Australian shipbuilders get ultimatum on destroyer program

JUNE 4, 2014 — Australia's three-ship Air Warfare Destroyer project is in such a sorry state that the Australian shipbuilders involved have been told that if they can't turn things around there will likely be no future surface warships built in Australia.

As we reported in March, a report from the Australian National Audit Office says that the project is Australian $302 million above budget and is likely to go over budget by considerably more. It is also behind schedule.

The three Aegis destroyers were originally scheduled for deliveries in March 2016, September 2017 and March 2019. Each ship is comprised of 31 blocks constructed via a distributed-build process at four shipyards:

ASC AWD Shipbuilder Pty Ltd (ASC4), at Osborne, South Australia; Forgacs Pty Ltd (Forgacs), in Newcastle, New South Wales; BAE Systems Australia (BAE Systems), in Williamstown, Victoria; and Navantia, in El Ferrol, Spain.

Today, Senator Mathias Cormann, Australia's Minister for Finance, and Senator David Johnston, the Minister for Defense, announced what they called "the way forward" for the troubled program. It is based on the findings of an independent review into the program commissioned by the Government in December 2013 and led by former U.S. Secretary of the Navy Donald Winter.

The Winter review has not yet been made public, but the ministers said that itidentified several causes for the cost and schedule issues, including problems with:

The initial program plan; Inadequate government oversight; The Alliance structure's capacity to manage the project and deal effectively with issues if and when they arose; and The performance and capabilities of ASC and major subcontractors.

"The Government is totally committed to put this important Defence project back on track and to stop the growing cost and schedule overruns by implementing the recommendations for a Reform Strategy made by the Winter Review," said the ministers.

They say the Reform Strategy will:

  • Improve shipbuilding productivity at the Air Warfare Destroyer shipbuilder ASC and its subcontractors BAE Systems, Forgacs and Navantia;
  • Include the urgent insertion of an experienced shipbuilding management team into ASC; and
  • After augmented shipbuilding capacity has been put in place, pursue the reallocation of blocks between shipyards to make the Air Warfare Destroyer program more sustainable.

The Government will immediately engage commercial and legal advisers to assist in implementing this Reform Strategy.

"The implementation of the Reform Strategy will ensure that the Air Warfare Destroyer program returns to the effective and efficient delivery of this vital defense capability," say the ministers.

"We are committed to working collaboratively and constructively with all stakeholders to ensure we realize both the national security benefits as well as the long term benefits of this program for the Australian shipbuilding industry in the most cost-effective and efficient way possible."

However, at a press conference later in the day, the defense minister said "we've got potentially another eight future frigates that we would like to build in Australia, but I am sending a very clear message out today. If we can't fix this, that is something that will certainly be in jeopardy, because I don't believe the Government will support an enterprise that cannot deliver productively."

Following is a transcript of the press conference:


FINANCE MINISTER: My colleague Senator Johnston and I are here today to outline the way forward for the Air Warfare Destroyer Program. When we came into Government we were both advised, we were both confronted with advice that this very important program for our national security and for the ship building industry here in Australia was in serious trouble. We were confronted with advice about serious delays in the delivery of the program. We were confronted with advice about serious cost overruns. You would be aware that earlier this year the Auditor-General released a report where he pointed to cost overruns of about $300 million at that point in time. The position that we inherited was a deteriorating position and right now we are being advised that the project, the overall project, is about 21 months behind.

So what we did, the Defense Minister and I, before Christmas last year was to commission an independent review, to give us an independent perspective on all of the issues with the program and also make some recommendations on the best way forward. That review of course was led by the former U.S. Secretary of Navy, Professor Winter. They have provided a report to Government both on the issues with the program that we have inherited and also outlining a series of proposed solutions. Now the main problems with the project as we have inherited it is that there were problems with the initial program plan, there were problems with inadequate government oversight, there were problems with the alliance structure which seemed incapable to manage issues if and as they arose and there were also problems with the performance and capabilities of ASC and major subcontractors.

As the Government, we are totally committed to ensure that this program is put back on track, that it is delivered in the most cost effective way possible, which is why we have decided to adopt the recommendations made by the Winter Review in principle while we now proceed with working through some of that detail.

In summary, the reform strategy that Professor Winter has recommended to the Government will seek to improve shipbuilding productivity at the Air Warfare Destroyer Ship Builder ASC and its sub-contractors. It will include the urgent insertion of an experienced shipbuilding management team into ASC and after we have been able to augment shipbuilding capacity, we will seek to pursue the reallocation of blocks between shipyards to ensure that the program is sustainable and that productivity levels are maximized.

