In December 2002 a team headed by Malcolm Kinnaird undertook a major Defence procurement review of the Australian system, culminating in the Defence Procurement Review 2003, (better known as the Kinnaird Review). It made  10 clear recommendations aimed at ­restructuring the Defence Materiel Organisation (DMO) and improving the way it conducted business with industry and its internal partners in the wider Defence community.

Shaping the AWD Program
Coupled with the Kinnaird Review, two additional key influences have had a major bearing upon the way the AWD Program conducts its business, these are; the Carnegie Wylie Review of Naval Shipbuilding & Repair, and the design-led procurement philosophy developed by DMO in response to lessons learned from past maritime projects. It is important that I reflect on some of the key recommendations of each of these as I believe an understanding of each is integral to understanding the strategic direction being taken by the AWD Program.

As a result of the Kinnaird Review, a ‘Two Pass Government Approval’ system for Defence projects has been instituted to ensure that Government is provided the opportunity to make better informed decisions regarding the procurement of Defence systems.

In considering the procurement of complex Defence capabilities, the DMO is now required to evaluate a ‘Military off-the-Shelf’ (MOTS) variant together with an evolved variant as capability solutions, and provide the two fully scoped and costed options to Government for its consideration at 2nd Pass Approval.

In our case, both of these options are to be considered in the context of an Australian build. The formal definition of MOTS is ‘a product that is available for purchase and will have been delivered to another military or government body or commercial enterprise in a similar form to that being purchased at the time of the approval being sought.’ For the AWD Program, the Government selected the Spanish F100 design as best representing the MOTS capability option in March ’04.

At 1st Pass of the ‘Two Pass Gov­ern­ment Approval’ requirement, Government agreed that the Program should continue to examine, in parallel during Phase 2, the existing Navantia F100 design, together with an evolved design that will be developed by Gibbs & Cox. Both ASC Pty Ltd and Raytheon Australia, together with the AWD Program Office, will contribute to the development of both options. To gain 2nd Pass Approval, which includes the decision on which of the two capability options to pursue, Government will consider Business Cases developed by the AWD Program Office. The Business Cases will provide comprehensive detail surrounding capability, cost and schedule, together with significant risks and issues associated with both solutions, as the basis for choosing the preferred capability option.

Having achieved 1st Pass Approval, our budget for activities throughout Phase 2 (predominantly design related activities) is approximately AU$455 million dollars. Spending a significant amount of money early in the program to support design related activities is also consistent with the Kinnaird Review that a higher proportion of project funds will be spent earlier, to improve project outcomes, and provide greater certainty in regard to project costs and risks.

Another significant Kinnaird recommendation stipulated that the DMO become a Prescribed Agency. The DMO achieved this status on 01 July 05, which provides clear boundaries between the DMO’s procurement activities and Defence. It is my belief that Prescribed Agency Status clearly transforms the DMO into a supplier of Defence Goods & Services and not simply a buyer. As a result, the emphasis in the DMO is to closely integrate itself with industry to ensure the ADF is supplied with adequate capability on time and on budget. Consequently, the DMO is now clearly accountable for the provision of capability. The traditional gap between DMO and industry must be closed if DMO is to deliver on its commitments.

Some of you may be less familiar with the Carnegie Wylie Review than with Kinnaird. Carnegie Wylie was appointed jointly by Defence and the Department of Finance in January 2004 as a specialist commercial consultant, to conduct a high level independent review of the Naval Shipbuilding and Repair sector. Three specific Carnegie Wylie recommendations, accepted by Government in May 2004, are key to our Program, including:

1. that the Naval Sector should be based on a pro-competition model;
2. that the contract for the AWD shipbuilder should be ‘alliance based’;
3. that the contracts for the AWD and Amphibious Deployment & Sustain­ment (ADAS) ship projects should be completed in a specific order, with AWD proceeding to contract in advance of ADAS.

In essence, these recommendations were the basis for pursuing the selection of our industry partners in the manner we did over the last 18 months.

Both the pro-competition and timing recommendations bring their own challenges, which we continue to address, but among the three Carnegie Wylie issues, it is the alliance based contracting philosophy, coupled with the design-led procurement philosophy mentioned earlier, which I’d like to further elaborate upon.

Carnegie Wylie’s recommendation to pursue an alliance based contract was based – and we agree with this – on an understanding that for a project with the complexity of AWD, it offered significant benefits, largely through the alignment of project and industry interests, with a need for both the Commonwealth and industry partners to focus on meeting a specific target cost for the project. In effect, the AWD SPO is brokering a marriage between all industry participants and, in doing so, has put itself in the middle of the industrial base required to procure the three Air Warfare Capable Destroyers.

