The fog of Defence contracts

Department of Defence secretly investigates itself, does not make public the review’s existence or its terms of reference, and keeps any resulting report secret. Defence recommends buying hundreds of vehicles from Thales, despite no need for them, just so Thales can keep its factory open. Michelle Fahy investigates.

20 November 2020 | Michelle Fahy/Michael West Media
(Image: Thales/digital manipulation by APAC News)

The culture of cosiness; the revolving door; and undue influence. The relationship between government and military industrial companies is just one strand of the evidence showing the urgent need for a national anti-corruption commission. “Undue influence” is a noted marker for corruption.

In a recent investigation Michael West Media examined how the then $50 billion (now $80 billion) submarine contract was awarded to Naval Group, despite it being under investigation in numerous countries over probity issues, including bribery and corruption concerns.

The multinational weapons maker Thales has also exerted influence on successive governments. There has been considerable coverage of how Thales pressured federal Attorney General Christian Porter to censor key parts of the auditor general’s report into the procurement process for the Thales Hawkei vehicle. There is more to that story than the censored sections.

Then there is yet another key supplier to Defence, the UK multinational BAE Systems, which in 2018 won the $35 billion future frigate contract to build the navy’s nine new anti-submarine warships. The new contract was awarded even though there had reportedly been “long-running concerns” inside Defence about alleged inflation of invoices by tens of millions of dollars by BAE for its work on the navy’s elderly Adelaide-class of frigates (now decommissioned). An internal audit by Defence reportedly found BAE’s Adelaide contract “riddled with cost overruns, with the British company consistently invoicing questionable charges”. By May 2019, Defence had launched a fresh investigation.

Thales and the Hawkei: “Extensive industry lobbying”

A 2018 Australian National Audit Office (ANAO) report details the acquisition process for the Thales Hawkei vehicle, which was ultimately selected as the ‘light’ vehicle within a multi-phase procurement started in 2003 to replace Australian Defence Force field vehicles and trailers.

Initially, the decision was made that Australian-based options for a light vehicle were high risk and high cost and that Australia would partner with the US in its new-build joint light tactical vehicle program (JLTV) while also retaining the option of buying a vehicle “off the shelf”. In 2008, following the change of government in late 2007, the overall project became politically contentious, with claims and counterclaims made by new and former government ministers, with various project contracts cancelled and retendered.

Against that backdrop, in December 2008, Thales Australia made an unsolicited pitch to Defence for a new ‘manufactured and supported in Australia’ option for the light vehicle. The pitch was accompanied by what the ANAO described as “extensive industry lobbying”. A key lobbying point was that the Thales Bendigo factory, then manufacturing the medium Bushmaster armoured vehicle, would run out of work when Bushmaster production ceased, putting jobs at risk.

It was decided that Australian options for a light vehicle should be sought after all. Three Australian options, including Thales, were subsequently included.

The Thales proposal was seen as high risk because it was a developmental proposal and therefore also carried high cost risks, particularly given the limited number required. To manage those risks, Prime Minister Rudd requested that the defence and finance ministers jointly assess the Australian industry proposals. The ANAO report says Defence did not carry out this prime ministerial request.

Thales Hawkei military vehicle (supplied)

The ANAO report also includes part of a letter (p35) from the prime minister to the defence minister expressing doubt that an Australian developmental option could offer any legitimate competition to the more developmentally advanced US JLTV program. Despite his concerns, PM Rudd authorised $30 million for prototyping activities for the Australian option.

By 2011 Defence was recommending the Thales Hawkei as the preferred option. The government agreed the Hawkei program could continue but directed that the JLTV also continue as a backup. The government directed that the Defence and Finance departments jointly agree the cost estimate difference between the Hawkei and the JLTV. The ANAO report says Defence did not provide its audit with any evidence “that a single agreed cost comparison was undertaken with Finance as requested by the Government” (p40).

In September 2013 the Coalition defeated Labor in the federal election.

In March 2015 Thales appointed Brendan Nelson – Liberal defence minister prior to Labor’s 2007 election win – to its “advisory board”.

Five months later, the Coalition government approved the Thales Hawkei acquisition and in October the contract was signed.

The ANAO report contains many significant revelations; the following are just some of the concerns raised:

