Government response to
committee's first report
On 6 June 2014, the government announced that it had given approval for
Defence to conduct a limited competitive tender between Navantia of Spain and
Daewoo Shipbuilding and Marine Engineering of South Korea (DSME) for the
construction of two replacement Auxiliary Oiler Replenishment ships (AOR).
Based on the evidence, the committee found that there were no significant
impediments preventing the ships being built in Australia. In this chapter, the
committee notes and considers the government's response to the committee's
first report on the tender process for the new replenishment ships.
First report—tender process for new supply ships
Although the committee had only started its inquiry into the future
sustainability of Australia's naval ship building industry, its consideration
of the proposed tender process for the supply ships [SEA 1654–3] highlighted a
number of concerns. They related to the lack of contestability and competition
in the limited tender for the two ships, the insufficient level of industry
engagement in the process so far and the absence of long-term strategic
planning that led to the decision. As such, the committee recommended that:
the tender process for the two replacement replenishment ships be
reopened to include Australian companies;
the tender must make clear that a high value would be placed on
Australian content in the project; and
the government undertake open tender processes for any future
The government tabled its response to the committee's findings in April
2015. In its response, the government disagreed with the committee's
recommendation to re- open the tender and allow Australian companies to tender.
It explained that the schedule, the cost effects of an Australian build and the
imperative to replace HMAS Success in the 2021–22 timeframe were the key
determinants in reaching the decision to go off-shore.
Timing and schedule
According to the government, navy's highest priority was to replace both
HMA Ships Sirius and, in particular, Success because the vessels were
'essential enablers of operational capability'.
In this context, the government dwelt on the fact that the construction
of the supply ships in Australia would extend the production schedule, making
it highly unlikely that the delivery of the first ship would meet the required
in-service date to replace Success. This delay in construction could pose
the real risk of a gap developing in navy's capability to deploy combat power.
The government also indicated that, given the lead time to commence
construction of an Australian build, a decision to conduct an open tender would
have no effect on impending job losses in Australian shipyards. To support this
contention, the government cited a number of examples of the time taken to
arrive at the construction stage:
Experience with AWD and the ANZAC Ship Projects and more
recently the Canadian Joint Support Ship (JSS) Project (two supply ships for
the Canadian Navy) suggests five to six years is required from the initial
approach to industry for a design through to the contract award and 'cut steel'.
- The initial Risk
Reduction studies for AWD were commenced in early 2004, yet construction did
not start until January 2010.
- Designs for the
ANZAC Ship Project were tendered in 1986, with Defence selecting Blohm+Voss
(Germany) as the designer. Work (cut steel) started approximately six years
later in March 1992 (Note: production started well before the detailed design
was completed in September 1993, resulting in significant rework). Although
delivered in March 1996, HMAS ANZAC was not accepted into naval service until
- In November
2010, Canada announced a decision to commence design studies through release of
a Request for Proposal to Navantia and TKMS [ThyssenKrupp Marine Systems of Germany]
for the JSS Project. The JSS specification is closely aligned with that
produced for SEA 1654–3 [project to acquire two replenishment ships]. The JSS
build contract is currently scheduled for December 2016.
According to the government, these extended schedules for the construction
of supply ships were associated with 'the requirement to adapt the design and
where appropriate the shipyard facilities to achieve productivity gains associated
with larger block construction'. Based on such factors, it concluded that:
...Australian industry would be unable to deliver the
capability sought by SEA 1654–3 prior to 2022–23; whereas unsolicited proposals
from Navantia and DSME for an offshore design and build suggest 2019–20
delivery is achievable.
The government also drew attention to the costs of keeping Success
operational. It noted that Defence had commenced a program, being undertaken by
companies in Australia, to improve Success's materiel state and was
allocating around $365 million to sustain the ship to financial year 2021–22
(forecast Initial Operational Capability of the first replacement ship).
Furthermore, the government stated:
Activities to sustain Success even further past its planned
withdrawal from service, to accommodate an open tender process, are yet to be
assessed. However, due to the obsolescence of equipment fitted to HMAS Success,
these activities are likely to come at a considerable cost above what has
already been committed.
The committee understands fully the essential role that navy
replenishment ships have in supporting naval deployments and the strategic
imperative to purchase replacement ships to avoid a capability gap and to stem
the continuing high costs of maintaining the current ageing vessels. The
urgency of this situation highlights the need for government to have a
realistic and practical long-term capability plan.
It is worth noting that no-one denied that navy needs replenishment
ships to service the rest of the fleet and that their replacement is overdue.
Even so, a few witnesses had proposals that, in their view, would maintain the
afloat support capability and not cause significant delay to the acquisition of
the vessels. Indeed, a number of witnesses put forward proposals that
could address this potential shortfall in capability but without having to
resort to a limited tender.
Importantly, it should be remembered that no-one suggested that the
vessels be built entirely in Australia. At least two unsolicited proposals for
a hybrid build were tendered to government.
