2010–11 Major Projects Report

T h e A u d i t o r - G e n e r a l Report No.20 2011–12
Assurance Report
Defence Materiel Organisation
A u s t r a l i a n N a t i o n a l A u d i t O f f i c e
ANAO Report No.20 2011–12 2010–2011 Major Projects Report 2
© Commonwealth
of Australia 2011 ISSN 1036–7632 ISBN 0 642 81222 5
COPYRIGHT INFORMATION This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: Executive Director Corporate Management Branch Australian National Audit Office 19 National Circuit BARTON ACT 2600 Or via email: [email protected]
ANAO Report No.20 2011–12 2010–2011 Major Projects Report
3
Canberra ACT 20 December 2011 Dear Mr President Dear Mr Speaker The Australian National Audit Office has undertaken a review of the status of selected Defence equipment acquisition projects as at 30 June 2011 as presented by the Defence Materiel Organisation in accordance with the authority contained in the Auditor-General Act 1997. Pursuant to Senate Standing Order 166 relating to the presentation of documents when the Senate is not sitting, I present the report of this review to the Parliament. The report is titled 2010–11 Major Projects Report. Following its presentation and receipt, the report will be placed on the Australian National Audit Office’s Homepage—http://www.anao.gov.au. Yours sincerely Ian McPhee Auditor-General The Honourable the President of the Senate The Honourable the Speaker of the House of Representatives Parliament House Canberra ACT
© Commonwealth
of Australia 2011 ISSN 1036–7632 ISBN 0 642 81222 5
COPYRIGHT INFORMATION This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to: Executive Director Corporate Management Branch Australian National Audit Office 19 National Circuit BARTON ACT 2600 Or via email: [email protected]
3
Canberra ACT 20 December 2011 Dear Mr President Dear Mr Speaker The Australian National Audit Office has undertaken a review of the status of selected Defence equipment acquisition projects as at 30 June 2011 as presented by the Defence Materiel Organisation in accordance with the authority contained in the Auditor-General Act 1997. Pursuant to Senate Standing Order 166 relating to the presentation of documents when the Senate is not sitting, I present the report of this review to the Parliament. The report is titled 2010–11 Major Projects Report. Following its presentation and receipt, the report will be placed on the Australian National Audit Office’s Homepage—http://www.anao.gov.au. Yours sincerely Ian McPhee Auditor-General The Honourable the President of the Senate The Honourable the Speaker of the House of Representatives Parliament House Canberra ACT
AUDITING FOR AUSTRALIA The Auditor-General is head of the Australian National Audit Office (ANAO). The ANAO assists the Auditor-General to carry out his duties under the Auditor-General Act 1997 to undertake performance audits, financial statement audits and assurance reviews of Commonwealth public sector bodies and to provide independent reports and advice for the Parliament, the Australian Government and the community. The aim is to improve Commonwealth public sector administration and accountability. For further information contact: The Publications Manager Australian National Audit Office GPO Box 707 Canberra ACT 2601 Telephone: (02) 6203 7505 Fax: (02) 6203 7519 Email: [email protected] ANAO audit reports and information about the ANAO are available at our internet address: http://www.anao.gov.au
Assurance Review Team
Dr Carolyn Cuello Ben Watson Sean Neubeck Anora Harris
Anne Kent Evan Moraitis
5
Auditor-General’s Foreword .................................................................................. 11 Summary ................................................................................................................... 13
Introduction ........................................................................................................... 13 Report objective and review scope ....................................................................... 16 Overall conclusion ................................................................................................ 17
1. 2010–11 MPR Review .......................................................................................... 29 Introduction ........................................................................................................... 29 Report structure .................................................................................................... 29 Review approach .................................................................................................. 32 Review outcomes ................................................................................................. 36
2. Projects’ Performance .......................................................................................... 43 Introduction ........................................................................................................... 43 Cost performance ................................................................................................. 47 Schedule performance .......................................................................................... 58 Capability performance ......................................................................................... 71
3. Governance and Business Processes .................................................................. 81 Introduction ........................................................................................................... 81 Governance framework for Major Projects ............................................................ 81 Business Processes for Major Projects ................................................................. 84
Part 2. DMO Major Projects Report ..................................................................... 93
CEO DMO Foreword ................................................................................................. 95 Executive Summary ................................................................................................... 97 1. DMO Strategic Performance in 2010-11 ..............................................................109
Introduction ..........................................................................................................109 DMO Overview ....................................................................................................110 DMO Strategic Risk Environment ........................................................................115 DMO Wide Risk Management Framework ...........................................................120 Project Lessons Learned .....................................................................................121 Governance .........................................................................................................125 Other Business Improvements .............................................................................128 Base Date Dollar Budget Management ................................................................135 Out-turned Budget Management .........................................................................136
2. Summary of Major Project Performance in 2010-11 ...........................................139 Introduction ..........................................................................................................139 Performance Overview ........................................................................................140
AUDITING FOR AUSTRALIA The Auditor-General is head of the Australian National Audit Office (ANAO). The ANAO assists the Auditor-General to carry out his duties under the Auditor-General Act 1997 to undertake performance audits, financial statement audits and assurance reviews of Commonwealth public sector bodies and to provide independent reports and advice for the Parliament, the Australian Government and the community. The aim is to improve Commonwealth public sector administration and accountability. For further information contact: The Publications Manager Australian National Audit Office GPO Box 707 Canberra ACT 2601 Telephone: (02) 6203 7505 Fax: (02) 6203 7519 Email: [email protected] ANAO audit reports and information about the ANAO are available at our internet address: http://www.anao.gov.au
Assurance Review Team
Dr Carolyn Cuello Ben Watson Sean Neubeck Anora Harris
Anne Kent Evan Moraitis
5
Auditor-General’s Foreword .................................................................................. 11 Summary ................................................................................................................... 13
Introduction ........................................................................................................... 13 Report objective and review scope ....................................................................... 16 Overall conclusion ................................................................................................ 17
