosed by government at that time but it was stored at

Tindal and originally regarded by Air Force as ‘a matter for Customs’. It included four

helicopters, two of which were regarded as civilian and later sold, and two Mi-24 attack

helicopters.

About five years later, in February 2002, the attention of Parliament was brought to the

continued presence of the two Mi-24 helicopters. The then Minister for Defence advised a

Senate Estimates hearing that they were ‘in limbo’ but, when pressed on how long they would

remain so, he indicated that he was not contemplating a period of 10 or 20 years.

In 2014, seventeen years after their arrival, the helicopters remained at Tindal.

Primary source: Defence records.

7.48 Questions as to how Defence would dispose of the Mi‐24 helicopters  were  raised  within  Defence  in  January  2010.  A  JLC  ‘tiger  team’  visited  the  Northern Territory with a view to identifying and disposing of materiel that  was obsolete or surplus to operational requirements. That team drew to the  attention of the then Director of Defence Disposals the continued presence of  the  helicopters  at  RAAF  Base  Tindal.  The  Director  of  Defence  Disposals  promptly checked with Defence’s International Policy Division, which advised  that the ex‐Sandline materiel should not be disposed of as its status was ‘still  under investigation’. The implication from the records is that the question of  ownership  was  at  issue.  The  Director  of  Defence  Disposals  indicated  that, 

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when  ownership  was  resolved,  an  approach  to  disposal would  be  required  along with consideration of the storage impact on ADF warehousing. 

7.49 In  April  2010,  an  infrastructure  project  at  RAAF  Base  Tindal  was  expected to lead to the demolition of the hangar housing the helicopters, after  which  they  would  be  stored  in  the  open.  An  Air  Force  officer  expressed  concern that ‘although the helicopters have kept fairly well to date, any length  of time in the open is likely to accelerate any deterioration.’298 The helicopters  were moved into an open storage area later in 2010. 

7.50 Parties outside Defence were also aware of the continued presence of  the helicopters at RAAF Base Tindal and that they had been moved to an open  area. For example, the Minister for Defence Materiel received representations  from the Aviation Historical Society of the Northern Territory in October 2011,  offering an arrangement to store and display the helicopters at its museum on  behalf of Defence. The offer was declined. 

7.51 Nevertheless,  this  offer  helped  stimulate  action  from  the  Director‐ General Logistics—Air Force, who, in October 2011, wrote to superiors seeking  assistance in removing the helicopters. He explained that ‘last year we had to  move the airframes from their then storage area (old aircraft hangar) to a hard  stand area out in the elements so that the hangar could be demolished as part  of the RAAF Base TDL ongoing works program ... the climate in the NT will  quickly  impact  the  condition  of  the  airframes  now  that  they  are  out  in  the  elements.’299 Further, he took the view that: 

Defence needs to take a stand and reach agreement with Sandline that we will  dispose of them. I am of the view that as long as we are storing the airframes  for zero cost Sandline has no pressure to move quickly to dispose of them, the  complicating factor being that it was Australia that confiscated them in the  first place.300  

7.52 Eight months later, an Assistant Secretary from Defence’s International  Policy Division wrote to a Sandline representative notifying the company that  Defence  would  terminate  the  bailment  of  the  helicopters  and  remove  the  helicopters in the most cost‐effective way it could identify. The letter stated  that,  whereas  it  was  originally  envisaged  by  Defence  and  Sandline  that 

                                                      

298 Defence, internal correspondence, 23 April 2010. 299 Defence, internal correspondence, 20 October 2011. 300 ibid.

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Defence would store them for twelve months, ‘Defence had now stored the  helicopters at its expense for fifteen years.’ Further: 

Defence  also  has  concerns  about  the  potential  risk  of  contamination  from  hazardous materials, given the age of the helicopters and their deterioration as  a result of exposure to environmental conditions at RAAF Base Tindal. 

