Introduction

1. Super Seasprite helicopters were acquired for the Royal Australian Navy (the Navy) for the purpose of enhancing the capability of the Navy's eight ANZAC class ships.¹ The tasks to be performed by the Super Seasprites included surface warfare, undersea warfare, boarding party operations, naval gunfire support, utility operations and conversion training.

2. The acquisition of the Super Seasprites occurred under Project Sea 1411 Phase 1 (the Project). The Project was approved in February 1996 with an original budget of $746 million (December 1995 prices). Following a tender evaluation process, the Department of Defence (Defence) signed contracts with Kaman Aerospace International Corporation on 26 June 1997 for the acquisition (the Prime Contract) and in-service support (the ISS Contract) of the Super Seasprite helicopters.\

3. Under the original Prime Contract the final helicopter was to be delivered in May 2002. It was apparent by mid 1999, that this schedule was at significant risk of not being achieved and the Project was under cost pressure. During 2000, consideration was given by Defence to provisionally accepting the Super Seasprites in an interim configuration. The Prime Contract was amended in early 2003 to allow  this to occur. Between late 2003 and mid 2005 the Defence Materiel Organisation (DMO) provisionally accepted nine Super Seasprites in an interim configuration.

4. The provisionally accepted aircraft were operated by Navy between late 2003 and early 2006, but were subject to significant limitations including a prohibition on Navy operating the Super Seasprites from ships which applied from late 2004. In March 2006, flying of the aircraft by Navy was suspended due to concerns surrounding the aircraft's Automatic Flight Control System (AFCS). In May 2006, the Australian Military Type Certificate (Type Certificate) for the aircraft was withdrawn and the aircraft was not subsequently operated by Navy.

5. The success of the Project was dependant on the performance of Defence, DMO and the Prime Contractor. The ANAO's focus in conducting this audit was on Defence's and DMO's administration of the Project, including DMO's key responsibility of managing contractor performance and ensuring the interests of the Commonwealth were appropriately protected when the Project encountered difficulties.²

6. The Project ran for more than 12 years and, when expenditure against the Project budget and other clearly related expenditure are combined, total expenditure related to the Super Seasprites exceeded $1.4 billion.³ In March 2008, the Government cancelled the Project and DMO entered into a Deed of Settlement with the Prime Contractor which terminated both the Prime Contract and the ISS Contract, and put in place arrangements for the disposal of the helicopters, associated equipment and spares. As a consequence, additional time and investment will be required to provide the ANZAC ships with the helicopter capability that was intended to be fulfilled by the Super Seasprites.⁴

7. The Project was complex in nature and long running, and accordingly the decision to cancel the Project cannot be attributed to any individual factor. Rather a range of issues escalated over time and ultimately led to the decision to cancel the Project. These issues included the emergence of technical issues in range of areas, difficulties in defining requirements and evaluating compliance with the Prime Contract, changed airworthiness arrangements within Defence and incidents which brought an increased focus on aviation safety within the ADF. It is sometimes the case when such issues interact, contracting parties find it difficult to agree on the underlying causes and the allocation of responsibility for resolution of such issues.⁵

8. The Chief Executive Officer (CEO) of DMO has informed the ANAO that he has undertaken two significant initiatives to increase the focus on helicopter 3management including establishing the Helicopters Systems Division in 2006 and seeking to ensure that the lessons learnt from the Super Seasprite were incorporated into the 2008 Defence Procurement and Sustainment Review (the Mortimer review).⁶

Audit objective

9. Given the significant expenditure associated with the Super Seasprites, and the problems that the Project had encountered over some time, the ANAO had commenced this performance audit prior to the Government's decision to cancel the Project. The focus of the audit was on Defence's and DMO's administration of the Project. In light of the Government's decision to cancel the Project, the objective of the audit was revised to place greater emphasis on those issues that resulted in the failure of the Project to provide the required capability, and highlighting project management lessons for major Defence acquisitions going forward. Accordingly the audit objective was to:

• identify those factors that contributed to the on-going poor performance of the Project;
• outline measures taken by Defence and DMO in seeking to overcome issues encountered by the Project, and key lessons arising from this project for the benefit of major acquisitions projects generally; and
• determine the capability and cost implications of a project that failed to deliver to expectations.

Conclusion

10. The ANAO examined decisions taken at key points in the life of the Project to acquire the Super Seasprites, having regard to the information available within Defence and DMO at the time these decisions were taken, and reviewed the extent to which the implementation of these decisions contributed to project outcomes. This analysis revealed that decision making occurred in an environment of significant tension between the objective of providing Navy with the required capability, the fundamental obligation to meet ADF airworthiness requirements, and the inherent difficulties in managing a complex aircraft acquisition and associated sustainment arrangements. For the Project to be successful, these tensions needed to be managed and resolved. In the event, they were not, with the following factors contributing to the unsatisfactory Project outcome:

• the risks associated with the Project were increased by the decision to seek to incorporate extensive capability enhancements into a smaller helicopter than the ANZAC ship is designed to operate;⁷
• an adequate understanding of the significance of the risks associated with the acquisition was not attained through the requirement definition and tender evaluation processes;
• inadequacies in cost estimation resulted in a significant shortfall in the approved Project budget which was addressed by reducing the number of helicopters acquired, other cost saving measures that placed the delivery of the desired capability to Navy at additional risk, and through significant expenditure funded from outside the Project budget;
• financial leverage available through the Prime Contract was ineffectively applied in the early stages of the Project, allowing a large proportion of the funds to be expended despite evidence of schedule slippage and burgeoning risk;
• the Project Office experienced ongoing difficulties in attracting and retaining appropriately qualified personnel which inhibited its capacity to manage a large and complex project;
• software and system development activities undertaken by sub-contractors to the Prime Contractor were critical to project success, but DMO had limited contractual capacity to resolve risks as they emerged;⁸
• the decision to provisionally accept the Super Seasprites in an interim configuration did not deliver the desired outcomes, was poorly implemented and shifted much of the risk associated with the Project to DMO;
• Defence did not seek to amend the Prime Contract to reflect contemporary ADF airworthiness management practices creating a disparity between contractual and ADF certification requirements which Defence and DMO were ineffective in addressing; and
• poor contract management practices within Defence and DMO, over the life of the Project, contributed to ongoing contractual uncertainty.

11. The expenditure associated with introducing a capability into the ADF exceeds the direct acquisition costs, significantly in some cases. Where a project suffers ongoing schedule slippage, routine reporting on the project's performance does not provide transparency of mounting costs incurred outside the project.⁹ For the Super Seasprite, when expenditure against the Project budget and other clearly related expenditure are combined, total expenditure exceeded $1.4 billion.¹⁰ This figure is 47 per cent greater than the expenditure against the Project budget alone of $953 million.

12. It is not uncommon for major projects, including Defence projects, to experience cost overruns and integration issues. There is a tendency for initial estimates to be optimistic, contingencies to be too low, the severity of risks to be underestimated, delays to be more extensive than anticipated and the complexity of integration issues not to be fully appreciated. Where these factors accumulate, pressure is placed on the project budget, timetable and contracting arrangements, and as a consequence, the delivery of the contracted capability. In the case of the Super Seasprites all of these factors were significant, as explained in paragraph 10, and played a part in the eventual cancellation of the Project.

13. The ANAO recognises that major capital acquisition projects such as these are complex and demanding, and DMO's management approach for major projects has developed since the Project commenced in the mid 1990's, particularly following the 2003 Defence Procurement Review.¹¹ In addition, the ANAO is conscious that DMO is investing considerable resources into its approach to project management and the skills of its staff. This audit indicates that these steps being taken by the DMO are essential. Within the context of improving procurement practices and associated processes, there are some expensive lessons for Defence and DMO from this Project. Defence and DMO have worked with the ANAO to catalogue some of the key lessons (see Appendix 1) but if there is an overriding message from this Project, it is that risks to project outcomes need to be better managed.

Key findings by chapter

Tender Evaluation and Contract Negotiation (Chapter 2)

14. The project to acquire the Super Seasprites was subject to budget constraints from the outset due to an underestimation of the costs used to derive the Project budget for Government approval. Rather than request an increase to the approved Project budget of $746 million (December 1994 prices), Defence reduced the capability to be acquired by the Project. The primary capability reduction involved reducing the number of helicopters being acquired from 14 to 11. Savings were also derived by refurbishing existing airframes rather than acquiring new airframes, and moving the procurement of air to surface missiles for the Super Seasprite, which was originally within Project scope, to another project (Sea 1414). Defence was unable to provide evidence that approval was sought from then Government, the original approving authority, for these scope changes as was required under Defence Policy at the time. However, the then Minister was informed of this approach in a Ministerial Brief of January 1997 which also advised him of the selection of the Preferred Tenderer.