1. 2010–11 MPR Review .......................................................................................... 29 Introduction ........................................................................................................... 29 Report structure .................................................................................................... 29 Review approach .................................................................................................. 32 Review outcomes ................................................................................................. 36
2. Projects’ Performance .......................................................................................... 43 Introduction ........................................................................................................... 43 Cost performance ................................................................................................. 47 Schedule performance .......................................................................................... 58 Capability performance ......................................................................................... 71
3. Governance and Business Processes .................................................................. 81 Introduction ........................................................................................................... 81 Governance framework for Major Projects ............................................................ 81 Business Processes for Major Projects ................................................................. 84
Part 2. DMO Major Projects Report ..................................................................... 93
CEO DMO Foreword ................................................................................................. 95 Executive Summary ................................................................................................... 97 1. DMO Strategic Performance in 2010-11 ..............................................................109
Introduction ..........................................................................................................109 DMO Overview ....................................................................................................110 DMO Strategic Risk Environment ........................................................................115 DMO Wide Risk Management Framework ...........................................................120 Project Lessons Learned .....................................................................................121 Governance .........................................................................................................125 Other Business Improvements .............................................................................128 Base Date Dollar Budget Management ................................................................135 Out-turned Budget Management .........................................................................136
2. Summary of Major Project Performance in 2010-11 ...........................................139 Introduction ..........................................................................................................139 Performance Overview ........................................................................................140
Part 3. Auditor-General’s Review, CEO DMO Statement and Project Data Summary Sheets ........................................................................................173
Independent Review Report by the Auditor-General .................................................175 Statement by the CEO DMO .....................................................................................179 Project Data Summary Sheets ..................................................................................183
AIR WARFARE DESTROYER .............................................................................................. 185 AIRBORNE EARLY WARNING AND CONTROL AIRCRAFT ............................................. 197 MULTI ROLE HELICOPTER ................................................................................................. 207 BRIDGING AIR COMBAT CAPABILITY ............................................................................... 219 OVERLANDER ...................................................................................................................... 235 AMPHIBIOUS SHIPS (LHD) PROJECT ............................................................................... 247 NEW AIR COMBAT CAPABILITY ......................................................................................... 259 ARMED RECONNAISSANCE HELICOPTER ...................................................................... 271 F/A-18 HORNET UPGRADE ................................................................................................. 281 C-17 GLOBEMASTER III HEAVY AIRLIFTER ..................................................................... 295 AIR TO AIR REFUELLING CAPABILITY .............................................................................. 303 GUIDED MISSILE FRIGATE UPGRADE IMPLEMENTATION ............................................ 317 F/A-18 HORNET UPGRADE STRUCTURAL REFURBISHMENT ...................................... 331 BUSHMASTER PROTECTED MOBILITY VEHICLE ........................................................... 339 NEXT GENERATION SATCOM CAPABILITY ..................................................................... 351 HIGH FREQUENCY MODERNISATION .............................................................................. 361 SM-1 MISSILE REPLACEMENT .......................................................................................... 373 ADDITIONAL MEDIUM LIFT HELICOPTERS ...................................................................... 385 ARMIDALE CLASS PATROL BOAT ..................................................................................... 395 ANZAC ANTI-SHIP MISSILE DEFENCE 2B ........................................................................ 407 COLLINS REPLACEMENT COMBAT SYSTEM .................................................................. 419 REPLACEMENT HEAVYWEIGHT TORPEDO .................................................................... 431 COLLINS CLASS SUBMARINE RELIABILITY AND SUSTAINABILITY .............................. 443 INDIAN OCEAN REGION UHF SATCOM ............................................................................ 455 ANZAC ANTI-SHIP MISSILE DEFENCE 2A ........................................................................ 465 FOLLOW ON STAND OFF WEAPON .................................................................................. 475 ARTILLERY REPLACEMENT PROJECT ............................................................................. 487 BATTLEFIELD COMMAND SUPPORT ................................................................................ 499
Appendices .............................................................................................................509
Appendix 1: Guidance for Readers of the DMO’s 2010-11 MPR Project Data Summary Sheet ....................................................................511
Appendix 2: Types of Acquisition Undertaken by the DMO ...............................522 Appendix 3: Categorising Acquisitions ..............................................................523 Appendix 4: Project Maturity Scores – Monitoring Progress .............................524 Appendix 5: JCPAA Report 422: REVIEW OF THE 2009-10 DEFENCE
MATERIEL ORGANISATION MAJOR PROJECTS REPORT .......529 Appendix 6: Glossary ........................................................................................533
Series Titles ..............................................................................................................541 Current Better Practice Guides .................................................................................544
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Abbreviations
ANAO Australian National Audit Office
AOR Acquisition Overview Report
ARH Armed Reconnaissance Helicopter
ASMD AntiShip Missile Defence
AWD Air Warfare Destroyer
COTS CommercialOffTheShelf
DEFMIS Defence Financial Management Information System
DMO Defence Materiel Organisation
FFG Fast Frigate Guided (Guided Missile Frigate)
FIC Fundamental Inputs to Capability
FMR Final Materiel Release
FMS Foreign Military Sales
FOC Final Operational Capability
Hw Heavyweight
Part 3. Auditor-General’s Review, CEO DMO Statement and Project Data Summary Sheets ........................................................................................173
Independent Review Report by the Auditor-General .................................................175 Statement by the CEO DMO .....................................................................................179 Project Data Summary Sheets ..................................................................................183