For these reasons, Defence has determined that it is not an efficient, effective  economical  and  ethical  use  of  Commonwealth  resources,  and  poses  unacceptable risk in light of its duties under the Workplace Health and Safety Act  2011 (Cth), for Defence to continue to store the helicopters.301 

7.53 The  Sandline  representative  responded  immediately,  stating  among  other  things,  that  the  course  that  Defence  had  outlined  in  its  letter  was  reasonable. International Policy Division then advised others in Defence that 

Defence could dispose of the helicopters (from 21 October 2012).302 

7.54 In the light of these developments, the Director‐General Logistics—Air  Force then sought DMO help to identify disposal options and costs. Air Force  Logistics  Branch  identified  a  need  for  an  engineering  assessment  and  to  identify hazardous materials (particularly as a Russian design of the era of the  Mi‐24 was expected to contain many hazardous materials). Discussion between  various parties in Air Force and DMO ensued, which found that it was difficult  to identify a source of funding for the disposal, partly because these had never  been Defence assets:  

The key problem for us all is that the items are not a Defence asset as such …  As no one in Defence owns [them] they have no funding attached and a brief  discussion  with  [the Defence CFO]  last  week  assured  me  that  there  was  no  money [to] spare. 

7.55 The intended technical assessment of the helicopters was then planned  for January-February 2013, subject to a funding source being found. Defence  informed the ANAO that the technical assessment has been performed and the  helicopters  were  found  to  be  in  good  order.  Defence  further  informed  the  ANAO that Air Force has received a request which will result in the disposal  of the helicopters during 2015. 

                                                      

301 Defence, letter to a representative of Sandline from Assistant Secretary, Pacific and East Timor, International Policy Division, 23 July 2012. 302 Defence, internal correspondence, 13 August 2012.

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7.56 At the conclusion of this audit Defence had not yet advised the Minister  for  Defence  about  the  Mi-24  helicopters  at  Tindal.  Defence  informed  the  ANAO that it expected to advise the Minister in January 2015.  

Conclusion—other risks 7.57 In addition to the matters considered above, a range of specific risks  add to the complexity of managing SME disposals. The audit considered the  following additional sources of risk:  

 management  of  trailing  obligations,  specifically  adherence  to  US  International  Trade  in  Arms  Regulations  (ITAR),  which  limit  how  Defence can dispose of US‐sourced SME; 

 perceived and actual conflicts of interest, which can arise for Defence  personnel involved in disposals; and 

 disposal of non‐ADF SME, which has arisen in a small number of cases. 

7.58 The US controls access to its defence technology through ITAR, making  this  a  major  consideration  in  many  disposals  because  a  large  proportion  of  ADF SME is of US origin. Obtaining ITAR approval can take time and might  not  be  granted.  This  can  have  cost  or  other  consequences  for  a  disposal.  Defence  has  generally  obtained  ITAR  approval  where  relevant  for  SME 

disposals over recent years. However, Defence has no centralised register of  ITAR  obligations  in  relation  to  existing  SME,  and  could  consider  the  cost‐ benefit of compiling a register to help manage its obligations.  

7.59 A conflict of interest involves a conflict, which can be actual, potential  or perceived, between a public official’s duties and responsibilities in serving  the  public  interest,  and  the  public  official’s  personal  interests.  The  audit  observed  a  number  of  instances  involving  individuals  working  for  Defence  subsequently  taking  up  related  positions  with  external  organisations  doing  business with Defence. In some cases, the individual had remained a Reservist  with continued access to Defence resources. 

7.60 Defence’s post‐separation employment policy requires ADF members  and  Defence  APS  employees  wishing  to  take  up  employment  with  private  sector  organisations  to  fully  inform  Defence of  the  situation.  However,  this  does  not  always  take  place  and  has  limited  Defence’s  capacity  to  manage 

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potential conflicts of interest.303 Defence should reinforce its conflict of interest  and post‐separation policies to its ADF members and APS staff, particularly  the need for transparency concerning any future private sector and Defence  Reservist employment, and introduce practical measures to achieve consistent  application  of  policy  across  the  Defence  Organisation.  Defence  could  also  provide  illustrative  examples  of  certain  situations  or  behaviours  requiring  close management, including: related post‐separation employment, Reservists  undertaking  private  business  with  Defence,  personal  business  interests  and  requests for favours. 

