Defence officials failed to properly document and investigate bribery allegations made against navy contractor officials, a scathing audit report on the multibillion-dollar commissioning and maintenance of two military ships has found.
Defence also determined a senior official involved in finding a supplier to take on a $700m maintenance and upkeep contract – who took a job offer with the winning contractor in the middle of the process – did not give rise to a conflict of interest.
The report from the Australian National Audit Office (ANAO), released on Friday, details a series of failings in defence’s decade-long management of the navy ships, worth more than $3.5bn in contracts from 2014 to 2032.
The federal government auditor assessed the management of two navy ships, known as Canberra class amphibious assault ships or landing helicopter docks, since 2014 to determine whether they were value for money, performing as expected and if contract rules were being followed.
The ANAO determined defence’s failure to manage contracts effectively led to critical failures, including during humanitarian operations after the 2023 Vanuatu cyclones.
The two ships, HMAS Canberra and HMAS Adelaide, were delivered in 2014 and 2015 by BAE with more than 1,000 “defects and deficiencies” covering their communication, radar, combat management and sewerage systems, the report found.
In 2017, a remediation program was established, and in November 2019 the ships were accepted into full service with six “significant residual deficiencies”.
Total power failures and urgent defects prevented the ships from being deployed to Tonga in 2022 and Vanuatu in 2023 for humanitarian aid for periods of time.
Navy officials remarked during senior-level meetings in 2023 on the “catastrophic failures” affecting the navy’s reputation with “the community, the government and international partners [US, UK]” as well as “their confidence in the navy to operate nuclear submarines”, the ANAO noted.
There were also shortcomings in how defence managed fraud and corruption allegations, the report found.
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The report revealed that in September 2022 two anonymous whistleblowers accused the maintenance contractor, Naval Ship Management (NSM), of bribery and kickbacks for potential subcontractors.
The allegations surrounded the maintenance period before one of the ships was sent to Tonga for relief aid in January 2022. The whistleblowers also made allegations of “sub-standard” work and that invoices were submitted and paid for before tasks had been completed.
The ANAO said the allegations were referred to the defence’s navy shipbuilding group and the integrity division three weeks later, but a formal investigation did not proceed due to a lack of further information.
Defence officials met with NSM to discuss the allegations in October 2022. NSM disclosed that a similar complaint in 2021 had been the subject of an investigation, which had upheld allegations of poor procurement practices and favouritism towards certain subcontractors. NSM’s report did not cover the kickback or bribery allegations.
An extract of NSM’s 2021 report was provided to defence. A briefing note provided to the chief of navy in April 2023 referred to NSM’s response to the 2021 allegations as being of the “highest order” and a “thorough, appropriate and sufficiently independent investigation to satisfy a standard that would be acceptable to the Commonwealth”.
Nevertheless the brief concluded the incidents did not constitute a notifiable incident, which the ANAO report said was inconsistent with policy.
The ANAO said defence did not request additional contract risk assessments or management plans after the allegations.
In another example, the ANAO found the integrity of a $700m maintenance contract had been compromised in 2018 as companies tendered submissions to win the job.
A senior defence official involved in the procurement phase declared a conflict of interest on 24 September 2018 – four days before the tender for market closed – revealing they had “active negotiations with NSM for a job opportunity they ‘were likely to take’”. The official had also been approached months earlier by NSM for information related to the contract offer.
Defence determined the job offer was not a conflict of interest, but the official was barred from the process two days after declaring the conflict of interest.
On 28 September the senior official, then still employed by defence, was listed as one of NSM’s key personnel if awarded the contract. By November, the official was negotiating on the contract with defence on behalf of NSM.
The ANAO said NSM did not seek written approval for the former official’s inclusion against contracting rules, and defence took no action once it became aware of the former official’s involvement.
Defence acknowledged the findings and agreed to all nine of the ANAO’s recommendations to improve planning efforts, document-keeping and adhering to contracting management rules.
In a statement to Guardian Australia, a defence spokesperson said it took all allegations of fraud and unethical conduct seriously and had a “zero tolerance policy”.
The spokesperson added shipbuilding and sustainment were “complex activities” and defence would continue to improve its processes.
“Defence recognises that appropriate management and identification of conflicts of interest in procurements is paramount to achieving the highest levels of probity and ethical procurement standards,” they said.
The spokesperson said the ANAO’s report acknowledged there had been some improvements in recent years.
A spokesperson for Babcock, which fully acquired NSM in 2022, said it acknowledged the ANAO’s report. It said “the subsidiary has operated under Babcock’s global procurement framework, which reflects a continued commitment to transparency, compliance, and best practices in service of our customers and the national interest”.
A spokesperson for BAE Systems said it had “delivered on its contractual obligations” and “addressed all concerns raised by the Commonwealth, with all matters resolved in 2021”.
The office of the defence minister, Richard Marles, was contacted for comment.
