In what was seen by many in Defence, industry and government as a scathing report, the ANAO called on Defence to revisit the cost assumption of its naval shipbuilding projects.
The report found that the Naval Shipbuilding Plan was based off assumptions made when the 2016 Defence White Paper was published, but key factors have since changed, with the Future Submarines now confirmed for construction in Australia and the OPVs and Future Frigates commencing construction earlier than expected.
"That Defence, in line with a 2015 undertaking to the government, determine the affordability of its 2017 Naval Shipbuilding Plan and related programs and advise the government of the additional funding required to deliver these programs, or the Australian Defence Force capability trade-offs that may need to be considered," the ANAO recommended.
The report also said that key risks to the naval shipbuilding projects "relate to the delivery of expected capability, program cost, ability to meet program schedules, and management of the industrial base. The Naval Shipbuilding Plan did not address the management of these risks in any detail".
The integration of the Aegis Combat Management System, which will have a tactical interface from Saab Australia, was also highlighted as a concern by the ANAO, while the first phase of the Naval Shipbuilding College has blown out to $62 million, two and a half times more than the original cost estimate of $25 million.
In various statements to Senate estimates, head of CASG Kim Gillis said the statements in the ANAO report, which spoke of high to extreme risks in the government's Future Frigates program, were based on or quoting Defence's own assessments of the program in early 2016.
"This was our statement that the audit office was reporting on. It wasn't the audit office's assessment that this program is high to extreme, they were reporting on the documentation that we provided them, this was Defence's assessment of the risk in 2016," Gillis said.
"I’m taking this opportunity to correct the public record on what has been selective reporting and interpretation of the Australian National Audit Office recent performance audit into Naval ship construction mobilisation. The audit itself was conducted across a number of months throughout 2017."
Gillis said Defence has already identified how to ensure Australia undertakes a successful and continuous shipbuilding exercise.
"In their conclusion, the ANAO found Defence continues to work towards effective planning and mobilisation to deliver the Australian government’s Naval Shipbuilding Plan. Defence has identified the key elements for a successful, continuous shipbuilding exercise and Defence is currently meeting all scheduled milestones for naval construction programs, noting that each program is in its early stages," he said.
"I do note, however, that the commentary and media that followed this has conveniently ignored these findings. Let me set the record straight and a few of those more outlandish claims following the release of that report."
Gillis told Senate estimates "there is no cost blowout in relation to the OPVs", and that Defence has undertaken "standard shipbuilding practice" in putting together the sustainment date for the Offshore Patrol Vessels project.
"This is a fixed price contract, Defence understands precisely how much the ships will cost to build both in South Australia and Western Australia. The government was provided with the sustainment data for the Offshore Patrol Vessels based on historical usage and designer forecasts. This is standard shipbuilding practice. Defence provided government with an indicative life cycle costs for the Offshore Patrol Vessels across a 20-year life cycle. This indicative cost was based on previous programs, historical usage and upkeep data provided by the tenderers. This is typical for shipbuilding projects at this stage," he said.
The head of CASG also said "a number of mitigations have been put in place by government" to reduce the high to extreme levels of risk identified by Defence in 2016 in relation to the Future Frigates project.
"The first risk level strategy is to commence the Future Frigate production prototyping in 2020 to demonstrate the ship design, shipyard processes and workforce are production ready. Prototyping is used widely around the world, including in the construction in the United States of the Queen Elizabeth II aircraft carrier and the United States Navy's littoral combat ships," Gillis said.
"Prototyping has been shown to be one of the most effective strategies to reduce overall program cost in ship and submarine construction. The second strategy was to decouple the shipyard infrastructure from the projects, including the creation of the ANI. This has allowed for the early commencement of shipyard design and construction ahead of the Future Frigates decision.
"And finally, the government’s announcement in October 2017 to take an enterprise approach to combat management systems and to bring forward the commencement of the Future Frigate Combat Management decision has allowed the commencement of studies prior to the future frigate decision."
Gillis said the changes associated with the domestic builds of the Future Submarines, which the ANAO said had not been costed for in Defence's Naval Shipbuilding Plan, and the Future Frigates.
"All of the changes associated with the domestic build of the Future Submarine and Future Frigate program are reflected in the Defence’s Integrated Investment Program," he said.
"The shipbuilding provisions identified in the IIP are consolidated to enable government to consider the affordability of the naval construction program as each of the projects is presented to government. Offsets are recommended for any shortfalls between funding requirements and existing provision.
"The reality is that we are making steady progress on the implementation of the government’s naval shipbuilding enterprise. In the year since the release of the government’s naval shipbuilding plan, Defence has progressed the key policy initiatives and critical milestones outlined in the plan in a timely and co-ordinated national effort. Implementation of the plan is subject to unprecedented levels oversight and accountability, including regular audits by the ANAO.
"As identified in the plan, most far reaching government policy initiatives will take time to develop and mature. The ANAO supports this premise and at this early stage of the process they made only a single recommendation which Defence asserts, and the government agrees, is already in place."
Labor senator Kim Carr questioned Gillis about the "unprecedented" levels of strong, negative language in the report, but Gillis disagreed, saying he thought the report was "relatively positive".
Outgoing Vice Chief of the Defence Force Vice Admiral Ray Griggs added there would always be adjustments made to shipbuilding project costs.
"As we learn more about each of these projects ... these adjustments will need to be made," VADM Griggs said.
"There has not been a budget shortfall."