7.61 From time‐to‐time Defence needs to dispose of non‐ADF SME. While  unusual  and  unpredictable,  these  instances  impose  a  workload  on  Defence,  and  require  planning  and  funding,  in  common  with  more  conventional  disposals.  In  the  case  of  the  Russian‐made  military  helicopters  flown  to  Australia  in  1997304,  Defence  has  been  incurring  some  unquantified  cost  in  storing them at Tindal for the better part of two decades. Greater awareness of  such costs and the assignment of responsibility within Defence for disposal of  SME  that  currently  lacks  a  clear  internal  ‘owner’  would  assist  in  effective  disposal of such equipment.  

 

Ian McPhee 

Auditor‐General 

Canberra ACT 

5 February 2015 

 

 

                                                      

303 Measures to manage conflicts of interest could include: allocating alternative duties; the restriction of the flow of information to the Defence member/employee; a review or audit of access that the Defence employee/member has, or has had, to specific information with relevance to their future employment; and restrictions on access by the Defence employee/member to information systems.

304 The helicopters were part of a shipment of equipment diverted to the Northern Territory in 1997. A United Kingdom-based private military company, Sandline International, had assembled the equipment for use under contract to the Papua New Guinea Government.

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Appendices

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Appendix 1: Entity response

 

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Appendix 2: Responses by other parties to extracts from the proposed report

The following comments on an extract from the proposed report were provided by the  Department of Finance: 

 

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The following comments on an extract from the proposed report were provided by Omega Air: 

 

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Appendix 3: Disposals Review Recommendations

These  six  recommendations  were  made  by  the  DMO  Disposals  Review  (October 2013). All have been accepted by Defence. 

Recommendation 1: Legislation and policy review

 That a detailed review of the legislation and policy applicable to Disposals’  activities  be  conducted.  This  should  include  a  review  of  procurement  and  contracting  policy  to  confirm  where  this  policy  is  appropriate  for  disposal  activities and where any departures from existing procurement policies are  warranted in the disposals context. 

 The review should adopt a holistic approach involving consultation with all  necessary stakeholders to consider all key compliance obligations, including  financial  management  and  accountability,  management  of  dangerous/  hazardous substances and international arrangements. 

 That  the  review  produces  a  single  guidance  document/instruction  which  clearly sets out the legislative and policy framework applicable to disposals. 

 That the guidance document/instruction produced is developed and agreed  with relevant stakeholder organisations to resolve current inconsistencies and  lack of clarity in available guidance. 

Recommendation 2: Delegation framework clarification

 That the delegation structure applicable to disposal activities be clarified so  that  it  is  clear  which  stakeholder  organisations  hold  particular  delegations,  and what delegations must be exercised in relation to disposal activities. 

 That  the  risk  analysis  process  referred  to  in  recommendation  4  be  used  to  establish appropriate delegate approval processes at key “risk points” in the  disposal process. 

 That  processes  are  established  to  ensure  delegates  have  visibility  of  the  stakeholders that have been consulted, and the advice of those stakeholders,  when delegate endorsement is sought. 

 That  the  Minister  be  engaged  more  appropriately  in  Disposals’  operations,  including through the use of noting briefs at key points, rather than approvals. 

Recommendation 3: Governance framework

 That,  based  on  the  clarified  delegation  structure  referred  to  in  recommendation 2, a clear governance framework be developed to apply to all  disposal activities. This framework should articulate: 

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 each relevant delegate and when delegate consultation / approval is  required; 

 the role and responsibility of each stakeholder organisation and when  stakeholder consultation / advice is required; and 

 mandatory  requirements  applicable  to  all  disposals  (for  example  if  probity or DMO Legal advice is to be mandatory for all disposals). 

 That  Disposals  consider  introducing  a  “light  touch”  independent  review  process at key points for each of its major, or politically sensitive, disposal  processes. 

