Introduction

1.1 In the May 2010 Budget, the government provided $573.6 million over 10 years for the acquisition and operating costs (including crew, maintenance and fuel) for a fleet of eight larger and more capable patrol boats to replace the ageing Bay Class vessels. The funding provided was to meet the estimated cost to design, construct and deliver the Cape Class patrol boats (CCPBs) together with a portion of the increased personnel and operating costs, as illustrated in Table 1.1:

Table 1.1: Government funding per cost element

Source: ANAO analysis of departmental documents.

1.2 As part of its approval, the government required that a level of effort of 2400 patrol days (300 patrol days per CCPB) per annum was to be maintained across the patrol boat fleet. The CCPBs form part of Australia’s broader marine capability and are responsible for performing strategic patrols, providing tactical surveillance, and undertaking enforcement activities to address maritime security threats within and beyond Australia’s 200 nautical mile Exclusive Economic Zone. The capability requirements for the replacement patrol boats are detailed below at Table 1.2.

Table 1.2: Cape Class Patrol Boat capability requirements

Note a: Each CCPB carries two Ship’s Boats which are 7.3m long and can be launched simultaneously from the CCPB to conduct interception and boarding activities.

Source: Auditor-General’s Report No.13 2014–15, Management of the Cape Class patrol boat program, p.37.

Acquisition phase

1.3 On 12 August 2011, the Commonwealth, represented by the Australian Customs and Border Protection Service (ACBPS) entered into a combined acquisition and support contract (the contract) with Austal Ships Pty Ltd (Austal). The contract with Austal was to design, build and provide in-service support (ISS) for a fleet of eight aluminium hulled patrol boats — the CCPB fleet. Austal designed and constructed the fleet, and entered into a sub-contract arrangement with DMS Maritime, a subsidiary of Serco, to provide the ISS.⁵ The ISS activities specified in the contract include management and delivery of all engineering, maintenance and supply support services required to achieve the contracted rate of effort (2400 patrol days across the fleet — 300 patrol days per CCPB per annum).

1.4 The first CCPB (Cape St George) was delivered in April 2013. Delivery of the remainder of the fleet took place from May 2014 through to 31 August 2015. The delivery date and acceptance status of each CCPB is detailed below at Table 1.3.

Table 1.3: Delivery and acceptance status of the Cape Class patrol boats

Source: ANAO analysis of departmental documentation.

1.5 All of the CCPBs were conditionally accepted into service⁶ due to a range of deficiencies and defects.⁷

1.6 After the acceptance of the last CCPB (Cape York), and the deficiencies and defects which had arisen had been remedied to the satisfaction of the department, the full fleet of eight CCPBs was to be accepted. Achievement of this milestone⁸ was to mark the completion of the acquisition phase and the successful transition to the ISS phase of the contract.⁹ To illustrate the significance of achieving final acceptance, a payment of $44.6 million was associated with the achievement of this milestone.

Final acceptance issues

1.7 In August 2015, as part of planning for final acceptance, the department provided Austal with a list of 62 items identified throughout the delivery of the CCPB fleet, which had not yet been satisfactorily resolved. These items (the Final Acceptance Issues List) included all of the exceptions specified in the supplies acceptance certificates submitted for department acceptance upon delivery of each CCPB, as well as some additional items raised by the department and agreed with Austal.¹⁰

1.8 The Final Acceptance Issues List spanned a range of issues in relation to the deliverables of the acquisition phase of the CCPB project, including capability (vessel performance) and support system deficiencies that had emerged. Between August and December 2015 Austal and the department¹¹ attempted to resolve the issues, and on 17 December 2015, Austal submitted the supplies acceptance certificate and associated claim for payment for the final acceptance milestone for approval.

1.9 On 22 December 2015 the supplies acceptance certificate submitted by Austal was rejected. Austal was advised that the request for final acceptance had been referred to the department’s senior executive and that the $44.6 million final acceptance milestone payment would be withheld. The department then wrote to Austal on the same day and advised that a partial payment of $31 million (69 per cent) of the total milestone amount would be made subject to the following conditions:

• the provision of financial security in the form of a performance security deed for $31 million;
• that the parties execute a Contract Change Proposal which would provide for a dispute resolution process¹² that is binding when referred to an independent third person¹³;
• that a series of performance and capability trials be conducted before 30 May 2016; and
• acknowledgement from Austal (in writing) that the partial payment did not constitute a waiver of the Commonwealth’s rights under the contract, or at law.

1.10 However, a further letter was sent to Austal on 22 December 2015 agreeing that the conditions relating to the provision of a financial security and the conduct of performance trials to address disputed capability shortfalls would be removed subject to Austal and the department agreeing a way forward in January 2016. Austal wrote to the department to acknowledge the conditions, and on 23 December 2015, the $31 million was paid. Between January and June 2016, the department and Austal continued to attempt to resolve the issues, and a further payment of $8 million was made on 29 June 2016. Despite these efforts, the final acceptance issues have not been successfully resolved, and as at October 2018, the CCPB fleet has not been finally accepted, capability and support system deficiencies remain, and the project has not successfully transitioned to the ISS phase.

In-service support phase

1.11 Under the combined acquisition and support contract, the ISS phase was to commence upon acceptance of the first CCPB (Cape St George), and transition from the acquisition to the ISS phase using a staged approach. The transition period was to close after the last CCPB (Cape York) had been delivered and the fleet had been unconditionally accepted into service.

1.12 In 2014, a previous audit undertaken by the ANAO¹⁴ identified that the initial application of the ISS arrangements had resulted in the identification of a number of areas of contention between the department and Austal that would require resolution. Particularly, the calculation and application of payment abatements¹⁵ in accordance with the performance management framework of the contract, and the operation of the survey and quote mechanism.