For example, BAE Systems informed the committee that it had submitted an
unsolicited proposal to government in September 2012 setting out a hybrid build
program, with part of the ship built overseas and part of the ship built in
Referring to BAE's joint proposal together with Navantia, Mr William Saltzer,
BAE Systems, informed the committee in April 2015:
Nobody in Australia has a design for a replenishment ship. We
thought together with Navantia that the same solution that we created on LHD, a
hybrid build, would be an ideal solution for the replenishment ships as well
and it would allow us to put work into Australian industry as well as into
Spanish industry, quite frankly, because they would build the hull, just as
they did on LHD.
BAE estimated that the additional time required to produce the
replenishment ships according to its proposed hybrid model would be
approximately six months.
In effect, the hybrid proposals were intended to address the potential
shortfall in capability and negate the need for a limited tender.
In its response, however, the government noted:
Preliminary analysis of unsolicited proposals from
Navantia/BAE, Navantia and DSME indicate an approximately 40 percent cost
premium, compared with a full offshore build, if 40 percent of the build was
undertaken in Australia. Noting that the specific details of the unsolicited
proposals remain commercial-in-confidence, Defence has not quantified the
additional cost premium associated with fully building the supply ships in
The decision to conduct the limited tender effectively dismissed
outright the unsolicited proposals for a hybrid build in Australia that
endeavoured to address some perceived concerns about current capacity in
Australia and possible capability gap. These solutions not only remain untested
but, as mentioned on a number of occasions, sent an unfortunate message to
Australian defence industry.
Overall, the committee was concerned that the strategic and economic
imperative to acquire the vessels led to a decision that effectively closed off
options before they were given any due consideration and prevented a more open,
competitive and, indeed, fairer process. There was never a genuine attempt to
test the economic and strategic merit of the hybrid proposals or the cost
premium to build in Australia. Furthermore, as noted in the committee's first report,
the disregard shown to Australian industry through this limited tender process,
the lack of consultation and engagement by the Australian Defence Organisation
(Defence) with Australian industry stood in stark contrast to Defence's stated
industry policy. There have been no developments since then to persuade the
To support the grounds for a limited tender that excluded Australian
companies, the government cited a 2007 report by a UK company, Appledore
International, which undertook an assessment of Australia's capacity to construct
the forward section of the Landing Helicopter Dock ship (LHD). In addition, it
referred to another report commissioned by Defence—a 2013 report by an internationally
recognised consultancy within Royal Haskoning DHV, First Marine International (FMI),
which conducted an assessment of the Australian shipyards' capacity to support construction
of the supply ships. According to the government's response, the conclusions
from both reports supported the contention that:
Australian Shipyards currently do not have the capacity to
build these ships at similar productivity levels to those achieved during the
construction of the Spanish Supply Ship Cantabria without making a significant
investment in infrastructure, which is unlikely to be amortized over a two ship
The government's response also noted that Defence SA had previously
...upgrade options (to support construction of the supply
ships) for the shiplift include a $20m upgrade for lift capacity increase, a $50m
upgrade for lift and length capacity increase and up to a $175m upgrade for the
shiplift to be useful for sustainment of any naval ship.
In its response, the government acknowledged that there would be some
return on investment in facilities for future sustainment of the ships.
Referring to experience gained on the ANZAC Ship Project, the government suggested,
however, that productivity saving associated with learning curve effects
including facilities upgrades would not be realised with a two-ship build.
The government's response has not swayed the committee from its initial
findings about the importance of holding an open tender for the supply ships and
the capacity of Australian shipyards to build the vessels. In its response to
the committee's recommendation, the government introduced no new evidence nor
did it produce convincing analysis that would support its decision to limit its
tender to two suppliers and to deliberately exclude Australian companies from
The committee stands by its findings that an open tender would have
allowed matters, including the amount of investment required to upgrade current
facilities and the long-term benefits of this investment, to be fully explored
and contested. Thus, while the committee acknowledges that there are currently
shortfalls in the capacity of Australian shipyards to construct a large AOR as
contemplated in the Defence Capability Plan (DCP), the deficiencies are not
insurmountable. With some investment, local major shipyards could be upgraded
to meet the challenge. Furthermore, the initial upfront costs for the
improvements should not be considered in isolation but with a view to the long-term
benefits, especially when such infrastructure could be regarded as a
fundamental input to capability.
In its first report, the committee also looked at the much broader
economic benefits that accrue from a local build or Australian involvement in
the production of a naval vessel. They included the development and maintenance
of a highly skilled workforce, the benefits that innovation brings to the wider
economy and the economic and employment growth that flow from investment in
research and development.
The committee also recognised the importance of having the skills base,
experience and local know-how necessary to support navy's vessels through their
operational life. This self-reliance is central to Australia's national interests.
Taking account of the myriad advantages in having Australia build its naval
ships in-country, the committee urged the government to place a high priority
on maximising Australian content in the acquisition of the supply ships.
Accordingly, the committee recommended that Defence become actively engaged
in encouraging and supporting Australian industry to explore opportunities for
Australian industry involvement in naval shipbuilding. The committee made this
recommendation because it could see great potential for Australian industry to
become involved as subcontractors in the replenishment ship project. The government
agreed in principle to the committee's recommendation.
