Updated 17 May 0709
The wellbeing of the $45 billion Hunter-class anti-submarine frigate program has been called into question with a report by the Australian National Audit Office (ANAO) warning of a further delay in delivery and the likelihood of a significant cost increase.
The report, tabled in Parliament on 10 May, was sufficiently critical of Defence’s procurement processes to suggest that “further training and oversight may be required of Defence officials involved in high-level planning and advising on major capital acquisition projects, at all levels”.
Contract expenditure to date had not been effective in delivering on project milestones for Sea 5000 Phase 1, and “lack of design maturity” had resulted in a fresh 18-month delay to the project, with the first of the nine Hunter-class vessels intended to replace the RAN’s Anzac-class frigates now expected to be delivered in mid-2032 rather than early 2031, the report disclosed. As of 31 March 2023, schedule slippage from originally contracted due dates for remaining key design and productionisation milestones ranged between 17 and at least 31 months.
A separate 18-month delay to the start of construction was agreed with ship designer and constructor BAE Systems Maritime Australia in June 2021, with delivery of the final ship anticipated in 2044.
And as of January 2023, Defence’s internal estimate of total acquisition costs for the project as a whole was that it was likely to be significantly higher than the $44.3 billion advised to government at second pass in June 2018”, the report stated.
Current efforts by Defence and industry were “unlikely to result in a cost model within the approved budget”, the Surface Ships Advisory Committee (SSAC) had advised.
“As of March 2023, while Defence had advised portfolio ministers that the program is under extreme cost pressure, it had not advised government of its revised acquisition cost estimate, on the basis that it is still refining and validating the estimate,” the report stated.
The following month, Defence advised the ANAO that it would be inappropriate to provide Government with an updated estimate “when a large amount of uncertainty remains in elements of the estimate, including the BAE Systems Maritime Australia Head Contract for which a final price will not be received until mid-2023”.
Reviewing procurement history, the audit disclosed that the RAND Corporation had identified the following eight designs for government consideration: Patrol Frigate 4923, Huntington Ingalls Industries (United States); Type 26, BAE (United Kingdom); D650 FREMM, DCNS (France); F590 FREMM, Fincantieri (Italy); Iver Huitfeldt, Odense Maritime Technology (Denmark); JDS Akizuki (Japan); HMAS Hobart, Navantia (Spain); and Type 45 Daring, BAE (United Kingdom).
According to the report, Defence’s Capability and Investment Committee had decided in February 2016 that Italy’s FREMM multipurpose frigate and Spanish shipbuilder Navantia’s modified F-100 were considered the most viable designs and that either the UK’s BAE Systems Type 26 or the French variant of the FREMM design should be progressed as a third option for the competitive evaluation activity.
Records of the rationale for the selection by the Defence Secretary (the decision-maker) of the BAE Type 26 design as the third option to be recommended to government had not been retained by Defence, the ANAO said. The BAES proposal, dubbed the Global Combat Ship-Australia, was announced as the program’s winner in June 2018.
Defence had advised the government that it had assessed the three tenders against 23 high-level capability requirements and project objectives and the key differentiator between the tenders related to anti-submarine warfare, the audit said.
However, the ANAO concluded that Defence did not conduct an effective limited tender process for the ship design because it failed to advise Government that Defence officials had not undertaken a value for money assessment of the three competing designs.
Also, sustainment cost estimates had not been prepared for government consideration, and a 10 per cent cost reduction applied by Defence to tendered building costs valued at $2.1 billion had not been negotiated with tenderers.
Noting that Defence did not document the basis for this advice, the ANAO reported that the Department’s Contestability Division had considered the 10 per cent reduction and presciently noted significant discussion that supported the opposite — “initial cost estimates tend to be overly optimistic resulting in future cost increase.
“The reduction in the total acquisition estimate by this amount is a cost risk to the project and increases the likelihood that during future submissions to government the build cost will increase from this base cost”.
The report also disclosed that the SSAC had been asked to review cost, schedule and risk across the Sea 5000 Phase 1 program and provide input to the Defence Strategic Review, which presented its final report to government on 14 February.
Defence had advised in the same month that the SSAC review had not resulted in any changes in project scope, the ANAO stated - although this obviously precluded any conclusions emergingfrom the separate review due by September into the size, structure scope and composition of the RAN’s surface combat fleet.
An ANAO recommendation that Defence ensure compliance with the Defence Records Management Policy and statutory recordkeeping requirements over the life of the Hunter- class frigates project, including capturing the rationale for key decisions, maintaining records, and ensuring that records remain accessible over time, appears to have engendered some dissension with the audit body.
While agreeing with the recommendation, Defence pointed out that of the more than 730,000 Hunter-class frigate project documents within its Records Management System, of the thousands of documents identified and requested by the ANAO, less than 10 were unable to be located.
“Defence ensures all procurement advice to Government on major acquisition projects includes the basis and rationale for proposed decisions, including value for money and whole-of-life cost estimates, and contends that this did occur in relation to the Hunter class frigate project”, the Department stated.
Subsequent ANAO comment noted, with further examples, that “shortcomings in Defence record-keeping are discussed throughout the report”.
Editor's Note: In response to the significant findings in the above ANAO report, the Joint Committee of Public Accounts and Audit (JCPAA) has expanded the scope of its existing inquiry into the Defence Major Projects Report (MPR) to include a detailed examination of Defence's procurement of Hunter Class Frigates, one of the projects included in the MPR.
The Chair of the JCPAA, Julian Hill, said: “This is a deeply concerning report by the Auditor-General into a critically important Defence project. Given the seriousness of the concerns the Committee initiated this inquiry less than 24 hours after the tabling of the report, and has scheduled initial public hearings for Friday 19 May.”
The Committee has also invited written submissions by Friday 15 June 2023 and has requested submissions from the contractor, BAE Systems, as well as the British High Commission.