Background

1. The basis of the Army's armoured reconnaissance and surveillance capability is provided by a fleet of 257 Australian Light Armoured Vehicles (ASLAVs). The vehicles are used to equip units in Darwin and Brisbane. Currently there is a deployment of some 50 ASLAVs serving in the Middle East Area of Operations.

2. The development of the ASLAV capability commenced in 1989 and has involved three acquisition phases to date and the integration of a range of capabilities to the base vehicles. The project has spanned a period of multiple changes in the structure of the Defence acquisition organisation, in acquisition processes and procedures, and in Defence capability decision-making processes.¹

3. Phase 1 had an approved cost of $28.4 million (April 1989 prices). This involved the purchase of 15 ex-US Marine Corps Light Armoured Vehicles in order to trial the Wheeled Armoured Fighting Vehicle (WAFV) concept in northern Australia. The trials were conducted in 1990-91, with the subsequent report endorsing the suitability of the WAFV. Subsequently, Defence selected the Light Armoured Vehicle as the WAFV solution.

4. The initial scope of ASLAV Phase 2, approved in August 1991, involved the acquisition of 97 ASLAVs and supporting ancillary equipment at an approved project cost of $255.73 million (April 1991 prices). In December 1992, Defence contracted with the Canadian Commercial Corporation (the Prime Contractor), a Canadian Government ‘Crown Entity'² for 97 vehicles at a cost of $123.84 million. The production work was then subcontracted to Diesel Division General Motors (later to become General Dynamics, described in this report as the Supply Contractor-Canada or the Supply Contractor-Australia). In 1995, the scope was broadened to include the replacement of the Phase 1 vehicles and the acquisition of 111 ASLAVs. Phase 2 vehicles were delivered to schedule over the period 1995-97 to the School of Armour in Puckapunyal and 2nd Cavalry Regiment in Darwin.

5. Under Phase 2 the ASLAV fleet required three hull types to provide the basis for seven variants:

• The ASLAV Type I is a turreted vehicle with a 25mm stabilised cannon and thermal imaging weapon system, and is used for only one variant titled the ASLAV-25.
• The ASLAV Type II has greater internal capacity and no turret. Using a common hull design installed with unique Mission Role Installation Kits, it provides the Personnel Carrier, Command, Ambulance and Surveillance variants.
• The ASLAV Type III allows for the installation of a crane for the fitters (repair) variant or a heavy winch and support stands for the Recovery variant, again each with its own Mission Role Installation Kits.

6. In December 1997, the Government approved the acquisition of up to an additional 150 ASLAVs under Phase 3 at an approved project cost of $491 million (Dec 1997 prices). Defence used a major contract amendment valued at $286.37 million³ to the existing Prime Contract with the Prime Contractor to seek an additional 144 ASLAVs, to standardise the Phase 2 fleet to the Phase 3 build standard, and to provide supporting ancillary equipment, including commander's weapon stations, surveillance suites and simulators (the scope of 150 was reduced to 144 in accordance with direction to keep within the cost cap).

7. Phase 4 of the Project is planned for first pass approval in 2006–07 for a mid-life upgrade to enhance the survivability and situational awareness capabilities of the existing ASLAV fleet. This may include: mine protection; battlefield management; signature management; spall liners; and ballistic protection at a cost of between $200 million and $250 million. The DMO provided the following capability outcomes advice to the ANAO in August 2006 (Table 1).

Source: DMO advice provided to the ANAO in August 2006

8. The objective of the audit was to provide an independent assurance on the effectiveness of Defence and DMO's management of the acquisition of the ASLAV capability to Army. The audit examined the initial capability requirements and approval process, the contract negotiation process, and the management of the Project and Contracts by DMO.

Overall audit conclusions

9. The ASLAVs have proven to be a significant addition to the Army's capability. They have represented a proven vehicle type that is in widespread use with other military forces. DMO has advised the ANAO that the ASLAV capability is maintained at a high state of readiness as demonstrated with the highly successful short notice operational deployments in East Timor in 1999 and Iraq today.