1.13 These issues first emerged in November 2013, when the department applied abatements as set out in the performance management framework of the contract for the first time.¹⁶ Austal disputed the abatement amount and in January 2014, wrote to the then ACBPS, (now the Department of Home Affairs) requesting that the ISS arrangements in the contract be revised. Austal’s position was that:

adjustments to the monthly service fee in accordance with the performance management framework are commercially disproportionate to the company’s projected revenue stream and could result in a financial loss. The contract must be good business for Austal and this approach is not consistent with Performance Based Contracts, where the costs are recovered and only the profit element is at risk.

1.14 Since late 2013, and through the establishment of the Australian Border Force (previously the ACBPS) in July 2015 as the operational arm of the Department of Immigration and Border Protection, the operation of the contracted ISS arrangements for the CCPBs continued to be contentious. In December 2017, the Department of Immigration and Border Protection was transferred into the newly established Department of Home Affairs and as at October 2018, the contracted ISS arrangements, as well as other issues which have emerged are being addressed through an ongoing dispute resolution process.

The ANAO’s previous audit

1.15 In December 2014, Auditor-General’s Report No.13 2014–15, Management of the Cape Class Patrol Boat Program, was tabled in Parliament. This report concluded that the then ACBPS had established sound arrangements to underpin the acquisition of the CCPB fleet, but that risks remained in relation to the provision of ongoing support for vessel operations, particularly in relation to budget and workforce arrangements. The audit made two recommendations, which the then ACBPS, now the department, accepted.

1.16 As at October 2018, the status of the recommendations is outlined at Table 1.4 on the following page.

Related departmental and external reviews

1.17 There have been a number of departmental and external reviews into the management of the CCPB program since the ANAO presented its initial audit report to Parliament in December 2014.¹⁷ The objectives, findings, number of recommendations and status of implementation is detailed on the following page at Table 1.4:

Audit approach

1.18 The objective of this audit was to examine the effectiveness of the department’s administration of the support arrangements designed to ensure that the CCPBs are achieving contracted availability and performance requirements.

1.19 To form a conclusion against the audit objective, the ANAO adopted the following high-level criteria.

• Has the department established effective governance arrangements for the in-service support program?
• Has the department established effective arrangements to manage the in-service support contract?
• Has the department implemented effective arrangements to support the operation of the Cape Class patrol boats?

1.20 The audit team has:

• reviewed, examined and analysed documentation held by the department;
• interviewed staff and external stakeholders, including Austal;
• examined maintenance records for CCPBs and training records for the Cape Class crew; and
• extracted and analysed data from the Computerised Maintenance Management System (CMMS).

1.21 Additionally, site visits have been conducted at the Austal Shipyards in Henderson Perth, the primary crew changeover point at East Arm Wharf in Darwin and the Austal Service Centre in Cairns.

1.22 The scope of the audit has not included an examination of the communications and surveillance capabilities, tasking, or strategic and tactical operations of the CCPBs.

1.23 The audit was conducted in accordance with the ANAO Auditing Standards at a cost to the ANAO of about $375,600. The team members for this audit were Joyce Knight, Hannah Climas, Haydn Thurlow, Jessica Kanikula and Paul Bryant.

Has the department established effective governance arrangements for the in-service support project?

Governance for the Cape Class patrol boat project

2.1 Under the Department of Home Affair’s Project Management Framework, the CCPB project is categorised as a ‘Tier 1’ project.¹⁸ This categorisation reflects the fact that the CCPBs:

• represent a significant level of capital investment;
• have a planned capability life cycle of twenty years;
• require a large team of dedicated specialist resources;
• is a moderately complex project due to demanding requirements and limited funding;
• is high risk;
• will require significant business change to fully exploit the benefits of the enhanced capability; and
• is prominent in terms of public concern and media interest.

2.2 The framework in place, prior to the transition of the ACBPS into the ABF as part of the establishment of the Department of Immigration and Border Protection, specified that a Tier 1 project requires governance arrangements that provide departmental scrutiny and oversight which properly reflect the project’s heightened risk profile. This policy framework was retained throughout the transition of the Department of Immigration and Border Protection into the Department of Home Affairs.

2.3 Initial governance arrangements for the acquisition phase of the CCPB project conformed to the project management policy framework, and continued through the commencement of the in-service support phase in April 2013 through to October 2015. Since October 2015, the department has not been able to demonstrate that effective coordination between the business units responsible for managing the CCPB contract and providing support to the CCPB fleet was maintained. In July 2015, specific arrangements were established to address the contract management and commercial issues that had emerged and achieve final acceptance of the CCPB fleet.¹⁹ Under these arrangements some progress was made, however the arrangements were ultimately not effective in resolving the issues, and lapsed in September 2016.

2.4 Successive Department of Finance Gateway reviews conducted between 2016 and 2017 found that governance arrangements for the Cape Class patrol boat project were not to the standard expected for a Tier 1 project.²⁰ The review in November 2016 found that a number of gaps had emerged between the generally sound governance and management arrangements in place for the acquisition phase and the arrangements in place for the introduction into service (transition phase) and in-service support phases of the CCPB project. Therefore, the review recommended that the department develop and implement governance arrangements commensurate with the complexity of the project at this stage of its lifecycle.

2.5 In November 2017, a subsequent review found that despite some progress, appropriate project governance and corporate management structures were absent. The report recommended that the department expedite the reviews which had been commissioned to ensure that appropriate project governance and corporate management arrangements were in place for the ISS phase of the CCPB project.

