22 March 2009

Defence industry: delays are costly

An article by John Kerin on page 10 of the Australian Financial Review, 18 March 2009 stated that “Defence Minister Joel Fitzgibbon will review defence industry policy this year in a bid to reassure the industry the government has not neglected the sector”.

One matter the Minister would be well advised to ensure the review covers is the high cost to both defence industry and Defence itself of delays in the issuing of Requests for Tender (RFT) and changes in capability acquisition plans.

We all know that major defence projects are very complex and very costly. The documents can run to hundreds of pages and lodging a tender can involve the supply of tens of thousands of separate pieces of data. This means that companies who are serious about bidding must start assembling a bid team well ahead of the scheduled date for release of the tender documents. The cash burn starts from then.

These bid teams may involve some in-house staff, but they often involve engaging an external contractor, usually an ex-military person, to project manage the bid, and identify others with the required background and skill-sets to assist with preparing the tender. Many of these additional members of the bid team are also ex-military people with skills that are in high demand in certain sectors of industry. When any given individual is available, it cannot be assumed that he/she will be available for long, and they cannot be expected to wait around unremunerated for the real work to start – in order to secure them for the bid, they need to be brought onto the payroll.

The task of these bid teams ahead of time is to develop the tenderer’s proposed solution to what is expected to be in the RFT, to identify any joint venture partner that might be required, and the second and third tier contractors that are required to deliver the complete package, negotiate the commercial arrangements under which the prime will partner with all these other companies, and work on the project costings. This is an expensive and time consuming business.

Sometimes the Request for Tender process is preceded by a Registration of Interest or a Request for Proposals. Preparing these is a smaller scale task, but responding to them means the work has started, there is the nucleus of a bid team in place, and it is important to industry that the issue of the RFT documents not be delayed.

There is another aspect to this. These contracts are all about the capability of the Australian Defence Force. To coin a phrase, capability delayed is capability denied. This applies whether we are talking about the acquisition of new capability or the sustainment of existing capability.

To take some specific examples:

Maintenance of F404 engines for the FA/18 Hornets. A Request for Proposals was issued in about mid-2005, to be lodged by October. I know of one highly capable company, in addition to the existing contractor Air New Zealand Engineering Services (ANZES), that submitted a response to the RFP, a response that included a conforming proposal and at least one suggested alternative solution. Two years later, in 2007, the CEO of the company was still trying to find out from the Defence Materiel Organisation when the RFT would be issued, and not getting definite answers. Some time after that, the company’s board decided that the company was no longer interested. Australian Defence Monthly’s list of the Top 40 Suppliers to Defence in that same year 2007 shows that ANZES its subsidiary Tasman Aviation Enterprises was performing this work under an ADF Standing Offer. But if the project was never competed, how can we as taxpayers be sure that we have the best company delivering the best solution?

LAND 907: Through life support for Abrams Tanks and Hercules Tank Recovery Vehicle. Expressions of interest for provision of through-life support were sought in late 2005. Industry’s expectation at that stage was that the RFT would be issued in 2006. The tanks officially went into service in July 2007. The RFT for through-life support was issued in November 2008, and closes on 30 April 2009 – 3.5 years after the request for expressions of interest. At least one highly capable company with direct access to relevant technology set up a team to compete for this project, and subsequently disbanded it because of the cost of awaiting the start of the tender process.

AIR 7000 Phase 1B: Phase 1B of AIR 7000 is a project to acquire High Altitude Long Endurance Unmanned Aerial Systems for maritime patrol and other surveillance at an estimated cost of $1000m-$1500m. The Defence Capability Plan 2006 states (page 35) that the areas on which Australian industry involvement requirements are anticipated to focus in Phase 1B include:

systems integration

through-life support

development and implementation of an integrated Ground Environment for command and control, mission planning, information management and training for the UAS and manned systems, and

development and implementation of a data exploitation, display and dissemination system.

In the through-life support area opportunities were expected to exist for through life support of the strategic surveillance Unmanned Aerial Vehicle system in the traditional areas of airframe, engine, platform utilities and ground-based systems. Main focus areas would be deeper maintenance, possibly some operational level maintenance, supply support and inventory management. This is a huge project, with huge opportunities for Australian industry (meaning industry based in Australia, irrespective of nationality of ownership).