We will in progressing this further, seek the advice from commercial and legal advisors. There are obviously some serious complexities involved in giving effect to the recommendations made by the Winter Review, which is why we will immediately engage relevant commercial and legal advisers to assist us through that process. We will have some further announcements to make in terms of the practical implementation of this reform strategy in July this year.

I hand over to my friend and colleague, Senator Johnston.

DEFENSE MINISTER: Well thank you Senator Cormann and can I thank you for the support that you've given the project and the Defence Materiel Organization going forward. When we looked at the numbers surrounding the performance of this program, just before Christmas last year, there was cause for some concern. We balanced baseline production at about 80 man hours per gross tonne for these three ships. Currently it is running at 150 man hours per tonne. There was a rebaselining in May of 2011 and a further change to the schedule again in September 2012. It is clear that none of that work, that remediation work, was adequately surveyed and quite frankly both the Defense and the Finance Departments have come to the conclusion that action needs to be taken. Simply from the perspective that I for one and I know I speak on behalf of Senator Cormann, will not have a project running over time, running over cost at such a particular stage of the program.

Now we are going to take some remedial action, we are sending today a very clear message to industry that we must do better. We must do better. This is the third remediation cycle that has been put before this program. I can assure everybody that myself and Senator Cormann will be surveying this remedial action on a very very regular basis. We are not about to tolerate another Defence blowout in this subject. Now that's what's happened here, dating back to about September/October, we then put the report in place with the assistance of the Finance Department, working together to come up with this solution. Now we are announcing the solution and we are going to put it into play. And that's really all I want to say other than to underline the fact that we are going to fix this up.

FINANCE MINISTER: Happy to take some questions.

JOURNALIST: On the Air Warfare Destroyer Program, there have been three remediations you've said before. What's to say this one is going to be any different? What will you do differently?

FINANCE MINISTER: The main difference here is that we have commissioned a very significant independent review by Professor Winter, who is a very experienced when it comes to shipbuilding, when it comes to requirements of the Navy, as a former Secretary of the US Navy. The reason we have taken some time is exactly to address the particular issue that you have just pointed to. We didn't want to rush, head over heels into making some judgements about a changed approach. We wanted to make sure that we had all the information. That all the information was properly considered. That we have considered all of the potential options on the way forward. We want this to be the final remediation. We want this to be the reform strategy that puts this project back on track for the long haul, to get us to a successful conclusion in the most cost effective and efficient way possible.

JOURNALIST: So what is the difference between this remediation and ones done in the past?

FINANCE MINISTER: It is a more structural remediation. We have essentially, very honestly looked at all of the problems. Without wanting to get into finger pointing, without getting into any blame shifting, what we've said is okay, what were all of the structural and systemic issues. How do we best, moving forward, get this back on track. That is what we are putting forward as the way forward today.

JOURNALIST: If you start changing the management does that mean that Rod Equid and Steve Ludlam will be looking for new work by the end of the day the two of the ASC and the head of the alliance?

FINANCE MINISTER: I will speak for the ASC and the Minister for Defense can talk for Defence of course. Now in relation to the ASC, I had another very good conversation with Bruce Carter the Chair of the ASC last night about the findings in the Winter Review and the way forward and the way the Government proposes to go forward. I have every confidence that Bruce Carter, as the Chair of the Board and the Board of the ASC will work collaboratively, constructively and positively with the Government to ensure that this project is put back on track, that this project is delivered in the most cost effective way possible. Matters related to management at the ASC is a matter for the ASC Board.

DEFENSE MINISTER: I had some discussions with two of the contractors last night. They were official discussions. They were very formal discussions about the fact that this project needs to improve and that we are not going to tolerate the sort of outputs that have been put on the table from a productivity perspective particularly. That bears upon cost and schedule. I can just tell you that the tone that I'm using now is a lot lighter than the tone I was using last night. There are no second chances in this. We are going to wade into this. Senator Cormann and I are going to wade into this. We demand commercial discipline in the project and we're going to have it.

JOURNALIST: Minister, the national audit report pointed out that it was headed for a $300 million blow out and I think it said a 21 months behind schedule. Is there any way that time can be made up without compromising the integrity of the actual ships? And is that $300 million as good as gone? Can we kiss that money goodbye?

FINANCE MINISTER: So you're quite right, the Auditor General pointed to a $300 million cost overrun at that point. As I've said earlier, the position that we inherited was a deteriorating position. The overall project is 21 months behind schedule. The remedial action we are announcing today and that we are proposing to implement over the next couple of months is designed to make up as much time as possible. But I don't believe we will be able to make up all of the time. The first ship was due for delivery in December 2014. Manifestly we're not going to be able to reach that deadline. Is there going to be some exposure for the Commonwealth ultimately as a result of the state the project was in when we came into Government? Yes there will be. Can I put a precise number on that right now? No I can't. But of course the work that we will be doing with all of the government and commercial partners in this project over the next few weeks and months will seek to minimize whatever exposure there is for the Government and for the taxpayer so that we can deliver what is a very important project in a national security context in the most cost-effective way possible.