2.6 In August 2018, the department advised the ANAO that improved governance arrangements were being implemented. Specifically, the department advised that the governance requirements specified in the contract had been re-instated; an engineering and configuration governance process was being developed, and a senior governance board would be convened to:

• provide high-level oversight and advice on operations and activities;
• monitor associated risks and issues;
• support operation and activity delivery within the allocated budget; and
• make recommendations in relation to matters requiring consideration and determination by the senior responsible officer.

Governance arrangements

2.7 On 1 July 2015, the government established the Australian Border Force (ABF) as a group within the integrated Department of Immigration and Border Protection. The ABF is headed by a statutory officer, the Australian Border Force Commissioner, and for administrative purposes reports to the Secretary of the department.²¹ On 20 December 2017, the Department of Home Affairs was established which transferred the administrative and reporting functions for the ABF into the newly established department. Consequently, the ABF is part of the Department of Home Affairs for the purposes of the Public Governance, Performance and Accountability Act (PGPA Act).

2.8 The blueprint for Home Affairs identifies that maritime border protection is a strategic priority for the department, which will be delivered by conducting patrols within the Australian Maritime Domain and engaging in surveillance, reconnaissance and enforcement activities to mitigate and eliminate border-related threats. As such, the Cape Class patrol boats (CCPBs) and other marine assets operated and maintained by the department play a significant role in achieving the strategic objectives of the department, and overall policy objectives of government. The performance target for the Department of Immigration and Border Protection in 2017–18, and for the Department of Home Affairs from 2018–19 through to 2019–20 and beyond, is the delivery of 3320 patrol days across the entire marine fleet, with the CCPBs responsible for delivering 2400 (73 per cent) of the total patrol days required.

2.9 Noting this, the department does not have a fleet management plan, which details how marine assets will be operated and supported throughout their planned lifecycles. As such, the department should develop an overarching fleet management plan to outline how it intends to operate, manage and maintain the marine fleet, including the CCPBs, to support the achievement of policy objectives and deliver the performance targets of government.

Governance arrangements for the Cape Class patrol boat contract

2.12 The Department of Home Affairs’ contract governance policy states that governance arrangements should consist of:

• the contract;
• the contract governance charter; and
• the contract management plan.

2.13 As at June 2018, a separate contract governance charter had not been developed for the CCPBs. However, the department advised that elements of the governance charter, specifically, the contract governance structure and roles and responsibilities, have been incorporated into the recently approved contract management plan for the in-service support phase of the CCPBs.

2.14 The contract management plan outlining the governance arrangements for the ISS phase of the CCPB contract did not come into effect until 5 July 2018. As such, the effectiveness of these arrangements cannot be accurately assessed at this time.

Has the department integrated the identification and reporting of in-service support risks into the governance arrangements, and are they being effectively managed?

2.15 Prior to the delivery of the final CCPB (Cape York) the department had developed a consolidated risk register. This risk register identified, recorded and was used to monitor contract, sustainment, support, workforce and logistic risks associated with the CCPB project. However, the consolidated risk register was not maintained. Consequently, risk management for the ISS phase between 2015 and 2017 has not been effective. In early 2018, the department commenced developing and updating a consolidated risk register for the ISS phase of the CCPB project and has provided evidence that as at September 2018, improved risk management arrangements for the ISS phase of the CCPB project are in the process of being implemented.

2.16 As discussed previously, the CCPB project has been categorised as a Tier 1 project. The Tier 1 rating was assigned as the acquisition of an enhanced patrol boat fleet was deemed by the ACBPS, now the Department of Home Affairs, to be ‘mission critical’.²² Consequently, the total indicative risk rating for the CCPB project is high. Further, achievement of the performance and availability targets by the CCPBs is required to support the strategic priorities of the department²³, and address three of the department’s 14 enterprise level risks. However, until September 2018, the department had not updated the risk management plan and had not developed an integrated risk register for the ISS phase of the CCPB project.

Risk management

2.17 The department has mature arrangements in place to ensure that the CCPB vessels are operated safely²⁴, and technical directives are issued which detail how hazards are to be managed. Where issues have been identified, monitoring and evaluation is conducted via a risk assessment which details how the risk is to be treated.

2.18 The arrangements in place to identify and report in-service support risks, however, are less mature. An approved risk management plan outlining how the department intends to manage, monitor and report risks in relation to the ISS phase of the project did not come into effect until September 2018. As at August 2018, risk plans for the contracts providing goods and services to support operations of the CCPBs, including fuel and port services, are being developed but have not yet been implemented. Multiple risk registers exist²⁵ and there is evidence that the department is in the early stages of developing a consolidated risk register to capture workforce, budget, contract management and logistics risks. Nevertheless, the consolidated risk register does not yet include an assessment of the effectiveness of the controls, identify treatment options, or detail how risks will be monitored and evaluated.

Risk reporting

2.19 Risks in relation to the delivery of services under the ISS phase of the CCPB contract are monitored and managed through contractually required reporting arrangements, which include:

• Annual Performance Review Reports;
• Quarterly Performance Review Reports; and
• Monthly Performance Review Meetings and Reports.

2.20 The Annual and Quarterly reports are intended to provide an overview of Austal’s progress and performance over the assessment period against the agreed critical success factors and key performance indicators. These reports are also used to monitor the delivery of engineering, maintenance and supply services. The Quarterly Performance Review Reports are the primary mechanism used by the department to monitor contract service delivery risks. The reports and associated meetings are intended to be used for both Austal and the department to discuss their respective performance, review the risk register, and determine corrective action for issues which have emerged.