AIR WARFARE DESTROYER .............................................................................................. 185 AIRBORNE EARLY WARNING AND CONTROL AIRCRAFT ............................................. 197 MULTI ROLE HELICOPTER ................................................................................................. 207 BRIDGING AIR COMBAT CAPABILITY ............................................................................... 219 OVERLANDER ...................................................................................................................... 235 AMPHIBIOUS SHIPS (LHD) PROJECT ............................................................................... 247 NEW AIR COMBAT CAPABILITY ......................................................................................... 259 ARMED RECONNAISSANCE HELICOPTER ...................................................................... 271 F/A-18 HORNET UPGRADE ................................................................................................. 281 C-17 GLOBEMASTER III HEAVY AIRLIFTER ..................................................................... 295 AIR TO AIR REFUELLING CAPABILITY .............................................................................. 303 GUIDED MISSILE FRIGATE UPGRADE IMPLEMENTATION ............................................ 317 F/A-18 HORNET UPGRADE STRUCTURAL REFURBISHMENT ...................................... 331 BUSHMASTER PROTECTED MOBILITY VEHICLE ........................................................... 339 NEXT GENERATION SATCOM CAPABILITY ..................................................................... 351 HIGH FREQUENCY MODERNISATION .............................................................................. 361 SM-1 MISSILE REPLACEMENT .......................................................................................... 373 ADDITIONAL MEDIUM LIFT HELICOPTERS ...................................................................... 385 ARMIDALE CLASS PATROL BOAT ..................................................................................... 395 ANZAC ANTI-SHIP MISSILE DEFENCE 2B ........................................................................ 407 COLLINS REPLACEMENT COMBAT SYSTEM .................................................................. 419 REPLACEMENT HEAVYWEIGHT TORPEDO .................................................................... 431 COLLINS CLASS SUBMARINE RELIABILITY AND SUSTAINABILITY .............................. 443 INDIAN OCEAN REGION UHF SATCOM ............................................................................ 455 ANZAC ANTI-SHIP MISSILE DEFENCE 2A ........................................................................ 465 FOLLOW ON STAND OFF WEAPON .................................................................................. 475 ARTILLERY REPLACEMENT PROJECT ............................................................................. 487 BATTLEFIELD COMMAND SUPPORT ................................................................................ 499
Appendices .............................................................................................................509
Appendix 1: Guidance for Readers of the DMO’s 2010-11 MPR Project Data Summary Sheet ....................................................................511
Appendix 2: Types of Acquisition Undertaken by the DMO ...............................522 Appendix 3: Categorising Acquisitions ..............................................................523 Appendix 4: Project Maturity Scores – Monitoring Progress .............................524 Appendix 5: JCPAA Report 422: REVIEW OF THE 2009-10 DEFENCE
MATERIEL ORGANISATION MAJOR PROJECTS REPORT .......529 Appendix 6: Glossary ........................................................................................533
Series Titles ..............................................................................................................541 Current Better Practice Guides .................................................................................544
7
Abbreviations
ANAO Australian National Audit Office
AOR Acquisition Overview Report
ARH Armed Reconnaissance Helicopter
ASMD AntiShip Missile Defence
AWD Air Warfare Destroyer
COTS CommercialOffTheShelf
DEFMIS Defence Financial Management Information System
DMO Defence Materiel Organisation
FFG Fast Frigate Guided (Guided Missile Frigate)
FIC Fundamental Inputs to Capability
FMR Final Materiel Release
FMS Foreign Military Sales
FOC Final Operational Capability
Hw Heavyweight
IMR Initial Materiel Release
IOC Initial Operational Capability
JSF Joint Strike Fighter
LHD Landing Helicopter Docks
MAA Materiel Acquisition Agreement
MOTS MilitaryOffTheShelf
MOU Memorandum Of Understanding
MPR Major Projects Report
MRH90 MultiRole Helicopter
MRM Materiel Release Milestone
RCS Replacement Combat System
R&S Reliability and Sustainability
SADI Skilling Australia’s Defence Industry
SATCOM Satellite Communication
ANAO Overview ANAO Report No.20 2011–12
2010–2011 Major Projects Report
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Part 1: ANAO Overview
IMR Initial Materiel Release
IOC Initial Operational Capability
JSF Joint Strike Fighter
LHD Landing Helicopter Docks
MAA Materiel Acquisition Agreement
MOTS MilitaryOffTheShelf
MOU Memorandum Of Understanding
MPR Major Projects Report
MRH90 MultiRole Helicopter
MRM Materiel Release Milestone
RCS Replacement Combat System
R&S Reliability and Sustainability
SADI Skilling Australia’s Defence Industry
SATCOM Satellite Communication
9
Part 1: ANAO Overview
ANAO Overview ANAO Report No.20 2011–12 2010–2011 Major Projects Report 10
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Auditor-General’s Foreword Managing major Defence equipment acquisitions that successfully deliver front line capability for the Australian Defence Force represents a significant challenge, not unique to Australia. As major Defence equipment acquisitions are often expensive and technically complex, there are significant risks, not only to delivering within budget and on schedule, but also to delivering the required capability.
This fourth review of the status of selected Defence equipment acquisition projects builds on the work undertaken by the Defence Materiel Organisation (DMO) and the Australian National Audit Office (ANAO) to improve the transparency and public accountability for major Defence equipment acquisitions. The 2010–11 Major Projects Report (MPR) includes 28 projects with approved budgets totalling $46.1 billion, which is over half of the approved budget for the DMO’s major capital investment program ($79.5 billion).
The preparation of the MPR has received strong ongoing support from the Government and the Joint Committee of Public Accounts and Audit (JCPAA). In April 2011, the second examination of the MPR by the JCPAA culminated in the publishing of JCPAA Report 422, Review of the 2009–10 Defence Materiel Organisation Major Projects Report. Report 422 made nine recommendations to further progress and improve the transparency and accountability of major Defence equipment acquisitions. Action already taken by the DMO to implement the JCPAA’s recommendations contributed to the enhancement of this MPR, in terms of improved reporting on each of the three key elements of the MPR: cost, schedule and capability. As the DMO further progresses the implementation of these recommendations, future MPRs will also benefit.
In addition, the Foreign Affairs, Defence and Trade References Committee is currently undertaking an inquiry into Procurement procedures for Defence capital projects. This report, which covers DMO’s most significant procurements, along with other ANAO reports on Defence acquisitions, provides relevant information to assist the Committee in its deliberations.

11
Auditor-General’s Foreword Managing major Defence equipment acquisitions that successfully deliver front line capability for the Australian Defence Force represents a significant challenge, not unique to Australia. As major Defence equipment acquisitions are often expensive and technically complex, there are significant risks, not only to delivering within budget and on schedule, but also to delivering the required capability.
This fourth review of the status of selected Defence equipment acquisition projects builds on the work undertaken by the Defence Materiel Organisation (DMO) and the Australian National Audit Office (ANAO) to improve the transparency and public accountability for major Defence equipment acquisitions. The 2010–11 Major Projects Report (MPR) includes 28 projects with approved budgets totalling $46.1 billion, which is over half of the approved budget for the DMO’s major capital investment program ($79.5 billion).
The preparation of the MPR has received strong ongoing support from the Government and the Joint Committee of Public Accounts and Audit (JCPAA). In April 2011, the second examination of the MPR by the JCPAA culminated in the publishing of JCPAA Report 422, Review of the 2009–10 Defence Materiel Organisation Major Projects Report. Report 422 made nine recommendations to further progress and improve the transparency and accountability of major Defence equipment acquisitions. Action already taken by the DMO to implement the JCPAA’s recommendations contributed to the enhancement of this MPR, in terms of improved reporting on each of the three key elements of the MPR: cost, schedule and capability. As the DMO further progresses the implementation of these recommendations, future MPRs will also benefit.
