On 25 June 2014, the Senate referred the matter of the future of
Australia's naval shipbuilding industry to the Senate Economics References
Committee for inquiry and report by 1 July 2015. The term of reference for the
inquiry is straightforward yet comprehensive in its coverage—the future
sustainability of Australia's strategically vital naval ship building industry.
As part of this broad inquiry into Australia's naval shipbuilding
the committee resolved to inquire into the tender process for the Royal
Australian Navy's (RAN) new supply ships as its first order of business. On 10
the committee adopted the following terms of reference for the first part of
The tender process for the RAN's new supply ships and, given the
significant impact that this decision will have on the Australian shipbuilding
industry, in particular:
the reasons for the Government's decision in June 2014 to exclude
Australian-based defence industry from tendering for the replacement of HMAS Success
and HMAS Sirius, and instead have a restricted tender for Spanish and
South Korean shipbuilders;
the capacity of Australian shipbuilding to carry out, in part or
in full, the construction and fit-out of two auxiliary ships to replace the
Navy's HMAS Success and HMAS Sirius;
the role of the Department of Finance and/or Department of
Treasury and/or Department of Defence, the Finance Minister and/or the
Treasurer and/or the Defence Minister, in the Government's decision to exclude
Australian defence industry from tendering for the auxiliary ship replacement
the feasibility of including Australian industry participants in
the tender process for the replacement auxiliary ships;
the management and performance of DMO that contributed to the
Government's decision to exclude Australian industry from tendering for the replacement auxiliary ships; and
any related matters.
The committee determined that it would report on this first part of its
inquiry by 27 August 2014. With regard to Part 1 of this inquiry, the
committee called for submissions to be lodged by 17 July 2014 in time for its
public hearing on 21 July 2014. For the second part of the inquiry,
the committee set down 1 December 2014 as the closing date for
Conduct of inquiry
The committee advertised its inquiry on its website and in the Australian.
The committee sought views directly from a range of people interested in the
future of Australia's naval shipbuilding and repair industry. In particular, it
wrote to, and invited, submissions from shipbuilders, suppliers, unions,
professional associations and individuals engaged in the shipbuilding industry
such as engineers and architects as well as academics including economists. The
committee also invited state governments and relevant Commonwealth government
departments to lodge written submissions. In drawing attention to the inquiry,
the committee noted its intention
to examine the tender process for the supply ships as a priority. Although this
report deals only with the tender process for the supply ships, it lays the
foundations for the committee's broader inquiry into the sustainability of
Australia's naval ship building industry.
The committee received 15 submissions for its inquiry into the tender
process for the two supply ships, as well as additional information, listed at
On 21 July 2014, the committee held a public hearing in Canberra. A list of
witnesses is at Appendix 2.
Background to inquiry
Over many years, Defence procurement has been subjected to regular, extensive
and in-depth examinations that have revealed deficiencies in the processes for
acquiring major military equipment. These revelations have often been followed
by a period of reform to rectify perceived inadequacies. Indeed, in December
2011, the Senate Foreign Affairs, Defence and Trade References Committee, which
was inquiring into procurement procedures for Defence capital projects, spoke
of Defence being caught in an 'endless merry-go-round of reviews and
In its 2014 report, the Commission of Audit also noted that the efficiency and
effectiveness of Defence capability development and procurement processes had
been 'a long standing issue, commented on by previous reviews'. The numerous independent reviews undertaking over recent years into Defence
procurement involving naval acquisitions include:
Report of the Defence Procurement Review, 15 August 2003
Going to the Next Level: The Report of the Defence Procurement
and Sustainment Review, 2008 (Mortimer Review);
2008 Audit of the Defence Budget, 3 April 2009 (Pappas Report);
Review of the Defence Accountability Framework, January
2011 (Black Review);
Plan to Reform Support Ship Repair and Management Practices,
July 2011 (Rizzo Report);
Collins Class Sustainment Review, Phase 1 Report, 4 November
2011 (Coles Review); and
Study into the Business of Sustaining Australia’s Strategic
Collins Class Submarine Capability, November 2012, report issued by Mr John
The Senate Foreign Affairs, Defence and Trade Committee undertook a
comprehensive inquiry into Australia's naval shipbuilding industry in 2006 and
more broadly into defence procurement, which included the acquisition of naval
in 2011–12. The Australian National Audit Office (ANAO) also regularly conducts
performance audits into major defence acquisitions, including.
ANAO Major Projects reports; and
ANAO Performance Audit reports, including the recent audit of the
Air Warfare Destroyer (AWDs)—Audit Report No. 22 2013–14 Performance Audit, Air
Warfare Destroyer Program, March 2014.
Decision to inquire into the limited tender for two replenishment vessels
Australia's naval shipbuilding history has witnessed the delivery of
large, complex and technically difficult projects with varying degrees of
success. HMAS Success was built in Australia but when finally
commissioned in 1986, was well over budget and late. The Australian Frigate
Project was also constructed locally and after initial difficulties succeeded
in its prime objective of re-establishing a major warship capability in
Australia during the early 1990s. The Collins-class submarines and the ANZAC class
frigates, commissioned between March 1996 and June 2006, were also built in
Australia. The latter project involved the design, construction, testing and
trialling of ten vessels which were delivered on time and on budget with some
frigates delivered ahead of schedule.
