Land Warfare: DMMA: The pointy end of the kill chain | ADM October 2012

The decision to compete for propellants and ammunition with the expiration of the Strategic Agreement for Munitions Supply (SAMS) contract in 2015 has seen six contenders put their hands up. ADM editor Katherine Ziesing looks at the Domestic Munitions Manufacturing Arrangements (DMMA) and the offerings on the table.

The SAMS contract, which began in 1999, morphed from the earlier 20-year Long Term Agreement (LTA) implemented in 1993 as an essential precursor to the private cash funding for building a then-new munitions facility on a greenfield site at Benalla in Victoria.

SAMS was needed to put the LTA on a more commercial footing in preparations for the government’s sale of Australian Defence Industries (ADI) as a viable business concern, but is past its due-by date.

Back in the day when the government was selling off defence assets, it packaged up all of ADI’s assorted manufacturing and service businesses that had been directly owned by the Department of Defence. Until its privatisation, ADI was a corporatised entity with its own CEO and Board, but 100 per cent of its shares were owned by the Commonwealth.

Assets included a lease over the Captain Cook Graving Dock at Garden Island, the contract to build six Huon class minehunters, the ammunition factory at Benalla and the contract to operate the propellant and explosives plant at Mulwala.

So when Thales bought ADI, it got a whole deal of firm contracts across a few domains.

The LTA began in 1993 as an interim arrangement. In 1997 the Minister for Defence announced the Government’s intention to sell ADI. SAMS was a follow on arrangement which commenced in 1998, and was necessary to adjust the contract for the transition from government owned to a fully commercial arrangement.

The jewel in ADI’s crown was for munitions, under which ADI had a contract (the LTA and then SAMS) to provide Defence with certain ammunition natures for a 20-year period from the date that the munitions factory at Benalla commenced operations in 1995. It was that agreement that put about 70 per cent of the overall value on the ADI sale price realised by the government.

One important clause to LTA was that in effect Defence could give its wholly owned entity one-month’s notice to terminate the agreement, would meet all the costs of winding up the relevant operations of ADI, but would not be liable for any other costs.

Utilising financing from a group of institutional investors, as well as some of its own resources, ADI constructed the $150 million Benalla facility under a “Build Own Operate Transfer” agreement with the Commonwealth. Under the SAMS agreement, Thales Australia oversees the establishment, maintenance, operations and expansion of the Benalla facility.

The company-owned company-operated (COCO) assets funded under the facility establishment at Benalla could be bought back by the Commonwealth for a notional $1 at the end of the contract, not including any private investment made by Thales outside of SAMS.

Under SAMS, all munitions are supplied to the ADF at Thales Australia’s production cost (materials and direct labour). The SAMS Agreement covers the provision of 43 of the approximately 830 explosive ordnance items in Defence’s inventory. The SAMS Agreement prescribes the industry capability and capacity required to manufacture specified annual quantities of certain high usage munitions used by the ADF, although actual orders placed by Defence often fall well short of this.

Capability payments are made separately from product purchases for the purposes of sustaining the strategic industry capability. Changes to the Benalla facility’s capability must be agreed between Thales Australia and the Commonwealth where Thales’s investment in the new capability is to be recovered through the annual capability payment.

According to the ANAO the capability payment for 2008-09 was around $63.2 million. A substantial amount of this payment is associated with repaying the financial institutions that funded Benalla’s construction. A key objective of DMMA will see the burden for capability payments expire with the current contracts. At the expiry of SAMS the Commonwealth has, in effect, discharged the mortgage on Benalla with the result that payments would reduce by around 40 per cent even without any further savings that might be achieved through DMMA.

Defence spends an average of $20 million on SAMS items each year. In 2008–09, paid capability payments to the contractor, Thales Australia, of $63.2 million and $29.7 million under the SAMS and Mulwala Agreements respectively, according to the ANAO Audit Report No.24 2009–10 Procurement of Explosive Ordnance for the ADF.

According to that same report, the SAMS Renegotiation Project was established in January 2006 to review and renegotiate the SAMS Agreement. The objective of the renegotiation project was to ‘deliver a negotiated SAMS contract that better aligns risk and returns in keeping with contemporary expectations’. The SAMS Renegotiation Project failed to achieve this aim. ADM understands that the Commonwealth was seeking to have financial institutions forego revenues from funding Benalla’s construction.

Defence has acknowledged that ‘both Benalla and Mulwala are under utilised, with capability often based on increasingly irrelevant items, and an inability to meet preparedness requirements’.

