18 June 2009

ASC: What was the management consultants’ audit about?

In Submarines: The management consultants' review I said that it was hard to know whether to laugh or cry at the thought of a reported $4.3 million of taxpayer’s money being spent on a management consultant’s audit of the former Australian Submarine Corporation’s (now ASC Pty Ltd) delivery of through-life support to the Collins class submarines, as reported in the Australian Financial Review on 28 April 2009. No-one without deep domain knowledge and systems safety expertise could opine on whether or not the Defence Materiel Organisation (DMO) is getting cost effective performance from ASC Pty Ltd, or whether improvements could be made without compromising safety and military effectiveness.

The situation is all the more bizarre because as well as being the Government’s submarine builder and maintainer, ASC is the design authority for the Collins class submarines – it has the last word on configuration management, maintenance regimes etc. Every change in the configuration of the submarine or the way it is maintained must be signed off by ASC. And ASC is where the buck stops – if there is a significant incident leading to injury, death or damage to the submarine, the people who sign off on the way the work is done can take no refuge in saying to the Board of Inquiry that the management consultants said it would be alright.

So no matter what changes the consultants might recommend (on an all care and no responsibility basis), if ASC does not agree to make changes they cannot happen.

Now the plot of this extraordinary saga thickens as we discover in this morning’s Financial Review that the findings of the audit have never been vouchsafed to ASC:

Incoming ASC Chairman Vice-Admiral Chris Ritchie has urged Defence Materiel Minister Greg Combet to provide the submarine builder with the details of a damaging defence audit that criticised its maintenance on the Collins submarine fleet...

The audit, which backed a $20 billion savings reform plan in defence, which was carried out by George Pappas and McKinsey and Co, has never been released by Defence, though it has said maintenance on the Collins class was inefficient and costly.

The government and the DMO used the audit to put pressure on former ASC managing director Greg Tunny, who quit in May, but its findings were never provided to the submarine builder.

Admiral Ritchie said it would be difficult for ASC to respond unless it was privy to the Pappas findings. “ASC has never seen the Pappas report and we would like to see it ...”

What is the point of conducting a performance audit if the organisation being audited is not permitted to be made aware of the findings? Was this just about scoring points in an unseemly brawl between two taxpayer funded entities?

What we seem to have here is not only the extraordinary spectacle of a hostile review launched by one taxpayer funded entity against another, but a violation of standard audit ethics and practice. If an audit were considered necessary (and one would hope that DMO could not decide that unilaterally) one would expect to see the following steps:

- Consultation between DMO and ASC to settle the terms of reference

- Joint identification of an auditor with the required competences, which I would think would have to be an agency of the Royal Navy or the US Navy, or one of their submarine builders or service providers

- Detailed discussion of draft findings with ASC

- Inclusion of ASC’s comments in the final report to DMO.

That would be consistent with the way the Australian National Audit Office (ANAO) conducts its business. It always reviews the findings with the body being audited, always publishes its reports, and these published reports always include the agency response.

The fact that none of the above appears to have happened raises serious doubts about the value of the exercise, and its motives. And yet, as I raised in Combet captured?, the Minister for Defence Materiel seems to have rushed to embrace the DMO position on this very important question without allowing himself the time to make an informed and measured judgment.

He continues to adhere to that position:

Mr Combet said last night he welcomed the appointment of Admiral Ritchie and would discuss the direction and management of ASC with him in detail.

“The government is keen to ensure that our navy gets the capability it needs and Australian taxpayers get value for money,” he said.

I have yet to see convincing evidence that the situation is otherwise. For my money, I think we need the ANAO to conduct an audit of the audit, to see whether it was an appropriate use of taxpayers’ money.

We also need Defence to publish the audit report without delay, so that we all have an opportunity to assess the quality of the advice upon which it has come to the conclusion that it is not getting value for money from ASC.

This is no small matter. I think the attitude of DMO to ASC has informed its strange decision to conduct a design competition for the future submarine, which for reasons spelt out in Future submarine: why the design competition? is quite inappropriate. In short, the future submarine will be an evolution of the Collins class; we might as well recognise that and get on with it.

Also, is the treatment DMO has meted out to ASC a sign of what other service providers can expect from DMO? Defence says that $4.4 billion of the $20 billion of savings that are to be made following the Defence White Paper will come from “smart maintenance”. Most of that will have to be sweated out of the companies that provide the through-life support. We are told that DMO will “develop appropriate incentive arrangements in its future maintenance contracts to encourage industry to implement ongoing productivity improvements”. Given that the maintenance contracts as they stand were awarded by competitive tender, one wonders what form of “encouragement” will be required to reduce the aggregate bill by over $400 million per annum. That is a lot of money off company bottom lines; can they expect to be bullied out of it? How will that contribute to the viability of the domestic industrial capability without which our defence force cannot operate?

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