By Shane Wright
A Defence official sought a bottle of champagne from defence giant Thales during discussions over the possible supply of vital explosives and munitions, a scathing auditor-general’s report into a $1.2 billion contract has revealed.
The official, who supplied internal Defence Department advice to the company that ultimately won the contract despite its response to the tender being found not to offer taxpayers value for money, would later take up a senior position with Thales.
A Defence official sought a bottle of champagne while negotiating a billion-dollar munitions contract.Credit: Istock
The auditor-general found the department had been only partly effective in managing the contract signed in 2020, noting “evidence of unethical conduct”.
Australia’s Defence Force relies on explosives and propellants from a single plant based at Mulwala on the NSW-Victoria border. Some of these are supplied to a munitions factory at Benalla, about 100 kilometres to the south of Mulwala. Both have been operated by Thales since 1999.
Negotiations for a long-term contract for the ongoing supply of explosives and munitions started in 2016.
The auditor-general found probity problems emerged almost immediately, with Defence personnel providing the company with confidential information that went to the heart of how the contract would be assessed.
In November that year, a Defence official gave information to Thales that included “Defence committee processes and Defence thinking and positioning”.
By the following year, the same official was seeking a bottle of champagne from Thales.
“Defence records indicate that in May 2017, this Defence official also solicited a bottle of champagne from a Thales representative. In a response on the same day, the Thales representative acknowledged that they had previously offered the gift to the Defence official,” the auditor-general found.
“Both email exchanges evidenced unethical conduct. The Defence official subsequently commenced employment with Thales Australia (Australian Munitions) in April 2019.”
Defence did not put in place a process to manage probity issues surrounding the contract until the second half of 2018.
The auditor-general’s report used the term “unethical” on eight occasions to describe problems in the contract negotiations.
It found risk assessments were not timely and appropriate records for key meetings between the department and Thales were not developed or retained by Defence. The department was in a poor bargaining position throughout the entire process even though it had identified 199 “non-compliances” by Thales with the proposed contract.
“After assessing Thales’ tender response as not being value for money in October 2019, Defence proceeded to contract negotiations in December 2019, notwithstanding internal advice that Defence was at a disadvantage in such negotiations due to timing pressures,” it found.
“Defence considered the number of non-compliances to be ‘unprecedented’.”
Defence and defence industry ministers at the time were not properly informed about the situation.
“Defence’s advice to ministers on the tender and contract negotiations did not inform them of the extent of tender non-compliance, basis of the decision to proceed to negotiations, or ‘very high risk’ nature of the negotiation schedule,” it found.
The 10-year, $1.2 billion contract was signed in mid-2020.
The auditor-general made eight recommendations, all of which were accepted by the Defence Department, including that it seeks specialist advice on complex contracts and employs outside probity advisers on major projects.
In a statement, Air Marshal Leon Phillips, the chief of guided weapons and explosive ordnance, said Defence had taken significant steps to improve record management and governance arrangements.
“We accept the findings and the recommendations of the report. The identified issues are not evidence of the standard expected, and we commit to their remediation through the continual education and training of staff,” he said.
“This includes an increased focus on the recording of decisions and compliance with Defence’s record-keeping policies.”
A spokesperson for Defence Minister Richard Marles said the report had identified “substantive” probity issues around the contract between 2016 and 2020.
“As the secretary and the chief of Defence Force wrote to the Australian National Audit Office, the identified issues are not evidence of the standard expected of staff,” the spokesperson said.
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