Mulwala

The propellants site at Mulwala is another story altogether. Under the Mulwala Agreement, Thales currently operates an aging propellant manufacturing plant that is difficult to maintain and poses challenges with respect to compliance with current environmental and work, health and safety requirements. However, under Project JP2086 Bovis Lend Lease is contracted to deliver a modernised plant that meets stringent, contemporary environmental and work, health and safety standards. The works include construction of new nitrocellulose, solvent and propellant production plants, a confined burn facility and a Performance and Safety Testing Centre (PSTC).

Practical Completion of construction was originally contracted for March 2010 but achieved in February 2011, some 12 months behind schedule. Due to current delays against schedule by the contractor, and subcontractor ATK, Final Acceptance is now scheduled to take place in late 2013. Commissioning of the new facility will commence shortly after Practical Completion with a 15-month propellant qualification period.

“The most significant project risk is that there may be an extended transition phase from the existing plant which would adversely impact on cost and schedule,” according to the DMO. “This is being mitigated by close collaboration with, and provision of technical support and advice by, the existing operator through a support services contract.

“There is a further risk to the project schedule that the contractor may not meet the plant commissioning and propellant qualification program of 15 months due to the complexity of the manufacturing process and uncertainty of test results. Close monitoring of the contractor’s commissioning and qualification schedules is mitigating this risk. If this risk is realised, final acceptance of the Modernised Mulwala Facility will be further delayed.”

Under the current Mulwala Agreement with Thales Australia, Defence pays a capability payment to the supplier of $29.7 million per year (indexed annually) to retain an agreed level of production capability.

In March 2007, on the basis of a submission from Defence, the Parliamentary Standing Committee on Public Works recommended that a redevelopment of the propellant manufacturing facility at Mulwala proceed. The approved expenditure for the project is $368 million with an additional $63 million required for environmental remediation works with groundwater contamination a major issue for the site and wider community.

In July 2009, the ANAO sought confirmation that the investment in the Mulwala facility had been reviewed to confirm that it remains consistent with contemporary requirements and developments in domestic manufacturing arrangements. The DMO was unable to demonstrate any such review, relying on a 2001 decision by the Defence Capability Investment Committee.

In January 2010, the DMO informed the ANAO that the inaugural meeting for the Project Management Stakeholder Group (PMSG) for the Mulwala Redevelopment Project was held in September 2009. This was more than two years after the contract was signed in June 2007 for the design and construction of the modernised facility.

According to a July 2007 financial analysis by external consultants, the total estimated cost to the Commonwealth of allowing the Mulwala Agreement to expire on 30 June 2015 is $215.2 million assuming no material contract amendments are made and no additions or deletions are made to capability, according to the 2010 ANAO report.

As to the reality of where the delays have come from, there are mixed opinions on where the blame truly lays. But at the end of the day, the site will be delivered roughly three years late and for $368 million for the upgrade program. International sources are unsure what value such a sum will bring to the site and its capabilities given similar international programs have not cost anywhere near that figure.

DMMA contenders

Fast forward to today, and the DMMA program office admits that if the SAMS contract was put before them now, it would not be considered an ideal way to do business.

The current DMMA timeline saw the first stages of the pre-RFT information released as this edition of ADM came together. The formal RFP is expected to be released in early 2013, by which time the six downselected contenders will have had a chance to conduct a site visit to Benalla and Mulwala.

At this stage, the program office is aiming to have a preferred tenderer by late 2013, and contract signature by mid-2014, giving the winner a chance to transition by the time SAMS expires in mid-2015. Current thinking is that DMMA will be two separate contracts, one for the assets and facilities (almost a landlord arrangement) and the other for the range and price of munitions held by a single entity.

In August 2011, the DMMA ITR closed. After evaluation of the responses, the following shortlist of respondents and teaming arrangements were successful:
1. Alliant Techsystems Inc (ATK) of the USA, teaming with NIOA Nominees Pty Ltd, an Australian based SME
2. BAE Systems Australia Limited
3. Expal Systems SA of Spain
4. Raytheon Australia Pty Ltd, teaming with Chemring Australia Pty Ltd, and Poonsang Corp of South Korea
5. Rheinmetall Waffe Munitions GMBH of Germany, teaming with Nitrochemie of Germany, and RUAG Ammotec of Switzerland
6. Thales Australia Pty Ltd, teaming with General Dynamics-OTS of the USA, and NAMMO of Norway

ATK and NIOA

ATK’s munitions-related businesses operate from seven factories in the USA and have the world’s largest ammunition distribution network through 440 dealers, distributors and representative in 99 countries.