10. The ASLAV vehicles have been supplied to the Australian Defence Force generally in accordance with the provision of the Contract and within the approved cost envelope. Initial planning time horizons for the delivery of the vehicles were overly optimistic. As such, the additional capabilities (including commander's weapon stations, surveillance suites and simulators) which accounted for less than one tenth of the overall project cost and were to be delivered under Phase 2 of the Project, have not been provided to schedule and in some instances will no longer be provided through the Prime Contract. The ANAO notes that the changes made to strengthen the procurement process following the Defence Procurement Review of 2003 (Kinnaird Review) are intended to avoid similar situations from arising in future projects.

11. The ANAO considers that the decision to retain the original 1992 Contract for Phase 2 and incorporate Phase 3 as a Contract Amendment created a cumbersome document to effectively manage a decade after signature. From DMO's perspective the strategy to utilise the original Prime Contract has proven successful in the delivery of the ASLAVs to contracted schedule, although, given improved contracting strategies being adopted by DMO, it would likely adopt a different strategy today.

12. However, at the time, progressing a $491 million major capital equipment project as a Contract Amendment to the Prime Contract of an earlier project approved at $255 million was considered by Defence to be a low risk strategy. The ANAO considers that Phase 3 was not simply the delivery of further quantities of Phase 2 vehicles from the same production line, but a strategic acquisition deserving of its own Prime Contract.

13. While DMO has delivered the capability within the approved project budget, there are aspects of contract administration of the Project that have been managed less than satisfactorily. The Program Office did not have an up to date version of the Contract between February 2002 and March 2006⁴ and there was a substantial lack of readily available financial documentation for Phase 2 of the project. The Program Office detected errors in the payment of accounts amounting to at least $7.15 million and instigated corrective action with the Contractor. The ANAO noted that the ASLAV Phase 3 Program expenditure was over reported on foreign currency transactions by some $23 million. In addition, $12.4 million has not been paid by Defence to the Australian Taxation Office for its Goods and Services Tax (GST) liability in the period 24 November 2000 to 25 November 2002, for which Defence would have been eligible for a tax credit.

Key Findings

Acquisition of Vehicles (Chapter 2)

14. The ASLAV is a proven and capable armoured vehicle that provides the ADF with significant capabilities for Australian defence requirements. The 111 vehicles purchased under Phase 2 of the Project were acquired between 1995 and 1997 in accordance with the Contract schedule. In-service delivery of the 144 Phase 3 vehicles began in 2002 and was completed by 2004.

15. Phase 2 vehicles were introduced some 28 months later than originally planned by Defence as outlined in the Defence Equipment Acquisition Strategy, but in accordance with the Contract provisions. The initial slippage was due to Defence delays in issuing the Request for Tender and in the subsequent tender evaluation. In March 1995, the then Government approved a subsequent scope increase at a cost of $43.9 million to increase the total funding of the project to $316.5 million.

16. Phase 3 was approved in the December 1997 Budget at a cost of $491 million (Dec 1997 prices) for up to 150 ASLAVs. In late 1996, the Prime Contractor had submitted an unsolicited proposal to Defence for additional vehicles and offered a price reduction to 90 per cent of the Phase 2 vehicle price valid for some three months. The offer of a reduced price lapsed as Defence did not respond within the required timeframe.

17. As part of the Phase 3 Project, the Standardisation of the Phase 2 vehicles to the Phase 3 standard is currently 85 per cent complete. The delivery schedule of standardised Phase 2 vehicles has been affected by recent unplanned operational enhancements. The schedule has been recovered by the Contractor.