  • Defence did not make the government aware of the results of an economic study it commissioned from Monash University that found there would be limited regional economic benefits from the Hawkei project, and that Defence would be paying a substantial premium for it (p38). Governments make much of the importance of local jobs, yet the study noted that the jobs created in Bendigo would likely reduce job numbers by a similar number elsewhere, and the majority of Thales’ profits would end up with overseas shareholders (p39).
  • Defence estimated the costs for an Australian option at $2 billion, some $700 million more than the two other options being considered (p33).
  • Defence recommended the purchase of 214 extra Bushmaster vehicles from Thales, despite admitting there was little need for them. This was so Thales could keep its Bendigo plant operational while it was awaiting possible approval of the Hawkei. Four government departments opposed this plan – Prime Minister and Cabinet, Treasury, Finance, and Foreign Affairs and Trade. Nevertheless, the purchase went ahead and Defence’s expenditure rose by $221 million. This amount was not taken into account when the cost of the Hawkei was assessed at the next evaluation point, despite Treasury advice to do so. The national audit office says the alternative plan of closing and later reopening the Bendigo facility would have cost $33 million, less than one-sixth the cost of buying 214 unnecessary Bushmasters. (p41)
  • Once Defence dropped the JLTV option and moved into a sole source tender with Thales for the Hawkei it eroded most of its ability to exert pressure on price. It removed any remaining leverage when it sought government approval on the Hawkei prior to the completion of its negotiations with Thales. Defence records indicate that once Thales knew the government had approved the Hawkei it refused to negotiate anything further of significance.

“Pressuring the Commonwealth”

Seven independent expert ‘gate’ reviews of the Hawkei procurement were conducted between October 2010 and October 2017. The 2016 review commended the work that had been done to achieve acquisition approval, but noted there was a risk of a major failure by Thales (p58).

The review also observed that, “Thales has already been successful in pressuring the Commonwealth to relax requirements and can be expected to do so again in the future if Thales fails to perform.” (p59)

In response Thales told the ANAO in August 2018: “Thales rejects any suggestion that undue pressure has been brought to bear.” (p59)

Despite widespread support for an increase in the ANAO’s funding, in the last federal budget its funding was cut, in what was perceived as payback for its politically damaging investigations like the ‘sports rorts’. There are calls to protect the ANAO from budget cuts by making it a parliamentary department.

Oversight of contract expenses

In May 2019, Thales was in the media again, along with BAE Systems Australia.

The Weekend Australian ran an article headlined “Defence probes ‘inflated’ contracts”. It said Defence had opened a secret investigation into Thales and BAE over allegations that both corporations had inflated ongoing contracts by tens of millions of dollars through unsubstantiated expenses.

As noted earlier, despite these serious audit concerns on the Adelaide-class frigates, in 2018 BAE was awarded the $35 billion contract to build the navy’s newest generation of nine anti-submarine warfare frigates.

A second article the same day said the Defence audit team revealed frustration at BAE’s inability or unwillingness to justify a string of expenses, such as bus hire, travel and catering, amounting to hundreds of thousands of dollars, and says it repeatedly complained that BAE failed to provide breakdowns of costs or supporting evidence for them.

Concerns about BAE had reportedly been raised within Defence since 2014 but Defence only began its secret investigation in late 2018, in response to a whistleblower.

An accompanying third story described how fraud officials from Defence were also apparently told that Thales had been paid an unexplained extra $16 million for work on the same ships and that a $30 million increase in Thales’ contract was not properly approved. Thales was also reportedly allowed to claim an extra $100,000 to $200,000 per quarter more than it was entitled to due to an improper financial formula used by Defence. The story reports an accusation that Thales refused to provide officials within Defence’s Capability Acquisition and Sustainment Group (CASG) with financial information.

The Weekend Australian said Defence appointed Graham Eveille of Eveille Consulting to conduct a fresh investigation into the concerns. Eveille was reportedly also asked to investigate whether a staff member at CASG inappropriately favoured Thales and BAE when making procurement decisions.

Eveille Consulting was, and remains, an existing contractor to Defence. It is not apparent, from the limited information available, that Defence’s choice of consultant has relevant experience or qualifications in conducting investigations. Mr Eveille had not responded to questions by time of publication.

Michael West Media asked Defence whether this internal review was complete and, if so, what the review had found and whether any specific actions had been taken.

A spokesperson said:

“An independent internal review of this matter found no evidence of inappropriate excess charges by BAE and Thales. The investigation did find some minor administrative issues which have been subsequently addressed through additional training. This training is now part of the normal cycle and is routinely refreshed.”

Defence investigates itself

How “independent” or effective a review is it when a department secretly investigates itself and its contractors by appointing an existing contractor to conduct the review, does not make public the review’s existence or its terms of reference, and keeps any resulting report secret?

Defence says the review found “no evidence” of inappropriate excess charges. This is despite three stories the same day in The Weekend Australian containing detailed allegations. So serious were the allegations, they were escalated up to Defence’s assistant secretary of fraud control who reportedly then referred several matters to the Independent Assurance Business Analysis and Reform Branch of Defence.

Is Defence saying multiple audit and fraud officials, including at the most senior levels, all got it wrong?

Are we being asked to conclude that senior Defence fraud officials cannot accurately identify inappropriate excess charges?

It seems there is a serious problem then, no matter which way we look at it.

This article was first published by Michael West Media
Michelle Fahy has had a long career in writing and research, initially in the financial services sector producing plain language investor communications. For the last 10 years, she has been involved in research and campaigning for various organisations seeking to reduce warfare and militarism. 

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