The company operates an integrated munitions manufacturing network of seven facilities including:
• the US Government owned Lake City Army Ammunition Plant (LCAAP) which produces small calibre ammunition up to .50 cal. (as background, Lake City is currently up for competition. BAE Systems US has joined forces with Winchester to go head-to-head with ATK, following BAE Systems US’ success at Holston and Radford),
• the US Government owned Allegany Ballistics Laboratory (ABL) which produces a range of large calibre munitions components, warheads , and provides proofing and testing services
• the New River Energetics plant as a commercial sub-lease on the Radford Army Ammunition Plant (RFAAP) site which produces commercial propellant powders (about half the capacity of the Mulwala Plant),
• ATK is also joint owner of American Ordnance, a company which operates US Government owned facilities at Milan Army Ammunition Plant (MLAAP) and Iowa Army Ammunition Plant (IIAAP) to produce high explosive artillery, 40mm grenades, smart munitions, and mortar rounds.
• ATK owns small arms ammunition plants in the US cities of Anoka and Lewiston

Combined, these plants produce 6.3 billion rounds of ammunition per annum of which 1.6 billion rounds are supplied to the military market and the remaining 4.7 billion rounds are supplied to law enforcement and sporting markets. The company also has its own research and development facilities and capabilities.

In Australia, ATK has been contracted by Lend Lease to build and commission the new propellant plant at Mulwala. As mentioned earlier, the plant will be handed over to the successful DMMA bidder.

NIOA is building a DISP-accredited high security facility on a 13-acre site at the Brisbane Airport to support its activities in the supply of ammunition, propellants and weapons.

As well as supplying military munitions to the Australian Department of Defence, NIOA is the largest supplier of ammunition in the Australian commercial market and supplies around 80 per cent of all ammunition consumed by State and Territory Police forces. The company has been the largest domestic customer of the Mulwala propellant plant for the past 25 years, according to a statement from the company.

BAE Systems Australia

BAE Systems is aiming to leverage off the wealth of experience they have in both the US and UK markets for munitions, explosives and propellants. Their international operations allow them to offer an integrated solution that covers the Australian requirement.

In the US, the company operates a number of ammunition sites for the US government under a GOCO arrangements. BAE Systems operates the Holston facility in Tennessee, the only military explosives plant in the country. Holston is a sprawling site, nestled in a picturesque valley in the middle of nowhere at the base of the Smokey Mountains. Small brick buildings connected by a maze of pipes dot the landscape.

In another section, both concrete and wood barriers house small bunker-like buildings for the loading of energetic materials such as HMX, RDX and other explosives. The company is also investing heavily in insensitive explosives and munitions that are safer to handle and transport.

The partly modernised WWII site is operating at only a small percentage of its full capability, perhaps only 20 to 25 per cent, according to Michael Ervin, Director R&D, BAE Systems Ordnance Systems Inc. Prior to upgrade, production the site was producing 1 million pounds of explosives, but only one or two types of energetics. The site now has the ability to produce about 300 different types of energetics with an annual run of 20-30 different energetics. Ervin also outlines how many parts of the facility are ‘laid away’ for a surge capability if needed.

The Holston site is highly automated with a single new upgraded building able to accommodate the entire Mulwala explosives capability inside it. The work being done on the site, particularly on insensitive munitions, has won the company international awards for innovation and design.

The company has a 25-year asset management agreement with the government and a rolling five-year agreement for supply.Given the size of the land, BAE Systems sublets part of the site to a rail company as it had an extensive rail system built during its inception. This is also a great help in the transportation side of the business.

The US branch of the company also has experience in transitioning a GOCO site thanks to their recent award of the Radford Army Ammunition plant that was previously operated by ATK.

The UK branch of the business is different again. Under the 15-year, GBP 2+ billion Munitions Acquisition Supply Solution (MASS) program, inaugurated in August 2008 the UK aims to keep a sovereign munitions supply capability. Initially for a 15-year period MASS will supply about 80 per cent of the “general munitions” consumed by UK Armed Forces for training and front line operations. The set of munitions is very wide, encompassing small arms and medium-caliber ammunition, mortar bombs, tank ammunition, artillery shells, and naval gun shells.