15. The ANZAC Ships are capable of operating a helicopter up to a medium size. However, the procurement of the helicopters under the Project was linked to an unapproved proposal for the development of an Offshore Patrol Combatant (OPC) vessel.¹² Consequently, the tender documentation constrained the size of the helicopters being sought for the ANZAC ships to an intermediate size to provide interoperability with the OPC. During the tender process there was ongoing uncertainty as to whether the OPC project would proceed. Concerns were also expressed surrounding the capability being sought from an intermediate sized helicopter. The OPC project was cancelled eight months after the Prime Contract was signed for the procurement of intermediate sized helicopters for the ANZAC Ships.¹³

16. One of the objectives of the Project was to allow the Super Seasprite helicopter to be operated by a crew of two, rather than the original configuration of a three person crew. The development of the Integrated Tactical Avionics System (ITAS) was fundamental to achieving this objective. The ITAS was to integrate the helicopters systems for avionics, navigation, weapons, communication and sensors. The final build of the ITAS was to be coupled to an AFCS which was to be enhanced through an upgrade of the flight control computer. Defence did not gain a complete appreciation, at the time of tender evaluation, of the risks associated with the Super Seasprite in relation to the development of the ITAS or the modifications to the AFCS. The development of the ITAS and AFCS were ongoing areas of difficulty for the Project and were factors that contributed to the decision to cancel the Project.

Financial Management (Chapter 3)

17. The Defence Portfolio Budget Statements for 2008–09 reported that $953 million (86 per cent) of the approved project budget of $1.108 billion had been expended.¹⁴ The largest proportion of this expenditure, $895.4 million, related to the Prime Contract. The highest period of expenditure occurred between contract signature in June 1997 and mid 2001. During this period Cost Performance Reports indicated significant schedule slippage relative to expenditure, most notably in the development of the flight simulator and the ITAS. By mid 2003, a large proportion of the project funds had been expended but no helicopters had been accepted by DMO.

18. The Prime Contract did not include a liquidated damages provision. In negotiating the Prime Contract, the inclusion of critical milestones and an earned value management system were seen as alternative mechanisms to liquidated damages to promote performance. Under the Prime Contract, if a critical milestone was not achieved Defence was entitled to withhold all payments until such time as it was achieved. Notwithstanding the lack of progress in achieving the complete requirements of critical milestones in the Prime Contract, Defence either paid in full or part paid critical milestones or diluted them through contractual amendments. The last critical milestone was paid in August 2001, nearly seven years before the Project was cancelled in March 2008.

19. Defence was required to validate the Prime Contractor's Cost Schedule Control System which supported claims for earned value method payments under the Prime Contract. In May 1998, an internal Defence minute recommended that earned value method payments could commence, notwithstanding that a validation review had identified eleven major weaknesses in the Prime Contractor's earned value management system. There was no contractual obligation on Defence to commence making earned value payments until the Cost Schedule Control System had been validated. Twelve months later, the Prime Contractor's Cost Schedule Control System was validated by Defence and subsequently accredited by the Deputy Secretary Acquisition. By the time the system was accredited, Defence had paid $81 million in earned value method payments.

20. In 2001 there was concern within DMO surrounding the status of the earned value management system of one of the key ITAS sub-contractors and these concerns remained ongoing in 2003. Under the Prime Contract, the Prime Contractor was responsible to set in place mechanisms with sub-contractors for earned value management. The Prime Contractor was required to maintain compliance with Australian Cost Schedule Control System Implementation Guide, DEF(AUST) 5657 which imposes obligations on the Prime Contractor with respect to sub-contractors. Failure by the Prime Contractor to maintain a Cost Schedule Control System in accordance with DEF(AUST) 5657 entitled the Commonwealth to withhold all future earned value payments until the requirements were met.

21. During 2003, the Prime Contract was amended to remove earned value arrangements for all items, other than spares and stores. By this time annual expenditure against the Prime Contract had reduced significantly — payments peaked in 1998–1999 at $189.4 million while payments in 2003–04 were only $34.4 million.

Interim Capability Accepted (Chapter 4)

22. The ITAS emerged as an area of risk to the Project within five months of the Prime Contract being signed. The performance of one of the sub contractors involved in the development of the ITAS was a key factor in this regard. Reviews conducted by Defence in 1998 and 1999 confirmed the risk ITAS development posed to the Project. In early 2001, DMO gave conditional approval for an alternative sub-contractor to be engaged for the development of the ITAS. In April 2001 the sub-contractor with primary responsibility for ITAS development was acquired by another Defence company.

23. In April 1999, the Deputy Secretary Acquisition had been informed that there was no scope for further schedule slippage if the contracted capability was to be delivered on schedule. In April 2000 it was proposed to, and accepted by the Naval Capability Management Board that the helicopter be accepted in phases as the successive builds of the ITAS became available. DMO briefs to the Under Secretary of Defence Materiel in March 2001 and late 2002 put forward options for action, including limited consideration of the option of cancelling the Project. In both briefs the acceptance of the helicopter in phases was put forward as the preferred option. By the time of the late 2002 brief, DMO had already signed a Statement of Principles with the Prime Contractor. The 2002 Statement of Principles established the basis for contractual negotiations to allow for the provisional acceptance of the Super Seasprites in an interim configuration (the Interim Training Helicopter).

24. The late 2002 brief to the Under Secretary of Defence Materiel included a copy of the 2002 Statement of Principles and a copy of a legal advice. This advice included a series of recommendations on how to approach the renegotiations of the Prime Contract. The brief to the Under Secretary of Defence Materiel canvassed a series of options for how to proceed with the contract. Subsequent to this brief, the Prime Contract was amended to insert the provisional acceptance arrangements for the Interim Training Helicopter without all the recommendations contained in the legal advice having been implemented. In late 2006, the recommendations of the 2002 advice were implemented, however, by this time many of the issues that the recommendations had sought to address had been exacerbated by the provisional acceptance arrangements and subsequent actions by DMO.

25. Under the February 2003 Contract Change Proposal the aircraft was intended to be operated with ITAS Build 1 for 18 months. ITAS Builds 2A, 2B and 3 were to be delivered later as part of the Full Capability Helicopter. The capabilities provided by the Interim Training Helicopter were well short of those to be provided by the Full Capability Helicopter. Flight testing conducted during 2004 indicated that deficiencies in the aircraft prevented the aircraft from fulfilling all the roles intended of the Interim Training Helicopter.

26. Over the period from October 2003 to June 2005, nine of the eleven aircraft were provisionally accepted by DMO in the interim configuration. The remaining two aircraft were never accepted. All aircraft were accepted with a number of unserviceabilities, deviations and Software Trouble Reports. Parts were borrowed to facilitate the acceptance of some helicopters. The ninth helicopter was accepted but was never flown by Navy after provisional acceptance. Prior to the cancellation of the Project, the warranty had expired on all of the provisionally accepted aircraft.¹⁵ In September 2007, seven of the nine aircraft provisionally accepted were held in long-term preservation. None of the accepted aircraft were operated by Navy after May 2006.

27. The Prime Contract, as amended in 2003, provided that provisional acceptance of the aircraft in the Interim Training Helicopter configuration was subject to certain conditions being met. In respect of one of these conditions the Prime Contractor asserted that DMO had contributed to delays in meeting one of these conditions. In response to these claims, and a request for cash flow relief, DMO agreed in 2004 to make additional payments for services acquired outside the Prime Contract and to bring forward payments of $1 million each for the subsequent five helicopters to be provisionally accepted. The last four aircraft provisionally accepted each attracted $1 million in cash flow relief under these arrangements. The last helicopter subject to these arrangements was never accepted.

28. The Project experienced ongoing difficulty in developing the remaining aspects of the ITAS. A factor in this difficulty was DMO's limited contractual capacity to oversight the activities of the sub-contractors responsible for developing the ITAS. This had been an ongoing issue for the Project since the outset. Both the 2002 and 2004 Statement of Principles required a robust schedule to be developed and agreed. Under the contract amendment which followed the 2004 Statement of Principles a milestone payment for the last 10 aircraft being accepted in final configuration was scheduled to occur in November 2005. At the time the November 2005 milestone passed, Formal Qualification Testing of the ITAS required for the Full Capability Helicopter had not commenced.

29. In late 2006, DMO agreed to enter Formal Qualification Testing of the ITAS notwithstanding that some associated documents were not ready, and there were known software trouble reports in relation to system response times and spare capacity. In April 2007, this testing was halted as a number of issues precluded the completion of testing. Subsequently, DMO and the Prime Contractor were unable to agree on an approach to retesting the system. Issues surrounding system response times and spare capacity remained unresolved at the time the Project was cancelled. None of the Super Seasprites were ever accepted in the Full Capability Helicopter configuration.

Aircraft Sustainment (Chapter 5)

30. In parallel to the acquisition activities, DMO and the Prime Contractor needed to establish appropriate aircraft sustainment arrangements for when the Navy commenced operating the aircraft. The ANAO reviewed sustainment arrangements for the Super Seasprite and found ongoing challenges in the areas of linkages between the acquisition contract and ISS Contract, spares availability, achievement of the desired rate of effort and maintenance manuals.

31. In 1997, the Government agreed to procure seven used Seasprite airframes in addition to the 11 aircraft to be upgraded under the Super Seasprite Project. These airframes were procured in 1998 at a cost of US$3.09 million. The original intention was to upgrade all seven of these airframes under later phases of the Project. Three of the aircraft were to provide the originally intended capability of 14 aircraft as well as four further aircraft as a contingency measure to address estimated aircraft attrition. These later phases of the Project were cancelled in 1999. None of the seven additional airframes were upgraded. In late 2006 a Business Case, which was prepared on the basis that the Super Seasprite would remain in service till 2025, indicated that a fleet of 11 helicopters could not provide the required six flights at sea for the ANZAC ships. Rather, the Business Case indicated that a fleet of 11 helicopters could only realistically achieve a maximum of four flights at sea. There was also no capability to address the possibility of aircraft attrition.