Overall, Defence's programs for the procurement of major capital
equipment, including important naval acquisitions, have been dogged by delays
and cost overruns and in some cases projects have been abandoned. Problem
projects involving naval projects have involved acquisitions from overseas and
from Australia. For example:
The Super Seasprite project was intended to acquire helicopters
for the Navy's ANZAC ships. Having failed to deliver the required capability,
the project was ultimately cancelled in March 2008 with a total expenditure of
The LCM 2000 project was intended to purchase six landing
watercraft that would transfer personnel and supplies from Navy's Landing
Platform Ships (LPA) to shore. Originally approved in 1997, the watercraft project
was placed on the projects of concern list in 2010 and eventually cancelled.
The Guided Missile Frigate Upgrade project commenced in 1999 and
was subsequently re-baselined in 2004 and 2006 due to delays. Also, the project
scope was reduced from six to four ships. The operational release of the four
ships was successfully completed in July 2011, representing delays of between
67 and 84 months. The Foreign Affairs, Defence and Trade References Committee suspected
that 'the full story of incompetence on this project, including that of the
contractor, will never be discovered'.
The Lightweight Torpedo Replacement project had a long history of
project management difficulties.
The Collins Class Submarine Reliability and Sustainability project
designed to upgrade the Collins Class platform systems has exposed problems,
some of which can be traced back to the initial acquisition phase.
A number of recent developments have once again posed serious questions
about the performance of major naval acquisitions, but more importantly about
Australia's shipbuilding industry.
On 6 March 2014, the ANAO released its performance audit on the Australian
Warfare Destroyers (AWDs) which was highly critical of the project. The public
response to the ANAO report tended to focus on the project's poor performance.
Media headlines spoke of cost blowouts, the bleak future facing Australian
shipyards, with some referring to the looming 'valley of death' for the
industry. At that time, the Minister for Defence also announced that the AWD
program was to be added to the projects of concern list and would join five
other ADF projects including the Collins Class Submarine Sustainment Program,
which had been on the list since 2008.
That same day, Senator the Hon Don Farrell, at the request of
Senator the Hon Kim Carr, moved a motion in the Senate to
recognise 'the vital contribution of the Australian shipbuilding industry as an
employer, a storehouse of advanced manufacturing capabilities and a strategic
On 17 March 2014, members of the House of Representatives also spoke to a
similar motion to recognise 'the proud naval shipbuilding history of Australia
and to note that the ability to build and maintain naval ships was essential to
Australia's defence capability.
Almost three months later, on 4 June 2014, the Minister for Finance made
a public statement raising further concerns about the AWD project. He stated
that when the Coalition came into government, both he and the Minister for
Defence were confronted with advice that the AWD program was in 'serious
trouble'. Noting the critical importance of this program to national security,
he explained that the project was experiencing significant delays in its
delivery and considerable cost overruns.
In his view, the government had inherited a deteriorating position and the
project was about 21 months behind schedule. The Minister indicated that the
problems encountered with the AWDs could have far-reaching implications for
Australia's naval shipbuilding industry. He stated that everyone involved in
this project was 'on notice':
Unless we can get this back on track, unless we can
demonstrate that we can build these sorts of ships competitively here in
Australia, then we have problems for the shipbuilding industry for these sorts
of ships here in Australia as a whole and we don’t want to get into that
situation. We want the industry as a whole to have the best possible
opportunity to be successful in building and delivering these sorts of ships in
the future on time and on budget.
The Minister for Finance made clear that this was 'the final opportunity
to get this right, there's no two ways about it'.
Within days, the government announced that it had given approval for
Defence to conduct a limited competitive tender process between Navantia of
Spain and Daewoo Shipbuilding and Marine Engineering of South Korea for the
construction of two replacement replenishment vessels based on existing
The Minister for Defence explained that the decision to conduct a limited
tender involving only two overseas companies was due to the urgent need to
replace the vessels and avoid a capability gap; the current low productivity of
shipbuilders involved with the AWD project; and value for money considerations.
During his announcement, the Minister stated:
Demonstrating that the AWD Program is able to provide value
for money will be a crucial test for the Australian shipbuilding industry. No
responsible Government could consider providing further work to an industry
that is performing so poorly.
It was in this context of mounting concern not only about the
performance of the AWDs but more broadly about the future prospects for
Australia's shipbuilding industry that the Senate referred the matter of
Australia's naval shipbuilding to the committee.
As noted earlier, the committee resolved to inquire into the tender
process for the new supply ships as a priority. In this report, the committee considers
the need and importance of the supply ships to the Australian Navy, the
capacity of Australian industry to build the ships and the contribution that such
construction could make to sustaining Australia's naval shipbuilding industry.
The committee thanks all those who assisted with the inquiry, especially
those who made written submissions and appeared before the committee at such
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