{"id":12785,"date":"2014-03-14T06:00:00","date_gmt":"2014-03-13T19:00:00","guid":{"rendered":"http:\/\/www.aspistrategist.ru\/?p=12785"},"modified":"2014-03-17T10:50:17","modified_gmt":"2014-03-16T23:50:17","slug":"the-awds-and-the-auditors-round-two","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/the-awds-and-the-auditors-round-two\/","title":{"rendered":"The AWDs and the auditors\u2014round two"},"content":{"rendered":"

\"A<\/a><\/p>\n

When the Australian National Audit Office’s audit report on the Air Warfare Destroyer program<\/a> was released last week, I was told by a veteran journo that it was a bit of a disappointment to his colleagues. They\u2019d apparently been hoping for a story about a Defence managed fiasco that\u2019d make for screaming headlines along the lines of \u2018billions wasted says government watchdog\u2019.<\/p>\n

That\u2019s an unfortunate reflection on the state of news reporting these days, because the ANAO report is a very important one, and it has implications far beyond the AWD program. It fills out much of the detail\u00a0hinted at last year<\/a>\u00a0in ’round one’. And I\u2019d have thought there are enough titbits in there to make for at least a moderately unhappy story if that\u2019s what required to sell papers (or, increasingly, to draw clicks). But it\u2019s also to my eye the auditor\u2019s best Defence project effort to date, so let me at least put my vote of thanks on the record for an important piece of work.<\/p>\n

This report is especially significant because there\u2019s bipartisan support in Australia for continuing naval shipbuilding in country. So despite the shortcomings in the AWD build, more such projects are likely to follow\u2014with costs to taxpayers running into tens of billions of dollars. It\u2019s pretty important to understand what\u2019s happened in this case.<\/p>\n

I\u2019d recommend reading at least the summary of the report, but I\u2019ll provide some comments on what I think are the most salient points. Let\u2019s start with the headline issue of cost overruns: the alliance building the vessels is reporting an estimated final cost of some $302 million, or 6.8% above the target cost estimate. But given that the overrun in the 2012\u201313 financial year was $106.4 million as a result of increased labour, materials and subcontract costs, largely for the relatively straightforward industrial work of module construction, and that the difficult system integration parts are still to come, it could easily get worse than that. The ANAO says as much: \u2018the current estimated cost [overrun] of $302 million \u2026 should be treated with caution; the cost increase is likely to be significantly greater. \u2026 the program is approaching the complex stage of systems integration when, historically, cost and schedule risks tend to rise\u2019.<\/p>\n

So by the time the program\u2019s finished, we\u2019re going to end up paying an even larger than expected premium for local construction of these vessels. The report tells us that the 2007 Treasury estimate of the premium was \u2018around $1 billion\u2019. My estimate was $1.5 billion<\/a> (PDF), which probably won\u2019t be far off the mark. We also learn that the \u2018effective rate of assistance\u2019\u2014a measure of economic distortion due to the program\u2014was estimated at 30%, a figure well above the level for other subsidised industries.<\/p>\n

Those figures are sobering. Naval shipbuilding is an enterprise that\u2019s consuming taxpayer\u2019s resources that are therefore not available for other government programs. And there\u2019s no shortage of lobby groups making the case for expanding<\/i> it, arguing that it\u2019s the stop-start nature of the business that has caused the problems seen here. Indeed, the ANAO includes some comments along those lines from two of the shipbuilders (whose performance fell short of what was expected when the project was approved):<\/p>\n

\u2026 companies that have participated in the AWD Program, our company included, have faced a significant challenge from the need to re-establish capability, capacity and experience after the gap in naval shipbuilding that preceded the start of AWD construction.<\/p><\/blockquote>\n

And:<\/p>\n

\u2026 the costs of ramping back up to a competitive shipyard to maintain the indigenous shipbuilding capability have not been fully appreciated in terms of the magnitude of the investment required in facilities, recruitment, training and retention of the workforce to reach competitive productivity; once established, the shipbuilding capability will once again dilute and disappear if not utilised in an ongoing shipbuilding program out across the Defence portfolio.<\/p><\/blockquote>\n

As I said above, there\u2019s bipartisan support to respond positively to these entreaties. So the policy question now becomes \u2018how best to ensure that the local naval shipbuilding industry performs as well as it can\u2019? The first thing to do is to try to work out how much of the underperformance of the AWD program is due to genuinely unavoidable learning issues in an industry that hadn\u2019t built a warship in well over a decade, and how much is due to factors more amenable to best practice management.<\/p>\n

There\u2019s plenty of evidence in this report of start-up and inexperience woes, which seem to have taken pretty much everyone by surprise, despite $262 million being spent on due diligence activities before contract signature. And some of the problems should\u2019ve been predictable. Looking over the report, devotees of Augustine\u2019s and Gumley\u2019s Laws will recognise some old friends. In paragraph 26, for example, we find:<\/p>\n

\u2026 additional modifications primarily to accommodate the Australianised Combat System, which comprises an upgraded Aegis Weapon System and additional Australian elements to meet specific capability requirements. The selection of largely existing platform and combat system designs formed the basis of the DMO\u2019s technical risk reduction strategy for the Program, and was considered at the time to provide a high level of comfort.<\/p><\/blockquote>\n

The \u2018specific capability requirements\u2019 might well be Augustine\u2019s final 10% of capability<\/a>, which we know leads to 1\/3 of the cost and 2\/3 of the risk. And Gumley\u2019s laws remind us that combining off-the-shelf systems isn\u2019t off-the-shelf. (MOTS + MOTS \u2260 MOTS<\/a>)<\/p>\n

But that was then and this is now. And those errors, while regrettable, are now behind us. Hopefully we\u2019ll learn from the experience and not repeat the beginner\u2019s mistakes that have plagued this program. Next week I\u2019ll come back to the report and tease out what it might teach us for future naval shipbuilding programs. There are some powerful lessons here\u2014especially for the future submarine.<\/p>\n

Andrew Davies is senior analyst for defence capability at ASPI and executive editor of\u00a0<\/em><\/em>The Strategist. Image courtesy of Department of Defence<\/a>.<\/em><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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