Patrol boats - PFI OK, but Defence wants a fall-back

The Defence Materiel Organisation (DMO) has issued its long-awaited Request for Tenders for Project Sea 1444 - a new fleet of patrol boats worth up to $450 million to replace the RAN's fast-ageing fleet of fifteen 42-metre Fremantle-class patrol boats by 2004.

However, the tender document doesn't specify how many craft it needs to replace the Fremantle-class boats - and nor does the RAN seek necessarily to purchase the new boats outright. Instead the DMO is planning to acquire the new boats under a Private Finance Initiative (PFI) arrangement, although it will also consider purchasing the boats outright in the traditional manner if a suitable PFI deal can't be hammered out.

This will be Australia's first formal defence-related PFI deal if it goes ahead (the Port Services CSP contract was probably the first, though is rarely acknowledged as such) and would see the prime contractor build, own and maintain the boats and then dispose of them at the end of their 15-20 year service lives. A direct purchase deal would see the RAN own the patrol boats with maintenance handled by the prime contractor under a separate maintenance contract.

Bidders may submit a direct purchase proposal only if they wish, but any bidders submitting a PFI proposal must also submit a direct purchase proposal as well. Merhant bankers Rothschild Australia Ltd has been working with Defence for 12 months to develop the public sector comparator required for any PFI-type contract and will be part of the tender evaluation team, along with Broadleaf Spectrum Ltd, a fellow-member of the defence PFI panel announced earlier this year. Broadleaf Spectrum will focus on risk management issues.

Defence released a draft RFT in August to allow Industry to provide comment on both the contractual and technical aspects of the bid, according to defence minister Peter Reith. "That consultation was very beneficial and industry input has been included in the RFT," he said.

"The invitation to tender will ... seek bids under a privately financed arrangement or direct purchase by the Government," Reith added. "It is expected that a single business entity will take responsibility for not only supplying the Patrol Boats, but also maintaining and supporting them for the duration of their 15 - 20 year life span."

Tenders close November 23 and the DMO plans to shortlist two contenders early in 2002. A decision will be made at the shortlisting stage on whether to continue with a PFI-based acquisition or revert to the usual purchase-type acquisition. The DMO plans to sign the prime contract by the end of 2002 or early in 2003. If a direct purchase option is selected the prime contractor will likely be responsible for through-life support of the patrol boats under the same prime contract awarded for their purchase.

For both PFI and direct purchase options, the tender document specifies the level of availability required of the patrol boat fleet and leaves the bidders to estimate how many craft, of what design, are required to meet the RAN's operational requirements. But it does confirm the boats will be armed with a 25mm gun, to be supplied as Government-Furnished Equipment (GFE), and a comprehensive communications suite.

The new boats are required to have better sea-keeping qualities than the existing Fremantles in order to overcome some existing sea-state and weather restrictions on their operational availability. The patrol boat force will continue to provide 1,800 days support a year for Coastwatch, with the fleet as a whole required to deliver a baseline availability of 3,000 days a year, with a significant short-notice surge capacity to meet unexpected contingencies. That would amount to having at least eight patrol boats on-line every day of every year for the life of type of the boats.

Likely bidders include Australian shipbuilders ADI Ltd, which is prime contractor for the RAN's Huon-class Coastal Minehunters; Tenix Defence, which has built patrol boats for Middle East and Pacific Island navies and police forces and, more recently, [patrol and search and rescue vessels for the Philippines Coastguard; BAE Systems Australia Ltd; Australian Submarine Corporation Pty Ltd, which designed a new class of patrol boats for the Philippines Navy during the early-1990s before the project was terminated for budgetary reasons; NQEA Ltd, which built the Fremantle-class boats; and Austal Ships Pty Ltd, which has built six Bay-class 38m patrol boats recently for the Australian Customs Service.

Specialist consultancies, finance houses and banks known to have expressed an interest at the time of writing include PricewaterhouseCoopers and Westpac.

Project Sea 1444 is Australia's first defence-related PFI program, Stuart Lamond of PricewaterhouseCoopers (PwC) told ADM. Lamond declined to name PwC's bidding partner for the project.

However, the government's decision to leave open the option of a conventional purchase means that each bidder is forced, in effect, to submit two tenders for the contract. A bid for a PFI-based contract could be very different from one for a direct purchase contract, he said, and the evaluation criteria would be different. This heavily increases the cost and workload involved in preparing the tender, he warned.

Other finance and shipbuilding sources have questioned why it will take so long to reach contract signature. If the Air 87 tender process for the Army's new armed reconnaissance helicopter could be concluded within eight months, why can't a tender for a much simpler and cheaper piece of equipment be concluded as quickly, or even quicker?

Furthermore, sources have asked, why is it necessary to submit two separate bids, for a PFI and for an outright purchase? This will push up the bidders' costs and will place a heavy workload on the project office when evaluating the tenders and also in working out whether to go with a PFI deal or revert to a traditional capital purchase with a long-term maintenance contract to the builder.