In its response to the committee's recommendation that a high value be
placed on Australian content in the tender, the government informed the
committee that Defence sought to influence the designer's commitment to
Australian content through the 'commonality' requirements set out in the Risk
Reduction Design Study statement of work.
It informed the committee:
The ship design shall investigate commonality with equipment
currently in service, or planned to be in service in the Royal Australian Navy.
This may include
areas of commonality leading to lower life-cycle costs, such as with training
requirements, through life support (including sustainment) and other areas that
would contribute to lowering the cost of ownership of the capability.
The government also responded to the committee's recommendation for Defence
to become actively involved in encouraging and supporting Australian industry to
explore opportunities in the construction of the replacement replenishment
ships. The government agreed in principle with this recommendation and identified
such prospects including but not limited to:
design and installation of C4I systems;
specialist Integrated Logistics Support (ILS) Systems; and
development and support of RAN specific 'support products'.
The government explained further:
Overall, decisions on industry options will consider Value
for Money assessments and the trade-off between enhancing local industry capability
and the delivery of the required capability on time and within budget.
In accordance with Defence's Australian Industry Capability
policy, Defence continues to encourage and support Australian industry.
Prospects for Australian content in Project SEA 1654–3 will be further developed
during the preparations leading up to the release of Requests for Tender for
both the Prime Acquisition and Sustainment contracts. It is expected that both
designers will engage with Australian industry during the development of their
responses to the Prime Acquisition and Sustainment RFTs [request for tender].
Despite these assurances, the committee feels compelled once again to
underscore the importance of the government making every effort to maximise
Australian content in the construction of the two supply ships. This means
going beyond statements of commitment to putting in place practical and
effective measures to achieve this goal.
Importantly, the government and Defence must be seen to be actively
encouraging and supporting Australia's defence industry and earn industry's
trust that the government will standby its stated commitments. At the moment,
however, the government and Defence have failed to secure that trust. As shown
repeatedly in the committee's first report, Australia's defence industry was
bitterly disappointed with, and confused by, the government's decision to
exclude Australian companies from the tender process for the new supply ships.
Mr Christopher Burns, Defence Teaming Centre, captured industry's sense of dejection
when he spoke of a sector that wanted to be recognised and respected for its
significant role in the development and delivery of ADF 'military capability
and the preservation of the nation's sovereignty'. He referred to an industry
that was looking for:
...the opportunity to compete under the construct of holistic
whole-of-life benefit to the nation and on a level playing field, where the
lowest price is not the determinant of value for money; an industry that would
rather collaborate and partner with government and Defence than be subjected to
orchestrated campaigns to discredit it in order to justify going offshore to
acquire low-risk hardware at the cheapest price.
The way in which the government and Defence have managed the tender
process so far has had a demoralising effect on Australia's defence industry
and runs counter to their stated defence industry policy—in fact their actions
have neither encouraged nor supported the industry.
The committee also argued in favour of having an open tender process for
future major naval acquisitions. Defence disagreed with this recommendation. It
Without the ability to limit tenders through the use of the
Commonwealth Procurement Rules there is a potential that the cost of tendering
for industry will increase. This is a constant concern expressed by industry in
relation to DMO procurement. Procurement strategies are developed on a
case-by-case basis in consideration of the global market and the ability of industry
to deliver the capability that is required on time and on budget. The ability
to limit tenders is also paramount to Commonwealth National Security, with
sensitive capability requirements and considerations being classified, and
specifically quarantined from non-allied nations.
It noted that the Pacific Patrol Boat replacement, which was planned to
be a tender limited to Australian Industry, would be affected should the
government adopt a policy that would require open tender processes for naval
acquisitions. Defence stated further that:
An inability to use limited tender will also impact interoperability
and the ability for the Commonwealth to meet international obligations.
Specifically, we would be unable to draw on Government to Government procurement
arrangements for supply of naval weapons, and communications systems.
The committee accepts that in many cases a limited tender may be the
most sensible, strategically prudent and cost-effective means of acquiring
capabilities for the Australian Defence Force. It is firmly of the view,
however, that wherever possible options under consideration should include
Australian defence industry participation as well as thorough assessments of
the economic and strategic benefits of domestic involvement.
The committee believes that the limited tender process for the new
supply ships failed to adequately account for the potential for Australian
industry involvement. Indeed, the committee remains concerned that the process
neither adequately nor holistically assessed the economic and strategic
imperatives of such an acquisition. The committee is also concerned that
Australian industry was given no formal opportunity to engage with the process.
This limited the depth of understanding in relation to contributions that the
Australian defence industry could make to such a project.
In the committee's view, the process the government adopted has damaged
industry confidence and harmed Defence's relationship with Australia's defence
The committee reaffirms recommendation 1 from its initial report
that the tender process for the two replacement replenishment ships:
be opened up to allow all companies, including Australian
companies, to compete in the process; and
make clear that a high value will be placed on Australian
content in the project.
In the following chapter, the committee turns to the acquisition of the
future submarines and considers further this principle of openness,
competitiveness and fairness in the tender process as it related to these
Navigation: Previous Page | Contents | Next Page