JOURNALIST: You've spoken sternly to management. You've got presumably a report from a Mr. Winter, are you able to release that report and are you able to explain to us in a little more practical terms any of the measures that might actually be put in place to get us back on track?

FINANCE MINISTER: What we've done today is a release a one-page summary of the report and we've reflected the key findings and the key recommendations in the body of our press release. You'd appreciate that there are a number of senior partners, both in the public sector and in the private sector that are involved in this. There will be some complex negotiations in the next few weeks and the next couple of months. That is the reason why we've decided not to release the full report at this point in time because we don't want to hinder the proper conduct of those negotiations and to achieve a successful conclusion of those negotiations, essentially by creating too much disturbance as those discussions take place. But at the right time the report will be released.

JOURNALIST: And what does this mean for shipbuilding generally and for projects like the prospect of building submarines in Australia?

FINANCE MINISTER: In terms of shipbuilding generally in Australia, it's certainly very important that we get this project back on track, which is why the Defence Minister and I are announcing the measures that we're announcing today.

 DEFENSE MINISTER: Well Brendan, if we can't get this right, if we can't get this to an acceptable benchmark standard, it doesn't say a lot about our future capacity. Now we've got potentially another eight future frigates that we would like to build in Australia, but I am sending a very clear message out today. If we can't fix this, that is something that will certainly be in jeopardy, because I don't believe the Government will support an enterprise that cannot deliver productively.

JOURNALIST: [inaudible] submarines?

 DEFENSE MINISTER: Well submarines are a different kettle of fish altogether. They are much more strategic, tactical artifact. I don't want to connect submarines to the Air Warfare Destroyer at this stage, we are still on the path with respect to the two options that we left to us by the previous Government, and we're still working those through. But may I just underline the fact that this submarine issue is a very very complex.

FINANCE MINISTER: And let me just say as the Shareholder Minister for the ASC here that the ASC is performing very well when it comes to the submarine maintenance program. That is certainly the feedback that we've had from all our relevant partners in the Defence industry.

JOURNALIST: [inaudible] turn their ship around, so to speak, does that make the fourth AWD more of a possibility?

FINANCE MINISTER: Firstly, there will be some structural changes also in the governance arrangements of the program and I wouldn't want to make judgements on 'what if's' might happen before we actually can see that we get the runs on the board with the reform strategy that we've outlined today. Obviously, we want to get into a position where the building of these sorts of ships in Australia can be performed competitively and cost-effectively. But we wouldn't want to pre-empt where we will end up as a result of the decisions that we've announced today.

JOURNALIST: What does that say about the state of the ASC though that you need to insert an experienced a shipbuilding management team?

FINANCE MINISTER: Well what it says is that the ASC did not have the adequate capability to cost-effectively manage a project of this size. Let's not kid ourselves. Effectively, and I think this is a matter of public record, the ASC was quasi learning on the job how to deliver a project of this sort of complexity, the AWD project. Which is why the Winter Review made very clear that there were problems with the initial program plan and there were problems in terms of the inadequate government oversight. Essentially, at the outset the risks with this sort of project, with this sort of program, were underestimated, the effectiveness of risk mitigation strategies was overestimated and it has quite frankly taken too long for a Government to take serious, structural and systemic remedial action. The reason why we're now releasing what we're doing here today is to get on top of that and to give this program the best possible chance to be successful.

JOURNALIST: One last question. Are you able to say under the reallocation, or indicate, who is likely to lose work? Or are you waiting or giving them the chance to improve their productivity?

FINANCE MINISTER: Well this goes to the discussions that we will be having with all of the partners in this project over the next few weeks. You will appreciate that there are some serious commercial sensitivities involved in all of this and the reason we are engaging commercial advisers and legal advisers is to assist us in working through all of these issues both from a governance point of view, from an integrity point of view and also in terms of making sure that we make the best decisions ultimately for the sustainable delivery of this project.

JOURNALIST: Are they on notice that they have to demonstrate they have improved productivity , or else?

FINANCE MINISTER: Everyone involved in this project is on notice. Everybody involved in this project is 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.

JOURNALIST: Minister, to be absolutely clear, this is a final warning. If you don't lift your game, that's it, no shipbuilding in Australia?

FINANCE MINISTER: This is the final opportunity to get this right, there's no two ways about it.