In addition, the Foreign Affairs, Defence and Trade References Committee is currently undertaking an inquiry into Procurement procedures for Defence capital projects. This report, which covers DMO’s most significant procurements, along with other ANAO reports on Defence acquisitions, provides relevant information to assist the Committee in its deliberations.


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Summary Introduction 1. Major Defence equipment acquisition projects (Major Projects) are the subject of considerable Parliamentary and public interest, in view of their high cost, planned contribution to national security and the challenges involved in completing Major Projects within budget, on time and to the required level of capability.
2. The Defence Materiel Organisation (DMO) contributes to the development and sustainment of capability for the Australian Defence Force (ADF) and expended some $5.6 billion on major and minor capital acquisition projects in 2010–11.1
3. Over the next 15 years, the Government intends to replace or upgrade up to 55 per cent of the ADF’s equipment.2 This will include the purchase of equipment in all of the major elements of ADF capability, including Land, Air, Sea and Joint capabilities, as publicised in the Defence White Paper. These procurements by the DMO do not generate new capability for the Defence Organisation until they have been successfully introduced into service with the ADF. Thus, while the DMO’s role is only part of the introduction into service of new capability, it is a significant one.
2010–11 Major Projects Report projects 4. This fourth report covers 28 of the DMO’s Major Projects, an increase of six projects on last year’s report and an increase of 19 projects when compared to the first Major Projects Report (MPR), which was tabled in Parliament in November 2008. The 28 Major Projects and their approved budgets are set out in Table 1.
5. In total, the approved budgets for the 28 Major Projects amount to $46.1 billion, as at 30 June 2011. This represents over half of the budget for the DMO’s approved major capital investment program ($79.5 billion).
1 Department of Defence, Defence Annual Report 2010–11, Volume 2 Defence Materiel Organisation,
p. 25. 2 Minister for Defence Materiel, the Hon. Jason Clare MP, Defence Skills Plan to Meet the Challenges
Ahead, Brisbane 2011.

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Summary Introduction 1. Major Defence equipment acquisition projects (Major Projects) are the subject of considerable Parliamentary and public interest, in view of their high cost, planned contribution to national security and the challenges involved in completing Major Projects within budget, on time and to the required level of capability.
2. The Defence Materiel Organisation (DMO) contributes to the development and sustainment of capability for the Australian Defence Force (ADF) and expended some $5.6 billion on major and minor capital acquisition projects in 2010–11.1
3. Over the next 15 years, the Government intends to replace or upgrade up to 55 per cent of the ADF’s equipment.2 This will include the purchase of equipment in all of the major elements of ADF capability, including Land, Air, Sea and Joint capabilities, as publicised in the Defence White Paper. These procurements by the DMO do not generate new capability for the Defence Organisation until they have been successfully introduced into service with the ADF. Thus, while the DMO’s role is only part of the introduction into service of new capability, it is a significant one.
2010–11 Major Projects Report projects 4. This fourth report covers 28 of the DMO’s Major Projects, an increase of six projects on last year’s report and an increase of 19 projects when compared to the first Major Projects Report (MPR), which was tabled in Parliament in November 2008. The 28 Major Projects and their approved budgets are set out in Table 1.
5. In total, the approved budgets for the 28 Major Projects amount to $46.1 billion, as at 30 June 2011. This represents over half of the budget for the DMO’s approved major capital investment program ($79.5 billion).
1 Department of Defence, Defence Annual Report 2010–11, Volume 2 Defence Materiel Organisation,
p. 25. 2 Minister for Defence Materiel, the Hon. Jason Clare MP, Defence Skills Plan to Meet the Challenges
Ahead, Brisbane 2011.
6. The ANAO’s review of these Major Projects is in addition to its regular program of performance audits and financial statement audit work conducted in the Defence portfolio.
Role of the Joint Committee of Public Accounts and Audit
7. The Joint Committee of Public Accounts and Audit (JCPAA) has been influential in establishing the MPR, and has taken an active role in the development of the MPR program.3 In April 2011 the Committee published its second report on its review of the annual MPR.4 The report made nine recommendations to further progress and improve the accountability and transparency of major Defence equipment acquisitions including with respect to the presentation of financial data by the DMO, which was the subject of audit qualification in prior years.

3 The guidelines for the 2010–11 MPR, which were endorsed by the JCPAA in May 2011, set out the
requirements for the DMO project offices to provide complete and accurate Project Data Summary Sheets and supporting information for the ANAO to review.
4 Joint Committee of Public Accounts and Audit, Report 422, Review of the 2009–10 Defence Materiel Organisation Major Projects Report, April 2011, p. iii.
