Case File

Australia’s Adelaide-class Sustainment Contracts

Author
Jack Cinamon ; Alexandra Fischer
Published on
July 30, 2024
(updated August 26, 2024)
Image
Australian Adelaide class frigate. This image is a work of a U.S. military or Department of Defense employee, taken or made as part of that person's official duties. As a work of the U.S. federal government, the image is in the public domain in the United States. "The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement."
Australian Adelaide class frigate. This image is a work of a U.S. military or Department of Defense employee, taken or made as part of that person's official duties. As a work of the U.S. federal government, the image is in the public domain in the United States. "The appearance of U.S. Department of Defense (DoD) visual information does not imply or constitute DoD endorsement."

Contents

Contents

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Introduction

Introduction

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Over three decades after the Adelaide-class frigates were transferred to Australia, sustainment contracts were awarded, without a formal bidding process, to BAE Systems and Thales.

At the time, the Australian government, led by the Liberal Party, and its primary opposition, the Labor Party, pledged additional defence investment, which resulted in the hiring of BAE Systems and Thales to upgrade the outdated Adelaide class of frigates. Staff members at the Australian Defence Department’s (Defence) Capability Acquisition and Sustainment Group (CASG) were accused of inappropriately favouring the two defence contractors when making procurement decisions.

Case Details

Case details

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Seller country
United Kingdom, United States, France
Seller company
Thales, BAE Systems, Vigor International
Buyer country
Australia
Goods category
Warships
Equipment sold
Adelaide-class Guided Missile Frigate (sustainment contracts only)
Deal value
AUD $155 million - $178 million
Sum involved in corruption
BAE Systems - At least AUD $33 million ; Thales - At least AUD $46 million
Start year
2008
End year
2020
Outcome status
No legal Investigations Begun

Actors

Actors

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  • BAE Systems Australia: subsidiary of British aerospace and defence company BAE Systems, the largest defence contractor in Europe; responsible for building two of the six frigates in Australia (HMAS Newcastle and HMAS Melbourne); responsible for contracted maintenance services.

  • Vigor Industrial: United States based industrial company specialising in shipbuilding, ship repair and nuclear components; responsible for building four of the six frigates in the United States before being transferred to Australia (HMAS Adelaide (II), HMAS Canberra (II), HMAS Sydney and HMAS Darwin).

  • Thales Australia: formerly ADI Limited, now a subsidiary of French Defence company Thales, partially owned by the French state and the second largest defence contractor in Europe; contracted to carry out weapons upgrades for four of the ships and later awarded sustainment contracts.

  • Defence Australia: department of the Government of Australia responsible for defence.

Allegations

Summary of Corruption Allegations

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Repeated extensions of these contracts has led to costs soaring from AUD $72 million to AUD $155 million. In total, the maintenance of the frigates has cost Defence a suspected AUD $170 million. Interestingly, as the sustainment contracts were awarded, the Adelaide-class was already set for decommission, to be replaced by the Hobart-class AWD, a project beginning in 2000 by the Australian Defence Force. Furthermore, Defence’s internal evaluation reportedly found that BAE's Adelaide contract was "riddled with cost overruns, with the British corporation regularly invoicing suspicious costs." According to the 3-part exposé by The Weekend Australian, these sustainment contracts were engrossed with unexplained inflations by the subsidiaries of Thales and BAE Systems.

Thales Australia received an unexplained AUD $16 million payment for maintenance work on the ships, whilst also inflating the contract by AUD $30 million, a fee that was improperly approved. Additionally, the company also improperly claimed an extra AUD $100,000 to AUD $200,000 every quarter more than they were entitled to, using an incorrect financial formula that was clearly not approved by Defence.

Allegations against BAE Systems Australia included overcharging for meals and bus rentals, which together amounted to tens of millions of dollars. The audit, which was overseen by Navy Capt. Jason Sears, reveals dissatisfaction with BAE's inability or unwillingness to provide justification for a number of expenditures made over a four-year period, including AUD $325,000 for chartering bus hire, more than AUD $252,000 for travel, and AUD $55,500 for catering. Sixty BAE personnel were being transported annually for AUD $2000 per head from Defence Plaza in Sydney's Central Business District to the nearby Garden Island navy installation, which is cause for concern as the locations are only 4 kilometers apart. According to records obtained by The Weekend Australian, BAE overcharged Defence by up to AUD $4.8 million a year, or AUD $33 million over the course of the project.