32. The ISS Contract involved a Ramp Up Fee during the establishment phase and an ongoing Management Fee supplemented by additional payments for work not covered by the Management Fee. Under the ISS Contract the Kaman Aerospace International Support Centre (the KAISC) was established adjacent to HMAS Albatross Nowra. The KAISC was opened in late 1999, with ramp up operations commencing in early 2000. No helicopters were provisionally accepted by DMO until October 2003.

33. There were inadequate linkages between the commencement of payments under the ISS Contract and deliveries of helicopters under the Prime Contract. This allowed payments of the Management Fee to commence notwithstanding that no helicopters had been accepted. From January 2000, DMO withheld a proportion of these payments. DMO obtained legal advice in 2002 that suggested that it may have been under no obligation to pay the Management Fee until the ramp up had been completed, but that by negotiating a lesser management fee DMO may have compromised its position in this regard. In early 2003, the ISS Contract was amended to include a revised milestone schedule with payments adjusted, for a limited period, to reflect the non achievement of milestones under the Prime Contract.

34. Following the suspension of flying in May 2006, payment of the Management Fee continued unadjusted. Legal advice obtained in October 2006 indicated that there was no contractual basis for ceasing payments but there was a basis for undertaking negotiations to seek a reduction in the Management Fee based on a significant reduction in the aircraft rate of effort. These negotiations were subsumed into broader renegotiations of the Prime Contract. Consequently, Management Fees under the ISS Contract were not reduced between May 2006 when the Type Certificate was withdrawn and early 2008 when the Project was cancelled.¹⁶ Over the life of the Project, DMO expended $134.53 million under the ISS Contract and $5.56 million on Defence staff located at the KAISC.

35. Generally, Defence major capital equipment projects are required to acquire three years worth of spare parts utilising the Project budget. In the case of the Super Seasprite Project, the capacity to acquire the spare parts recommended to meet this requirement was constrained by the shortfall in the Project budget. Consequently, in 2000–01 Defence commenced procuring spare parts using recurrent funding. At this time no aircraft had been accepted by DMO. By the time the Project was cancelled in March 2008, $58.94 million had been spent on spare parts from sustainment funding. In some instances parts were cannibalised from other aircraft to meet requirements.

36. There were also a number of issues identified with the maintenance manuals including the documentation of Critical Maintenance Operations. Under the Technical Airworthiness Regulations Critical Maintenance Operations require independent maintenance inspections. Independent maintenance inspections were not mandated for the large number of Critical Maintenance Operations in Super Seasprite maintenance publications. Temporary arrangements were put in place through an Authorised Engineering Technical Memorandum in 2003 to address this issue pending the update of these publications. Over the period December 2004 to September 2005, there were five reported maintenance issues associated with inappropriate conduct of Critical Maintenance Operations.

37. Also during this period a review of maintenance attitudes and practices within Naval Aviation, known as the Maintenance Reinvigoration Program was conducted. While the primary driver for this review was the Sea King Nias Island accident, other factors contributed to the decision to undertake the review, including a maintenance incident relating to a Super Seasprite. This review provided anecdotal evidence of inappropriate maintenance attitudes and practices across Naval Aviation and a program of rectification was initiated to address these issues.

Aircraft Certification (Chapter 6)

38. The ability of Navy to operate the Super Seasprite was contingent on the aircraft achieving and maintaining type certification. Certification activities occurred concurrently with acquisition and sustainment activities. Achieving and maintaining type certification was an ongoing area of difficulty for the Project.

39. During 1998 the ADF Airworthiness Management System was established. Navy transitioned to those arrangements during that year. However, the Prime Contract, having been signed in 1997, pre-dated the introduction of the ADF Airworthiness Management System. Accordingly, the Prime Contract specified the previous Navy specific certification arrangement as the applicable airworthiness regime against which the Prime Contractor was required to deliver the Super Seasprites. Defence decided not to update the Prime Contract to reflect the changed certification arrangements and instead opted to manage the difference within Defence. This created a risk that the Prime Contractor could deliver an aircraft which was contractually compliant but not able to meet the ADF's certification requirements. This shifted much of the certification risk to Defence, which became particularly evident in areas where the aircraft was modified to meet ADF requirements.

40. A Special Flight Permit enables an aircraft to be operated for specific purposes prior to being awarded a Type Certificate. In October 2003, the Super Seasprite was awarded a Special Flight Permit. The Special Flight Permit was renewed in June 2004, as the Project Office was not ready for an Airworthiness Board to consider the award of a Type Certificate. In renewing the Special Flight Permit, the ADF Airworthiness Authority¹⁷ required that an Airworthiness Board be convened to review the regulation of the Special Flight Permit. The Airworthiness Board convened in September 2004 was informed that the Special Flight Permit was not fully compliant with the regulations and there had been limited independent review of operational airworthiness management. The Board was advised that contractual delays and political pressures had led to the complexities of phased acceptance of the Super Seasprite and these had contributed to a hybrid approach to the Special Flight Permit. The Board concluded that operations under the Special Flight Permit should not be prolonged. In March 2009, Defence informed the ANAO that, in hindsight, the breadth of the Special Flight Permit was too broad and subsequently changed the way in which Special Flight Permits were issued and reviewed.

41. Subsequently, in December 2004 an Airworthiness Board was convened to consider the award of a Type Certificate to the Super Seasprite. The Board was informed that the aircraft was a legacy design which did not necessarily comply with modern airworthiness standards, but that the aircraft had been extensively modified to provide additional capabilities sought by Defence. The Board was advised that this required a hybrid approach to design acceptance by assessing legacy aspects of the design against the Prime Contractor's standards, and the aircraft modifications against internationally recognised standards that were not a requirement set out in the Prime Contract. In recommending the award of a Type Certificate, the Board acknowledged that the extended duration of the acquisition process combined with the inherent legacy design meant that the Super Seasprite would always possess, to some extent, lower airworthiness standards when compared to contemporary airworthiness requirements.

System and Software Safety (Chapter 8)

42. The certification of the systems and software presented significant difficulties to the Project particularly with regard to the AFCS. Numerous concerns surrounding the approach to meeting systems and software safety certification requirements were raised with the Project Office by Director-General Technical Airworthiness (DGTA)¹⁸ staff over the life of the Project. These concerns included a lack of confidence in the capacity of the Project Office to oversight the carriage of the software certification functions, a lack of correlation with internationally recognised standards and a lack of confidence in the development processes. In 2000, three years after the contract was signed, an external service provider was engaged by DMO to assist the Project Office in evaluating safety related software aspects of the Project.

43. A key difficulty for system and software safety certification for the AFCS, was the disparity between standards that were defined in the requirement of the Prime Contract and standards applied to aircraft certification activities. Two such standards that were used for certification but not defined in the Prime Contract included US Federal Aviation Regulation (FAR) 29 for the Certification of Transport Category Rotorcraft and RTCA DO 178B, which was developed to establish software considerations for developers, installers and users when an aircraft equipment design is implemented using microcomputer techniques. Neither of these standards was established as a requirement under the Prime Contract, yet were both applied in assessing compliance against certification requirements. Both standards pre-dated the execution of the Prime Contract in mid 1997.

44. Demonstration of compliance of the Flight Control Computer against RTCA DO-178B within the AFCS became increasingly significant to the Project as it progressed. In March 2001 the Under Secretary Defence Materiel was informed that there was number of issues which needed to be resolved in relation to the Flight Control Computer within the AFCS. The Prime Contract did not align to DGTA's preferred certification basis which was RTCA DO 178B. The Under Secretary was informed that if the AFCS was unable to meet DGTA's requirements, an engineering change proposal valued at approximately $1 million to $2 million would be required to be implemented to provide an acceptable product. No such engineering change proposal was implemented. The failure by DMO to conclusively resolve this issue with the Prime Contractor was an ongoing area of difficulty for the Project; which was not resolved by the time the Project was cancelled. The Prime Contractor informed the ANAO that there is no doubt that the most significant factor was Defence's need to see RTCA DO-178B used for software development and, ultimately, Defence's failure to impose this standard made it impossible to complete the program and put the Super Seasprite into service.

45. Another key point of contention between Defence and the Prime Contractor was the Software Hazard Risk Index applied in the developing and testing of the AFCS. The Software Hazard Risk Index is derived from US Military Standard MIL-STD-882C and is based on a matrix of control category and hazard category. Software exercising higher degrees of control and having more extreme consequences attract a higher Software Hazard Risk Index. The Prime Contractor applied a Software Hazard Risk Index of ‘two' to AFCS development.

46. In March 2003 the Project Office wrote to the Prime Contractor arguing that the nature of the software should attract an Index of ‘one'. The Project Office's March 2003 letter to the Prime Contractor stated that restrictions associated with the AFCS meant that the aircraft would not meet the operational requirements set out in the Prime Contract and that a higher level of safety integrity was warranted. One month prior to sending this letter, DMO had approved the Contract Change Proposal that introduced the provisional acceptance arrangements for the Super Seasprite in the Interim Training Helicopter configuration.

47. In recommending the award of a Special Flight Permit in October 2003, a DGTA minute acknowledged that the ability of the pilot to maintain safety in the event of an AFCS failure had not been fully assessed, tested and demonstrated in high pilot workload regimes. As a consequence, DGTA recommended that limitations on AFCS flight be imposed through the Special Flight Permit. A number of restrictions associated with the AFCS were also imposed through the Type Certificate and Service Release first issued in December 2004.

