A leaked confidential document gives an insider's perspective on how the Morrison government went about cancelling the French submarine contract, highlighting how officials were kept in the dark and debunking claims made by the former government about the deal.
The leak, on the anniversary of the announcement of the cancelling of the French contract and the establishment of the AUKUS agreement, comes in the wake of revelations that the former prime minister secretly appointed himself to five powerful ministries — although Defence was not among them — and once again throws a spotlight on the way the former government sidestepped normal processes.
The 10-page document, written by a former Department of Defence deputy secretary who was brought into contract negotiations by former defence minister Christopher Pyne, disputes at great length the claims that the French contract had blown out by billions of dollars and would not deliver on time.
But it also reveals that the French partners were obliged to sign up to commitments to Australian content without being allowed to assess whether local manufacturers could actually deliver.
The contract was eventually terminated with an $800 million payout from the taxpayer.
The document was written by Kim Gillis, who had been involved in the original decision to choose the French bid for the submarines and the contract negotiations with the French.
He was asked by the government to return from retirement to assist in final negotiations between Defence and Naval Group – the French company partially owned by the French government which was contracted to build the submarines.
Mr Gillis subsequently joined the board of Naval Group Australia in January 2021 as an independent director and resigned in June this year after the collapse of the deal.
In a note to staff documenting events surrounding the collapse of the deal, Mr Gillis says he does not believe that any more than a handful of people within Defence knew of the change of plans, and also canvasses options for future submarine capability which include re-opening discussions with the French about buying nuclear-powered submarines.
There is widespread speculation that French President Emmanuel Macron will visit Australia before the end of the year and that his visit may open the door for further talks on the submarine deal, even though the new Australian government has committed to the AUKUS pact with the United States and the United Kingdom.
'Kept in the dark'
In the note, Mr Gillis says, "it seems clear that the contractual team [in Defence] that was working with us on a day-to-day basis was kept in as much dark as the Naval Group Australia and French boards were".
"In any contract, you will hear noises, rumours and sometimes misinformation.
"The only thing that you should be able to rely on is what the Commonwealth Contract Manager [in this case, retired Admiral Greg Sammut, who was the general manager of submarines at the Defence Department] actually says or more importantly puts in writing.
"I believe it is totally unacceptable when the Commonwealth contract manager is excluded from discussions regarding the termination of the contract for what now appears to be six or more months.
"The problem was that there was an alternate strategy being developed behind closed doors and outside the accepted contractual processes."
In his note, written for those involved in the project, he observes that "the phrase 'I do not think I know' will now become an integral part of the Australian vernacular".
"It will relate to a lie or to a mistruth told by someone in high office," Mr Gillis wrote.
"My hope is that we as Australians can recover this relationship with France as well as recover our reputation as a country that operates with integrity and honesty."
Cost blowout claims
On the claims of a cost blowout, Mr Gillis says these claims were built on an escalating series of misunderstandings of comments made as early as 2015 by officials in parliamentary committees.
This process began with an estimate of $50 billion mentioned in an October 2015 committee hearing which was quoting the cost of the submarine program in 2040 dollars.
"What was not stipulated but was understood at the time was that Defence was talking about the purchase of Japanese Soryu Class submarines to be built in Japan. Built and potentially delivered in the 'early 2040s,'" Mr Gillis said.
This was for a significantly smaller submarine than the current Australian subs, and submarines "built in Japan with no new infrastructure [and] no Australian content targets".
Mr Gillis says that the subsequent competitive bidding process delivered "a strong win for Naval Group".
"The evaluation identified that the new Attack class would be the most advanced and lethal conventionally powered submarine ever built.
"The main criteria for selection were that it would produce a regionally superior and sovereign capability.
"It was interesting at the time that my American submariner colleagues who assisted with the evaluation concluded that the new Attack could provide capabilities in a range of operational environments that would exceed some of the capabilities of the US nuclear boats.
"Not in all but in areas that would be critical in the defence of the Australian continent, especially in the protection of the shallow sea lanes and the littorals to our north.
"In 2016 the Program Manager Rear Admiral Greg Sammut provided in Senate Estimates evidence that the cost of the project was $50 billion in 'constant dollars' not including the inflationary factors that the Secretary had included in 2015 (based on the tendered price from Naval Group and Lockheed Martin and the costs for the shipyard and the infrastructure, sparing for the first of class and a very long list of Defence and Government related costs).
"Admiral Sammut was, as he usually is, very precise and deliberate in his wording. One of the reasons that he used constant dollars was that it was so early in the program that the production schedule was not locked down and therefore an 'out year' or inflation adjusted figure for 30 or so years would have been nothing more than a rough guess. We did however know that the first of class would be delivered in 2032 and the last of class in the 2050s.
