If not now, when? The ANAO’s reporting on defence megaprojects
27 Jun 2018|

The Australian National Audit Office’s public assessments of the health of major Department of Defence projects are invaluable—but the fact that the ANAO isn’t yet reporting on the $80-billion future submarine program or the $35-billion future frigate program means that it’s missing the boat.

ASPI has noted on numerous occasions in recent years the decline in transparency regarding Defence’s investment program. This has reached the point where it’s impossible to even know which projects the government has approved, let alone their budgets, schedules or risks.

The one shining exception to this has been the ANAO’s major projects report, published annually since 2008–09, which is based on Defence’s own project reporting. As ASPI has previously noted, the MPR is about the only place the public can get information directly from the coalface of Defence. It includes not just reporting on budgets and expenditure and progress against schedules, but frank assessments of risks and the measures adopted to address them.

However, the MPR has limitations. It includes only 25 or 30 of the hundreds of projects conducted by Defence’s Capability Acquisition and Sustainment Group (so it has no ICT or facilities projects, which spend billions of dollars of public money). Moreover, the guidelines for MPRs (endorsed by parliament’s Joint Committee of Public Accounts and Audit) state that a project can only be included a year after it receives second-pass approval.

This latter point is fundamentally problematic. Over the next few years, it will make the MPR miss the largest programs in Australia’s history.

One of the key judgements of the First Principles Review of Defence was that the department was too focused on process at the expense of outcomes. To address this, Defence has developed a new capability life cycle that’s risk-driven instead of process-driven. The approach, agreed by the Prime Minister’s Department and the Department of Finance, is now in place.

While milestones such as second pass (or Gate 2, as it is termed in the capability life cycle) still matter, the focus throughout is on identifying risks and managing projects in a way that’s commensurate with those risks. And as Defence moves from lots of individual projects to fewer, larger programs, what ‘second pass’ might mean becomes unclear.

Despite this, the ANAO seems to be stuck in the previous process-driven model where milestones matter more than risks.

The ANAO’s reporting criteria mean that the two biggest projects in Defence’s history—SEA 1000 (future submarines) and SEA 5000 (future frigates)—are not included in the MPR. This is not an oversight. According to advice from the ANAO, there are no plans to include them in the 2017–18 edition to be published later this year. But the scrutiny provided by the MPR is warranted for those projects right now because:

  • according to the 2018–19 Defence portfolio budget statements, the funding approved by the government for SEA 1000 is already over $2.2 billion (which Defence can commit and spend)—that, by itself, would put it on the cusp of the top 10 approved projects
  • waiting for the submarine project’s second pass may be like waiting for Godot, because the megaprojects are going through incremental approvals. Is second pass when the preferred designer/builder is chosen? That has occurred already for the submarines and will happen any day for the frigates. Is it contract signature? For which contract, given there are many in the submarine program? The submarine design mobilisation contract has already been signed. The design contract should come soon (with further billions of approved funding). And that could be followed by a number of construction contracts—for the first boat, then for the rest of the first tranche, and later for further tranches. Where in that lengthy, incremental process is the ANAO planning to start covering the future submarines?
  • basic data for SEA 1000 isn’t public and what’s there is a little fuzzy. I’m not aware of any agreed date for initial operating capability, the point at which the government and Defence get the first usable military capability. It now appears that when Defence says the acquisition cost is >$50 billion, it actually means a number closer to $80 billion. One wonders what that means for the future frigates’ $35-billion budget
  • the risks around SEA 1000 are here right now, so public and parliamentary understanding of this megaproject is needed right now. Signature of the strategic partnering agreement, the overarching head contract governing the entire program, appears to be sliding (although from when to when isn’t clear—see previous point). And according to Naval Group Australia’s recent Senate evidence, without the agreement Naval Group and Lockheed Martin, the combat system integrator, can’t share information, making progress on design work challenging
  • as the ANAO itself has reported, Defence’s own risk assessments of aspects of the shipbuilding program were in the ‘extreme’ category.

So the fundamental question for the ANAO and the JCPAA is: If not now, when?

One could argue that the ANAO’s performance audits of aspects of Defence’s capability program—such as its review of mobilisation of shipbuilding and its earlier audit of the submarine program’s competitive evaluation process—do the job. There’s certainly no denying that that work was valuable and ASPI and Senate committees have drawn upon it. But there’s no substitute for having detailed, accurate project data updated over time that allows everyone to see what’s going on and to make up their own minds on how projects are tracking.

If it’s a matter of resources, it’s pretty straightforward to make an argument for prioritising coverage based on risk and cost. The ANAO could also stop covering projects in the MPR that are near their end and no longer face substantial risks. That would free up the office’s resources to cover the projects that involve truly significant risks and huge investments.

For example, the 2016–17 MPR still included projects such as SEA 1439 Phase 4A (Collins replacement combat system), which was originally approved in 2002. As at June 2017, it had spent $437.1 million (or 97%) of its $450.4 million budget, and only $2.5 million in expenditure was programmed for 2016–17. With five of the six Collins boats completed, the sixth close, and the combat system performing well, it wasn’t surprising that no significant risks remained.

Which projects would you rather see the ANAO cover? It’s time to revisit the process-focused selection criteria and instead look at cost and risk.