This Chapter sets out the Committee’s findings in relation to the Inquiry into Naval Shipbuilding – Mobilisation, based on Auditor-General Report No. 39 (2017-18), Naval Construction Programs – Mobilisation. It comprises the following sections:
Committee conclusions and recommendations
Committee conclusions and recommendations
The Australian National Audit Office (ANAO) undertook a performance audit on the Australian Government’s 2016 Defence White Paper commitment of $89 billion for new Royal Australian Navy ships and submarines, and to develop a permanent naval shipbuilding industry in Australia.
The Government’s Naval Shipbuilding Plan, released on 16 May 2017, outlines how Defence will deliver the naval capabilities outlined in the 2016 Defence White Paper. The objective of the audit was to assess the effectiveness to date of Defence’s planning for the mobilisation of its continuous shipbuilding programs in Australia. The audit did not seek to provide assurance on the detailed management and progress of individual programs and platforms.
The audit concluded that Defence continues to work towards effective planning and mobilisation to deliver the Australian Government’s Naval Shipbuilding Plan. The Auditor-General made one recommendation:
That Defence, in line with a 2015 undertaking to the Government, determine the affordability of its 2017 Naval Shipbuilding Plan and related programs and advise the Government of the additional funding required to deliver these programs, or the Australian Defence Force capability trade-offs that may need to be considered.
The Committee’s inquiry focused on the following key issues:
Planning and forecasting expenditure
Planning and forecasting expenditure
The ANAO concluded that the Department of Defence (Defence) is currently meeting scheduled milestones for the naval construction programs’. As such, the Committee acknowledges that Defence is delivering the mobilisation phase of the naval construction program, whilst noting it is in the very early stages.
As referred to above, the ANAO’s one recommendation resulting from the performance audit on Naval Shipbuilding Programs – Mobilisation surrounds accuracy in forecasting expenditure.
Defence stated that it takes an enterprise approach to its Naval Construction Programs, adjusting costs assumptions twice a year. Shipbuilding provisions identified in the Integrated Investment Program are consolidated to enable the government to consider affordability of each project under the program. Offsets are recommended to government if there is a shortfall in funding requirements. Defence elaborated in the public hearing that they are satisfied with current processes that address this recommendation, which is to re-forecast cost assumptions twice a year.
On the issue of estimated sustainment requirements, Rear Admiral Dalton stated:
We have a very good understanding of what the sustainment requirements are … of what the usage and upkeep cycle of the vessel will be and … of how Navy intends to operate it. What we don't have is tender quality data to support a final government approval to spend those moneys.
Rear Admiral Dalton further elaborated that ‘tender quality sustainment costing’, for a thirty-year sustainment contract, could only be ascertained through a tender process. Further, Defence calculations for sustainment costs for the offshore patrol vessel program have taken into consideration the Royal Brunei Navy operating model, anticipated Australian operation of the vessels, modifications and impacts of factors such as water temperature that influence operating costs.
However, the Committee notes that Defence’s guidelines, contained in its capability lifecycle manual, require ‘tender quality cost evidence’ at the second gate process. If this is unrealistic, the manual should be updated to reflect a different standard for sustainment costs at the second gate process.
The Committee notes observations from the ANAO that a change from Defence’s 2016 White Paper’s policy to ‘maximise[ing] Australian industry involvement in the submarine program’ to ‘building in Australia’, is a significant decision, warranting a revision of costing estimates to consider the implications of Australia’s higher manufacturing cost environment, which could be highly significant.
Spending within budget is critical to the successful delivery of the naval construction programs, as with all government initiatives. The Committee notes that, historically, Defence has overspent on construction and associated sustainment programs. The Committee will continue to monitor expenditure forecasts and costs through future reviews of Defence audits, including the annual Defence/ANAO Major Projects Reports.
The Committee notes its authority to seek information from agencies, even when that information may be considered commercial-in-confidence.
The Committee recommends that in relation to the naval construction programs, the Department of Defence report back to the Committee in July 2019 with an update on estimated financial costings that were previously released in the 2016 White Paper.
The Committee recommends that the Department of Defence should review its requirements around quality of sustainment costing at the second-gate process and update the Committee on outcomes of this review and any changes necessary to its capability lifecycle manual.
The Defence workforce plan was due for release in December 2017 and was expected to alleviate uncertainty surrounding workforce requirements.
Analysis provided in the audit report shows the fluctuations in number of full time equivalent staff required for the naval shipbuilding program over the next 15 years. Representatives from Defence acknowledged that the ‘rate of growth’ in the workforce is of concern, for example, a ‘400-person growth’ of ‘experienced engineers’ above the normal workforce is likely to be required.
The Committee notes the ANAO finding that estimated costs on the Naval Shipbuilding College increased from $25 million in March 2017 to $62 million confirmed in May 2018. Defence representatives noted that this increase was a consequence of increased scope of the College’s work:
As we worked through the tenders […] and listened to them, we reached the conclusion that actually as a matter of fact we want the institute, the college, to do these additional pieces of work, which of course meant we provided a contract of a greater value but there’s been no change to that contract and we expect to deliver within it.
