Navy’s troubled frigate project suffers further cost blowout

One of the nation’s biggest and most troubled defence projects – a plan to build a fleet of nine 10,000-tonne frigates in Adelaide – will suffer a budget blowout above $45 billion and fall even further behind schedule, a damning audit report has found.

The Australian National Audit Office’s report on the Hunter-class frigate program paints a dismal picture of the Defence Department’s procurement processes and finds it failed to retain crucial documents about why particular companies were selected to advance in the tender process.

The government may cut the number of Hunter-class frigates built to free up money for smaller vessels.Credit: Supplied

The report is likely to increase pressure on the government to cut the number of Hunter-class frigates to free up money to spend on smaller, more nimble vessels, and has raised questions about whether the AUKUS nuclear-powered submarine program can be delivered without significant cost overruns.

There was a widespread expectation in the lead-up to last month’s defence strategic review that the government would cut the number of frigates from nine to six, but that decision was deferred until a snap review of the navy’s surface fleet reports in September.

“Defence’s procurement process and related advisory processes lacked a value-for-money focus, and key records, including the rationale for the procurement approach, were not retained,” the audit report states.

“Contract expenditure to date has not been effective in delivering on project milestones, and the project is experiencing an 18-month delay and additional costs due in large part to design immaturity.”

The Hunter-class program was costed at $30 billion in 2016, but that estimate blew out to $45 billion two years later and is expected to rise significantly again.

“As of January 2023, Defence’s internal estimate of total acquisition costs, for the project as a whole, was that it was likely to be significantly higher than the $44.3 billion advised to government at second pass in June 2018,” the report states.

“As of March 2023, while Defence had advised portfolio ministers that the program is under extreme cost pressure, it had not advised government of its revised acquisition cost estimate, on the basis that it is still refining and validating the estimate.”

The report finds a “lack of design maturity” has resulted in an 18-month delay to the project, with the first Hunter-class vessel expected to be delivered in mid-2032 rather than early 2031.

The audit finds the Defence Department “did not conduct an effective limited tender process for the ship design” and value for money from the three competing designs was not assessed by officials as it should have been.

“The hallmark of Defence’s management of this procurement and related advisory processes is that they lacked a value for money focus, and in that sense the procurement did not comply with the core rule of the [Commonwealth Procurement Rules],” the audit states in an especially scathing passage.

The review is especially damning of the department’s failure to keep key records, including the rationale for BAE Systems being included among the top three bidders ahead of a rival French company.

The frigates are being equipped with an Australian-made radar and interface, plus an American combat management system, significantly adding to the project’s complexity.

In its response to the audit, the Defence Department notes it has more than 730,000 documents in its record management system relating to the project.

“Of the thousands of documents identified and requested by the [Australian National Audit Office], less than 10 documents were unable to be located across the department,” it said.

Former navy chief David Shackleton last year called for the project to be stopped and redirected, saying the Hunter-class frigates were not powerful or well-armed enough to meet Australia’s needs.

Defence Minister Richard Marles said he was waiting for the outcomes of the “short and sharp review of Navy’s surface combatant fleet” but said “what is clear is the Coalition government once again didn’t take Defence and Defence projects seriously”.

Defence Industry Minister Pat Conroy said the report demonstrated the “bungling and mismanagement of critical defence projects” by the previous government.

Greens defence spokesman David Shoebridge said: “Something is deeply wrong in the parliament and the broader government that allows a $45 billion project to be rammed through Defence without anyone even asking if taxpayers are getting value for money.

“No other part of government, and certainly no private entity, would be allowed to get away with this cavalier approach to billions and billions of dollars.”

Shoebridge said the “deep and systemic failures” exposed by the audit raised questions about Defence’s capacity to deliver the AUKUS nuclear-powered submarine program.

“If Defence can’t build a frigate without scandal and cost blowouts, how on earth do they think they can build a nuclear submarine without bankrupting the place?” he said.

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