MASS consists of 3 elements: (1) a “capability charge” to cover all fixed costs, insulating them from demand swings; (2) payment for products, priced at direct material and labour costs to compensate for commodity swings like the rapidly rising global price of steel; (3) and a further element to allow for flexibility, such as additional engineering tasks and “surge manufacture” to support operational deployments. It also guarantees the MOD a certain ceiling on ammunition prices for 10 years. Funnily enough, the UK modelled the MASS contract on the SAMS framework as competition in the nation was deemed too difficult.

The main BAE Systems munition sites are Radway Green, which manufactures the small arms rounds, Washington replaces Birtley as the producer of larger shells such as the 105 and 155 rounds and Glascoed in Wales is where the loading, assembling and packing of the rounds takes place.

All three sites have had or are currently undergoing significant refurbishment and replacement given the WWII nature of many of the sites. The sites now host a range of robotics, much like the car industry, have been redesigned along Lean principles and have increased efficiency enormously.

A big part of the MASS framework was guaranteed investment in the facilities on the part of BAE.

“We had to invest the dollars in order to make the dollars,” Simon Miller, BAE Systems MASS Transformation Manager at the Washington factory said. “In terms of what we wish we had known before we embarked on the transformation program that MASS offered; don’t skimp on project management or you’ll deliver a poor project.”

That being said, the capability that the upgraded sites is impressive. New buildings with state-of-the-art equipment have been built, older equipment has been refurbished and transferred to new facilities where possible, staff have been retrained with the new technology and the safety of the sites is remarkable as the company now counts near misses rather than lost time accidents.

Expal Systems of Spain

Perhaps the darkest horse in the race is Spanish company Expal, a MAXAM group company.

“For EXPAL, setting up in Australia would be a step beyond in our internationalization strategy to become a global company,” Manuel García-Sañudo, General Manager of EXPAL told ADM. “We already have facilities in Spain, Denmark, Italy and Bulgaria, and we sell products and services worldwide, so, it would help us to attend better the Australian market as well as the Asia-Pacific region. DMMA is therefore a magnificent and unique opportunity to enlarge our current industrial capacities taking advantage of our important international presence in the defence and explosive markets.

Through the civil explosives business unit of MAXAM, the company has experience of more than 20 years operating in the Spain. Interestingly, Alfred Nobel founded the company 140 years ago in 1872.

“Our aim is to establish an Australia presence and with our industrial and commercial efforts, contribute to the progress and development of the communities where we have a presence,” García-Sañudo said.

Raytheon Australia, Chemring Australia and Poonsang Corp

Raytheon is priming a bid with partner Chemring Australia and South Korea’s Poonsang Corp. Both Chemring and Poonsang have a wide and varied background in the domain and Raytheon will no bring the project management side of the equation. Raytheon known for the manufacture of precision guided munitions and is the primary supplier to the ADF of the majority of classes of in-service guided munitions.

Chemring Australia manufactures and supplies expendable countermeasures and military pyrotechnics under the countermeasures contract. Chemring Australia is part of the global Chemring Group PLC, which is well known for expendable countermeasures, and is a niche manufacturer of munition components and energetic materials.

In March 2011, Minister for Defence Materiel Jason Clare MP officially opened Chemring Australia’s new $30 million state-of-the-art air launched countermeasures manufacturing plant in Lara, Victoria. The facility was built after the Commonwealth awarded Chemring a 10-year contract, worth $160 million in November 2008 to supply countermeasures and pyrotechnics to the ADF.

The Lara facility is the only countermeasures manufacturing plant in the southern hemisphere and is capable of producing flares of all configurations to satisfy the ADF’s countermeasure needs.

It also includes a Research and Development capability to support the ADF in developing solutions to meet evolving threats. The countermeasures contract was also seen as a ‘dry run’ for the DMMA contract.

Under this proposal, Chemring would be responsible for the Mulwala site while Raytheon Australia will operate the Benalla site.

“Poongsan Corporation, based in the Republic of Korea, is renowned for its design, development and manufacture of small, medium and large calibre ammunition and propellant,” Michael Ward, Raytheon Australia’s managing director told ADM. “The company is the designated general ammunition manufacturer to the South Korean Government and recognised as a leader in the provision of conventional ammunition to the global market, with an overseas customer base that spans 60 countries including the US and Australia.

“Poongsan not only brings considerable domain expertise; they also bring the ability to be a large part of our supply chain to drive down costs and have an enormous penetration to export markets.”

There is also the matter of the 700 regional jobs at the Mulwala and Benalla sites that the program office would also like to see kept in place where possible, given the economic impact the sites have in these regional communities.

“Our investigations to date have revealed to us that efficiency gains are largely to be found in areas other than in labour, particularly in relation to the manufacturing process and supply chain,” Ward said. “There is little incentive to focus primarily on labour costs.”