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Table 1 2010–11 MPR projects and approved budgets at 30 June 2011
Project DMO Abbreviation Approved
Budget $m
Air Warfare Destroyer Build (SEA 4000 Ph 3) AWD Ships 7 931.8
Airborne Early Warning and Control Aircraft (AIR 5077 Ph 3) Wedgetail 3 859.5
Multi-Role Helicopter (AIR 9000 Ph 2/4/6) MRH90 Helicopters 3 753.7
Bridging Air Combat Capability (AIR 5349 Ph 1/2)* Super Hornet 3 578.5
Field Vehicles and Trailers (LAND 121 Ph 3) Overlander Vehicles 3 263.9
Amphibious Ships (LHD) (JP 2048 Ph 4A/4B) LHD Ships 3 122.6
New Air Combat Capability (AIR 6000 Ph 2A/2B)* Joint Strike Fighter 2 666.8
Armed Reconnaissance Helicopter (AIR 87 Ph 2) ARH Tiger Helicopters 2 060.3
F/A-18 Hornet Upgrade (AIR 5376 Ph 2) Hornet Upgrade 1 917.5
C-17 Globemaster III Heavy Airlifter (AIR 8000 Ph 3) C-17 Heavy Airlift 1 848.9
Air to Air Refuelling Capability (AIR 5402) Air to Air Refuel 1 828.5
Guided Missile Frigate Upgrade Implementation (SEA 1390 Ph 2.1) FFG Upgrade 1 528.9
F/A-18 Hornet Upgrade Structural Refurbishment (AIR 5376 Ph 3.2) Hornet Refurb 951.3
Bushmaster Protected Mobility Vehicle (LAND 116 Ph 3) Bushmaster Vehicles 929.8
Next Generation SATCOM Capability (JP 2008 Ph 4) Next Gen Satellite 880.9
High Frequency Modernisation (JP 2043 Ph 3A) HF Modernisation 670.8
SM-1 Missile Replacement (SEA 1390 Ph 4B)* SM-2 Missile 612.0
Additional Medium Lift Helicopters (AIR 9000 Ph 5C)* Additional Chinook 584.6
Armidale Class Patrol Boat (SEA 1444 Ph 1) Armidales 537.2
ANZAC Anti-Ship Missile Defence (SEA 1448 Ph 2B) ANZAC ASMD 2B 462.0
Collins Replacement Combat System (SEA 1439 Ph 4A) Collins RCS 450.4
Replacement Heavyweight Torpedo (SEA 1429 Ph 2) Hw Torpedo 425.4
Collins Class Submarine Reliability and Sustainability (SEA 1439 Ph 3) Collins R&S 411.4
Indian Ocean Region UHF SATCOM (JP 2008 Ph 5A)* UHF SATCOM 407.2
ANZAC Anti-Ship Missile Defence (SEA 1448 Ph 2A) ANZAC ASMD 2A 389.5
Follow On Stand Off Weapon (AIR 5418 Ph 1) Stand Off Weapon 343.3
Artillery Replacement (LAND 17 Ph 1A)* 155mm Howitzer 326.1
Battlefield Command Support (LAND 75 Ph 3.4) * Battle Comm. Sys. 325.9
Total 46 068.7
Source: 2010–11 MPR, Part 3, Project Data Summary Sheets.
Note: *Indicates the project is included in the MPR program for the first time in the 2010–11 Report. For Bridging Air Combat Capability (AIR 5349), only Phase 2 was reported for the first time in 2010–11.
6. The ANAO’s review of these Major Projects is in addition to its regular program of performance audits and financial statement audit work conducted in the Defence portfolio.
Role of the Joint Committee of Public Accounts and Audit
7. The Joint Committee of Public Accounts and Audit (JCPAA) has been influential in establishing the MPR, and has taken an active role in the development of the MPR program.3 In April 2011 the Committee published its second report on its review of the annual MPR.4 The report made nine recommendations to further progress and improve the accountability and transparency of major Defence equipment acquisitions including with respect to the presentation of financial data by the DMO, which was the subject of audit qualification in prior years.

3 The guidelines for the 2010–11 MPR, which were endorsed by the JCPAA in May 2011, set out the
requirements for the DMO project offices to provide complete and accurate Project Data Summary Sheets and supporting information for the ANAO to review.
4 Joint Committee of Public Accounts and Audit, Report 422, Review of the 2009–10 Defence Materiel Organisation Major Projects Report, April 2011, p. iii.
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Table 1 2010–11 MPR projects and approved budgets at 30 June 2011
Project DMO Abbreviation Approved
Budget $m
Air Warfare Destroyer Build (SEA 4000 Ph 3) AWD Ships 7 931.8
Airborne Early Warning and Control Aircraft (AIR 5077 Ph 3) Wedgetail 3 859.5
Multi-Role Helicopter (AIR 9000 Ph 2/4/6) MRH90 Helicopters 3 753.7
Bridging Air Combat Capability (AIR 5349 Ph 1/2)* Super Hornet 3 578.5
Field Vehicles and Trailers (LAND 121 Ph 3) Overlander Vehicles 3 263.9
Amphibious Ships (LHD) (JP 2048 Ph 4A/4B) LHD Ships 3 122.6
New Air Combat Capability (AIR 6000 Ph 2A/2B)* Joint Strike Fighter 2 666.8
Armed Reconnaissance Helicopter (AIR 87 Ph 2) ARH Tiger Helicopters 2 060.3
F/A-18 Hornet Upgrade (AIR 5376 Ph 2) Hornet Upgrade 1 917.5
C-17 Globemaster III Heavy Airlifter (AIR 8000 Ph 3) C-17 Heavy Airlift 1 848.9
Air to Air Refuelling Capability (AIR 5402) Air to Air Refuel 1 828.5
Guided Missile Frigate Upgrade Implementation (SEA 1390 Ph 2.1) FFG Upgrade 1 528.9
F/A-18 Hornet Upgrade Structural Refurbishment (AIR 5376 Ph 3.2) Hornet Refurb 951.3
Bushmaster Protected Mobility Vehicle (LAND 116 Ph 3) Bushmaster Vehicles 929.8
Next Generation SATCOM Capability (JP 2008 Ph 4) Next Gen Satellite 880.9
High Frequency Modernisation (JP 2043 Ph 3A) HF Modernisation 670.8
SM-1 Missile Replacement (SEA 1390 Ph 4B)* SM-2 Missile 612.0
Additional Medium Lift Helicopters (AIR 9000 Ph 5C)* Additional Chinook 584.6
Armidale Class Patrol Boat (SEA 1444 Ph 1) Armidales 537.2
ANZAC Anti-Ship Missile Defence (SEA 1448 Ph 2B) ANZAC ASMD 2B 462.0
Collins Replacement Combat System (SEA 1439 Ph 4A) Collins RCS 450.4
Replacement Heavyweight Torpedo (SEA 1429 Ph 2) Hw Torpedo 425.4
Collins Class Submarine Reliability and Sustainability (SEA 1439 Ph 3) Collins R&S 411.4
Indian Ocean Region UHF SATCOM (JP 2008 Ph 5A)* UHF SATCOM 407.2
ANZAC Anti-Ship Missile Defence (SEA 1448 Ph 2A) ANZAC ASMD 2A 389.5
Follow On Stand Off Weapon (AIR 5418 Ph 1) Stand Off Weapon 343.3
Artillery Replacement (LAND 17 Ph 1A)* 155mm Howitzer 326.1
Battlefield Command Support (LAND 75 Ph 3.4) * Battle Comm. Sys. 325.9
Total 46 068.7
Source: 2010–11 MPR, Part 3, Project Data Summary Sheets.
Note: *Indicates the project is included in the MPR program for the first time in the 2010–11 Report. For Bridging Air Combat Capability (AIR 5349), only Phase 2 was reported for the first time in 2010–11.
