Saving the AWD project—too little, too late?
27 May 2015|

To properly understand last week’s announcement from the government about the beleaguered Air Warfare Destroyer (AWD) project, some background is needed. Back in June 2014, the government received the independent ‘White–Winter report’ into the project. Although the report hasn’t been released, the government said it identified numerous issues including: the initial program plan, inadequate government oversight, the alliance structure’s capacity to manage the project, and the performance and capabilities of ASC and major subcontractors.

The centrepiece of the proposed remediation plan advocated putting an experienced shipbuilding management team into ASC. At first, this seemed likely to happen, after the government engaged advisors with ‘mergers and acquisitions’ experience. In a case of history repeating itself, it looked as though a private sector shipbuilder would be brought in to save the ailing project, just as had happened back in the 1980s, when the long-troubled FFG project at the then government-owned Williamstown shipyard was turned over to the private sector to complete. In fact, one of the authors of the report (John White) had been involved in the FFG rescue.

Initially, the government baulked at taking such radical action. Instead, it announced that it would ‘insert ‘additional shipbuilding expertise’ into the AWD program. At the time, it appeared that the project had until the end of this year to boost productivity. The implicit deal was that future domestic naval projects hinged on better performance.

But it looks like the government has lost patience. Last week, following the completion of a ‘forensic audit’, the government finally moved to more fully adopt the White–Winter recommendations. How fully we can’t say—the report remains under wraps.

The move was likely prompted by the sobering results of the forensic audit, which forecasts further delays and an additional $1.2 billion to complete the program—twice the cost blow-out previously disclosed. As the Minister for Finance observed, ‘these ships are costing $3 billion a ship when equivalent ships in other parts from the world would have cost us $1 billion a ship’. The table below shows the progressive slippage in the schedule.

Progressive delivery schedule for the AWD project

Original delivery date 2011 reschedule 2012 reschedule 2015 reschedule
HMAS Hobart December 2014 December 2015 March 2016 June 2017
HMAS Brisbane March 2016 March 2017 September 2017 September 2018
HMAS Sydney June 2017 June 2018 March 2019 March 2020

Source: various ministerial media releases

The government now plans a limited tender process ‘seeking proposals to either insert a managing contractor into ASC for the remainder of the AWD build or to further enhance ASC capability through a partnering agreement’.

In the event of a partnering agreement, it would likely be akin to the interim measures already adopted. The difference would be that a single firm would provide a team of skilled personnel to work alongside ASC. Nonetheless, with no skin in the game, it would be a case of ‘all care, no responsibility’ for the partner.

In the event of the managing contractor option, things get more interesting. However, it appears that the proposal is not to bring in a firm to take over the whole project, but rather only the ASC component. Similarly, there’s no suggestion that all of ASC is going to be put into new hands. Thus, far from having a private sector firm run the project, the managing contractor will operate within ASC and with the existing alliance partners.

If so, this will further complicate the already intricate arrangements of the alliance. Assuming the new managing contractor works under an incentive scheme (rather than a cost-plus contract), we’ll have four parties—ASC, Raytheon, Defence and the managing contractor—operating under two layers of contractual incentives. Perverse incentives can’t be ruled out. Moreover, capable firms may be hesitant to risk their reputation by tying their fate to the performance of the parties that got us to where we are today.

How will it work? The government’s implied that the new ‘baseline’ for the project was a precondition for seeking tenders. Do they think that the costs are well enough understood to have a managing contractor sign up to a fixed price contract? That might be difficult. Bidders will find it hard to properly assess the risk before signing up. So it might have to be a cost-plus contract with incentives for productivity and schedule.

Would a bolder and more decisive approach be possible? Certainly today’s approach is half pregnant compared with what was done back in the 1980s. Perhaps the alliance contract is simply too difficult a knot to disentangle; the current approach might be as good as it get.

However, given the massive cost blowout, it’s almost certain that the incentive/penalty provisions of the alliance contract‎ have been exhausted and the participants are now working under cost-plus arrangements. This is bad news for the taxpayer since the parties have little reason (beyond reputation) to improve their performance. But at this stage, the Commonwealth probably has step-in rights. If so, why not bring in an experienced firm to manage the whole project?

Whatever the arrangement— partnering agreement, managing contractor, or something bolder—there’s an implicit incentive beyond any direct financial considerations; the chance to be in pole position for the eventual sale of ASC and the lucrative Future Frigate program due around 2020. Again, history may be helpful. After Tenix finished the two half-complete FFGs languishing in the government shipyard, it went on to execute the very successful Anzac frigate program. Of course, taking on the completion of AWD could be a two-edged sword. If the program can’t be turned around, it’s a poisoned chalice.

Only time will tell whether the current plan works, but the future of naval shipbuilding is on the line. Although the government is committed to deliver ‘an enterprise-level naval shipbuilding plan’ later this year, the sad experience of the AWD will surely cast a long shadow. On the government’s own figures, we’re getting three ships for the price of nine. That’s probably unfair to local industry—the lessons learned from a government-owned shipyard can’t be simply extrapolated to the private sector—but that’s how the cards have fallen.

And the game’s not over yet. With 25 months before the first vessel is delivered, a lot could happen. Systems integration, including the Aegis combat system, vessel fit-out and at-sea trials all remain ahead. On past experience, these are much more difficult tasks than vessel fabrication.