Defence Business: Further concerns for local munitions manufacturing | ADM August 2014

Uncertainty over the future of munitions and propellant manufacture in Australian has been compounded by delay and lack of government direction. Unions, Industry and Departmental stakeholders are all concerned with the lack of government responsiveness.

At issue is selection of a preferred tenderer under the so-called Domestic Munitions Manufacturing Arrangements (DMMA) to operate the Mulwala explosives and propellant plant in southern New South Wales and the Benalla munitions facility in northern Victoria.

But a wider issue of much greater import also hangs in the balance; does government envisage a worthwhile long-term future for either operation?

Defence said in late June that government consideration was expected to take place later this year. ‘All options’ for the future of Benalla and Mulwala were being raised for government to address.

It is understood that those options range from continued production to mothballing, sale to closedown.

Further delays
While numerous discussions had taken place at senior level within Defence, further progress had halted while awaiting ministerial engagement. According to a May 28 story in the Border Mail newspaper, unions close to the operations at each plant are becoming increasingly concerned about the long term employment prospects at the facilities for their members.

An initial ITR in 2011 resulted in a short-listed group of companies being invited to submit business plans in a 2012 Request for Proposal (RFP) process. Further down-selecting occurred from the RFP process in early 2013 and the remaining bidders were told to expect a Request for Tender (RFT) in the second half of 2013.

A draft RFT was released to industry in late 2013 with promises that the final RFT would be released by the end of the year, but then revised to early in 2014, itself more than a year later than originally intended, given that the current agreements with Thales Australia covering both facilities expire in June 2015.

Although there was no public announcement the DMO confirmed to ADM that the RFT had been suspended on 22 January until at least mid-2014 ‘pending consideration of the DMMA project by government’.

Media reports at the time of the delay referenced a letter from the Director General Munitions to the three shortlisted consortia – Alliant Techsystems of the US teamed with Australian ammunition supplier NIOA, American Ordnance and Day & Zimmerman; BAE Systems Australia teamed with Expal Systems of Spain; and incumbent Thales Australia partnering with General Dynamics-OTI, Nammo and Winchester Australia - stating that the Commonwealth had reviewed and updated its munitions demand forecast.

It had also considered the ongoing schedule and performance risks associated with the $263 million contract for the development of Mulwala. This was awarded in 2007 to Bovis Lend Lease with ATK as a subcontractor providing the production process design, critical equipment and start-up support.

The work at Mulwala was placed on the Projects of Concern list in December 2012. In late June this year Defence told ADM about 40 per cent of the plant had been accepted between October 2013 and March 2014. The balance was scheduled for acceptance in 2015 – about four years late.

Request For Tender
Industry reaction to the RFT suspension was muted. BAE Systems said nothing, ATK expressed its disappointment, and Thales Australia interestingly said it was ‘working closely with DMO’ on contingency planning for the continued safe operation of the two plants after expiry of the current contract.

Privately, the reaction was less subdued. Industry sources referred to zero subsequent communication from the Project Office, a disregard for protocol, and individual project preparation costs in the millions of dollars.

The draft RFT, released to the three shortlisted contenders to help them save time in preparing responses to the definitive document, ran to almost 2,000 pages – “and that was the draft RFT, not the responses,” commented one source.

Preparation of responses for complex bids of this nature involves significant work from a multitude of support companies when building up cost models and operational concepts etc. for respondents. Add the complexity of proposing long term stewardship of government-owned major hazardous and explosives facilities and the teams of individuals and companies mobilised throughout the world to support the three bidding consortia, let alone the Commonwealth, at the time of suspension was massive.

A transition period of at least eight months would be required for a new operator to settle in should the incumbent be displaced. This would not only include the physical handover but also the lead time necessary to procure brass, ammunition links, and raw materials for propellants.

As reported in ADM in August 2013, more than 80 per cent of munitions in the DMO 2011-12 financial year Contracts Listing came from foreign sources. This percentage is likely to increase, given the operational downturn, increasing use of simulation, and financial constraints.

The replacement of Army’s 105mm Hamel gun with the 155mm M777A ultra lightweight howitzer means all artillery ammunition is now imported via the US Foreign Military Sales (FMS) programme, as is 120mm tank ammunition.

The RAN’s 5inch projectiles have been imported via FMS since the move several years ago to an insensitive filling, while low-rate production at Benalla of stockpiled Mk.82 bombs can be expected to taper off prior to the introduction of the Joint Strike Fighter, which will not carry them.

Benalla is understood still to be producing hand grenades, 81mm mortar projectiles, 25mm, 9mm 7.62mm and 5.56mm military rounds together with quantities of commercial ammunition.

However, its mainstay military production of 5.56mm ammunition could come under threat – the tightly-held US technology employed in production of the M855A1 5.56mm enhanced round on trial by the ADF could create issues with US ITAR (International Traffic in Arms Regulations) given Thales Australia’s 100 per cent French ownership.

Some M855A1 rounds have already been acquired from the US, and current stocks of standard rounds are being used for training.

Looking to the future
According to informed sources, contracted work at Benalla and Mulwala of $100 million in 2012 was reduced to $60 million in the draft RFT, and currently stands at about $25 million. (Although Defence did not confirm these figures, it did acknowledge that indicative requirements had been reduced since release of the draft RFT).

Despite the lack of public comment or debate, ADM understands the ADF would have no problem with its future requirements being met from overseas by stockpiling and standing offers supported by government-to-government agreements. Supplying everything from overseas was an option given to the DMMA contenders in the draft RFT.

As of mid-year it was looking increasingly as if Thales would be awarded a contract extension of at least three years. Industry speculation was that this would allow limited production to continue, environmental remediation and any necessary upgrades and maintenance be carried out, and time for government to determine what the future holds for both plants.

It’s possible the delay to the DMMA RFT was due at least in part to continuing negotiations between Thales and the Commonwealth on ownership of equipment and Intellectual Property.

Whatever the reason, the outcome seems likely to be one in which the competitive element inherent in settling the DMMA undertaking will have been reduced.