Additional Project Capability (Chapter 3)

18. Phase 3 includes the transfer of elements of Phase 2 components which were not achieved under the existing Contract. In May 2005 these requirements, at a value of $66.24 million, were moved from Phase 2 to Phase 3 of the Project. Whilst all capabilities were to be procured under the Prime Contract, other contractual arrangements have been entered into for two of the capabilities namely:

• the Behind Armour Commander's Weapon Station (BACWS) capability has been achieved through the purchase of a Remote Weapon Station from Kongsberg⁵ through a series of acquisitions. By December 2005 all 59 Remote Weapon Stations had been procured at a cost of $17.9 million. The BACWS project has completed deliveries on the contracted schedule with all Remote Weapon Stations fitted to vehicles by August 2006.
• The Multi-Spectral Surveillance System (MSSS) was to be introduced into service in October 2003 using the contractual requirements in the Prime Contract. The Surveillance prototype development, now contracted outside of the Prime Contract, is progressing to contracted schedule and has completed a successful Critical Design Review. DMO now expects this capability to be delivered in July 2008.

19. The remaining capabilities to be procured under the Prime Contract are the Crew Procedural Trainers (CPTs) and the Standardisation of 113 Phase 2 vehicles to a Phase 3 standard.⁶ Nine CPT simulation systems are to be procured at a cost of $20.8 million. The Project has suffered delays relating to technical defects within the system which the Contractor is seeking to resolve. DMO has now delivered three high fidelity turret trainer systems to the School of Armour, although without the collective capability functionality. The CPTs were to be provided to Army by June 2002 and DMO now expects them to be delivered by late 2006.

20. The Standardisation Project includes upgrading the Phase 2 vehicle's electric drive turrets, thermal sights, laser range finders, and drive-line and suspension components. A series of work packages have been developed to complete the Project by October 2006. The Standardisation Project was suspended in early 2005 in order to allow for the deployment of ASLAVs for the Middle East Area of Operations. This has led to an approved schedule postponement of five months although DMO has advised that the lost time has been recovered by the Contractor. DMO advised in August 2006 that the Standardisation Project is progressing to contracted schedule with 95 of 113 vehicles delivered to a high standard.

Financial Management (Chapter 4)

21. During Phase 3, a number of incorrect payments have been made against the Contract by DMO. Ten credit notes were supplied by the Contractor to DMO due to errors made in the payment of eight invoices. The errors were: making duplicate payments; paying against the wrong currency (for example in Australian dollars rather than Canadian dollars); and processing errors. The total amount of these credit notes was $7.15 million.

22. The ANAO has identified systemic discrepancy in terms of the way in which foreign exchange transactions were reported by the Program Office for Phase 3 of this Project. Actual foreign exchange payments for the Project used the Reserve Bank of Australia (RBA) indicative daily foreign currency rates for USD and CAD payments. However, for extended periods of time, the Program Office fixed the USD and CAD exchange rates at artificially low levels in the Defence and DMO financial management system (ROMAN).⁷

23. The actual cost to the DMO in purchasing currency from the RBA was not accurately reflected in the Program Office expenditure reports. The ANAO has calculated that the Program could be over reporting the cost of the Project by $23 million compared to actual costs incurred. As a consequence, the project budget process has not fully reflected all project payments. The ROMAN accrual records report the foreign exchange amount from an indicative rate on the day before the amount is entered into ROMAN and not on the date of invoice as required by Australian Accounting Standards.

24. There is no process for foreign exchange losses and gains to flow through to the project budget in DMO. The ANAO has been advised by DMO that the ASLAV Program Office, in conjunction with the Chief Finance Officer DMO, has prepared and posted the correcting journals to rectify the errors in the Asset Under Construction balance and assets in use caused by the fixing of the exchange rates.

25. In late 2000, a Reverse Charge Agreement between DMO and the Prime Contractor was entered into as the Prime Contractor was not willing to agree to the inclusion of any GST clauses as part of the negotiations for the Phase 3 Contract Amendment. This agreement allowed GST to be paid by the recipient of the supplies (Defence) and not by the Prime Contractor.

