The multibillion dollar project to replace Australia’s submarines is struggling to control contractors accused of creating perceived conflicts of interest, hiding labour hire worker numbers and spending without government oversight, a leaked Defence Department memo says.
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A document prepared by Defence officials, seen by Fairfax Media, has raised multiple complaints about the behaviour of contractors managing parts of what the government expects to be the nation’s largest military procurement program.
Staff at the department’s science and technology group, which has been tasked with researching designs needed for components of Australia’s new fleet of submarines, raised the alarm in a memo prepared in March alleging “probity and apparent nepotism issues” on the project, named SEA1000.
The group's research services division, monitoring use of contractors, has proposed the maritime division make a series of changes controlling contractors’ spending and improving transparency.
The contracting arm of the Defence Department’s non materiel procurement branch had also raised concerns about contractors on SEA1000, the internal memo said.
“Obtaining accurate information in relation to SEA1000 contracting has been difficult for a number of years, primarily as a result of an unwillingness to provide clear responses on contractual arrangements,” it said.
Australia’s $50 billion program to purchase 12 new submarines, announced in the 2016 Defence White Paper, will span decades and the first of the new fleet is likely to enter service in the early 2030s. Construction could extend into the late 2040s.
The submarine build has featured prominently during French president Emmanuel Macron's visit to Australia, as Prime Minister Malcolm Turnbull announced on Thursday that critical design work for the new fleet would move to South Australia from 2022.
Defence science and technology officials in the internal memo complained that SEA1000 contractors have:
- Appeared to try hiding labour hire workers by registering them as “service providers”, who are paid for delivering an outcome. Labour hire workers are meant to be paid on an hourly rate.
- Engaged other contractors using purchasing orders designed for buying simple items, and without oversight by Defence Department public servants.
- Signed contracts on behalf of the science and technology group, and paid invoices without apparent oversight by Defence staff.
The Defence Department confirmed “a number of concerns” were raised internally about the role and performance of some contractors.
“[The group] conducted a quick assessment of the issues raised, and has taken initial action to address the concerns raised,” a spokesperson said.
“Defence takes this matter seriously and is conducting a thorough review of the issues raised.”
‘Not cooperative’
Group officials said one contractor had proposed his company provide contractual assistance on SEA1000 while he was already contracted to the program through a different firm.
The contractor had access to insider knowledge and quoted for other work under his own company name, the internal memo said.
The memo said Defence science and technology’s maritime division should not consider the contractor’s company for SEA1000 contracts while he or any other of his firm’s employees were contracted through another contracting firm.
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A spokesperson said Defence took allegations of suspected wrongdoing and conflicts of interest seriously and had established and proven mechanisms to address issues.
“Further, Defence monitors its contractors and consultants and reviews their performance, including when specific concerns are raised.”
Contractor boom
The complaints coincide with growing scrutiny of the federal government’s booming spend on labour hire contractors and consultants, now the subject of a parliamentary inquiry and the focus of criticisms aimed at the Coalition’s cuts to public service staffing.
Fairfax Media reported last year the Defence Department would launch a hunt for contractors on its books masquerading as "service providers", as bosses feared managers were disguising the composition of their workforces to try to get around a departmental cull of consultants and contractors.
Former departmental secretary Dennis Richardson, before retiring from the role, expressed his frustration in 2017 that after his cuts to public servant numbers in his department — then down to about 17,200 — he was told there were up to 18,000 service providers, consultants and contractors on the books.
A senior analyst at the Australian Strategic Policy Institute, Marcus Hellyer, said Defence’s contractor numbers had risen to the point where it was not unusual in some areas to have only a thin layer of public servants overseeing a project run entirely by contractors.
In some areas, this model worked well, he said.
Contractors often supervised other contractors, and had a different culture to public servants.
“Potentially they haven’t grown up in the public service for example and may not understand the way things are done,” Dr Hellyer said.
“So without commenting directly on the allegations it’s potentially just a culture issue when you’ve got people coming in who you’ve brought in with a specific skill set, and that skill set is not understanding the niceties of Defence contracting rules and regulations.”
Australia hadn’t built submarines since the last Collins Class fleet was delivered in 2003, meaning much of the specialist knowledge for SEA1000 needed to be contracted in, he said.
There was virtually no transparency over where money was spent in Defence, Dr Hellyer said.
While it was not possible for Defence to audit all its spending, it had a risk-based audit framework.
Contractors would always be an issue as the Defence Department’s spending was so large.
“So what’s your level of tolerance? Do you want to spend $100 million stamping out a $10 million problem, or do you accept that there will be a level, and we'll have a risk-based approach which means we'll spend $10 million and manage it that way?,” Dr Hellyer said.
“Which isn’t to excuse poor behaviour and poor behaviour should always be dealt with.”