As this January 2008 article from C4ISR Journal indicates, a major component of AIR 7000 is the selection of an industry capability partner (ICP) responsible for developing an Integrated Ground Environment (IGE). Its functions include mission planning and control, data and imagery analysis, and operator training and simulation. Depending on which UAV the RAAF selected for Multi-mission Unmanned Aerial System (MUAS), the ICP might also serve as integrator for Australian-specific sensor and communications elements into the baseline BAMS platform and payload.

DMO called for tenders for the ICP contract in March 2007. Most of Australia’s major systems integration companies submitted bids; DMO short-listed two teams to refine their proposals in the so-called offer definition phase of the bid. One was a teaming of BAE Systems and L-3 Communications, the other a joint venture between Raytheon and Boeing.

The two teams have been “refining their proposals” since 2007. As I understand it, both have spent millions. Now, as Defence Minister Joel Fitzgibbon announced on 2 March, AIR 7000 Phase 1B will not proceed. The reasons given by the Minister are:

The delivery schedule for the United States Navy’s BAMS [Broad Area Maritime Surveillance] program has slipped and resulted in the earliest possible in-service date for the BAMS aircraft moving out to 2015.

Introducing such an advanced new aircraft at this time would have caused incredible workforce pressures on the Australian Defence Force, particularly given the requirement to transition the Air Force’s AP-3C Orion fleet to a new manned surveillance aircraft in the same time period…

The Australian Government has every confidence that the United States Navy BAMS program will deliver a very capable uninhabited aircraft. However, at this stage in the development of this project, it is in Australia’s best interests to not knowingly risk incurring the unmanageable workforce chaos that would result.

Blindly pushing on with the program would have placed a huge and unnecessary strain on our personnel in trying to potentially manage three separate airframes at the one time and I was not prepared to place this unnecessary burden on our men and women in uniform.

Interestingly enough, the author of the C4IRS article, Gregor Ferguson, foresaw the potential for a concurrency problem over a year ago:

The BAMS co-development process will continue until 2011, with initial operating capability for the U.S. Navy in 2013. Plans call for deliveries of the MUAS to the RAAF to begin in 2013, with service entry expected in 2017.

The following year, the last of the RAAF’s 18 AP-3C Orions will be withdrawn from service, replaced (probably) by the Spiral 1 variant of the P-8A Poseidon. But if the new MPRA [Maritime Patrol and Response Aircraft] enters service between 2015 and 2017, some overlap with the introduction of the MUAS is inevitable.

If the RAAF’s Orion fleet is as heavily tasked in the Middle East, or some other theater, as it now is, the force could come under stress as it tries to maintain operational commitments with a shrinking Orion fleet, introduces an all-new MUAS and simultaneously introduces a new MPRA.

Now the situation has arisen and the Government has walked away from the MUAS, while maintaining that “Defence will continue to closely monitor the progression of BAMS and other similar unmanned aircraft programs”.

That is all very well, but several important questions arise:

If concurrency is such a major problem, how confident are we that there will not be a further slippage on one side or another of these technically challenging programs that might lead to their not presenting that problem after all?

Even if the manned and unmanned aircraft are available to come into service more or less concurrently, is it not possible for us to arrange a delivery schedule we can cope with?

How long do we expect it to be before we return to the issue of unmanned surveillance aircraft (we need them, getting rid of the pilot creates all sorts of endurance and capability opportunities)?

Having summarily dismissed such major players as BAe Systems-L3 Communications and Boeing-Raytheon, how confident are we that they will return when we want to pick up the threads again? What do we expect them to do with their high-tech teams in the meantime?

The slippage in the BAMS project does not relieve us of the timelines for the retirement of the P3-C Orion fleet; what is Plan B?

Has the Government sat down with the two consortia at the highest level to consider how we (the Government and the affected companies) can best navigate our way through this setback to the introduction of the required capability? We hear a lot about partnership and risk-sharing in the policy documents and the conference speeches, but when there is a setback it seems to end with the brusque goodbye.

Leaving aside the specifics of how the Government will deal with the problem of obtaining unmanned surveillance capability, the critical issue is that delays and changes of direction impose enormous costs on the industry participants, and increase the risk of doing business with Defence. This ultimately must be recovered through higher prices, to the cost of the Defence budget, Defence capability, and the Australian taxpayer.

The Australian defence market is one which is large enough to be taken seriously by global defence primes, but small enough to be ignored if companies form the view that it is all too hard. Every time a capable company decides that it does not want to be involved, the ADF faces less choice and the potential for higher cost.

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