Report objective and review scope 9. The objective of this report is to provide:
• a formal conclusion on the review of the Project Data Summary Sheets (PDSSs) by the AuditorGeneral (contained in Part 3 of this report);
• comprehensive information on the status of projects as reflected in the PDSSs prepared by the DMO;
• ANAO analysis on the three key elements of the MPR: cost, schedule and capability, in particular longitudinal analysis of projects over time; and
• further insights and context by the DMO on issues highlighted during the year (not included in the scope of the review by the ANAO).
10. The ANAO’s review of the PDSSs was conducted under an agreement with the DMO, and was performed in accordance with the Australian Standard on Assurance Engagements (ASAE) 3000.5 The agreement excluded from the scope of the ANAO’s review PDSS data on the achievement of future dates or events (including forecasts on delivering key capabilities, also called Measures of Materiel Capability Performance), and major risks and issues. By its nature, this information relates to events and depends on circumstances that have not yet occurred or may not occur, or have occurred but have not yet been identified. Accordingly, the conclusion of this review does not provide any assurance in relation to this information.6
11. While our work is appropriate for the purpose of providing a review report in accordance with ASAE 3000, our review is not as extensive as individual project performance audits conducted by the ANAO, in terms of the nature and scope of project issues covered, and the extent to which evidence is required by the ANAO. Consequently, the level of assurance provided by this review in relation to the 28 Major Projects is less than that typically provided by our performance audits.
5 Australian Standard on Assurance Engagements (ASAE) 3000 Assurance Engagements other than
Audits or Reviews of Historical Financial Information, issued by the Australian Auditing and Assurance Standards Board.
6 Further information on the scope of the review is set out in paragraphs 1.9 and 1.10.
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Overall conclusion 12. This fourth MPR has progressed the development of an annual reporting program focused on improved transparency and accountability for performance relating to cost, schedule and progress towards delivering the key capabilities of Defence Major Projects. The report builds on the data analysis introduced in the 2008–09 MPR and provides a basis for greater longitudinal analysis of project performance in future years.
13. Overall, the program is well placed to incorporate a further two new projects in the 2011–12 MPR and the removal of one project, to bring the total number of Major Projects reported to 29.7
Review conclusion 14. Under arrangements with the DMO, the ANAO has agreed to review specified PDSS data and present a formal review conclusion.
15. The conclusion of the review of the PDSSs was that, except for the noninclusion of project expenditure history in Section 2.2 expressed in base date dollars8 for three of the 11 Major Projects specified in the guidelines as being required to report expenditure in base date dollars (as explained further in paragraph 1.23), nothing has come to the attention of the ANAO that causes us to believe that the information in the PDSSs, within the scope of our review, has not been prepared, in all material respects, in accordance with the guidelines on completing the PDSSs.
Projects’ performance 16. The data reviewed in the PDSSs centre on three major dimensions of project performance: cost, schedule, and the progress towards delivering the planned capability. 7 The JCPAA endorsed the inclusion of the Future Naval Aviation Combat System Helicopter project
(AIR 9000 Phase 8) and Counter Rocket Artillery & Mortar project (LAND 19 Phase 7A) and the removal of the Hornet Structural Refurbishment project (AIR 5376 Phase 3.2), in September 2011, as proposed by the DMO in consultation with the ANAO.
8 By converting the actual expenditure on a project to base date dollars, an assessment is able to be made of the performance of the project against its originally approved budget (base date dollars). Base date dollars is the amount, adjusted for the impact of inflation (prices) and foreign exchange movement over the period from a specified date (usually Second Pass Approval). In order that the initial budgeted cost of a project can be compared to the actual expenditure over time, in like terms, the financial tables in the PDSSs also adjust for real variations to budgeted costs, which involve: changes in the quantities of equipment or capability; transfers to the Defence Support Group to fund the acquisition of facilities and transfers to other projects; and budgetary adjustments such as the impact of efficiency dividends.
Report objective and review scope 9. The objective of this report is to provide:
• a formal conclusion on the review of the Project Data Summary Sheets (PDSSs) by the AuditorGeneral (contained in Part 3 of this report);
• comprehensive information on the status of projects as reflected in the PDSSs prepared by the DMO;
• ANAO analysis on the three key elements of the MPR: cost, schedule and capability, in particular longitudinal analysis of projects over time; and
• further insights and context by the DMO on issues highlighted during the year (not included in the scope of the review by the ANAO).
10. The ANAO’s review of the PDSSs was conducted under an agreement with the DMO, and was performed in accordance with the Australian Standard on Assurance Engagements (ASAE) 3000.5 The agreement excluded from the scope of the ANAO’s review PDSS data on the achievement of future dates or events (including forecasts on delivering key capabilities, also called Measures of Materiel Capability Performance), and major risks and issues. By its nature, this information relates to events and depends on circumstances that have not yet occurred or may not occur, or have occurred but have not yet been identified. Accordingly, the conclusion of this review does not provide any assurance in relation to this information.6
11. While our work is appropriate for the purpose of providing a review report in accordance with ASAE 3000, our review is not as extensive as individual project performance audits conducted by the ANAO, in terms of the nature and scope of project issues covered, and the extent to which evidence is required by the ANAO. Consequently, the level of assurance provided by this review in relation to the 28 Major Projects is less than that typically provided by our performance audits.
5 Australian Standard on Assurance Engagements (ASAE) 3000 Assurance Engagements other than
Audits or Reviews of Historical Financial Information, issued by the Australian Auditing and Assurance Standards Board.
6 Further information on the scope of the review is set out in paragraphs 1.9 and 1.10.
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Overall conclusion 12. This fourth MPR has progressed the development of an annual reporting program focused on improved transparency and accountability for performance relating to cost, schedule and progress towards delivering the key capabilities of Defence Major Projects. The report builds on the data analysis introduced in the 2008–09 MPR and provides a basis for greater longitudinal analysis of project performance in future years.
13. Overall, the program is well placed to incorporate a further two new projects in the 2011–12 MPR and the removal of one project, to bring the total number of Major Projects reported to 29.7
Review conclusion 14. Under arrangements with the DMO, the ANAO has agreed to review specified PDSS data and present a formal review conclusion.
