Hon Ron Mark

Minister of Defence

13 December 2017

MEDIA STATEMENT

Government resolves Defence cost blowout

Defence Minister Ron Mark has announced that a revised contract has been signed with Lockheed Martin Canada to deliver the installation phase of the Anzac Frigate Systems Upgrade (FSU) project.

The project, which had a budget of $491 million after contract signature in 2014, has experienced a cost overrun of $148 million, around 30 per cent of the budget. The revised project budget now sits at $639 million.

Mr Mark said that the FSU cost overrun was the largest example of procurement overspends under the previous Government yet identified.

“This Government has discovered a range of cost pressures and procurement overspends across several portfolios. This Defence project is the largest such example to date.

“This project is the biggest commitment of a series of mid-life upgrades on the frigates that have taken place since the mid-2000s, which have kept systems up to date with modern technology," he said.

“There has been a series of inaccurate estimates and project management errors by the Ministry of Defence, compounded by a failure to act by previous Ministers.

“The scale of this overrun is deeply disappointing, and I have made it clear to officials that under this Government, Defence procurement must and will be accurately costed, scoped and delivered on time and within budget. This is not good enough.

"While this Government has acted quickly on this issue, through making a fiscally neutral transfer within the Defence Budget allocation at no additional cost to taxpayers, the same cannot be said about the previous Government.

“After first becoming aware of this issue in September 2016, when additional costs were first estimated at between $65-74 million, they failed to resolve it over a year, while costs continued to increase, and schedule delays became longer and longer.

"Crucially, the contractor provided a final fixed firm price in June 2017, and this was not taken up in the run-up to the election. This decision imposed a real further cost to taxpayers and the Navy, with the contract having to be reopened and renegotiated, causing additional costs to be incurred, and a significant delay to the point at which installation of this essential equipment on the frigates could begin.”

To fund the cost overrun, and consistent with the Coalition’s commitment to fiscal prudence, Cabinet has agreed to reallocate a portion of the money that was provisioned in Budget 2017 for the Littoral Operations Support Capability project. This trade-off will mean that a contemporary, off-the-shelf commercial dive and hydrographic vessel will be procured, rather than a more advanced, specifically designed military vessel.

“While this is a trade-off in capability for Defence, this innovative response means that a dive and hydrographic vessel will be able to be delivered to the Defence Force sooner than the military-specification option,” Mr Mark said.

“It will be significantly more capable than HMNZS Manawanui and HMNZS Resolution, the two vessels it is replacing, particularly in regards to support to underwater search and recovery operations, and in capacity, speed, and versatility in response to domestic and regional natural disasters. This trade-off was made on the advice of Defence officials, as the most appropriate and manageable within the Defence portfolio.”

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