2.21 The ANAO reviewed the performance reports and minutes of the meetings associated with these reports and found indications that these meetings have not been held regularly.²⁶ Nine of the 20 Quarterly Performance Review Reports have been located, and six of the 20 Quarterly Performance Review Meeting minutes have been located. Of the records which have been located and reviewed, the ANAO has observed that the records for 2015 are absent, suggesting that these meetings were not held.²⁷

2.22 The department has since advised that risk and issue meetings are now held on a monthly basis with updates made to the risk register. This processes is currently limited to contract management risks, and documentation reviewed by the ANAO indicates that a consolidated risk register for the ISS phase of the CCPB program is still being developed. As such, regular reporting of contract, workforce, budget, and logistics risks, management strategies, and assessments of the effectiveness of the controls have not yet been incorporated into the governance arrangements.

Is the department managing all elements of the in-service support contract (including the engineering, maintenance and supply requirements) effectively?

3.1 The combined acquisition and in-service support (ISS) contract between the department and Austal Ships Pty Ltd (Austal) is a high value ($425.1 million), high-risk contract. Under this contract, Austal is responsible for designing, constructing, and delivering the Cape Class patrol boats (CCPBs), the associated support system, and providing in-service support to the CCPB fleet until August 2019.²⁸ For the ISS phase, Austal is to deliver all ISS, including the engineering, maintenance and supply services required to achieve a rate of effort of 2400 patrol days across the fleet (300 patrol days per CCPB).

3.2 As discussed above, the CCPBs are responsible for delivering 2400 (73 per cent) of the total patrol days required by government. The performance of the CCPBs in relation to the availability targets for the period 2014–15 to 2017–18 is detailed below at Figure 3.1.

Figure 3.1: Cape Class patrol days achieved from 2014–15 to 2017–18

Source: Department of Immigration and Border Protection Annual Reports 2015–16 and 2016–17,

Department of Home Affairs Annual Report 2017–18.

3.3 In 2016–17, the department reported that the shortfall was primarily the result of ongoing work to rectify defects with the CCPBs.²⁹ While the CCPBs have met the majority of the performance (capability) requirements³⁰, departmental documentation reviewed by the ANAO indicates that three of the twelve capability requirements (see Table 1.2) have not yet been fully met. However, it should be noted that this assessment is disputed by Austal. As at August 2018, the capability and support system deficiencies that emerged during the acquisition phase, and continue to impact on the delivery of ISS to the CCPBs are still being addressed, and those that are disputed are being reviewed as part of a dispute resolution process.

Contract management and administration

3.4 Despite delivery of ISS services commencing in 2013, an approved contract management plan for the ISS phase was not in place until July 2018, and communication and stakeholder engagement guidance, including escalation processes, were not documented until May 2018. As a result, inconsistent contract administration practices have been applied, which have been compounded by high staff turnover rates, the subsequent loss of corporate knowledge and poor record keeping practices.

3.5 Two previous decisions by the department to release funds to Austal in December 2015 and June 2016 (as discussed at paragraph 1.10) have eroded the financial leverage of the department. These decisions have also impaired the ability of the department to ensure that the deliverables of the acquisition phase, including the support system, will enable effective delivery of ISS, including the engineering, maintenance and supply services.

3.6 In November 2017, a report commissioned by the department identified that the contract management framework had not been implemented for the ISS phase and recommended that high value, high risk contracts (such as the CCPB combined acquisition and support contract) should be supported by contract management tools, governance documentation and procedural guidance. High-level contract management guidance material is available. However, documented procedures and processes specific to the management and administration of the ISS phase of the CCPB contract are currently limited to the processing of survey and quote invoices and the storage of documentation in the approved electronic records management system.

3.7 Additionally, as at October 2018, final acceptance of the CCPB fleet has not yet been achieved. These issues are being managed through the Final Acceptance Issues Resolution process, and the department has made progress (see Table 3.1). However, work remains to close out the final acceptance issues and ensure that the department is well positioned to effectively manage the contract.

Table 3.1: Final acceptance issues progress

Source: ANAO analysis of departmental documentation.

3.8 Prior to 2018, the department was not actively managing the ISS phase of the contract. In 2018, the department has taken steps to implement improved contract management and administration practices, including:

• the provision of regular contract management reports to generate improved visibility of emerging issues, provide performance and status updates, and record and monitor the implementation of approved actions;
• improved oversight and assurance arrangements to manage the configuration of the CCPBs and ensure that engineering change proposals and requests for deviation are reviewed and processed in a timely fashion, and implemented in a controlled manner; and
• improved financial management processes including forecasting and budgeting arrangements for the contract are being developed, but have not yet been implemented.

Additionally, the department has now engaged a contractor to provide project management and contract administration support and develop contract management and administration processes and procedures. Notwithstanding this, further work is required before management of the CCPB contract could be considered to be effective.

Engineering, maintenance and supply support

3.9 In 2011 when the contract was signed, Austal sub-contracted the in-service support to an experienced in-service support provider — DMS Maritime (Serco). In January 2017, Serco ceased providing in-service support to the CCPB fleet, and responsibility for providing the in-service support was transferred to Austal.

Engineering support

3.10 The engineering support that Austal is to provide for the CCPBs under the ISS phase of the contract includes:

• engineering management;
• certification requirements³¹;
• condition monitoring;
• engineering investigations³² and engineering change proposals (ECPs);
• technical instructions;
• configuration management; and
• technical data support.

3.11 The department is responsible for providing oversight and assurance that the engineering services delivered by the ISS contractor comply with the Marine Technical Regulatory System (MTRS). This includes ensuring that the technical integrity of the CCPB is maintained and any changes to the configuration of the CCPBs are implemented in a controlled manner through effective configuration and change management systems and processes. The department’s approach to providing oversight, assurance and specialist engineering support is largely reactive and is not triggered until an Engineering Change Proposal (ECP)³³ or Request for Deviation (RFD)³⁴ is submitted or a capability deficiency is raised by the Chief Engineer of a CCPB.