AFCS hard-overs

48. An AFCS induced hard-over is a potential failure condition resulting in a control input occurring that was not initiated or directed by the pilot.¹⁹ The risk of hard-over is generally mitigated by designing a system so that the likely occurrence is extremely low and by putting in place a process to control the outcome should a hard-over be experienced. The AFCS on the Super Seasprite comprised both legacy and new components, including a Digital Flight Control Computer, but retained its underlying legacy design philosophy known as ‘pilot in the loop'. Under this philosophy the pilot was required to intervene to correct an AFCS malfunction. In April 2004, a draft Compliance Finding Report²⁰ prepared by an external service provider indicated that the hazard mitigation of pilot intervention, in the event of an AFCS failure occurring without warning, was judged to be inadequate for critical flight conditions. The report stated that AFCS certification testing needed to be performed to assure compliance with the Certification Basis Description.

49. For the Super Seasprite an AFCS induced hard-over was a fault condition where the AFCS actuator moved to the extremity of its range and remained in that position, resulting in the aircraft diverging from its flight path in the direction of the hard-over. The onset of the hard-over could be abrupt and may require timely and deliberate intervention from the pilot to regain control of the aircraft. Two causes of hard-overs were regarded to be most significant for the Super Seasprite. The first was hard-overs occurring due to issues surrounding the interface between the AFCS and external data inputs such as the Air Data Computer and the inability of the system to adequately cope with corrupt data. The other related to the software not being designed to be flight critical and so minimise the chance for a fault to command a hard-over.

50. A Super Seasprite experienced an AFCS induced hard-over within two months of the aircraft being awarded a Special Flight Permit in late October 2003. This hard-over was attributed to an Air Data Computer failure, with the aircraft adopting a rapid nose-down pitch change with the failure of the AFCS to disengage being of serious concern. In August 2004, a Super Seasprite experienced a hard-over which was induced by pulling an AFCS Circuit Breaker to invoke a condition required for training purposes. A report based on test flying finalised in late 2004 indicated that a range of other issues exacerbated the potential impact of a hard-over such as space constraints in the cockpit.

51. In recommending the award of a Type Certificate to the Super Seasprite, the December 2004 Airworthiness Board noted that concerns with the AFCS were being partially addressed through a design change. The Airworthiness Board raised an Airworthiness Corrective Action Request which required a Deficiency Review Team²¹ to investigate a longer term solution to the system design issues associated with the Air Data Computer. The July 2005 Deficiency Review Final Report made a series of recommendations and findings relevant to the AFCS. These were broadly consistent with a March 2003 letter from the Project Office to the Prime Contractor that had indicated that the provisional acceptance of the aircraft was conditional on the AFCS concerns being addressed. By July 2005, when the final report of the Deficiency Review was issued, nine aircraft had been provisionally accepted by DMO.

52. A Super Seasprite experienced a further hard-over in March 2006. DMO advised the ANAO that the circumstances surrounding this hard-over were symptomatic of an Air Data Computer failure. Subsequent to this incident the Commander Australian Navy Aviation Group (CANAG)²² advised the Chief of Navy that the minimum obstacle clearance for operating the aircraft had been increased from 25 feet to 50 feet based on the outcome of AFCS low-speed hard-over flight testing. This advice indicated that the hard-over event was an undesirable but manageable event due to the risk measures in place at that time.

53. The Chief of the Defence Force directed through the Chief of Navy that a meeting of key airworthiness parties be convened to discuss the AFCS issue. This occurred on 27 March 2006 and involved CANAG and DGTA. The meeting was informed that there had been four hard-over events in approximately 1600 flying hours that had not been induced by flight testing. The aircraft design specification requirement was for a failure rate of one in one million hours for failures that may create a catastrophic outcome. DGTA expressed reservation about the ability of his staff to generate a credible order of magnitude of the likelihood of a hard-over occurrence in the Super Seasprite. In the absence of the ability to quantify the likelihood, the default likelihood was one in 500 hours. This meant that pending a design solution, the ADF would be operating an aircraft with a failure rate assessed as being 2000 times greater than the accepted standard for the aircraft's design baseline, and 20 000 times greater than the Federal Aviation Regulation standards current at that time. On 29 March 2006, the then Minister for Defence was informed that Super Seasprite flying had been suspended based on CANAG advice.

AFCS remediation

54. Subsequently, DMO and the Prime Contractor developed an AFCS remediation program which involved two phases. Phase 1 was intended to remove obvious design flaws to support a restricted return to flying. Phase 1 was to be funded on a cost sharing basis, pending a determination on whether it was within the scope of the Prime Contract. DMO's share was to be funded through a previously approved Contract Change Proposal. DMO documentation from early 2007 stated that the approval of AFCS Phase 1 work on the basis of a Software Hazard Risk Index of ‘two' was contractually problematic for DMO.

55. Phase 2 was to involve the redevelopment of the AFCS to meet identified design standards and safety objectives. Phase 2 work was to be funded out of a $110 million real cost increase to the Project budget agreed by the then Government in May 2007. A Project Office estimate indicated that AFCS Phase 2 would cost in the order of $50 million. Phase 2 was to be incorporated into the Prime Contract through a Deed of Variation. Agreement on this Deed was not reached prior to the Project being cancelled in early 2008.

56. Following the Government's decision to cancel the Project, a Negotiating Directive for the termination of the Project was approved by the CEO of DMO in March 2008. This directive indicated that AFCS Phase 1 remediation work had been tested by the Prime Contractor and Defence. The directive further noted that a report in respect to test flying was to be delivered in that month but that the preliminary view following testing was that the remediation work had not resolved all safety issues expected to be resolved through Phase 1. This contrasts with advice provided by the Acting Head Helicopter Systems to the then Minister some 10 months earlier in May 2007²³ which indicated that the testing of the AFCS software remediation Phase 1 had been successfully completed in early 2007.²⁴ In March 2009, Defence informed the ANAO that, following further analysis of flight test data and subsequent testing by Defence in November 2007, DMO formed the view that Phase 1 AFCS remediation had not resolved all safety of flight issues.

Management of Deficiencies (Chapter 7)

57. During the period Navy operated the Super Seasprites under a Special Flight Permit, aircraft testing revealed a large number of deficiencies with the aircraft. A number of these deficiencies were considered to be unacceptable, including the AFCS issues outlined above, and correction was regarded as essential. The ANAO found that the resolution of a number of deficiencies was an area of ongoing difficulty for the Project.

Airworthiness Issue Papers

58. Airworthiness Issue Papers are the primary mechanism used within the Airworthiness Management System to record significant airworthiness deficiencies and processes intended to resolve or mitigate risks associated with these issues. ANAO analysis revealed limited progress towards resolution of these issues. In October 2003, there were 11 Airworthiness Issue Papers attached to the Project Office's submission prepared in support of the recommendation for award of the Special Flight Permit.

59. The November 2004 Design Acceptance Certificate listed 37 open Issue Papers. Of the 11 Issue Papers that were open at the time the Special Flight Permit was issued only two were closed by the time the December 2004 Airworthiness Board considered awarding a Type Certificate. However, there were ongoing concerns in 2008 surrounding the matters addressed by the two closed Issues Papers. Similarly all of the 37 Issues Paper included in the 2004 Design Acceptance Certificate remained open in early 2007. At that time 19 were listed as requiring resolution by the Prime Contractor and 18 were to be resolved by DMO.

60. Subsequent to the 2004 Airworthiness Board, a Deficiency Review Team was established to review the interrelationship between the deficiencies in the aircraft and the Issue Papers, and recommend priorities for rectification. At the time of the Deficiency Review, in early 2005, there were 57 open Issue Papers. The July 2005 Deficiency Review Final Report classified 20 of the Issue Papers as requiring resolution for safety of flight, and three were regarded as being significant capability issues.

Deck handling system

61. One major deficiency related to the ship deck handling system known as the Rotorcraft Alighting, Secure and Traverse System (RAST). This system is used to secure the aircraft to the deck and to move the aircraft between the hangar and the flight deck via a probe fitted to the aircraft. Aircraft may either be hauled down into a Rapid Securing Device (RSD) on the flight deck by a cable, or the pilot may land the aircraft into the RSD. The Australian version of the Seasprite was the only version to be fitted with the RAST. The RAST was regarded as necessary in order for helicopter operations to occur up to the high end of Sea State 5. During flight trials the undercarriage was found to make contact with the RSD, notwithstanding that the probe was correctly positioned into the extremity of the RSD. While landing gear striking the RSD under these circumstances was not in accordance with the requirements of the Prime Contract, there were other circumstances where the undercarriage could strike the RSD about which there was contractual ambiguity. The DMO sought to address both circumstances and as a result introduced contractual uncertainty surrounding the RAST interface. This issue was never resolved.

Anthropometric restrictions

62. Another major deficiency related to space constraints within the cockpit which potentially prevented aircrew from exercising full control of the aircraft. This issue was known as anthropometric²⁵ restrictions and was particularly significant in circumstances when a Qualified Helicopter Instructor occupied the left seat and needed to intervene to correct student mishandling. Size restrictions on the aircrew occupying the cockpit were imposed with some aircrew having to leave 805 Squadron as they were anthropometrically unsuitable to operate the Super Seasprite. The potential for these restrictions was first identified in 1998 and then tested in 2001, with the issue then held in abeyance until 2004. This delay became contractually problematic. In 2006 Defence was considering regearing the cyclic to alleviate these restrictions. This was to be funded by a real cost increase to the Project budget agreed to by the then Government in 2007. The Project was cancelled prior to this issue being resolved.