26. From 24 November 2000 to 25 November 2002, a total of $124.3 million was paid to the Prime Contractor by Defence. These payments were made against invoices which did not include a GST component, in accordance with the Reverse Charge Agreement. Defence, as the recipient of the supplies, was obliged to pay the GST. However, according to Defence ROMAN records, no GST was paid between November 2000 and January 2003. On the basis of information on GST payments provided by Defence, some $12.4 million of GST payments should have been paid by Defence to the Australian Taxation Office. The ANAO acknowledges that while Defence can claim a rebate through input tax credits which leads to a nil effect to the overall Defence budget, it is still important for the Department to claim GST as stipulated by the A New Tax System (Goods and Services Tax) Act 1999.

27. In November 2004, the Prime Contractor provided an invoice to Defence in the amount of $213 638 relating to payment for GST consultants and Senior Legal Counsel. DMO advised the ANAO that the costs incurred were necessary to determine how the Prime Contractor was to comply with its GST obligations under the contract. The Program Office approved the Prime Contractor's invoice for payment in February 2006.

Agency response

28. The Department of Defence provided a response (see Appendix 1) on behalf of DMO and Defence. DMO and Defence agreed with the one recommendation contained in the report. An extract from the response stated that:

The acquisition of the 257 ASLAVs by the Defence Materiel Organisation (DMO) has involved three phases, spanning a combined total of 16 years. This has included many ASLAV variants and the integration of a range of capabilities and upgrades to the original base vehicles.

Defence has been very satisfied with the performance of the ASLAV fleet. The vehicles were deployed at short notice to East Timor in 1999 where they made a significant contribution to the success of the mission. The vehicles maintained a high level of availability and achieved great effect with their mobility, protection, firepower and night time capability.

The 50 ASLAVs deployed to Iraq today are the best-equipped and most capable light armoured vehicle in their class. The turreted 25mm cannon and Remote Weapon Station 12.7mm machine gun systems have day sights, thermal night weapon sights and integrated laser range finders. The turrets are stabilised and the vehicles have been successful in completing missions under fire utilising these accurate and capable systems. In terms of protection, the bar armour systems assist in the defeat of rockets, the ballistic steel amour is enhanced with the addition of spall liners to both reduce the effect of rockets and improve protection against blast and bullet. This package of offensive and protective systems, combined with high levels of training and sound tactics, have allowed the ASLAV fleet to perform thousands of kilometres of patrolling and escorts, while securing their areas of responsibility.

In 2004, the ASLAV Program identified a range of contractual and financial management issues that required attention. Defence initiated an internal review and developed a detailed rectification program that has been implemented and successfully completed. The issues identified and details of the remediation work completed were presented to the ANAO for consideration on commencement of the performance audit.

Phase 4 of the Project is planned for first pass approval in 2006–07 for a mid-life upgrade to enhance the survivability and situational awareness capabilities of the existing ASLAV fleet. This is to be achieved through: mine protection; battlefield management; signature management; spall liners; and ballistic protection at a cost of between $200 and $250 million.

Footnotes

1 The ASLAV Program is managed through the Wheeled Manoeuvre Systems Program Office in Melbourne.

2 The Corporation is wholly owned by the Canadian Government, which facilitates international trade and reports directly to the Canadian Parliament.

3 The Contract amount is denoted in three currencies: $C107.88 million; $47.05 million; and $US90.84 million (Sept 2000 prices).

4 At this time over 220 Contract Change Proposals (CCPs) had been approved.

5 The contractor Kongsberg Protech AS is a Norwegian firm which supplies high technology systems to defence forces around the world.

6 This includes 111 Phase 2 vehicles plus two additional vehicles.

7 DMO advised the ANAO in July 2006 that: in the period January 2001 to April 2005 the fixed exchange rate functionality available in ROMAN had been applied to two Purchase Orders relating to the Prime Contract and an additional nine supporting purchase orders. During the period this functionality was used, exchange rates were not manually applied to individual transactions. Rather, the Defence global update exchange rate was applied and updated with each global update exercise.