The Committee is interested in how key mitigation strategies will assist to meet the fluctuating workforce over the short, medium and long term. Such information should include, but not be limited to, how to manage a change in workforce locations from South Australia to Western Australia (if required), how to manage fluctuations in workforce size, training specifications over different phases of shipbuilding, and other relevant matters.
The Committee recommends that the Department of Defence provide a copy of its workforce plan to the Committee and summarise the key mitigation strategies in the plan to meet the workforce requirements of the naval shipbuilding program over the short, medium and long term.
Shipbuilding design risk
The Committee notes the ANAO’s finding in the audit report that ‘Defence has advised the Government of the high to extreme risks the shipbuilding programs present’ and evidence from Defence that in the period since the risks were identified, ‘a number of mitigations have been put in place to reduce the level of risk to a manageable level’. The Committee notes that limiting ‘unique Australian design changes’ is one of the guiding principles for naval construction, and design changes in previous builds such as the Hobart Class Destroyer impacted cost, quality and timeliness which was attributed to an immature design.
The Committee also notes that bringing forward the builds of the Offshore Patrol Vessel and the Future Frigate could also increase design maturity risk. Representatives from Defence acknowledged this risk in their submission, stating that it is implementing ‘a number of mitigations … to reduce the level of risk to a manageable level’.
Review of evidence
This section reviews the evidence received by the Committee. As part of its review on this topic, JCPAA held one public hearing in Canberra on 17 August 2018 with representatives from the ANAO and the Department of Defence. A list of witnesses can be found at Appendix C. The Committee received submissions from Defence and the ANAO. A list of submissions to the inquiry is provided at Appendix B.
Planning and forecasting expenses
Defence defines mobilisation as:
the process of generating Defence capabilities outside the scope and capacity of existing preparedness guidance, budgetary allocations and in certain circumstances may necessitate the marshalling of national resources to defend the nation and its interests.
As noted in the audit report, ‘Defence is currently meeting scheduled milestones for the naval construction programs’. Further, ‘Defence is currently on track to deliver the Offshore Patrol Vessel, Future Frigate and future submarine programs’.
The Auditor-General made one recommendation:
that Defence, in line with a 2015 undertaking to the Government, determine the affordability of its 2017 Naval Shipbuilding Plan and related programs and advise the Government of the additional funding required to deliver these programs, or the Australian Defence Force capability trade-offs that may need to be considered.
Defence disagreed with this recommendation, stating:
Defence takes on an enterprise approach for Naval Construction Programs. The shipbuilding provisions identified in the Integrated Investment Program are consolidated for Government to consider the Naval Construction Program affordability as each project is presented to Government.
Offsets are recommended to Government if there is a shortfall between the funding requirement and existing provision.
At the hearing Defence elaborated:
We used the Integrated Investment Program, and Defence conducts biannual updates of that program. It's not that we disagree with the point; I guess it is that we are already doing it. In terms of shipbuilding, every time we take a shipbuilding program up to government, it's done in consideration of how it fits into Defence's Integrated Investment Program, and adjustments are made across the Integrated Investment Program and approved by government on a six-monthly basis to make sure that not just the shipbuilding programs but all of the investment programs, including infrastructure and personnel costs, are part of the overall Integrated Investment Program, which is an outcome of the first principles review of Defence.
Defence’s current practice is to recommend offsets [of additional funding, or trade-offs in activity] to Government when a shortfall is discovered.
Costings for the shipbuilding programs were released in the 2016 Defence White Paper under the Integrated Investment Program. The Integrated Investment Program’s value is ‘approximately $195 billion over the decade to 2025-26.’
The White Paper suggested that Australian industry involvement should be maximised, however, Defence are now planning to build submarines entirely within Australia.
As discussed in the ANAO report:
the cost of building naval ships in Australia was 30-40 per cent greater than the United States benchmarks and even greater against some other naval shipbuilding nations.
Rear Admiral Dalton confirmed that ‘the Government has been advised on how [the cost for the Hunter Class Frigates] fits inside the Integrated Investment Program and the Government has agreed to that funding envelope’. There are uncertainties associated with the extended timeframe of the ship building programs, with acquisition and construction of the Hunter Class Frigates not expected to be completed until the 2040s and sustainment extending through to the 2060s.
Defence sustainment is defined as:
the provision of personnel, logistic and other support including recovery and reconstitution required to maintain and prolong operations or combat until successful accomplishment of the mission.
The Committee remains cautious regarding Defence procurement, mindful of previous incidents where Defence procurement was based on incorrect cost assumptions. For instance, the MRH included incorrect costs such as $3000 for a bolt, which was confirmed to be ‘an honest mistake’ and the cost refunded.
Defence recognise that sustainment is ‘a key driver in the acquisition process and [that it] must be considered in the earliest planning stages’.
The ANAO report found that, in the past, Defence did not have ‘sufficient fidelity’ in its sustainment plan to request funding, and consequently, the funding for the Offshore Patrol Vessel was not based on reliable whole of life cost estimates.