15. The conclusion of the review of the PDSSs was that, except for the noninclusion of project expenditure history in Section 2.2 expressed in base date dollars8 for three of the 11 Major Projects specified in the guidelines as being required to report expenditure in base date dollars (as explained further in paragraph 1.23), nothing has come to the attention of the ANAO that causes us to believe that the information in the PDSSs, within the scope of our review, has not been prepared, in all material respects, in accordance with the guidelines on completing the PDSSs.
Projects’ performance 16. The data reviewed in the PDSSs centre on three major dimensions of project performance: cost, schedule, and the progress towards delivering the planned capability. 7 The JCPAA endorsed the inclusion of the Future Naval Aviation Combat System Helicopter project
(AIR 9000 Phase 8) and Counter Rocket Artillery & Mortar project (LAND 19 Phase 7A) and the removal of the Hornet Structural Refurbishment project (AIR 5376 Phase 3.2), in September 2011, as proposed by the DMO in consultation with the ANAO.
8 By converting the actual expenditure on a project to base date dollars, an assessment is able to be made of the performance of the project against its originally approved budget (base date dollars). Base date dollars is the amount, adjusted for the impact of inflation (prices) and foreign exchange movement over the period from a specified date (usually Second Pass Approval). In order that the initial budgeted cost of a project can be compared to the actual expenditure over time, in like terms, the financial tables in the PDSSs also adjust for real variations to budgeted costs, which involve: changes in the quantities of equipment or capability; transfers to the Defence Support Group to fund the acquisition of facilities and transfers to other projects; and budgetary adjustments such as the impact of efficiency dividends.
Overview
17. The management of projects’ budgeted cost has been, to a significant degree, assisted by routine budget supplementation to deal with both price changes (via price indexation) and foreign exchange movement (via a whole ofgovernment ‘no win/no loss’ policy9); and the coverage of certain operating costs, such as staffing, from outside projects’ budgeted cost. In this context, while projects’ budgeted cost requires careful management by the DMO, this dimension of project performance has not been a major issue to date.10
18. From 1 July 2010, all projects’ approved budgets include the total price indexation, adjusted for the Specialist Military Equipment Weighted Average (SMEWA)11 or other appropriate index, to the point of the project’s forecast Final Operational Capability (FOC). This is defined as the budget being ‘out turned’.12 In 2010–11, this indexation adjustment resulted in a oneoff variation to projects’ total approved budgets of $1.16 billion. Under this model of price indexation, projects will only receive further indexation for fluctuations in the agreed index, or by Government approved real cost increase, where contingency funding has been exhausted or cannot be sourced internally by the DMO. Once the forecast FOC has passed, projects will be expected to manage price increases beyond the agreed index within their existing budget. This will require close management by the DMO to avoid project budget deficits, particularly in an environment of regular project slippage.
19. While none of the Major Projects in this report has exceeded its approved budgeted cost13, the ANAO’s analysis identified that the DMO had received a total of $295 million in price indexation, between the forecast FOC and the year ending 30 June 2011, for projects in the MPR sample, which are yet to achieve FOC.
9 Defence Portfolio Budget Statements 2010–11, p. 26. 10 In the 2010–11 MPR, the DMO is reporting less than one per cent negative variation in the total
approved budgeted cost and the total current budgeted cost for the 28 Major Projects. The net variation involves budgeted cost movements between Second Pass Approval to 30 June 2011 that are not due to price indexation, foreign exchange, government approved scope changes and transfers to other areas of Defence. See 2010–11 MPR, Part 2, DMO Executive Summary, Table 1, p. 106.
11 Australian National Audit Office, 2010–11 Major Projects Report, Part 2, paragraph 2.9, p. 148. 12 Australian National Audit Office, 2010–11 Major Projects Report, Part 2, paragraph 1.79, p. 136. 13 See Table 4, p. 51.
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20. Maintaining Major Projects on schedule, the second major dimension of project performance, remains the most significant challenge for the DMO and industry contractors; in turn affecting when the capability is made available for operational release and deployment. The DMO data indicates that at 30 June 2011, the total time for the 28 Major Projects to achieve their FOC date is expected to be almost onethird longer than was originally planned.14
21. In relation to the third major dimension of project performance, capability, the DMO expects to deliver almost all capabilities associated with the Major Projects in this report.15 This assessment by the DMO was outside the scope of the ANAO’s review as explained in paragraph 10. Nevertheless, the ANAO continues to engage with the DMO on developments regarding materiel capability measures and the revised Materiel Acquisition Agreement (MAA) framework in order to enhance our understanding of the DMO’s assessment of its own performance in the delivery of the materiel element of key capabilities.
22. There are some indications that the assessment of capability is overly optimistic in some cases. Analysis of the information available indicates that some critical capabilities have been unavailable or are expected to be delivered below that initially approved. For example, numerous recent issues in the sustainment of the submarine capability have gained significant public and political attention, and have limited the availability of this capability to the Navy. Similarly, in respect of the MRH90 Helicopters, ARH Tiger Helicopters and Air to Air Refuel projects, the DMO’s assessment of the capability expected to be delivered has declined in 2010–11 as compared to the original planned key capabilities for these platforms (refer to PDSSs in Part 3).
23. Table 2 provides aggregate DMO data on the approved budgeted cost, schedule performance and progress toward delivering capabilities for the Major Projects covered in this year’s report.
14 FOC is the point in time at which the final subset of a capability system that can be operationally
employed is realised. FOC is a capability state endorsed by the government at Second Pass Approval and reported as having been reached by Defence’s capability manager (usually the Service Chief). Major capital equipment can be in Defence service use before formally achieving FOC, such as in the case of Bushmaster Vehicles which are in active use by the ADF but have not achieved FOC.
15 This is discussed further in paragraphs 37 to 39.
Overview
17. The management of projects’ budgeted cost has been, to a significant degree, assisted by routine budget supplementation to deal with both price changes (via price indexation) and foreign exchange movement (via a whole ofgovernment ‘no win/no loss’ policy9); and the coverage of certain operating costs, such as staffing, from outside projects’ budgeted cost. In this context, while projects’ budgeted cost requires careful management by the DMO, this dimension of project performance has not been a major issue to date.10
18. From 1 July 2010, all projects’ approved budgets include the total price indexation, adjusted for the Specialist Military Equipment Weighted Average (SMEWA)11 or other appropriate index, to the point of the project’s forecast Final Operational Capability (FOC). This is defined as the budget being ‘out turned’.12 In 2010–11, this indexation adjustment resulted in a oneoff variation to projects’ total approved budgets of $1.16 billion. Under this model of price indexation, projects will only receive further indexation for fluctuations in the agreed index, or by Government approved real cost increase, where contingency funding has been exhausted or cannot be sourced internally by the DMO. Once the forecast FOC has passed, projects will be expected to manage price increases beyond the agreed index within their existing budget. This will require close management by the DMO to avoid project budget deficits, particularly in an environment of regular project slippage.