Australia has been a lucrative market for BAE Systems. For example, in June 2018, BAE Systems won a AUD $35bn tender -- and was selected over rival bidders (from Spain and Italy) for the delivery of the Hunter Class Frigate Program, Australia's largest peacetime warship program, with the initial price tag being blown out to AUD $45 billion. This will eventually replace the country's aging Anzac-class frigates, which have been in service since 1996. Various military and bureaucratic officials have been quick to criticise the contract, backing the belief that Defence has been captured by Thales and BAE. This may be the reason details on procurement decisions and contracts are kept well hidden by Australian authorities. The National Anti-Corruption Commission has received a referral concerning the project, prompted by concerns about the integrity of government decision-making.

Timeline

Timeline

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1980
  • 15 NovBAE’s HMAS Adelaide (II) was commissioned on 15 November 1980 -- and was the first of six Adelaide-class guided missile frigates to be delivered to the Royal Australian Navy. From 1981 to 1993, five sister ships were brought into commission: BAE’s HMAS Canberra (II), HMAS Sydney, HMAS Darwin, HMAS Melbourne, and HMAS Newcastle. The initial purchase price of the complete Adelaide-class is unknown, as the Australian Department of Defence refused a Freedom of Information request sent on 17 April 2023, due to the lengthy period of time between the contracts being signed.
  • Mid-1990s: The Labor government of Paul Keating decided not to replace the Adelaide-class frigates, choosing instead to upgrade the current fleet.
1999
  • Thales Australia, who acquired total control of ADI Limited in 2006, was awarded an initial AUS $987 million fixed price contract to carry out upgrades on the 4 newer ships. However, the planned upgrades were delayed for almost a decade due to problems in political decision making and the planned decommissioning of HMAS Adelaide (II) and HMAS Canberra (II). The initial costs rose to AUS $1.46 billion.
2008
  • JanJohn Howard's Liberal government, who replaced Keating’s in 1996, initiated SEA 1390, also known as the FFG Upgrade Project. Thales Australia was selected as project leader for the planned upgrade of the fleet. The renovation project comprised upgrades to the sonar suite, the air defence missiles, and the combat and fire control system. The project cost was partly offset by the decommissioning of the two oldest units HMAS Adelaide (II) and HAMS Canberra (II) in 2005 and 2008, respectively, it was planned to modernise four ships to extend their service life to 2020.
  • DecThe main sustainment contract for the Adelaide ships was awarded to BAE without a competitive tender for an initial period of five years. A contract worth an expected AUD $60 million to provide engineering, maintenance and supply support to the four Adelaide Class frigates: HMAS Darwin, HMAS Melbourne, HMAS Newcastle and HMAS Sydney.
2013
  • The alleged approval of an extra AUD $30 million spent on maintaining the HMAS Darwin, an Adelaide class frigate, as well as allegations that Thales refused to submit financial information to the CASG. During this period, Defence extended the sustainment contracts through to 2017.
2014
  • 1 JanHowever, tender documents obtained by The Australian, suggest Thales was granted an AUD $81 million contract to maintain the Navy’s Adelaide Class guided missile frigate’s (FFG) Group Maintenance Contract for an initial period of 3 years. Since being awarded, it is reported that the contract has been amended five times and its value inflated from AUD $97 million to AUD $178 million.
  • According to a Defence spokesperson, this inflation was due to “additional maintenance availabilities scheduled over the next two years, defect rectification," and the final maintenance periods “to prepare ex HMAS Sydney and ex HMAS Darwin for disposal”.
  • 6 JulAustralia’s Minister for Defence, David Johnston, finally announced that the Defence awarded a maintenance contract to Thales under a four-and-a-half-year agreement, which has extensions that could bring the overall value to AUD $130 million.
2017
  • During the period 2017-2018, there were two more extensions of the sustainment contract, the last extensions negotiated before the Adelaide class of frigates would be fully withdrawn from service.
2018
  • 28 JunPrime Minister Malcolm Turnbull unveiled BAE Systems’ Type 26 Global Combat Ship as the design for Australia’s AUS $35 billion Future Frigate Program, known as the Hunter-class.
  • 14 DecBAE Systems Australia’s new subsidiary ASC Shipbuilding has been awarded the contract for the design and build.
  • Although there had been concerns over the sustainment contracts with BAE since 2014, Defence only began its secret investigation into the Adelaide-class sustainment contracts in late 2018, in response to a whistleblower complaint, received through its whistleblower program, the Defence Public Interest Disclosure Scheme.
2019
  • 11 MayThe Weekend Australian reported in-depth accusations of corruption in maintenance contracts involving the Adelaide-class frigates. Tens of millions of dollars in inflated service invoices held by Thales Australia and BAE Systems Australia are among the allegations. According to documents obtained by The Weekend Australian, Defence has long been concerned about BAE's contract for Adelaide-class frigates. Cost overruns of up to AUD $4.8 million annually, or up to AUD $33 million over the course of the deal, have been reported.
  • 27 DecThe Armada de Chile (the Chilean Navy) bought HMAS Newcastle and HMAS Melbourne, renaming them Almirante Latorre and Capitan Prat, for a total cost of AUD $110 million, AUD $45 million for each ship plus spares and training.
  • HMAS Adelaide (II) and Canberra (II) were paid off prior to the sell-on in 2005 and 2008 and finally sank as dive wrecks. HMAS Darwin was shut down at the end of 2017. The initial plans for HMAS Darwin were to create a dive reef, but the plan was quickly shut down after the Tasmanian government rejected the project's outlined $12 million cost. After serving as a moored training ship for the majority of the year, HMAS Sydney was decommissioned in late 2015.
2020
  • 15 AprHMAS Newcastle and HMAS Melbourne were eventually transferred to Chile after a commissioning ceremony at the HMAS Watson Naval Base in Sydney.

