Defence Update

The inquiry comes after Shadow Minister for Defence Senator David Johnston expressed concerns to the ANAO over the lack of an open and transparent selection process and adequate competition to satisfy Australia’s defence tender regulations.

In reply, Auditor-General Ian McPhee said it was appropriate for the ANAO to undertake a performance audit to inform the Parliament of such a significant acquisition. The scope of the audit would address the “adequacy of Defence’s processes . . . to establish that the acquisition of the C-27J under the FMS arrangement represented the best value for money option to provide the capability required . . . ” Senator Johnston said: “When the Defence Minister announced this purchase he claimed that a competitive and comprehensive analysis was completed before the decision was made. But he has never released that analysis and I am very skeptical. . . ” The topic was brought up in June at Senate Estimates where Senator Johnston asked members of Defence’s Senior Leadership Group – including Chief of Air Force Air Marshal Geoff Brown, CEO of DMO Warren King and deputy CEO of the DMO Harry Dunstall – about the competition and selection of the C-27J.

At the time, Mr King said no open tender competition was necessary as the tender was a direct source purchase via the FMS program. Mr Dunstall told the committee the defence exemptions of the Commonwealth Procurement Guidelines, “. . . allow the chief executive of an agency to take a measure for, among other things, essential security reasons”.

Pushed by Senator Johnston to sketch out Defence’s national security justification, Mr Dunstall said exemptions within the CPG, the Financial Management and Accountability Act and the Defence Procurement Policy Manual meant all mandatory probity requirements had been complied with.

“In developing the acquisition strategy, the first step is: is this a covered procurement? Answer: because it is subject to one of the defence exemptions it is not bound by division 2 of the CPGs, which are the mandatory procurement procedures, which means we are not bound to conduct an open tender process but are able to undertake a different form of process,” Mr Dunstall said.

“An open tender process is not the only way of running a competitive process. The CPGs are categorised technically into three categories: open tender; select tender, which is a very, very small kind of category of procurement, which is if you down-select from an EOI [expression of interest] or, I think, if you have procured off a multi-use list and there is one other; and everything else is called direct source.

“Direct source does not mean sole source. Direct source means an approach to one or more potential suppliers, which is in fact the way Defence undertakes most of its major capital acquisitions, because there is not an open market for what we procure. ” The statements by Defence officials we’re at odds with comments by the Minister, who said at the time of the announcement: “There was a competition between the C295 Airbus Military aircraft and the C-27 and we down-selected the C-27. ” In response to media enquiries, Defence Media Operations said: “A competitive downselect to the C-27J was made following an exhaustive assessment by Defence, the DMO and Air Force of information provided by the manufacturers of the aircraft, including Airbus Military and the C295 . . . Information was sought from various suppliers throughout 2011. Alenia, Airbus Military, Raytheon and the US FMS Office were asked to participate in the process.

“Each was asked to provide information on the performance of their aircraft, as well as costing data, in order to enable Defence, DMO and Air Force to conduct a comparative assessment of each aircraft/performance/ configuration. ” It had been speculated previously that the aircraft’s selection had been fast-tracked as a means of spending money in the 2011-12 financial year.

Placing $1. 4 billion in the FMS ‘bucket’ before the 2012- 13 FY or elsewhere over the forward estimates allows for the purchase of capability desired by RAAF without eating into the government’s narrow budget surplus. This view was further reinforced by the surreptitious nature of the C-27J announcement at the 2012 Air Power Conference, only two days after the May budget. No mention of the C-27J Spartan, the Caribou replacement or the Battlefield Airlifter was made in the Portfolio Budget Statements beyond a vague, reiterated commitment to the project’s acquisition. But while this might indicate some interesting political manoeuvring regarding defence spending, it fails to show any reason why the project may have been excluded from the regulatory requirements for competition.

What seems unavoidable is that the process for the selection of the Spartan was not transparent – and thus far has lacked accountability in the assessment of whether the decision offered value for money for Australian taxpayers.

The ANAO audit report will take about eight to 10 months to complete and is due to be released around April- May of 2013.