Increase in all up weight

63. Defence documentation indicated that a number of technical risks were impacted by increases in the all up weight of the Super Seasprite. There had been concerns surrounding the increase in all up weight since 1999. The 2005 Deficiency Review recommended that a concerted effort be put into reducing the all up weight. Briefs provided to senior Defence officers in early 2008 indicated that the increase in all up weight, combined with a lack of agility over the flight deck, would limit operations of the Super Seasprite at sea to Sea State 4. The 1995 Detailed Operational Requirement required that the aircraft be able to operate off an ANZAC Ship up to the high end of Sea State 5. The Prime Contractor informed the ANAO in April 2009 that ‘Defence reasoning regarding the effect of increased all up weight and lateral cg [centre of gravity] is completely erroneous and neither characteristic, either taken individually or in concert, produces unacceptable handling qualities'.

Formation flying

64. The Special Flight Permit contained a number of operating limits intended to mitigate risks associated with aircraft deficiencies. However, there was a degree of uncertainty surrounding the scope of activities authorised under the Special Flight Permit. In particular there were divergent views within Defence on whether the Special Flight Permit authorised formation flying, which had been conducted in the Super Seasprite by Navy. The Airworthiness Board, which reviewed the Special Flight Permit in September 2004, formed the view that formation flying was beyond the intent of the Special Flight Permit but that the risk associated with this activity had been managed appropriately. Three months later, a subsequent Airworthiness Board²⁶ raised an Airworthiness Corrective Action Request due to concerns surrounding the impact of some control deficiencies on activities such as close formation flying.

Prohibition on intentional flight in Instrument Meteorological Conditions

65. On 16 December 2004, the Super Seasprite was issued with a Type Certificate and Service Release. Both the Type Certificate and Service Release contained a significant number of restrictions and limitations which were intended to mitigate known deficiencies. Among these were a prohibition on intentional flight in Instrument Meteorological Conditions. One of the contributing factors to the prohibition on intentional flight in Instrument Meteorological Conditions was due to occasional intermittent drift in the aircraft's navigation system. The navigation system had been updated for the Super Seasprite. Issues surrounding the navigation system were first identified in 2001 and were unresolved at Project cancellation. A factor contributing to the inability to resolve this issue was the absence of navigation system drift data required by the Prime Contractor. Seasprite operations were suspended before mechanisms could be put in place by DMO to record this data.

Scope of activities authorised under the Type Certificate

66. Another limitation contained in the Type Certificate issued in 2004 prohibited the Super Seasprite from participating in embarked operations. At the Airworthiness Board review of the Type Certificate in November 2005, Navy and the Project Office sought to have the prohibition on embarked operations moved from the Type Certificate to the Service Release. This would have allowed the ADF Airworthiness Authority to subsequently lift the prohibition on embarked operations without the requirement to first conduct an Airworthiness Board, if it could be demonstrated that certain issues which were regarded to be impediments to embarked operations had been overcome. The Chief of Navy had indicated a priority to get the Super Seasprite to sea.

67. Issues impacting on the embarked operation of the Super Seasprite included the RAST interface issue, undercarriage strength and AFCS issues. The July 2005 Deficiency Review Final Report expressed concern that identified deficiencies impacted on the ability to operate the aircraft at sea, and that a hard-over in the forward axis while over the flight deck could see the aircraft impact the hangar before the aircrew could reasonably be expected to react. A number of personnel involved in recommending to the November 2005 Airworthiness Board that the prohibition on shipboard operations be transferred from the Type Certificate to the Service Release had also been involved in the Deficiency Review. In line with a DGTA recommendation, the Airworthiness Board concluded that the issues that led to the prohibition on shipboard operations remained and it did not support the removal of this restriction from the Type Certificate.

68. The report of the November 2005 Airworthiness Board²⁷ stated that the restrictions and limitations imposed on the Super Seasprite through the Type Certificate and Service Release were onerous in comparison to other aircraft. The report stated that if the aircraft were operated in accordance with those restrictions, then there was a sufficient basis for airworthiness of the Interim Training Helicopter. One month after the 2005 Airworthiness Board review of the Type Certificate the Super Seasprite participated in a family day at 805 Squadron. This involved the carriage of 55 family members in a Super Seasprite.

69. Defence advised that no reference from a higher authority could be found which prevented the aircraft from participating in family day activities and that a detailed risk assessment had been undertaken by the officer that had authorised these activities. Within four months of the family day, flying operations of the Super Seasprite were suspended due to concerns surrounding the frequency of AFCS induced hard-overs. As noted above, concerns surrounding the AFCS were one of the reasons the Airworthiness Board did not agree to transfer the prohibition on embarked operations to the Service Release.

Crashworthiness

70. The 2005 Deficiency Review found that while individual safety related issues did not warrant the increased expenditure that would be necessary to improve crashworthiness, the Deficiency Review Team considered that, cumulatively, the likelihood of an incident or accident was such that an incremental improvement in crashworthiness was warranted. While the Seasprite was a 1960's design, and pre-dated modern crashworthiness standards, the aircraft had been heavily modified for Navy and as such the opportunity existed to improve the crashworthiness of the aircraft.

71. In 2006, a DMO crashworthiness review identified that the aircraft's crashworthiness was below the contemporary standard and that in some instances the modifications to the aircraft had caused the crashworthiness to regress when compared to the previous version of the aircraft.²⁸  The review indicated that the primary reason for the shortcomings in crashworthiness was a lack of focus on crashworthiness requirements for the helicopter, particularly the omission from the Prime Contract of a requirement for the aircraft to comply with a recognised crashworthiness standard. The review recommended that the replacement of the cockpit seats with energy attenuating seats would provide the single greatest return in improving the Super Seasprite's crashworthiness. The 2005 Deficiency Review drew a similar conclusion. Concerns surrounding the crashworthiness of the aircraft were a factor taken into consideration in the Government's decision to cancel the Project.

Renewal of the Type Certificate and Service Release

72. Notwithstanding the 2005 Deficiency Review, Defence did not have a full understanding of the airworthiness implications of the deficiencies in the Super Seasprite at the time the Type Certificate was reviewed in 2005. The Airworthiness Board reviewing the Type Certificate was informed by DGTA that the ADF should not continue to operate an aircraft with unknown or not agreed issues outstanding. DGTA indicated that in the event of an incident or accident, the ADF Airworthiness Authority may not be in a defensible position to argue the soundness of his decision to issue a Type Certificate.

73. DGTA recommended a review of the deficiencies, associated risk mitigation and, where required, timeframes and costs for design changes. This was supported by the November 2005 Airworthiness Board. A limited review was subsequently undertaken by staff within DGTA. This review indicated that there was no combination of Issue Paper deficiencies that presented a level of risk greater than that currently being accepted and/or mitigated by the extant Type Certificate and Service Release limitations. This review did not categorise aircraft deficiencies according to the DGTA recommendation to the 2005 Airworthiness Board.

74. In February 2006 the ADF Airworthiness Authority renewed the Service Release for the Super Seasprite based on a recommendation from the 2005 Airworthiness Board. In renewing the Service Release, the ADF Airworthiness Authority noted concerns surrounding maintenance procedures, the loss of confidence in the aircraft by aircrew and DGTA's lack of confidence in the integrity of the design. As a consequence of these issues, the ADF Airworthiness Authority renewed the Service Release for six months rather than the normal 12 months. This was intended to coincide with reporting dates for several Airworthiness Corrective Action Requests raised by the November 2005 Airworthiness Board, and to allow the quick reduction or removal of restrictions on the operation of the aircraft.

Navy Ceases Operating the Aircraft (Chapter 9)

75. In March 2006, the Chief of Navy was advised by CANAG that a series of factors had generated a high risk airworthiness and capability management situation in relation to the Super Seasprite. These factors included a large number of unresolved Issue Papers; a significant number of restrictions in place; the possibility that the AFCS hard-over issue represented an unacceptable risk and may not be resolved; and the software for the Full Capability Helicopter was yet to be completed and represented an ongoing risk. CANAG also informed the Chief of Navy that the Type Certificate and Service Release for the aircraft might not be renewed at the next Airworthiness Board, which was due to take place in mid 2006. The CEO of DMO also informed the then Minister for Defence in March 2006 that the Type Certificate for the Super Seasprite was at risk of being withdrawn.

76. In May 2006, a brief to DGTA concluded that the balance of technical deficiencies, together with concern over previous certification activities, had provided a lack of confidence in the validity of the Type Certificate for the Super Seasprite. Issues regarded as presenting risk included the large quantity and serious nature of technical deficiencies on the air vehicle; the acceptance of legacy specification in the areas of AFCS and crashworthiness; minimal and, in some cases, no progress being made on the majority of technical deficiencies since the award of the Type Certificate; and no appreciation of the potential combination of technical deficiencies on the aircraft. DGTA subsequently wrote to the ADF Airworthiness Authority recommending the Type Certificate be withdrawn. On 19 May 2006, the ADF Airworthiness Authority wrote to the Chief of Navy and CEO of DMO formally withdrawing the Type Certificate for the Super Seasprite. Following the withdrawal of the Type Certificate Navy was unable to operate the aircraft without the aircraft being reissued with either a Special Flight Permit or Type Certificate.