3.12 The department supports effective configuration and change management processes through the review and timely actioning of RFD’s and ECP’s. According to the contract, the department is to review and either approve or reject ECP’s within 20 working days. However, documentation reviewed by the ANAO indicates that ECP’s have taken on average 48 calendar days to be processed. In July 2018, the department identified that of 359 open ECP’s, up to 264 have been physically implemented, but have not been closed.

3.13 Where an ECP changes the maintenance or support requirements of a CCPB, it should be accompanied by technical data which details the new maintenance, testing, equipment and support implications. The ANAO reviewed the ECP register as at July 2018 and found that of 302 ECP’s which are identified as being approved, the configuration management or integrated logistic support requirements have not been updated for 84 (28 per cent).

3.14 A physical configuration audit conducted by the department on two CCPBs, one in 2017 and the other in 2018, identified that configuration management processes and practices require improvement to ensure that temporary and permanent changes to the design of the CCPBs are appropriately managed and controlled. The department has subsequently advised that processes to improve configuration and engineering governance arrangements are in progress (see paragraph 2.6). However, the department it is not yet well placed to provide assurance that the processes and practices employed to approve, manage and control changes to the configuration of the CCPBs support the efficient and effective delivery of preventative and corrective maintenance.

Maintenance support

3.15 For the ISS phase of the CCPB project the department is responsible for raising corrective maintenance requests and for coordinating the planning, scheduling, and delivery of preventative and corrective maintenance in consultation with Austal. The department is also responsible for monitoring the completion of preventative and corrective maintenance tasks, and ensuring that requests for payment include the required supporting documentation.

3.16 The department plans and schedules preventative maintenance in consultation with Austal, with arrangements in place to manage, schedule and monitor the delivery of preventative and corrective maintenance services. However, the arrangements are not fully effective as manual based processes and ‘workarounds’ have had to be implemented to address functionality shortfalls in the Computerised Maintenance Management System (CMMS). The CMMS was intended to support maintenance, inventory, and configuration management. However, the system is primarily used as a maintenance management tool. Corrective maintenance requests are raised and actioned in the CMMS, and Microsoft excel spreadsheets are used to monitor the resolution of corrective maintenance, track the associated survey and quote task, and validate associated invoices.

3.17 The systems and processes used by the department to provide assurance that the delivery of maintenance is effective is limited as documentation reviewed by the ANAO indicates that an accurate baseline for maintenance requirements has not been maintained. Interviews held with internal and external stakeholders have also identified that the unavailability of up-to-date technical documentation and maintenance work instructions has impaired the effective delivery and management of maintenance. Additionally, the maintenance requirements for the CCPBs have already increased (see case study no.1) and will continue to increase over time as the CCPBs age.

3.18 To address the additional maintenance requirements, including those outlined above, the department has implemented an extended readiness model for the annual depot level maintenance activities for 2018 through to 2020. The extended readiness model allows for an additional period of up to 28 days where planned and corrective maintenance tasks can be undertaken. An additional benefit was that the model could be utilised to address crew availability issues (see paragraphs 4.17—4.19). However, the application of this model to the CCPB fleet increases the risk that the contracted availability and performance targets will not be met for 2018–19 and 2019–20. Additionally, as at October 2018 the maintenance management plan, associated maintenance matrix and usage profile for the CCPB fleet has not been updated to reflect new, adjusted, and/or additional maintenance requirements.

Supply support

3.19 Responsibility for the provision of supplies for the CCPBs is split between Austal and the department. Austal is responsible for providing supply support services including: supply management; asset and inventory management, obsolescence management³⁵ and disposals; warehousing; stocktaking; and distribution. The department is responsible for monitoring the supply support system managed by Austal and providing assurance that the supply support system for the CCPBs is effective. The department is also responsible for procuring and delivering domestic and administrative consumables (such as cleaning products, and stationary) and fuel required by the CCPBs, as these are specifically excluded from the contract. These arrangements are examined in more detail in Chapter 4.

3.20 Interviews held with Austal and the department throughout the course of the audit indicate that supply support has not been a priority. As a result, purchasing practices and distribution methods are not efficient and obsolescence management and disposal processes are immature. Additionally, the effectiveness of the inventory management system is limited due to the inaccuracy of the inventory listing in the CMMS. The inventory listing in the CMMS has been generated from the Recommended Provisioning and First Outfit List (RPFOL), which identifies the test and equipment, spare parts, and other items required to maintain and operate a CCPB while at sea. However, documentation reviewed by the ANAO indicates that the inventory holding requirements in the CMMS are no longer accurate as changes to the configuration of the CCPBs and the integrated logistic support requirements (including supply requirements) have not been updated (see paragraph 3.13). Additionally, the spare parts, equipage, and test and evaluation equipment requirements vary for each CCPB.

3.21 The department is not actively managing the supply support aspects of the ISS contract. Assurance and oversight arrangements are currently limited to reviewing the Quarterly Performance Review Reports provided by Austal. However, the department and Austal are taking steps to improve the effectiveness of the supply support system.

Has the department designed and implemented an appropriate performance management framework?

3.22 The performance management framework is set out in the contract³⁶ and allows the department to withhold or reduce (abate) payments, exercise step-in rights, and claim liquidated damages. It also required Austal to issue nine financial performance securities to the department which were to be released, and new securities issued, as each CCPB was accepted. The value of the initial performance security held by the department was $20 million. This figure progressively reduced as each CCPB was delivered, and as at August 2018, the value of the financial performance security held by the department is $6 million.

3.23 Under the performance management framework, Austal’s performance is measured against four critical success factors (CSFs) and six key performance indicators (KPIs). The CSFs, KPIs and performance thresholds used to determine a performance rating against each of the measures is detailed at Table 3.2 and Table 3.3 respectively:

Table 3.2: Critical success factors and performance thresholds

Source: ANAO analysis of departmental documentation.