Recommendation 4: Risk analysis

 That an overarching risk analysis be undertaken to identify key risk areas for  disposal activities and key risk points throughout the disposal process - this  analysis  should  cover  all  relevant  perspectives  including  commercial,  financial, contracting, legal and project management (among others). 

 That  the  risk  analysis  considers  how  the  risk  profiles  of  disposals  and  procurements differ. 

 That a risk analysis framework be established to guide the development of risk  analysis for individual disposals projects. 

Recommendation 5: Templates, processes and instructions

 That  the  template  documentation  which  has  recently  been  produced  by  Disposals be: 

 reviewed for completeness; 

 reviewed against the outputs of the recommendations above; 

 reviewed  against  the  resources  (both  within  Disposals  and  from  stakeholder  organisations)  that  are  available  to  support  the  implementation of the processes and templates; and 

 subject to stakeholder feedback. 

 That based on the activity referred to above, the template suite developed by  Disposals  be  refined  and  completed  so  that  it  provides  a  useful  suite  of  documentation for Disposals personnel (and relevant stakeholders). 

 That  detailed  guidance  be  produced  for  all  template  documents  to  inform  users of why and how the templates must be used. 

 That Disposals’ existing template tender and contract suite be reviewed for  completeness  and  currency.  This  should  include  a  review  alongside  the 

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outputs of the recommendations above to confirm that there is appropriate  alignment. 

 That detailed instructions and guidance be produced which is applicable to  disposals  (such  as  a  disposals  policy  manual)  to  provide  standardised  guidance to individuals performing disposal activities. These instructions and  guidance materials should include details of key risks and the stakeholders  that  should  be  consulted  at  key  points,  or  on  key  issues,  in  the  disposal  process. 

 That business rules be established to support the use of templates, instructions  and guidance materials and the retention of appropriate records. 

Recommendation 6: Training and resourcing

 That a training needs analysis be conducted in the context of the Disposals  function to confirm required skill sets and training requirements for personnel  involved in Disposals (whether as stakeholders or Disposals personnel). 

 That  Disposals’  personnel  and  relevant  stakeholders  be  offered  training  on  legislative and policy obligations, disposal risks, procurement and contracting,  templates and guidance and on records management, particularly electronic  records creation and storage. 

 That Disposals’ resourcing model be reviewed to ensure that it has sufficient,  skilled,  personnel  with  the  necessary  contracting,  commercial,  logistics,  inventory management, project and contract management and finance skills to  effectively  identify  and  manage  risk,  and  to  manage  disposal  projects  in  accordance with legislative obligations and applicable policies. 

 That DMO/Disposals consider whether additional appropriately skilled and  experienced resources are required to properly support the disposal function. 

 If the extant resourcing profile for Disposals is inadequate to properly support  the  process  and  governance  models  established  in  response  to  this  review,  then  Disposals/DMO  should  consider  alternative  approaches  to  the  performance  of  the  Disposals  function  if  adequate  numbers  of  trained  resources are not made available to support the Disposal function. 

 

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Appendix 4: Revenues and Costs Associated with Disposals

1. Defence  is  aware  of  the  revenues  it  obtains  from  disposal  sales  and  these are reflected, in aggregate, in its financial statements (Table A.1). 

Table A.1: Sales of specialist military equipment

(As at 30 June) 2009

$000 A

2010 $000

2011 $000 B

2012 $000 C

2013 $000 D

2014 $000 E

Proceeds from sale 41 816 0 3 400 598 12 489 49,425

Less: Carrying value F 124 500 0 0 108 18 508 35,026

Less: Selling expense

320 0 0 0 2 280 9,949

Net gain (loss) from sale (83 004) 0 3 400 490 (8 299) 4,450

Source: Defence Annual Reports, Financial Statements.

Notes to Table A.1

A. Comprises part-payment for the B707 aircraft disposal ($2.3 million); net loss on the sale of the Super Seasprite helicopters ($85.3 million).