77. The subsequent process to achieve recertification of the Super Seasprite was inhibited by weaknesses in previous certification activities. Audits conducted by DGTA and Navy Aviation System Program Office (NASPO) personnel between 2000 and 2006 had repeatedly identified weaknesses in the design acceptance processes and the engineering management system for the Project, which are fundamental elements of the technical certification process. The DGTA Submission to the November 2005 Airworthiness Board noted that notwithstanding improvements in the engineering management framework provided by NASPO and the Prime Contractor, issues relating to refurbishment quality, quality of Original Equipment Manufacturer's advice and inconsistencies in fundamental design analyses had reduced the confidence of DGTA personnel in design and production since the Type Certificate was granted in December 2004.

78. A compliance finding is an engineering decision, based on relevant evidence that indicates whether an aircraft's design satisfies a design requirement. A 2006 NASPO audit identified that records of compliance findings were regarded to be poor and found discrepancies between the findings contained in compliance finding reports and the information recorded in the Certification Basis Description Database. The NASPO Crashworthiness Report from October 2006 found discrepancies between a compliance finding report for crashworthiness and the 2004 accomplishment summary prepared in support of Type Certification. The October 2006 report recommended a complete review of the compliance findings detailed in the submission in support of type certification.

79. A June 2007 presentation to the Project Manager Stakeholders Group was advised that the Project Office envisaged a series of expanding Special Flight Permits over the period from late 2007 to late 2010, and that the Full Capability Helicopter was expected to achieve type certification by late 2011. This would have been 14 years after the Prime Contract was signed, nine years after the contract was originally intended to be completed, and eight years after the Prime Contract was amended to introduce the provisional acceptance of the Interim Training Helicopter. At the time of this stakeholders meeting the status of the Certification Basis Description for the Interim Training Helicopter, which had previously supported the type certification of the aircraft, was not clear. This was four and a half years after the Interim Training Helicopter was awarded a Special Flight Permit and two and half years after it had been awarded a Type Certificate.

80. In September 2007, the ANAO sought clarification from Defence on the type certification process for the Super Seasprite. Defence advised that the number of open Issue Papers was a concern to the Technical Airworthiness Authority at the time the Type Certificate was awarded. At that time, in December 2004, the Project Office had indicated that the problems would be resolved in a matter of months. Defence advised that had the real closure time for the open Issue Papers been presented, it was unlikely that a Type Certificate would have been granted. This would have negated any potential benefit associated with the Provisional Acceptance of the aircraft in an interim configuration. Following the withdrawal of the Type Certificate in May 2006, the Super Seasprite was not subsequently issued with a Special Flight Permit or Type Certificate.

Cancellation of the Project (Chapter 10)

81. In March 2005, the Project Director assessed the status of the Project against the 1995 Detailed Operational Requirements for the ANZAC Ship Helicopter. At that time, the Project Director assessed that the Prime Contractor had demonstrated achievement of 75 per cent of the essential requirements contained within contract. Achievement against the remaining essential requirements was still to be demonstrated.

82. The 2005 Deficiency Review²⁹ also used the Detailed Operational Requirements as part of its methodology in classifying issues. There were two versions of the July 2005 Deficiency Review Final Report, a Restricted version and a more highly classified Confidential version. The Confidential version contained an additional finding and recommendation not included in the Restricted version. This finding suggested that it was time to consider an alternate platform to fulfil the role of the ANZAC Ship Helicopter. In line with this finding, the report recommended that the Super Seasprite not be further pursued as the ANZAC Ship Helicopter.

83. The Restricted version of the Deficiency Review Final Report was circulated within relevant areas of Defence. However, DMO was unable to provide any evidence that the Confidential version of the report was provided to any relevant officers outside of the Steering Group that had overseen the Deficiency Review. All the members of this Steering Group had some level of direct involvement in the Project. Defence informed the ANAO in March 2009 that the Steering Group requested that the finding and recommendation be removed as it was beyond the terms of reference provided to the team but that the conclusion that led to this finding and recommendation was retained in the Restricted version of the report. Given the significance of the additional finding and recommendation, and the fact that the conclusion that led to these remained in the Restricted version of the Report, it is unclear why the Confidential version of the report was not provided to senior officers.

84. 10 days after the Deficiency Review issued its final report DMO provided a brief to the then Minister for Defence. This brief contained no reference to the Deficiency Review. The brief indicated that it was Defence's view that the Super Seasprite, although less capable than expected in some areas, would meet the minimum requirements specified in the Detailed Operational Requirements. Comments from personnel within CANAG recorded on a copy of this brief expressed reservations about this statement.

85. In February 2006, the Chief of Air Force in his role as Senior Aviation Advisor commented that the Deficiency Review report provided a worrying outlook for the progression of the Super Seasprite toward a capability fit for its intended purpose. The Chief of Air Force's comments referred to the Restricted version of the report. In late March 2006, CANAG indicated to the Chief of Navy that the time for considering the broader capability, personnel and financial impact of the Project was looming large. This was after the AFCS induced hard-over in March 2006 that contributed to the decision to withdraw the Type Certificate.

86. In May 2006, a Senior Officer review of the Project was undertaken involving the CEO of DMO, the Chief of the Capability Development Group, the Chief of Navy and the Chief of Air Force. A NASPO presentation to this review projected that the Super Seasprite would achieve 95 per cent of its Surface Surveillance Capability, 70 per cent of its Anti Surface Warfare Capability and 80 per cent of its Anti Submarine Warfare Capability. A brief provided to the then Minister for Defence by the CEO of DMO in May 2006 reflected these projections as did a DMO brief to the Parliamentary Secretary for Defence Procurement in January 2008. A statement of impairment relating to the Super Seasprite was signed by the CEO of DMO in October 2006. In that statement the CEO of DMO concluded that the Super Seasprite capability would be impaired by 10 per cent, irrespective of ongoing remediation work. However, this impairment figure was increased to 15.5 per cent by the Secretary of Defence and the Chief of the Defence Force, in consultation with the CEO of DMO,³⁰ and reported in Defence's 2005–06 financial statements.

87. At the time of the Senior Officer review in May 2006, the projected initial operational capability for the Super Seasprite was expected to be achieved in 2009. By January 2008, this had slipped to late 2011. In May 2006, the then Minister for Defence informed the media that he had asked the Chief of Defence Force to provide all options the then Government might consider with respect to the Project. These included continuing with the Super Seasprite, procuring Sikorsky 60R Seahawks or procuring Eurocopter NH90 helicopters.

88. In September 2006, a Minute from the Chief of the Capability Development Group to the Chief of Navy and the CEO of DMO advised that the Defence Capability Investment Committee had agreed that the Super Seasprite would only be capable of providing an interim capability, and that there would be merit in bringing forward Air 9000 Phase 8 which was to replace the Seahawks and Super Seasprites. The Chief of the Capability Development Group stated that the Defence Capability Investment Committee required an understanding of the options that might provide an interim capability from 2008. These included the Super Seasprite in-service till 2025; interim capability provided by a Seahawk/Super Seasprite mix; or interim capability provided by Seahawk alone.

89. The 2006 Business Case subsequently prepared for the option of maintaining the Super Seasprite in-service included a capability assessment of the Super Seasprite in general flying conditions. This assessment indicated that the Super Seasprite would achieve 90 per cent capability in Visual Meteorological Conditions subject to the rectification of the AFCS safety concerns, and 80 per cent capability in Instrument Meteorological Conditions.³¹ At the time, the aircraft was yet to demonstrate its capability to operate in conditions of poor visual reference. In terms of embarked capability, the aircraft was assessed as meeting 75 per cent of its capability with a central centre of gravity if the RAST interface issue was resolved. In the case of embarked operations with an asymmetric centre of gravity, a 30 per cent capability could be achieved. The aircraft was assessed as being potentially not recoverable to a flight deck with a single Penguin missile and minimum fuel which generated the worst centre of gravity issues.³²

90. DMO documentation from mid 2006 indicated ongoing contractual uncertainty which was exacerbated by arrangements being agreed outside the Prime Contract, and poor record keeping. In late 2006, the General Counsel of DMO recommended to the CEO of DMO that legal advice obtained in 2002 be implemented. This 2002 advice had been intended to improve contractual certainty and involved pursuing a negotiated solution on outstanding claims, conducting a more thorough investigation of the course of dealings between the parties and commencing formal dispute processes. At the time of this recommendation by the General Counsel, there were time constraints on the dispute process flowing from statutory limitations. In line with concerns about the statutory limitation period expiring, the DMO issued a Notice of Dispute to the Prime Contractor on 17 January 2007. The matters set out in the Notice of Dispute had been longstanding issues for the Project. In March 2009, DMO advised the ANAO that it had not issued a Notice of Dispute before this time as it was seeking a negotiated settlement with the Prime Contractor.

91. In late January 2007, the Director-General Naval Aviation Systems wrote to several senior personnel in DMO advising that the Prime Contractor was also interested in preserving its rights beyond the statutory limitation period. On 1 February 2007, a Deed of Standstill was signed between the Prime Contractor and the Commonwealth preserving any cause of action available to any party which might have otherwise have been precluded due to the expiry of the limitation period. Two days prior to executing the Deed of Standstill, key DMO documentation identified a degree of uncertainty surrounding the matters set out in the Notice of Dispute and raised other significant contractual issues.

