The billion-dollar Defence-Thales scandal — in which the French arms giant was handed a $1.3 billion contract to run munitions facilities despite spectacularly failing in a bid process it had helped design — belatedly caught fire yesterday when defence secretary Greg Moriarty told the ABC’s Andrew Green the process has been referred to the National Anti-Corruption Commission.
The scandal — unearthed by the auditor-general in the first of what will be two examinations of how Defence has handled munitions contracts — has rapidly gained notoriety due to a Defence official soliciting a bottle of champagne from Thales before heading off to join the company.
That’s not the only example of unethical conduct unearthed by the Australian National Audit Office (ANAO).
While Defence was considering whether to proceed with the course it eventually undertook — to throw aside all thoughts of market contestability and simply approach Thales to keep running the Mulwala and Benalla plants — the ANAO says:
In November 2016, a Defence official sought assistance from, and provided information to, Thales on: the development of internal advice to the [investment committee]; Defence committee processes; and internal Defence thinking and positioning. Government information of this sort is normally considered confidential and these exchanges evidenced unethical conduct.
But the contract, which went from an initial costing of $660 million to $1.2 billion and is now projected over $1.3 billion, needs investigating not merely for unethical conduct by Defence officials but also because taxpayers need an explanation of two key decisions made by Defence.
The first was in July 2016 when Defence — having already given Thales an interim five-year contract spanning 2015-20 in order for the government to work out exactly what it wanted to do — internally decided to abandon competition and simply go straight to Thales (keep in mind this was in 2016 — with plenty of time to get it right).
Not everyone in Defence agreed with this. The team in the explosives branch prepared a paper that, according to the ANAO, pointed out the “potential merit in opening the facilities to global suppliers who could leverage their global business to achieve maximum economies of scale and offset low ADF demand; that by deciding to sole source to Thales at this stage, Defence had ‘discounted the potential benefits of another operator with a larger munitions business, without truly testing the course of action’.”
The explosives branch, however, was ignored by more senior executives.
On July 18, 2016, the director-general explosive materiel (SES Band 1 or one-star equivalent) acknowledged this input, noting however that the endorsed approach was ‘consistent with where the DEPSEC CASG [Deputy Secretary CASG] would want … to take things’ and that ‘it would be high risk (potentially disastrous to go to another operator)’.
These officials — at least one is now in the private sector, though not at Thales — should be grilled as to why they were so eager to stick with Thales rather than go to the market.
When the matter went to Defence’s investment committee, the newly formed “contestability division” attacked the decision as well on the basis that “the ‘value for money proposition of the contracts for Mulwala and Benalla [had] not been tested for more than 10 years’, and by 2025 — when the first ‘rolling wave extension’ under the new strategic partnership agreement would be likely — the contract ‘will not have been competitively tested in over 20 years’.”
But the investment committee decided to go ahead anyway, agreeing only that the factories would be put to the market at some nebulous point in the future.
The other appalling decision (one Defence ended up acknowledging) happened in late 2019 when Thales — in response to a request for tender [RFT] that the company had helped design and for which it was the only bidder — submitted a bid so bad that Defence officials wanted to reject it. But Defence had taken so long in the three years since it decided to stick with Thales that, by late 2019, it was running out of time before the 2015 contract expired.
That dilatory approach meant Thales had all the power in negotiations. Defence decided simply to start negotiating the 2020 contract with the company.
Senior Defence officials had been warned repeatedly that this would happen if they left it too late — that Thales would stall and drag things out, and that the company had a history of non-compliance in its dealings with the department. But they left it too late anyway.
Some officials wanted an extension of the interim contract by six months or a year to resolve the problems, but they were overruled. Instead, the dud RFT response from Thales led to a frantic series of meetings between top Defence officials and Thales executives, aimed at resolving their differences, for which no records were ever retained.
In the end, Defence settled on a contract despite the Commonwealth getting what it wanted on fewer than half of 42 key areas of disagreement. It even agreed in three areas where Thales wouldn’t even give Defence what it wanted as its fallback negotiating position.
The officials who allowed the RFT process to run so long, and who ignored suggestions that the interim contract be extended, and who allowed the Commonwealth to agree to a manifestly inadequate contract with Thales, should all be required to explain their conduct. Why did they allow Thales to run rings around them, and thus the taxpayer?
Anything less will merely confirm that, unless you’re dumb enough to demand a bottle of plonk in writing, there’s no accountability for rotten decisions in Defence.