B. Comprises part-payment for the B707 aircraft disposal.

C. Comprises net gain on the sale of the Caribou aircraft and associated spares.

D. Comprises net gain on sale of approximately 330 B Vehicles ($0.763 million); net gain on the sale of a number of Penguin Missiles ($1.970 million); net loss on the sale of Sea King Helicopters ($11 million); and a net loss on the sale of FA-18 centre barrels ($0.032 million).

E. Comprises net gain on the sale of Collins related items ($0.140 million); net gain on sale of a number of Penguin Missiles ($2.849 million); net gain on the sale of various military support items ($4.578 million); net loss on the sale of FA-18 centre barrels ($2.814 million); net loss on the sale of 3 Bushmaster Protected Mobility Vehicles ($0.064 million); net loss on the sale of approximately 2 000 B Vehicles ($0.188 million); net loss on the sale of ex-RAN tug boats Bandicoot and Wallaroo ($0.040 million); and net loss on the sale of tentage ($0.013 million).

F. Carrying value of specialist military equipment is carried at cost less any accumulated depreciation and accumulated impairment losses. For further information on asset values for Defence specialist military equipment refer to Defence’s financial statements and notes to and forming part of the financial statements in Defence Annual Reports.

 

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Index A 

Amrock, 93-97, 101-2 

Asbestos, 11, 15-16, 21, 23-24, 28, 87- 90, 103, 116, 124, 127-64 

Australian War Memorial, 34, 87, 88,  160 

B Vehicles, 14, 16, 18, 19, 21-22, 23, 54,  67, 72-73, 74, 77, 78, 86, 115-22, 122,  124-25, 152-59, 161, 163, 189, 213 

Boeing 707 (B707) aircraft, 14, 19, 20- 21, 37, 55, 60, 78, 86, 88, 100, 104-15,  122, 123-24, 213 

Caribou aircraft, 14, 15, 19, 60, 78, 86- 104, 122-23, 130, 134, 135, 142-45,  163, 189, 195, 213 

Comcare, 130-34, 151, 155 

Conflict of interest, 16, 26, 27, 169, 172,  187, 192-96, 201, 202 

Department of Finance, 20, 28, 55, 56,  59, 108, 112, 124, 168, 169, 173, 183,  207 

Dive wreck, 11, 14, 18, 25, 40, 63, 64, 65,  66, 70, 71, 76, 77, 166, 173, 174, 175,  180, 181, 184, 186 

F‐111 aircraft, 11, 24, 66, 103, 127, 130,  133, 134, 135, 145-51, 163, 166, 171,  174, 184-85, 189, 191 

Hazardous substances, 11, 13, 23-24,  34, 40, 76, 81, 90, 103, 127-64 

Historical Aircraft Restoration Society  (HARS), 90 

International Traffic in Arms  Regulations (ITAR), 26, 35, 40, 52, 53,  67, 68, 71, 167, 187-92, 201 

Leopard tank, 11, 25, 127, 135-41, 166,  173, 181-84, 186, 187, 189 

Omega Air, 20, 28, 104-15, 123, 208 

Pacific Patrol Boats, 197 

Reserve Bank of Australia (RBA), 94,  95, 102 

Returned and Services League (RSL),  25, 135, 138, 139, 140, 141, 160, 165,  166, 173, 186 

Sandline International, 27, 198, 199,  200, 202 

Ships 

HMAS Adelaide, 11, 18, 26, 35, 61, 63,  64, 66, 77, 174-79, 181, 186, 189 

HMAS Brisbane, 62, 63, 66, 174, 175,  176, 180 

Index

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HMAS Canberra, 11, 18, 25, 26, 61, 63,  64, 66, 77, 99, 141, 174-79, 181, 186,  189, 202 

HMAS Kanimbla, 18, 55, 63, 64, 65,  69, 70, 71, 72, 77, 78, 189 

HMAS Manoora, 18, 55, 63, 64, 65, 67,  69, 70, 71, 72, 77, 78, 189 

HMAS Otama, 62, 172, 173 

HMS Fearless, 64 

ZIAS Cultural Enhancement  Foundation (ZCEF), 90-94, 99-102 

 

 