This focus offers the potential to reduce the risk for cost overruns often associated with conventional fixed price contracts.

Rather than adopting a generic alliance model, the program established a range of cornerstone principles that now form the basis of the project-specific contract model. We have determined it is necessary to modify some traditional alliance principles, to ensure that the Commonwealth reserves specific rights to direct the overall program, and to afford protection against “catastrophic” failure. To recognise these changes, the contracting basis has been entitled an “Alliance Based Target Incentive Agreement.”

Importantly, we have retained the fundamental alliance principle that rewards superior performance, or penalizes poor performance, with pain share or gain share to be divided in agreed proportions amongst all the alliance participants, including the Commonwealth.

The alliance-based strategy brings a number of challenges, and will continue to do so in the future. The program, in selecting its preferred industry partners, went to some length to ensure that each had a fundamental understanding of the proposed contracting strategy, and the ability to operate within the framework that has been established, including a capacity to carry any risk that might accrue from the contracting model.

You may be aware that as part of the program’s efforts to facilitate alliance-based work in integrated teams, especially in the longer term through Phase 3 (the detailed design and production phase), a new AWD Systems Centre will be established in Adelaide. While we currently occupy temporary premises, an interim centre will be up and running in late February. It is anticipated that the Systems Centre will occupy permanent facilities in close proximity to ASC after 2nd Pass Approval from Government. We are expecting that the co-location of the project team will provide significant overall benefit. The AWD Program team recognizes the very important challenge of recruiting the appropriate workforce to undertake the project in Adelaide.

The challenges of working in an alliance relationship are not, of course, limited to the industry teams. Public sector and military staff on my own team will need to rethink the way they do business, and the manner in which program activity will be progressed in integrated teams rather than the more traditional, and dare I say, adversarial, contracting environment. Project staffs from Defence, ASC Pty Ltd and Raytheon Australia continue to evolve the business processes that will guide the future phases of the project.

Achievements to Date
Those familiar with the program would be conscious of a major ramp-up in activity since the last Federal Election in October 2004. Results of some of this activity since October 2004 are publicly evident as the AWD Program has achieved a number of significant milestones.

Three days after the election, the AWD Program was granted permission to release the first RFP for a Ship Builder.

Within a week, the second and third  RFP’s for the Combat System – System Engineer (CSSE) and the Ship Designer were approved for release.

In December 2004 responses to all three RFP’s were received, and proposal evaluations commenced in January 2005.

During 2005, the AWD Program went to Government on five separate occasions to seek six separate decisions. At each visit the AWD Program came away with a positive outcome, which we believe may be unprecedented for a program of this size and complexity, including:

1. the selection of Raytheon Australia as preferred CSSE, ASC Pty Ltd as preferred shipbuilder, and Gibbs & Cox as preferred ship designer;
2. the announcement of 1st Pass Approval in May 2005; and
3. the announcement of the AWD Systems Centre in November 2005.

Having achieved these milestones ahead of budget and schedule, I must take this opportunity to acknowledge the continuing support of the Australian Govern­ment, CEODMO and CCDG without whose support the AWD Program would not be in the healthy position it currently occupies.

Future Outcomes
An important priority currently facing the AWD Program is for the build up of the Systems Centre in Adelaide. The Systems Centre will draw together Defence and the industry participants in order to ensure the widest possible cooperation and integration between all stakeholders. The Systems Centre will offer accommodation to representatives from the Commonwealth, ASC Pty Ltd, Raytheon Australia, Gibbs & Cox, Navantia, Lockheed Martin, and the United States Navy. My immediate aim is to ensure the Systems Centre is established and adequately provisioned with key personnel and supporting infrastructure prior to the mid term review in July this year .

Preparations for the July 2006 Program Mid-term Review are currently being made where the status of the AWD Program will be assessed by Government. With this in mind, momentum continues to build with the AWD alliance focused on achieving 2nd Pass Approval in July 2007 when the AWD Program submits to government two fully scoped and costed AWD design solutions for 2nd Pass consideration and Approval, which if I can assert once again, is a key Kinnaird requirement. Having said this, however, I must stress that the AWD Program is focused on achieving 2nd Pass Approval only as part of greater continuum, and not as an end in itself.

This is a very important factor. Having built momentum with our Industry teams, we are very focused on avoiding the protracted pauses that occur between when tenders are submitted and contracts finally signed to undertake work. Often these delays seriously impact the momentum of a project.