Outcomes

Investigation Outcomes

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Investigation into BAE Systems:
2014
  • The government should "negotiate a smaller profit margin," the Financial Investigation Service of the organisation suggested following an internal study that determined BAE was making too much money.
2017
  • Another Financial Investigation Service study concluded that BAE's labour expenses were "inappropriate" and urged a "high priority" review of them.
2018
  • Another internal audit, overseen by Navy Capt. Jason Sears, reveals frustrations with BAE's inability or unwillingness to justify a string of expenses. Corruption Tracker submitted a Freedom of Information Request to the Defence Department, seeking the disclosure of the Sears audit. The department admitted that they were ‘unable to find the document’.
  • The audit team discovered that BAE had repeatedly failed to provide a cost breakdown. BAE was also billing Defence for a variety of miscellaneous expenses such as printing, stationery, couriers, and recruitment.
  • DecDue to the seriousness of the claims, they were escalated to Defence's Assistant Secretary for Fraud Control, Brendhan Egan, who reportedly sent a number of concerns on to the Independent Assurance Business Analysis and Reform Branch. Also notified was Rear Admiral Wendy Malcom, head of maritime services at CASG.
Investigation into Thales:
2018
  • DecConcerns sparked a new investigation. This was conducted by Graham Eveille of Eveille Consulting, who were paid AUD $370,499.99 by Defence for business intelligence consulting services between 27 June 2017 to 30 June 2018. Eveille alleged that French contractor Thales was wrongly paid at least AUD $46 million for work of the same ships which was contracted supposedly to provide support to the Adelaide-Class Guided Missile Frigate’s combat systems. Graham Eveille previously served as the Assistant Secretary of Defence Policy in the Department of Prime Minister and Cabinet. This is backed up by evidence provided by The Weekend Australian that Thales Australia received an unexplained AUD $16 million payment as well as inflating invoices by AUD $30 million. A total equalling the investigated AUD $46 million in wrongfully paid fees.
  • The ‘independent’ internal review concluded that there was "no evidence of unlawful excess charges by BAE and Thales”. Instead, "minor administrative issues" were blamed for the failures, which were reportedly resolved through more training. A Defence spokeswoman said the category of costs examined by the audit was much smaller, about AUD $3m over the 10-year contract.
  • Both the final Eveille report and internal review reports were refused by Defence in a Freedom of Information request as ‘releasing details of the relevant material could reasonably be expected to have a substantial adverse effect on the financial interests of the Commonwealth’. The Corruption Tracker team has submitted a comprehensive appeal to the Office of the Australian Information Commissioner, which has acknowledged receipt and agreed to review the case.
Investigation Overall:
 
  • How "independent" or efficient can a review be if Defence conducts an investigation against itself and its contractors by selecting an existing defence contractor to conduct the investigation. What makes matters worse, the investigation information remains secret and the final report confidential. With reasonable evidence of invoice inflation, one might claim that senior Defence Fraud officials are incapable of accurately identifying inappropriate excess charges. Even with solid evidence, no legal investigation has begun.
 
  • Strong anti-corruption measures are imperative in large procurement projects -- and it is clear that grey areas have been tolerated in this case as this “culture of cosiness” between government and industry continues. The Corruption Tracker team filed several Freedom of Information requests; however, these requests have all been rejected because doing so "would substantially and unreasonably divert the resources of the agency from its other operations." There are structural issues with Australia's Freedom of Information system, as evidenced by the abnormally high frequency of Freedom of Information request denials.

References

References

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