"In 2017 the Department of Finance used an estimate of 35 years for the completion of the final boat and came up with the inflation-adjusted figure of $90 billion. In the mind of some parliamentarians, Australia now had an instant $40 billion "cost blow out", and almost every media outlet in the country repeated the claim."
Mr Gillis said the Naval Group Australia board was badly hamstrung in being able to "correct this narrative" because "the contract with the Commonwealth was very specific about what we could and couldn't say" and because the board "did not have any visibility of the other price estimates for Lockheed Martin or other costs that would have been incurred by the Commonwealth".
Lockheed Martin and other contractors were providing weapons and operating systems on the submarines.
The Naval Group component of the build, he said, was approximately $32 billion.
"At no point was there any contract worth or expected to be worth AUD $90b and any reference to the cancellation with Naval Group of a AUD $90b contract is a deliberate lie and a total misrepresentation of the program," Mr Gillis says.
"NGA knew its estimate to build 12 vessels over the period of 35 years was stable and varied within 1 per cent from the 2016 contracted price. The Naval Group price was in Euros and exchange rate variation could significantly affect the overall price even on a day-to-day basis let alone over a 35-year period."
Mr Gillis said the situation "was exacerbated when Admiral Sammut provided an estimate to sustain the fleet over a period until 2080. Some media subsequently estimated that the total cost of the program had now 'blown out' to $235 billion."
A cabinet submission drafted by Greg Sammut, and released after an FOI request, was sent to the Defence deputy secretary responsible for shipbuilding, Tony Dalton, 34 days before the cancellation of the program on August 20 last year.
It said: "The updated program cost estimate is $46.4 billion in 2016 constant dollars, which remains within the original acquisition cost estimate of $50 billion in 2016 constant dollars announced at the outset of the Attack class submarine program in April 2016".
Australian content target
The Australian government had sought changes to the contract from a requirement that Naval Group "maximise" Australian content to a 60 per cent target for Australian content.
Mr Gillis says in his note that "Naval Group agreed to enter into negotiations even though we were not allowed the time to undertake the assessment of Australian companies".
"The main concern that Naval Group had was that the proposed contractual wording would have resulted in Naval Group being terminated 'for cause' or in simple terms we would have been assessed as breaching the contract if we had not met the newly established 'contractual targets' and could be terminated without any of the pre-agreed break payments or costs associated with standing down."
On the question of delays in the program, Mr Gillis said the total delay against Defence's pre-design contract planning stands at 14 months, comprising "approximately nine months" before the contract was signed and caused by "Defence planning dates not any delays in delivery by Naval Group", and "approximately five months post-design contract caused by various sources and constrained by the impact of COVID in France".
Naval Group 'totally unaware this was going to happen'
Mr Gillis notes that "the discussions with the Defence team leading up to the decision to cancel the program had given no indications other than the Commonwealth was happy with the Naval Group proposal and that everything was moving forward as per the contractual timetable and plan", a position confirmed by evidence given by Mr Sammut in Estimates hearings in October last year.
"The Naval Group Australia Board was totally unaware that this was going to happen. Naval Group had just received a letter on the 15th of September 2021 from the Defence Project Office advising us that we had met the final exit point to move to the next phase of the project," Mr Gillis says.
"The Naval Group Australia Board and executive team would not have agreed to sending our staff to France in the week before the fateful decision, nor would have agreed to signing up new Australian companies into subcontracts if we had had any inkling that this was about to occur.
"The advice that we received for the Defence project team in the weeks before the announcement was actually the best news that I had seen in my term on the Australian board."
Reflecting on what strategies he would have recommended if the decision to move from a conventionally powered submarine to a nuclear one was made, Mr Gillis said this would include having "an open and honest dialogue with your submarine partner" as "first point of call" — and all the options for a nuclear vessel being openly evaluated.
"It would also be prudent for the Commonwealth to include the [French] Suffren Class submarine option in any evaluation of a future nuclear submarine capability.
"It is the most modern nuclear submarine in the world. It is at a size, crewing and capability that best fits the Australian requirements. It is the most cost-effective nuclear submarine solution both for construction and sustainment and critically it utilises Low Enriched Uranium (LEU) as a source for power generation making it fully compliant with both the rules and intent of the IAEA and Australia's commitments to support Nuclear non-proliferation.
"And finally and critically to the defence of Australia it is the only option that offers full sovereignty over the deployment of the asset. Neither of the US or UK options will provide a sovereign capability and we would be reliant on operational preapprovals from the US to operate and deploy our most important Defence assets."
When contacted, Mr Gillis confirmed to 7.30 that the note was written by him but declined to comment further.
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