19. While none of the Major Projects in this report has exceeded its approved budgeted cost13, the ANAO’s analysis identified that the DMO had received a total of $295 million in price indexation, between the forecast FOC and the year ending 30 June 2011, for projects in the MPR sample, which are yet to achieve FOC.
9 Defence Portfolio Budget Statements 2010–11, p. 26. 10 In the 2010–11 MPR, the DMO is reporting less than one per cent negative variation in the total
approved budgeted cost and the total current budgeted cost for the 28 Major Projects. The net variation involves budgeted cost movements between Second Pass Approval to 30 June 2011 that are not due to price indexation, foreign exchange, government approved scope changes and transfers to other areas of Defence. See 2010–11 MPR, Part 2, DMO Executive Summary, Table 1, p. 106.
11 Australian National Audit Office, 2010–11 Major Projects Report, Part 2, paragraph 2.9, p. 148. 12 Australian National Audit Office, 2010–11 Major Projects Report, Part 2, paragraph 1.79, p. 136. 13 See Table 4, p. 51.
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20. Maintaining Major Projects on schedule, the second major dimension of project performance, remains the most significant challenge for the DMO and industry contractors; in turn affecting when the capability is made available for operational release and deployment. The DMO data indicates that at 30 June 2011, the total time for the 28 Major Projects to achieve their FOC date is expected to be almost onethird longer than was originally planned.14
21. In relation to the third major dimension of project performance, capability, the DMO expects to deliver almost all capabilities associated with the Major Projects in this report.15 This assessment by the DMO was outside the scope of the ANAO’s review as explained in paragraph 10. Nevertheless, the ANAO continues to engage with the DMO on developments regarding materiel capability measures and the revised Materiel Acquisition Agreement (MAA) framework in order to enhance our understanding of the DMO’s assessment of its own performance in the delivery of the materiel element of key capabilities.
22. There are some indications that the assessment of capability is overly optimistic in some cases. Analysis of the information available indicates that some critical capabilities have been unavailable or are expected to be delivered below that initially approved. For example, numerous recent issues in the sustainment of the submarine capability have gained significant public and political attention, and have limited the availability of this capability to the Navy. Similarly, in respect of the MRH90 Helicopters, ARH Tiger Helicopters and Air to Air Refuel projects, the DMO’s assessment of the capability expected to be delivered has declined in 2010–11 as compared to the original planned key capabilities for these platforms (refer to PDSSs in Part 3).
23. Table 2 provides aggregate DMO data on the approved budgeted cost, schedule performance and progress toward delivering capabilities for the Major Projects covered in this year’s report.
14 FOC is the point in time at which the final subset of a capability system that can be operationally
employed is realised. FOC is a capability state endorsed by the government at Second Pass Approval and reported as having been reached by Defence’s capability manager (usually the Service Chief). Major capital equipment can be in Defence service use before formally achieving FOC, such as in the case of Bushmaster Vehicles which are in active use by the ADF but have not achieved FOC.
15 This is discussed further in paragraphs 37 to 39.
Table 2 Longitudinal analysis of schedule performance
2007–08
Total Approved Budgeted Cost
Approved Budgeted Cost Increase/Decrease (In-year)1
$1.1 billion (8.5 per cent)
$4.8 billion (14.5 per cent)
-$3.3 billion (-7.5 per cent)
-$0.1 billion (-0.3 per cent)
Schedule Slippage (Total)1
increase)
increase)
increase)
increase)
39 months 25 months 34 months 30 months
Schedule Slippage (In-year)
Progress toward Delivering Key Capabilities • High level of
confidence that will be delivered (Green)
80 per cent
86 per cent
89 per cent
94 per cent
• Under threat but still considered manageable (Amber)
13 per cent 13 per cent 10 per cent 5 per cent
• At this stage unlikely to be met (Red)
7 per cent 1 per cent 1 per cent 1 per cent
Sources: 2007–08, 2008–09, 2009–10 and 2010–11 MPRs, Parts 2 and 3.
Note 1: As the data for the 28 Major Projects in the 2010–11 MPR compares results with subsets of projects in the 2009–10 MPR (22 of the current 28 Major Projects), the 2008–09 MPR (15 of the current 28 Major Projects) and the 2007–08 MPR (nine of the current 28 Major Projects), a comparison of the data across years should be interpreted in this context.
Note 2: Based on the same 15 projects from the 2008–09 MPR.
Note 3: Based on the same 22 projects from the 2009–10 MPR.
Note 4: The grey section of the table covers data that is not within the scope of the ANAO’s assurance review. It should also be noted that the measures used to record progress towards delivering the key capabilities in the grey section of the table can change from year to year. Any comparison of the data across years should therefore be treated with caution.
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Cost
24. The total budgeted costs for the Major Projects included in this year’s MPR have increased by $7.8 billion (20 per cent) since these projects received Second Pass Approval. The $7.8 billion is comprised of price (materials and labour) variation increases of $7.6 billion16, real variation (such as scope changes and budget transfers between projects) increases of $3.7 billion, and foreign exchange rate movement decreases of $3.5 billion.17 Three projects have had a real budgeted cost increase since Second Pass Approval of greater than $500 million, namely the MRH90 Helicopters, the Hornet Refurb and Bushmaster Vehicles (additional quantities/upgrades).
25. Compared to 2009–10, the strengthening Australian dollar had less impact on project budgeted costs in 2010–11. In 2009–10, the budgeted cost of the 22 projects decreased by $3.8 billion (11 per cent) as a result of foreign exchange movements. In 2010–11, the reduction of the total budgeted cost for the 28 projects as a result of foreign exchange movements was $1.1 billion (three per cent), although this was offset by a $1.1 billion increase in the budgeted cost due to price indexation. In general, this again highlights the yeartoyear volatility that can arise with projects exposed to foreign currency movements.18
26. In terms&

Documents

2010–11 Major Projects Report