92. In May 2007, the then Minister for Defence announced the Government had decided to continue with the Project, subject to satisfactory contractual arrangements being reached. Agreement on these contractual amendments was never reached. At the time the Project was ultimately cancelled, in March 2008, the former Minister for Finance at the time this decision was taken in 2007 issued a media release in his then role of Shadow Minister for Defence. In that media release he stated that the then Minister for Defence had recommended in early 2007 to the National Security Committee of Cabinet that the Project be cancelled.³³ According to the media release, the National Security Committee of Cabinet had been concerned about the potential cost to taxpayers and sought more detailed advice from the Department of Defence on the Government's liability. This National Security Committee meeting was held shortly after the Notice of Dispute was issued and Defence advised that there was a significant degree of contractual uncertainty.

93. In deciding to continue with the Project, the then Government agreed to a $110 million real cost increase to the Project budget. As noted above, the late 2006 Business Case and Statement of Impairment prepared by the DMO suggested that if certain issues were addressed the Super Seasprite would be able to meet a significant proportion of its intended capability. Elements of the project maturity score contained in the Acquisition Overview Report³⁴ provided to the Government in May 2007 did not adequately reflect the status of the Project in the areas of cost, technical difficulty, commercial and operation and support given the longstanding and ongoing issues in these areas. Nevertheless, the Project Office assessment in the Acquisition Overview Report did indicate that the Project was in significant difficulty and DMO advised the ANAO in April 2009 that the Super Seasprite Project was the only project showing all three traffic lights as red for cost schedule and capability.³⁵

94. In early 2008, a series of briefs were prepared for senior Defence personnel on the status of the Project. These briefs outlined a series of inadequacies in the Super Seasprite capability. Some of these inadequacies had been identified as early as 1998, and all issues were matters covered in the 2005 Deficiency Review, which had effectively recommended that the Project be cancelled. A brief to the Parliamentary Secretary in early 2008 on the status of the Project outlined further issues. Once again, these issues had been known for a number of years. On 5 March 2008, the then Minister for Defence announced that the new Government had decided to cancel the Project.³⁶

95. In the context of the history of the Project, it is clear that the Project was high risk from the outset and the scale of these risks escalated rapidly in the early stages and remained high prior to the Government's decision to cancel the Project. The issues encountered were fundamental to the Project's success and were not overcome during the 12 year life of the Project. From an accountability perspective, this leads to a question regarding how the Project was allowed to continue for so long at significant expense to Government. Factors contributing to this outcome include a degree of optimism surrounding the ability to achieve outcomes; a reluctance to make firm decisions based on the information available; and a lack of visibility of information to decision makers due, in part, to the Project's complexity and long history.

Settlement Deed with the Prime/ISS Contractor

96. In March 2008, DMO executed a Settlement Deed which terminated Prime Contract and the ISS Contract. A key aspect of the Deed was the transfer of title of ‘equipment for sale'³⁷ from DMO to the Prime Contractor. Under the original Deed of Settlement, the transfer was to be effected on DMO receiving approval from the US Government for transfer of title of this equipment to the Prime Contractor. This approval was not granted in its original form, however it was achieved through a two part process following further consultation with the US State Department. Instead of allowing title to transfer, the US Government granted approval for the temporary importation of this equipment into the US by the Prime Contractor. As a consequence, in September 2008, the Settlement Deed was amended to provide for the transfer of possession to the Prime Contractor followed by the Prime Contractor seeking permission from the US Government for the transfer of title from the Commonwealth to itself. Transfer of title to the Prime Contractor occurred on 12 February 2009. Upon transfer of title occurring, the Deed of Standstill was terminated and the Notice of Dispute withdrawn.

97. Equipment transferred includes the 11 refurbished helicopters, the flight simulator, technical data and manuals, part task trainers, the Mission Planning System and Debrief Facility, the Software Support Centre, spare parts, support equipment and the seven airframes owned by DMO and stored in the US. Expenditure on this equipment was in the order of $915 million. Some other spare parts acquired under the Project are to be retained by DMO, with DMO indicating in September 2008 that these were valued at $33.9 million. Under the Settlement Deed, DMO is entitled to receive minimum payments from the Prime Contractor totalling $39.52 million. This amount is payable in an initial instalment of $26.7 million in March 2011 and two further instalments of $6.41 million in March 2012 and March 2013.

98. If the Prime Contractor secures a buyer of the equipment for sale, DMO is entitled to a stepped proportion of the net proceeds of sale with the $39.52 million minimum payment outlined above offset against any amount payable. The net proceeds of sale will be derived from the sale price less a percentage as compensation for the Prime Contractor, agent's fees and reconfiguration costs. Under the Settlement Deed DMO may be liable for up to $12.5 million under the ISS Contract close-out arrangements. By November 2008, DMO had expended $6.85 million under the close-out arrangements for the ISS Contract.

99. Defence's 2007–08 financial statements included a write down $350.5 million for the helicopters, $108 million for spares, $273.8 million for assets under construction and $228 million for the Penguin Missiles. The 2007–08 financial statements also include $124.5 million in assets held for sale on the basis that a purchaser of the Super Seasprites can be identified and the estimated sale price is realised.

100. Defence's 2008–09 Portfolio Budget Statements indicate that $953 million (86 per cent) of the Project budget had been expended as at May 2008. However, the full cost of introducing a capability to the ADF is significantly higher than the Project expenditure alone would suggest. These costs increase as schedule slippage occurs. For the Super Seasprite, when costs associated with related projects, in-service support and establishing and maintaining the capability within Navy to operate the helicopters are combined, the total cost associated with the Super Seasprite is in the order of $1.4 billion. This figure is incomplete as it does not include salary costs for the Project Office and costs associated with work undertaken by the technical regulatory authorities and the Defence Science and Technology Organisation for the Project. At the time of preparation of this report the net outcome of settlement arrangements were not finalised.

101. Following the cancellation of the Super Seasprite Project, the Defence White Paper released on 2 May 2009 reports that, as a matter of urgency, the Government has decided to acquire a fleet of at least 24 new naval combat helicopters to provide eight or more aircraft concurrently embarked on ships at sea. These new aircraft are to possess advanced Anti-submarine Warfare capabilities, including sonar systems able to be lowered into the sea and air-launched torpedoes, as well as an ability to fire air-to-surface missiles.³⁸

Summary of responses

102. The Department of Defence provided a response to the proposed report on behalf of Defence and DMO. The department's detailed response to the report's recommendations is replicated at Appendix 3. Defence and DMO's overall response to the report is as follows:

Defence acknowledges the significant project issues raised in the Australian National Audit Office report that outlines the Defence and Defence Material Organisation aspects of the cancelled Seasprite Project. Defence accepts the seven recommendations made in the report.

Since initiation of the Seasprite project in 1994, and contract signing in 1997, Defence has implemented significant reform in its capability acquisition and project management practices particularly since implementation of the 2003 Kinnaird Review two pass approval process. These reforms include a professionalisation program, improved contracting functions and improved governance systems across the Defence Materiel Organisation. The 2008 Mortimer Review was undertaken with the knowledge of the Seasprite project difficulties, and will further strengthen this reform.

The specific improvements flowing from these reviews include:

• the introduction of Gate Reviews for all projects;
• the creation of the DMO Institute for training staff in Project Management disciplines;
• the creation of a categorisation system of projects by complexity rather than cost, identifying the appropriate competence and rigour to be applied to each project;
• refinements to the ADF-wide airworthiness management system, providing improved rigour to aircraft safety and occupant survivability; and
• the introduction of a significantly improved contracting function including the implementation of a defined suite of enhanced contracting templates.

103. The Prime Contractor, provided detailed comments on the proposed audit report and these are replicated at Appendix 4. The Prime Contractor also provided the following summary response:

In summary, Kaman remains steadfast in its position that the Project deliverables, including the aircraft, other equipment, and documentation were in compliance with all Prime Contract and Project requirements. Kaman committed significant human and financial capital to the Super Seasprite Project above and beyond contract requirements in an effort to bring the Project to a successful conclusion. Despite the obstacles to completion, Kaman persevered, even to the extent of completing the remaining aircraft development tasks after the Project was cancelled. The result is an aircraft that reflects the outstanding safety and reliability characteristic of its SH-2 heritage and which has unmatched performance capability for its maritime missions. Kaman now looks forward to fielding the aircraft with other customers.

104. The ANAO also provided all or part of the proposed report to a range of other parties whom it was determined had a special interest in the report. Under recent amendments to the Auditor-General Act 1997, comments received from these parties are also required to be included in full in the report and are set out in Appendix 5. The comments of these parties cover a wide range of issues and perspectives and were considered by the ANAO in finalising this audit report. In some cases the comments received focus on areas which were beyond the objective and/or outside scope of the audit; accordingly, the ANAO is not in a position to comment on these matters.

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¹ The ANZAC class ships were delivered over the period 1996 to 2006 at a total cost of some $6 billion (Dec 95 prices) and were designed to carry a helicopter.

² The Project extended over a period of significant procurement reform in the Department of Defence. Following the establishment of DMO in 2000, restructuring saw the Project Office move from Canberra to Nowra NSW in 2002 to form part of the Naval Aviation Systems Program Office (NASPO). This move contributed to difficulties in recruiting and retaining appropriately qualified and experienced personnel to work on the Project. Personnel issues impacted on the capacity of the
Project Office to provide contract and engineering oversight of the Project.