3.24 The critical success factors align with the availability requirements of government. The key performance indicators are assessed on a quarterly basis and include a range of quality, timeliness, availability, and performance outcomes in relation to the services that the contractor is to provide. One of the key performance indicators — system status per vessel — directly aligns with the capability requirements for the CCPB fleet that the government originally set out in its allocation of funding. The other indicators address the level of support necessary to achieve the critical success factors.

Table 3.3: Key performance indicators and performance thresholds

Source: ANAO analysis of departmental documentation.

Performance abatements

3.25 The performance framework as outlined in the contract requires Austal to adjust the Monthly Service Fee³⁷ where Austal’s performance, as measured against each CSF or KPI, is rated as ‘red’. The set abatement amount for CSFs is $14 775 per day. The methodology used and the abatement amount which is to be applied against each of the KPIs is detailed in Table 3.4.

Table 3.4: Abatement amounts per key performance indicator rated as ‘red’

Source: ANAO analysis of departmental documentation.

3.26 The contracted rate of effort allows 65 days per CCPB, and 520 days across the fleet to conduct corrective and preventative maintenance between patrol cycles which includes a 28 day annual maintenance period for each CCPB. In addition, the performance framework allows a further 10 days per CCPB and 80 days across the fleet, where operational days can be lost prior to abatements applying. The performance management framework, as set out in the contract, also includes a provision to ensure that adjustments are not compounded where a single event impacts multiple CSF’s. Austal has contested the department’s interpretation and application of the performance management framework since late 2013, when it was first applied (see paragraph 1.12 and 1.13).

3.27 Subsequently, a joint work instruction was drafted to clarify the operation of the performance management framework. However, the joint work instruction provided by the department is unsigned and undated, and documentation reviewed by the ANAO suggests that it was not successfully implemented. Review of the abatements levied between July 2016 and August 2017 found that abatements were applied to the critical success factor on vessel operational days, and abatements were not applied against any other CSF. The ANAO also reviewed the abatement calculations for the 2016–17 financial year, and found that total abatements of $5.0 million had been calculated but not applied.

3.28 Documentation reviewed indicates that the department has previously granted temporary concessions to allow for a proof of service delivery period. Specifically, the department waived the application of abatements against the KPIs from 22 December 2015 to 1 December 2016.

Are the performance arrangements continually monitored, evaluated and adapted where necessary?

3.29 Quarterly and annual performance reviews are used to monitor the delivery of ISS services including engineering, maintenance and supply support. The performance workbook and performance exception reports are used to monitor the contract and assess Austal’s performance against the measures³⁸ outlined in the performance management framework.³⁹

3.30 The ANAO examined the available quarterly performance reviews, performance exception reports and performance workbooks which indicate that Austal’s performance is being continually monitored by the department. However, it was noted that the performance workbooks are to be agreed by the department and Austal, and where agreement cannot be reached, the issue is escalated to the Quarterly and Annual Performance Review Meetings. The effectiveness of the escalation process has been constrained as the department and Austal have regularly disagreed on the number of days lost, and the abatement amounts which are to be applied to the monthly service fee.

3.31 In February 2018, the department engaged a contractor to review the performance management framework. The findings and recommendations from this review have yet to be implemented as the structure and application of the performance management framework is subject to a formal dispute resolution process.

Has the department established and maintained appropriate support and infrastructure for the Cape Class patrol boats?

Logistics support

4.1 The department maintains warehouses in Fremantle, Cairns and Darwin to store operational supplies and equipment and to provide logistical support to all of the marine assets operated by the department, including the Cape Class patrol boat (CCPB) fleet. The support provided by these facilities includes logistics planning; procurement of operational supplies and equipment; transfer and secure storage of cryptographic and personal defensive equipment; and the replenishment and disposal of ammunition.

4.2 From these facilities, the department coordinates and manages the delivery of supplies and services provided by commercial entities to the CCPBs during the handover period between crew changeovers and as part of planning for annual depot level maintenance activities.

4.3 The logistics planning and request processes used to coordinate the delivery of services and supplies to support the operations of the CCPBs are well documented and include a full suite of work instructions and guidance material to assist CCPB crew, logistics and sustainment officers to coordinate and manage the provision and delivery of fuel, victuals⁴⁰, stores, and medical supplies. The logistics support also includes the scheduling of planned and corrective maintenance conducted during a handover period⁴¹ in consultation with the contracted service providers and other internal departmental stakeholders.

4.4 The logistics service requests and planning commences prior to the arrival of the CCPB in port and continues until the handover period is completed. The schedule for the logistics services is finalised and any amendments are agreed during the logistics planning meetings (handover meetings) held on the CCPB after it has arrived in port.

Contract management

4.5 The department has outsourced the provision of port services, fuel, victuals, and medical services and supplies required by the entire marine fleet, including the CCPBs, to commercial providers. As such, the department is responsible for effectively managing the contracts detailed at Table 4.1.

Table 4.1: Contracts that provide support to the Cape Class patrol boats

Note a: The port services management contract includes the design, installation and lease of the interim dedicated berthing facilities at East Arm Wharf in Darwin.

Note b: The fuel management, medical and victualling contracts cover the full fleet of marine assets operated by the department including the CCPBs, ABFC Thaiyak, ABFC Ocean Shield, ABFC Ocean Protector, and the Fast Response Boats.

Source: ANAO analysis of departmental documentation.

