Background

1. The Department of Defence (Defence) is in the process of acquiring 12 new submarines. The ‘Future Submarine’ fleet is to replace the fleet of six Collins class submarines currently operated by the Royal Australian Navy (Navy), which without an extension to their service life, are due to be withdrawn from service by 2036.

2. In 2016 Defence reported the acquisition cost of the new submarines as more than $50 billion (out-turned). In November 2019, Defence advised the Senate that the acquisition cost of the Future Submarine was ‘in the order of $80 billion out-turned’, with an estimated sustainment cost of $145 billion out-turned to 2080.

3. Following a competitive evaluation process to select a designer for the Future Submarine, on 26 April 2016, the Prime Minister announced that:

… the next generation of submarines for Australia will be constructed at the Adelaide shipyard, securing thousands of jobs and ensuring the project will play a key part in the transition of our economy.

DCNS [now Naval Group] of France has been selected as our preferred international partner for the design of the 12 Future Submarines, subject to further discussions on commercial matters.

Subject to discussions on commercial matters, the design of the Future Submarine with DCNS will begin this year.

4. The commercial relationship between Defence and Naval Group commenced with the Future Submarine Program Design and Mobilisation Contract signed on 30 September 2016. The overarching arrangements with Naval Group in relation to the Future Submarine Program were subsequently set out in the Future Submarine Strategic Partnering Agreement signed by Defence and Naval Group on 11 February 2019.

Rationale for undertaking the audit

5. At a reported cost in the order of $80 billion, the design and construction of the Future Submarine fleet represents the largest Defence procurement in Australia’s history. Defence has described it as a ‘megaproject’ by all international standards and the most challenging acquisition program it has undertaken, the success of which will be driven by preparations during the design phase. The decision not to acquire a military‐off‐the-shelf submarine platform, and instead engage a ‘strategic partner’ to design and deliver the submarines with significant Australian industry input, has increased the risk of this acquisition.

6. There has been ongoing parliamentary and community interest in Defence’s management of the Future Submarine Program, particularly relating to: cost and capability; negotiation of the Strategic Partnering Agreement with Naval Group and the French Government; the possible emergence of a capability gap; the planned life-of-type extension of the Collins class to address any capability gap; and the Naval Shipbuilding Plan. This audit focuses on the platform design phase, which represents the largest material component of the program to date (approximately 47 per cent of all program expenditure as of 30 September 2019).

Audit objective and criteria

7. The audit objective was to examine the effectiveness of Defence’s administration of the Future Submarine Program to date. To form a conclusion against the objective, the ANAO adopted the following high-level audit criteria:

Has Defence established a fit-for-purpose strategic partnership in accordance with government requirements?

Is Defence meeting the planned design milestones for the Future Submarine Program?

Has Defence’s expenditure to date on design been effective in achieving the Future Submarine Program’s milestones?

8. The audit scope included Defence’s activities undertaken under the: Design and Mobilisation Contract (entered into in September 2016); Strategic Partnering Agreement (entered into in February 2019); and Submarine Design Contract (entered into in March 2019). The audit does not examine in any detail: non-design program activities and expenditures to date; the combat systems integrator contract with Lockheed Martin Australia; or the Collins class life-of-type extension.

Conclusion

9. Defence has established the formal arrangements necessary for the effective administration of the Future Submarine Program, through the Strategic Partnering Agreement. However, the two key mandated design milestones were extended. Program success is dependent on the timely and cost-effective delivery of major design milestones.

10. Defence, through the Strategic Partnering Agreement, has established a fit-for-purpose strategic partnership framework that addresses the Government’s objectives for the Future Submarine Program. The Agreement includes provisions which address 11 of the 12 documented contract goals and provide a basis for establishing a successful strategic partnership and delivering shared program objectives. Defence has assured the Government that the remaining contract goal has been addressed.

11. The program is currently experiencing a nine-month delay in the design phase against Defence’s pre-design contract estimates, and two major contracted milestones were extended. As a result, Defence cannot demonstrate that its expenditure of $396 million on design of the Future Submarine has been fully effective in achieving the program’s two major design milestones to date. Defence expenditure on design represents some 47 per cent of all program expenditure to 30 September 2019.

12. Defence’s overall assessment of risk for the Future Submarine Program is ‘high’ and Defence has adopted relevant risk mitigation strategies, including the long-term partnership with Naval Group. This key relationship is at a relatively early stage and the parties’ active management of both specific issues and the partnership is essential for effective risk management and program success.