Industry Factors
Industry has at times suffered in the past from protracted pauses during tender evaluations and contract negotiations. The Kinnaird reforms are allowing industry to ramp up operations and build up their skills-base through 1st and 2nd Pass Approval requirements, which in effect means that industry has not had the time to pause post submittal of its RFP responses. 

The construction of three Air Warfare Capable Destroyers will be a major project for Defence industry, especially for the maritime industry. Accordingly, companies bidding for the AWD Program were required to include Australian skills and training programs in their tenders, in line with the Government’s ‘Skilling Australia’s Defence Industry’ program. We will continue to work with industry, the South Australian Government – who I must thank for their support and Defence to build the skills necessary to undertake this project.

The national impact of our project cannot be underestimated. The AWD Program team conducted a national road-show of industry information seminars in all the major regional centers in October 2005. These seminars were aimed at highlighting to Australian industry the opportunities available to them, and encouraged interested parties to register their interest. A total of 790 organisations were represented with 47% of these being SME’s.

The opportunities presented to Australian industry are significant, and I must point out that the AWD Program would not be on the threshold to build three Air Warfare Capable Destroyers if it were not for the maturity of the Australian Shipbuilding industry. The successful maritime build programs, embarked upon from the mid 1980’s, include: Collins Class Submarine, ANZAC Frigate, and Mine Hunter Coastal Programs, created a benchmark industry capability from which the AWD Program will leverage.

When the final AWD is accepted into service in 2017, I envision that the Program will have a contri­buted to the development and maturity of the Australian shipbuilding industry, leaving it in better shape than it is today with continued support from Government and the Australian public.

The AWD Program would not be in a position to capitalize on these two opportunities had it not been for the success of the previous shipbuilding programs. Having said this, if the Program is not executed flawlessly, there may not be opportunities of this size and complexity for Australia’s shipbuilding industry in the future.

Technical Challenges
For a project building the most complex surface naval combatant in Australia’s ­history there are naturally a number of significant technical challenges.

Systems Integra­tion has proven to be one of the more complex challenges in the design and construction of naval platforms around the world. The problems confronting projects undertaking complex and novel systems integration challenges are legendary and regularly find their way into various audit reports around the world. The AWD Program has recognized these difficulties particularly for a country of Australia’s size and budget, and has selected the proven and highly effective AEGIS combat system for its program.

It gives us great confidence that the AEGIS Combat System has been successfully integrated into six ship classes, for five different countries, with 77 ships currently fitted around the world, while a further 28 are planned or under construction. For our Program, AEGIS will be supplied by the USN through an FMS Case with the Combat System Engineering Agency, Lockheed Martin, providing the system and engineering support as it has done for AEGIS programs all over the world. I am pleased to report that in December 2005 the Government approved early procurement of major AEGIS items to ensure the project remains on schedule.

While the core of the Combat System capability is delivered by the AEGIS system, we recognize the need for Australia to be able to exercise sovereign flexibility in the selection of systems and sub-systems providing unique capabilities necessary for Australia’s defence. To meet these require­ments, we have engaged Raytheon Australia as the CSSE responsible for the integration of non AEGIS equipment. We anticipate that the selection of a modern, flexible and open architecture will provide opportunities for Australian-based companies to offer effective and low risk solutions.

Although AEGIS will be the core Combat System for either of our selected design options, the platforms under consideration will vary. In determining the most suitable platform for this project, the Program will be undertaking a thorough and objective analysis of a range of parameters for each solution under consideration. Key issues we’ll be considering include: operational capability, minimum manning objectives, and growth options.

When we return to Government for 2nd Pass Approval in mid-2007, we will provide assessments on cost, schedule, risk and capability of each design option.

While a project of this complexity has inherent technical complexity, the establishment of the Systems Centre provides a central focus for the management of these challenges, which we believe is key to a successful project outcome.

Summary
Reforms instituted by the Kinnaird and Carnegie Wylie Reviews are delivering the outcomes that the Government, the Australian taxpayer and Defence expect. The Program currently remains on schedule, on budget, and to capability – and though it is still relatively early, I believe that the work and effort being expended continues to provide the foundation upon which future success depends.

In conclusion, the successful completion of this program will leave Australia with two legacies. First, an Air Warfare Destroyer Capability for Defence which will serve this country well for the next 30 years. And second, a public willing to embark on future ‘in country’ naval ­construction, ensuring that Australia has the skills and capacity to provide and ­support its maritime Defence needs well into this century.
 
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Warren King, Program Manager of the AWD,  is responsible for ensuring that agreements between the CEO Defence Materiel Organi­sa­tion and the Chief of Capability Develop­ment Group are executed effectively and that the AWD capability is fully realized.
© Frontline Defence 2006