4.6 The ANAO has reviewed departmental documentation and has observed that the contract management, stakeholder engagement and risk management plans for these contracts were not documented until May 2018. The ANAO has also observed that performance management and reporting obligations are not being utilised as required under the contracts, and the reporting which is provided has not been reviewed to ensure that it meets departmental needs and enables the department to accurately forecast budget requirements or control costs. For instance, the monthly contract reporting provided under the victualling contract does not include monthly, quarterly, or annual spending data, trends or analysis of quantities ordered and delivered. Further, there is no evidence that the contractually required reports for the port services management, victuals and fuel management contracts are analysed by the department to provide assurance:

• that contracted services delivered meet requirements;
• that costs are being controlled; and
• that the data provided supports departmental planning and budgeting activities.

4.7 The department’s management of the support to operations element of the contract can best be described as passive, as such the department is unable to provide assurance that contract management is effective. Accordingly, the ANAO recommends that the department ensure that contractually required performance reports meet the needs of the department, are analysed and the results used to support planning and budgeting activities.

Infrastructure (berthing)

4.10 When the project to procure the Cape Class patrol boats (CCPBs) was approved, the original intention was for the CCPBs to berth at commercial wharves. The CCPBs are 58.1m long, 10.8m wide and require access to berthing facilities that are approximately 65m long and where the depth of the water alongside⁴² exceeds 4.0m.

4.11 Each CCPB is scheduled to spend approximately 48 days alongside in Darwin per year to conduct crew changeovers, undertake maintenance, re-supply and refuel. As such, access to suitable infrastructure is required. The issue of this access was first raised in 2012, when the then Australian Customs and Border Patrol Service (ACBPS) identified that there were no ports in Northern Australia that could provide permanent or priority berthing for the CCPBs on a reliable basis. While all CCPBs are capable of docking at all primary and secondary ports in Australia, the majority of crew changeovers, where CCPBs are re-fuelled, re-provisioned and corrective maintenance is undertaken, are conducted in Darwin.

4.12 The introduction of the CCPBs between 2013 and 2015 highlighted the lack of available berthing options in Darwin, noting that in October 2014, crew transfers, logistics and maintenance had been conducted at anchor. ACBPS attempted to access facilities suitable to berth the CCPBs which were operated by the Department of Defence (Defence). In December 2014, a memorandum of understanding came into effect allowing the CCPBs access to suitable berthing facilities at HMAS Coonawarra in Darwin.

4.13 However, due to the maintenance needs for Defence’s Armidale fleet, these facilities were unable to be reliably accessed by the CCPBs.⁴³ Subsequently, the ACBPS agreed that an interim berthing facility in Darwin for a five year period (2015 to 2020) was necessary to enable efficient crew transfers, and provide efficient and cost effective maintenance and logistics support.

4.14 The development of requirements for interim dedicated berthing facilities commenced in March 2015. Between April and December 2015, the department approved a total of $25.1 million in funding to design, construct and lease suitable infrastructure. The ANAO has analysed the contract variations awarded and determined that the funding utilised to design and install the temporary berthing facilities at Darwin’s East Arm Wharf cost the department $12.1 million.

4.15 Interim use of the berthing facility began in February 2016, with full capability established in September 2016 to conduct crew changeovers, undertake maintenance, refuelling and re-supply activities. However, a formal sub-lease was not established. A sub-lease for the use of the facilities has now been established which expires 31 December 2020. In February 2017, the department was advised that there was a risk that the lease for the land adjacent to the berthing facility may not be renewed. In October 2017, the department commenced preliminary planning to secure permanent facilities. This work is in its early stages. Available options have been assessed however a procurement approach, timeframe for implementation and initial funding estimate have not yet been approved.

Does the department have effective workforce arrangements, including recruitment, training and support strategies to operate the Cape Class patrol boats?

4.16 In December 2014, Auditor-General’s Report No.13 2014–15, Management of the Cape Class Patrol Boat Program observed that a fully operational CCPB comprises 18 crew members on a 28 day patrol cycle. A crew of 18 allows two boarding parties to be launched for concurrent operations against multiple targets, or to undertake more complex boarding operations. On this basis the ACBPS estimated that a pool of approximately 360 crew members would be required. A pool of 360 crew allows for sufficient reserves to cover crew sickness, leave, training and upskilling requirements.⁴⁴

4.17 Initial operational and budget planning was undertaken by the ACBPS on this basis.⁴⁵ However, the department advised the ANAO during the course of the previous audit that the minimum number of crew had been reduced to 342, later identifying that budget arrangements and available operational funding would only support 332 crew members by 2015–16. As at August 2018, the records reviewed by the ANAO indicate that crew numbers are below 332, and as such, critical gaps in the workforce have emerged. To illustrate these gaps, a comparison of the actual and required crew numbers⁴⁶ is detailed at Figure 4.1.

Figure 4.1: Comparison of actual and required crew numbers for the CCPB fleet

Note: The crew positions in the above Figure are the: Commanding Officer, Deputy Commanding Officer, Engineering Officer, Deputy Engineering Officer, Navigation Officer, Communications Officer, Operations Officer, Marine Communications and Technical Officer, and Marine Cook. The required crew numbers are those identified in the workforce model, excluding Marine Tactical Officers.

Source: ANAO analysis of departmental documentation.

4.18 Cape Class crew are required to hold and maintain a high level of qualifications (particularly in critical roles) in order to maintain technical expertise and meet regulatory requirements. Noting this, the department should have a plan in place to address identified gaps, and maintain a recruitment ‘pipeline’ as a key strategy to mitigate the risk that CCPBs will not be available for tasking due to insufficient numbers of trained and qualified officers.

4.19 Where the CCPBs cannot access sufficient numbers of appropriately trained and qualified officers, the patrol may be restricted⁴⁷ or cancelled⁴⁸ to ensure that the CCPBs comply with regulatory requirements. Documentation reviewed by the ANAO has indicated that there have been instances where CCPBs haven’t been dispatched with a full complement of crew, and instances where patrols have been cancelled and days lost due to insufficient crew numbers.