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Series Titles

ANAO Report No.1 2014-15  Confidentiality in Government Contracts: Senate Order for Departmental and Agency  Contracts (Calendar Year 2013 Compliance)  Across Agencies 

ANAO Report No.2 2014-15  Food Security in Remote Indigenous Communities  Department of the Prime Minister and Cabinet 

ANAO Report No.3 2014-15  Fraud Control Arrangements  Across Entities 

ANAO Report No.4 2014-15  Second Follow‐up Audit into the Australian Electoral Commissionʹs Preparation for  and Conduct of Federal Elections  Australian Electoral Commission 

ANAO Report No.5 2014-15  Annual Compliance Arrangements with Large Corporate Taxpayers  Australian Taxation Office 

ANAO Report No.6 2014-15  Business Continuity Management  Across Entities 

ANAO Report No.7 2014-15  Administration of Contact Centres  Australian Taxation Office 

ANAO Report No.8 2014-15  Implementation of Audit Recommendations  Department of Health 

Series Titles

ANAO Report No.19 2014-15

Management of the Disposal of Specialist Military Equipment

217

ANAO Report No.9 2014-15  The Design and Conduct of the Third and Fourth Funding Rounds of the Regional  Development Australia Fund  Department of Infrastructure and Regional Development 

ANAO Report No.10 2014-15  Administration of the Biodiversity Fund Program  Department of the Environment 

ANAO Report No.11 2014-15  The Award of Grants under the Clean Technology Program  Department of Industry 

ANAO Report No.12 2014-15  Diagnostic Imaging Reforms  Department of Health 

ANAO Report No.13 2014-15  Management of the Cape Class Patrol Boat Program  Australian Customs and Border Protection Service 

ANAO Report No.14 2014-15  2013-14 Major Projects Report  Defence Materiel Organisation 

ANAO Report No.15 2014-15  Administration of the Export Market Development Grants Scheme  Australian Trade Commission 

Audit Report No.16 2014-15  Audits of the Financial Statements of Australian Government Entities for the Period  Ended 30 June 2014  Across Entities 

ANAO Report No.17 2014-15  Recruitment and Retention of Specialist Skills for Navy  Department of Defence 

ANAO Report No.19 2014-15 Management of the Disposal of Specialist Military Equipment

218

ANAO Report No.18 2014-15  The Ethanol Production Grants Program  Department of Industry and Science 

ANAO Report No.19 2014-15  Management of the Disposal of Specialist Military Equipment  Department of Defence 

 

ANAO Report No.19 2014-15

Management of the Disposal of Specialist Military Equipment

219

Better Practice Guides

The following Better Practice Guides are available on the ANAO website: 

Successful Implementation of Policy Initiatives  Oct. 2014 

Public Sector Governance: Strengthening Performance through Good  Governance  June 2014 

Administering Regulation: Achieving the Right Balance  June 2014 

Implementing Better Practice Grants Administration  Dec. 2013 

Human Resource Management Information Systems: Risks and Controls  June 2013 

Preparation of Financial Statements by Public Sector Entities  June 2013 

Public Sector Internal Audit: An Investment in Assurance and Business  Improvement  Sept. 2012 

Public Sector Environmental Management: Reducing the Environmental  Impacts of Public Sector Operations  Apr. 2012 

Developing and Managing Contracts: Getting the Right Outcome,  Achieving Value for Money  Feb. 2012 

Public Sector Audit Committees: Independent Assurance and Advice for  Chief Executives and Boards  Aug. 2011 

Fraud Control in Australian Government Entities  Mar. 2011 

Strategic and Operational Management of Assets by Public Sector  Entities: Delivering Agreed Outcomes through an Efficient and  Optimal Asset Base 

Sept. 2010 

Planning and Approving Projects - an Executive Perspective: Setting the  Foundation for Results  June 2010 

Innovation in the Public Sector: Enabling Better Performance, Driving  New Directions  Dec. 2009 

SAP ECC 6.0: Security and Control  June 2009 

Business Continuity Management: Building Resilience in Public Sector  Entities  June 2009 

Developing and Managing Internal Budgets  June 2008