Rheinmetall Waffe Munitions GMBH, Nitrochemie and RUAG Ammotec

Rheinmetall in Australia is best known for its vehicles but the European consortium is hoping to build on the successes of their operations in South Africa with Denel where they operate a similar GOCO arrangement for propellants and munitions. Rod West, Director Explosive Ordnance Programs at Rheinmetall outlined how the company would be looking to benchmark their DMMA efforts against this operation.

They are also looking forward to modernising the Benalla ad Mulwala sites to take advantage of the export opportunities that DMMA offers. West believes that this will help drive down costs for the Commonwealth even more.

“We think we can substantially make a contribution to Australia’s requirements for munitions and propellants and we keep meaning to introduce new technologies for which we have the licences and the technology in-house,” West told ADM.

“We are not well-known in Australia,” West admitted. “We’re getting a name through the Land 121 truck program but we are not well known for our other strengths. We are excited at the prospect of increasing the footprint down here and increasing our profile and doing more for the ADF, certainly not less.”

Thales Australia, the incumbent, has formed a new venture to bid for DMMA under Australian Munitions. Australian Munitions is part of Thales’s global network of explosive ordnance expertise, which includes Thales Advanced Weapon Systems, Thales Missile Electronics, Junghans Microtec, TDA Armements and Forges de Zeebrugge (FZ). Australian Munitions encompasses the manufacturing sites at Benalla in Victoria and Mulwala in New South Wales, and is headed by Thales Australia Armaments Vice President Kevin Wall.

Incumbency, as always, has its pros and cons. The current agreement with SAMS is no longer ideal as the company readily admits – the program to update SAMS failed and there’s always the potential danger of complacency after holding the contract for such a long time. But the company knows the sites, its customer, its workforce and the new playing field.

This is evidenced by the company’s track record in its Explosive Ordnance storage and distribution contract with Defence, and the fact it is working actively with the DMO to target and deliver significant SRP savings through to 2015, according to a statement from the company.

“As the incumbent, we have unparalleled experience in understanding the unique explosive ordnance requirements of the Australian Defence Force – and working closely with them to service those requirements – as well as the regulatory and compliance requirements in operating these Major Hazard Facilities (MHF) safely at Benalla and Mulwala,” Wall explained to ADM.

“These requirements and facilities are unlike any others in the world, and the knowhow we have built up over many years enables us to offer the DMO the lowrisk benefits of practical experience combined with the advantages of a very broad and cost-effective product range delivered with our strategic partners.

“Australian Munitions has already begun building for the future of explosive ordnance manufacturing in this country. We are investing many millions of dollars in new product lines, expanding our exports to lower overheads for the DMO, streamlining our operations, and continuing to enhance the product range on offer to the ADF.”

In terms of what the partners bring to the arrangement, each has their own areas of expertise. Nammo operates 16 sites in Europe and the US, and provides the team with innovative product solutions including its much celebrated multi-purpose ammunition and its range of market leading green ammunition solutions. Australian Munitions and Nammo are also collaborating on new munitions design relevant to the ADF such as the Nammo 25mm APEX for the Joint Strike Fighter program. Nammo also provides significant expertise in the demilitarisation of explosive ordnance.

General Dynamics Ordnance and Tactical Systems operates more than 10 principal munitions sites in the US and Canada, and is a world leader in the manufacture of small, medium and large calibre direct and indirect-fire munitions, aircraft bomb bodies, propellants and less than lethal products, Wall said.

The company combines proven ammunition development and production capabilities with advanced research and development strengths in key technological areas, as well as key skills and expertise in the demilitarisation of explosive ordnance. Its extensive product range and manufacturing expertise enable the team to supply leading munitions solutions directly from the US munitions industrial base, maximising ADF/USDF interoperability. They also provide critical industrial support to establish specific US munitions technology into Australia and serve as the long-term component supply position for the established technology.

Winchester is one of the world’s most recognised names in small arms ammunition. Winchester brings their extensive capabilities in small arms ammunition and is the designated US Second Source supplier for small arms ammunition to the US military.

“We also work closely in our domestic commercial market, where Winchester Australia is our distributor,” Wall said

End of the day

DMMA is an ambitious program that will completely change the way ammunitions are supplied and paid for by the Commonwealth. Industry has provided a strong field of contenders. It is now up to the program office to decide who best fulfils the requirements in terms of capability, cost and export opportunities. ADM will aim to keep you informed as the competition progresses.