4.20 According to the departmental level workforce strategy (People Strategy 2020) one of the priorities is to build a departmental wide workforce planning capability. As at October 2018, the department has advised that the development of a workforce plan for the marine unit is not yet complete.⁴⁹ However, the department has commenced recruitment to fill over 100 sea going positions to address the shortage of appropriately qualified and trained officers to fill critical roles and close the gaps which have emerged.

Training and certification requirements

4.24 The training and certification requirements for the CCPB crew are outlined in two of the three components of the legislative framework which applies to each sea going position. Where the operations of the CCPB fleet cannot meet regulatory requirements, the requirements outlined in the Vessel Management Plan (VMP) are to apply.⁵⁰ The regulatory framework as it applies to the operations of the CCPBs is detailed at Figure 4.2.

Figure 4.2: Regulatory framework for the operations of the Cape Class patrol boats

Source: ANAO analysis of departmental documentation.

4.25 The training and certification requirements vary for each CCPB position. An exemption granted by the Australian Maritime Safety Authority (AMSA) is in effect which allows a CCPB crew to operate within the coastal waters of Australia with a lower level of qualifications than would otherwise be required. Noting this, CCPB crew are still required to have:

• accrued sufficient levels of qualifying sea service⁵¹;
• completed an approved program of study that meets the Standards of the Training Certification and Watch-keeping (STCW) Code as outlined in the VMP;
• passed medical, psychometric and functional fitness assessments; and
• comply with any certification requirements specific to the role.

4.26 The below case study examines the qualification and sea service requirements of the Deck and Engineering Officers.

4.27 It is the responsibility of the individual crew member to maintain records of service, certification requirements and obtain validation of sea service completed. The Deputy Commanding Officers for the CCPBs are responsible for ensuring that all crew embarked hold the qualifications and certifications required to undertake the role. The department provides oversight by monitoring the training and recertification requirements using Microsoft Excel spreadsheets for each CCPB.

4.28 The number of training positions available is dependent on funding and crew availability with selection undertaken on a case-by-case basis. There is no evidence that the process used to select participants is supported by a formal learning and development framework that appropriately prioritises and aligns training positions with organisational needs over the longer term.

Does the department effectively manage the budget to operate and provide in-service support to the Cape Class patrol boats?

Budget Management

4.29 The government approval of the overall CCPB project was subject to the then Australian Customs and Border Protection Service (ACBPS) offsetting the increased CCPB operating costs over those provided for the existing Bay Class patrol boats. Accordingly, the department was advised that the expected budget shortfall would have to be met internally. In December 2014, a previous ANAO audit⁵² identified that the ACBPS did not have a strategy in place to manage the expected budget shortfall over the life of the CCPBs. As such, the ANAO recommended that a strategy to address the expected shortfall should be developed and implemented. The ACBPS, now the Department of Home Affairs, agreed to implement the recommendation. As at October 2018, the department has commenced work to, but not yet implemented a budget strategy to address the anticipated funding shortfall to maintain, support and operate the CCPBs across its expected lifespan.

4.30 In 2015–16, when the Department of Immigration and Border Protection was established, and the ABF stood up, the funding for the acquisition and in-service support contract for the CCPBs transitioned from a project based model to the standard internal departmental budget model used to manage and monitor operational expenditure. This model does not allocate operational funding to meet the estimated costs to provide in-service support to, and operate the CCPBs over their 20 year lifespan. However, the department’s budget allocation process does cover the forward estimates period (four years) and includes regular reviews where operational funding can be reallocated between divisions within the relevant financial year.

Budget estimate accuracy

4.31 The costs to provide in-service support to, and operate the CCPBs per cost element (sustainment, logistics, crew and crew travel) is detailed at Figure 4.3 on the following page. As illustrated, sustainment and crew costs comprise 81 per cent of the total.⁵³

Figure 4.3: Cape Class patrol boat cost breakdown per element

Source: Independent Financial Review — Resolution Consulting — January 2018.

4.32 Since 2014–15, the costs to sustain, operate and provide in-service support to the CCPBs have not been accurately estimated. A review of the financial reports for 2014–15 through to 2017–18 demonstrates that CCPB expenses regularly exceeded the allocated budget, and additional funds of $38 million, $34 million and $18 million were requested and allocated to the responsible business area for each of the relevant financial years. For the 2018–19 budget, the department engaged a contractor to determine the baseline costs to support, maintain and operate the CCPBs. As a result, a significant funding gap was identified, and an additional $60 million in funding was provided.

4.33 The contractor also developed cost models to inform baseline funding requirements based on historical spending patterns. However, the costs models that have been developed require further refinement to ensure that they are supported by accurate data, and support effective forecasting in later years. For example, after the 2018–19 budget allocation was provided the responsible business area identified that the maintenance costs for the CCPBs had been underestimated by approximately $2.5 million.

4.34 As a result, budget management is not fully effective as:

• the department is not yet well placed to accurately estimate or control costs, particularly where the contracts with commercial service providers (as discussed at paragraph 4.6) do not provide meaningful performance or financial reports; and
• the data underpinning the cost models to identify the cost drivers to provide in-service support to, and operate the CCPBs requires further refinement to generate accurate budget estimates and forecasts.

4.35 These budget management issues have been recognised by the department and documentation reviewed by the ANAO indicates that the business area responsible for providing in-service support, crewing and logistics for the CCPBs has taken steps to strengthen existing financial management arrangements, and identify where potential savings can be found or funds redirected. However, further work is required to establish effective budget and financial management arrangements to accurately estimate the funding required to operate and provide in-service support to the CCPBs over their expected lifespan.

Appendix 1 Entity responses