³ The Defence Portfolio Budget Statements for 2008–09 report that some $953 million or 86 per cent of the Project budget of $1.108 billion had been expended. The $953 million expenditure on the Project does not include other expenditure related to establishing, maintaining and operating the Super Seasprite capability during the Project's life. This expenditure included $201.13 million in expenditure on Penguin Missiles which no other ADF platform is capable of deploying; $134.53 million in expenditure against the ISS Contract for the Super Seasprite; $58.94 million in expenditure for spare parts procured outside the Prime Contract; $0.6 million for modifications to the ANZAC Ships to cater for the Super Seasprite and modifications to the FFGs to provide interoperability; $5.56 million in personnel and operating costs for APS and ADF staff located at the In-Service Support Centre; and $46.9 million in costs for Navy's 805 Squadron which was commissioned in February 2001 to operate the Super Seasprite and then decommissioned in June 2008 following the cancellation of the Project.

⁴ The Defence White Paper released on 2 May 2009 reports that, as a matter of urgency, the Government has decided to acquire a fleet of at least 24 new naval combat helicopters to provide eight or more aircraft concurrently embarked on ships at sea. These new aircraft are to possess advanced Anti-submarine Warfare capabilities, including sonar systems able to be lowered into the sea and air-launched torpedoes, as well as an ability to fire air-to-surface missiles. Defending Australia in the Asia Pacific Century: Force 2030, Defence White Paper 2009, p. 72.

⁵ There may also be implications for other parties that have an ongoing interest in the Project, such as sub-contractors to the Prime Contractor. These implications can be both financial and reputational. In conducting this performance audit, the ANAO focused on the activities of Defence and DMO in managing the Super Seasprite project, including their interactions with the Prime Contractor, and only focused on the activities of sub-contractors where their activities directly impacted on management of the Project. Accordingly, readers of this report should exercise care in drawing any inferences about the performance of sub-contractors.

⁶ 16 March 2009 advice from CEO of DMO to ANAO. 16 March 2009 advice from CEO of DMO to ANAO.

⁷ The Request for Tender restricted the size of the helicopter in line with the requirements of an unapproved project instead of seeking to acquire a medium sized helicopter which the ANZAC ship is designed to operate.

⁸ It was beyond the scope of the audit to identify the relative responsibility of the Prime Contractor and its sub-contractors for the difficulties encountered in developing the Integrated Tactical Avionics System (ITAS). Accordingly, in developing this report, the ANAO did not seek to apportion responsibility for the difficulties encountered in developing the ITAS amongst the parties that continued to be involved in ITAS development at the time the Project was cancelled.

⁹ The Defence Annual Report, Portfolio Budget Statements, Portfolio Additional Estimate Statements and DMO's Major Project Report include the approved project budget and cumulative expenditure against that budget. This expenditure does not include project office salary, sustainment costs paid for using recurrent funding, the cost of linked projects and costs incurred by other areas of Defence and DMO associated with introducing, sustaining and operating the capability being acquired.

¹⁰ This figure is incomplete as it does not include all expenditure associated with introducing the Seasprite capability into service and the net outcome of settlement arrangements was yet to crystallise at the time of preparation of this report. Where a Project fails, expenditure may also be required to address any resulting capability gap. For the Super Seasprite Project this involves the redirection of $10 million per annum in Super Seasprite sustainment funding to the Navy's Seahawk fleet in the short term.

¹¹ Also known as the Kinnaird Review.

¹² Also known as Offshore Patrol Vessels which can range in size from coastal patrol vessel boats or fast attack craft (about 500 tons) up to corvette or frigate-sized vessels (2 500 tons) Janes Defence Weekly, Volume 45, Issue 43, 22 October 2008, pp. 38-45.

¹³ In September 2008, Defence advised the ANAO that in hindsight, the subsequent cancellation of the OPC highlights the risk of linking the Seasprite to an unapproved project. However, at the time the OPC was before Government for approval, and until the final decision was made to cancel the OPC project, Defence procurement staff needed to continue to look at the most cost-effective option for the ANZAC ship and the OPC helicopters.

¹⁴ There was ongoing expenditure in late 2008 against the Project budget. Defence advised the ANAO in November 2008 that the difference between expenditure against the Project budget and the residual budget will be used to fund the Defence Capability Plan cost growth wedge. In December 2008 Defence informed the ANAO that Cabinet had agreed that the $110 million Real Cost Increase would be funded from the 'Cost Growth Wedge'. Defence further advised that the Cost Growth Wedge refers to funding set aside in the Unapproved Major Capital Equipment Program to manage the risk of unanticipated cost increases in either approved (i.e. post-2nd Pass) or unapproved (i.e. pre-2nd Pass) projects. These increases include variations for price and exchange rates. Defence further advised that funding from the Cost Growth Wedge does not avoid the need to seek approval from relevant authorities to increase funding for post-2nd Pass projects.

¹⁵ However, the warranty was yet to commence for the fitted sensors and weapon system as these were to be accepted as part of the final configuration.

¹⁶ Over the period 2006–07 to 2007–08, which includes the period where the provisionally accepted aircraft were not operated by Navy but the Project was ongoing, $24.9 million in Management Fees and price escalations were paid under the ISS Contract.

¹⁷ The Chief of Air Force is the ADF Airworthiness Authority.

¹⁸ DGTA performs the key roles of Technical Airworthiness Regulator and Technical Airworthiness Authority in the ADF Airworthiness Management System.

¹⁹ In April 2009, the Prime Contractor informed the ANAO that ‘it should be noted that the AFCS is a limited authority system – at any given time, the role, pitch, and directional actuator movements are limited to a smaller potential of overall travel.'

²⁰In March 2009, Defence informed the ANAO that this was the last complete draft compliance report but that compliance finding compilation continued until Project cancellation.

²¹ The establishment of the Deficiency Review Team was based on a recommendation by DGTA. Apart from considering the AFCS, the Deficiency Review Team was to consider other aircraft deficiencies and possible combinations of deficiencies which might impact on the safe operation of the aircraft. The Deficiency Review Team comprised personnel from the Project Office, Navy and DGTA. A Steering Committee comprising Navy and NASPO personnel oversighted the Deficiency Review.

²² The Commander Australian Navy Aviation Group is known as COMAUSNAVAIRGRP but for simplicity in this audit report the shorter acronym of CANAG, which is also in use in Defence, is used to refer to COMAUSNAVAIRGRP. For the Super Seasprite, the CANAG held the delegation of Operational Airworthiness Authority Representative which is a key role in the ADF Airworthiness Management System.

²³ In May 2007, post production test flying of Aircraft 10 was conducted by aircrew employed by a sub-contractor and was undertaken at HMAS Albatross in Nowra under a CASA exemption.

²⁴ Defence provided ANAO with copies of subsequent advice to the Minister in the form of a Question Time Brief and Question on Notice response, both from August 2007, each of which indicated ongoing issues surrounding AFCS Phase 1 although neither specifically sought to correct the May 2007 advice.

²⁵ Anthropometry is the scientific study of the measurements of the human body.

²⁶ This December 2004 Airworthiness Board recommended the issue of the Type Certificate and Service Release for the Super Seasprite.

²⁷ The November 2005 Airworthiness Board recommended the renewal of the Type Certificate and Service Release initially granted in December 2004.

²⁸ The DMO report of this review was dated five months after the Type Certificate for the Super Seasprite was withdrawn. In April 2009, the Prime Contractor stated that ‘the Super Seasprite was fully compliant with all crashworthiness requirements of the Prime Contract.'

²⁹ The Deficiency Review emanated from a recommendation by DGTA to the 2004 Airworthiness Board which awarded the Australian Military Type Certificate to the Super Seasprite. In this context the review had been intended to focus on airworthiness rather than capability considerations.

³⁰ 16 March 2009 advice from CEO of DMO to ANAO.

³¹ In April 2009 the Prime Contractor informed the ANAO that it disagreed with Defence's assessment of the Super Seasprites' capability in Instrument Meteorological Conditions stating that:

The SG-2G(A) was qualified by the Prime Contractor for operation in IFC [Instrumented Flight Conditions], or IMC [Instrument Meteorological Conditions] in accordance with Prime Contract requirements and military standard MIL-H-8501A, General Requirements for Helicopter Flying and Ground Handling Qualities.

³² In April 2009, the Prime Contractor informed the ANAO of its view that ‘moving the single missile to the opposite stores station was found to completely correct this problem and that this had been proven through flight testing'.

³³ Seasprite Cancellation, Media Release by the Shadow Minister for Defence – 5 March 2008.

³⁴ The Acquisition Overview Report is a high level status report produced for each of the projects being managed by DMO that is provided monthly to Government.

³⁵ The May 2007 Acquisition Overview Report for the Super Seasprite Project is replicated at Figure 10.2.

³⁶ In August 2008, DMO advised that addressing the resulting capability gap in the short term was to be achieved through redirecting $10 million per annum in funding from Seasprite sustainment to Seahawk sustainment.

³⁷ The ‘equipment for sale' is described in paragraph 97.

³⁸ Defending Australia in the Asia Pacific Century: Force 2030, Defence White Paper 2009, p. 72.