Defence assert that they have ‘quality sustainment costing,’ but not ‘tender quality sustainment costing’. Defence responded to the audit finding that that it is not appropriate to release costing information prior to going to tender. The sustainment estimates are due to Government in quarter 4, 2018.
Rear Admiral Dalton stated that there are courses of action available if Defence is dissatisfied with the sustainment supplier. The ANAO highlighted the risk that once construction has commenced, if sustainment forecasts substantially rise above budget, there will be ‘no option to consider alternative platforms’.
Defence procurement forecasting costs have previously been underestimated. However, Rear Admiral Dalton expressed confidence that the sustainment cost for the Offshore Patrol Vessel will ‘fit inside the budget envelope that’s been allowed for sustainment’. Defence’s submission to the inquiry confirms ‘the overall naval shipbuilding enterprise … will be met from Defence’s Integrated Investment Program funding’.
An example of initial cost estimates increasing is in relation to the establishment of the Naval Shipbuilding College. In March 2017 a joint media release announced an initial $25 million investment for the first phase of the Naval Shipbuilding College (previously referred to as the Maritime Technical College). In August 2018 representatives from Defence confirmed the cost of the College is expected to be $62 million. Mr Johnson explained that the substantial variation in cost arose due to a change in the scope of the College: ‘…in that process, first we had a request for information. We adjusted the bid then a request for tender and then, in the final decision making, we adjusted the work scope’.
In relation to workforce planning the ANAO found:
Defence has not determined industry workforce requirements for the naval construction programs. Defence is currently developing a workforce plan to address labour and productivity requirements across the naval construction programs. The plan was due to be finalised in December 2017, but had not been finalised as at 15 February 2018.
Analysis by RAND Corporation included in the ANAO report, explains that fluctuations in demand for shipbuilding workers is expected, due to the non-constant construction of shipbuilding programs. The forecast identifies an expected drop of around 1200 full time equivalent workers in 2017 to none in 2020, before increasing again to 2,700 in 2029.
Defence stated that the ‘rate of growth’ in the workforce is of concern, for example, a ‘400-person growth’ of ‘experienced engineers’ above the normal workforce is likely to be required. It is anticipated that entry level employees will be readily found, but experienced middle and more senior management personnel with shipbuilding experience are unlikely to be readily available. This is further complicated as different phases of the shipbuilding process, requiring different skills.
The Naval Shipbuilding College is being established to train shipbuilding workers. The College is to be delivered in three stages. The first stage in 2018 focuses on entry level trade qualifications, the second stage to commence in 2020-21 will provide engineering and naval architecture qualifications, and the third stage in 2022-23 will establish a training facility at an existing shipyard. The ANAO report found the ongoing operational costs for the College had not been considered, but will need to be met from shipbuilding project budgets.
At the hearing Defence confirmed the College will not meet all of Defence’s workforce needs, however, there are a range of mitigations to address workforce risk:
The college is one element of that. We are [setting] up the college very, very quickly with the joint venture partners. In the short-term, they are building the courses and getting their operations underway. … As well as that, we've worked closely with departments of education and training, and I know the college itself is working with the TAFE sector as well to really get a strong handle on the full education offering around the country and the capacity of the current education system to deliver the workers that we need in the short-term. I think the assessment at the moment from a strategic perspective is medium- to long-term, and the Australian education, skills, innovation, research and development system is going to provide the workers that we need. In the short-term, we have these mitigations that we're setting up right now.
Shipbuilding design risk
The audit report concluded that ‘Defence has advised the Government of the high to extreme risks the shipbuilding programs present’.
To maintain a degree of continuity of the shipbuilding workforce following the wind-down of the Hobart Class Destroyer build from 2017, Defence has brought forward the design and construction of the Offshore Patrol Vessel and Future Frigate builds, by two years and three years respectively.
The ‘guiding principles’ for Australian shipbuilding programs include: selecting a mature design at the start of the build, limiting the amount of changes once production starts and limiting Australian-unique design changes. These have been informed by previous experience, including construction of the Hobart Class Destroyer which ‘incurred cost and schedule overruns and productivity and quality shortfalls, as a result of immaturity in the detailed design documentation process’.
Rear Admiral Dalton stated that although shipbuilding in itself does not inherently carry extreme risk, the combination of bringing forward construction of the Future Frigate and altering the design by incorporating the CEAFAR radar and the Aegis Combat Management System, within the short time frame, means that this shipbuilding program can be classified as an extreme risk. Further, the ships must comply with Australian legislative requirements:
… we wanted to make sure the ships complied with those key Australian legislative requirements—largely around the Environmental Protection Act and those other legislative bits that are unique to Australia.
Defence have mitigated this risk through bringing forward prototyping and planning activities, detailed in the submission to the inquiry.
In its submission Defence states:
Defence acknowledges that active management is necessary and is adopting an enterprise approach to risk mitigation for the naval shipbuilding endeavour by developing a national risk profile. Further, since those risks were identified by Defence, a number of mitigations have been put in place to reduce the level of risk to a manageable level.