Last week, Minister for Defence Industry Christopher Pyne announced that Defence will enter into negotiations with Thales Australia, trading as Australian Munitions, for the continued management and operation of Australia’s munition factories in Benalla (Victoria) and Mulwala (NSW).
The Minister said negotiations with Thales will see a new strategic arrangement for the management and operation of the factories, improving price competitiveness and increasing export potential for Australian-manufactured ammunition and explosive products.
“This long-term, performance-based arrangement will provide a greater degree of certainty for Thales as the principal tenant and operator of the facilities and will enable seamless transition from the current contract when it expires in mid-2020.
“This announcement enables Defence to continue to capitalise on the more than $1.8 billion in investment it has made since the mid-1990s.”
The future arrangement will also see underutilised areas of the facilities sub-leased as additional precincts to other munitions companies, subject to maintaining high safety and security standards, either where Defence identifies a requirement for a particular product, or where a commercial or export opportunity exists.
Defence currently sources about 20 per cent by value of its non-guided munitions products from both facilities, a percentage the ADF is looking to increase, according to a Defence spokesperson.
“The ADF operates a complex munitions inventory from a broad supplier base, which is integral to operating a diverse range of weapon systems and platforms,” a Defence spokesperson said. “Defence actively seeks to optimise the use of Benalla and Mulwala through the manufacture of additional munitions products, where technically and economically viable. This includes training ammunition for some weapon systems consumed on a regular basis and at higher rates than many operational munitions.”
As the minister mentioned, the facilities have been upgraded significantly over the past two decades, with Mulwala notably on the Projects of Concern list for quite some time. Defence has invested $1.8 billion since the mid-1990s, including:
- the operations costs of the facilities through a number of current and past contracts
- Joint Project 2086 Phase 1 (the Mulwala Redevelopment Project) for $370 million
- a range of other facilities improvements.
“Defence has been working successfully with our strategic partner Thales Australia on the delivery of the Mulwala Redevelopment Project, which has now seen the closure of the old propellant plant in January 2018,” the Defence spokesperson said. “Defence and Thales are ramping up the reliability and capacity of the new plant to meet both Defence’s requirements and Thales Australia’s commercial opportunities, including exports. Full operational capability is expected to be achieved by the end of 2018.
“The ‘under utilised areas of the facilities’ includes empty buildings and facilities not currently being used by Thales Australia or not being used to full capacity. Proposals from other companies for productive use of such buildings and facilities will be considered on a case-by-case basis in consultation with Thales which will continue to have overall site management responsibility. Ultimately this will lead to Benalla and Mulwala supporting a broader supply base and expanding the customer base beyond the ADF by using a multi-operator model similar to that used by the US Government,” a Defence spokesperson said.
Defence also confirmed that Thales Australia is developing a number of new munitions products jointly with Defence that, once proven, could enjoy commercial sales through export opportunities, in addition to ADF orders.
ADM Comment: Given the history of the facilities and the contracts that operate them, ADM asked Defence for some clarification on a few key points of the announcement.
The strategic nature of the facilities is not in question but the details of the deal raised some red flags in terms of competition and efficiency of the extended arrangement.
“The new arrangement between Defence and Thales Australia Limited (which trades as Australian Munitions) is yet to be negotiated but is envisaged to be a long‑term performance based strategic agreement enabling both Thales and Defence to make investments and have sufficient tenure to allow economic payback of that investment,” according to a statement from a Defence spokesperson. “The agreement is planned to have suitable performance measures to enable additional tenure subject to satisfactory performance, along with off‑ramps as required if contractor performance is unsatisfactory.
“Defence is planning to complete negotiations with Thales Australia by the end of 2018, as there are many aspects to consider and get right with such a long-term arrangement. Collaborative development of the new arrangements could take longer. In any case, a sufficient period of time (6-12 months) will be required to transition from the existing contract to the new one. The new contractual arrangements will enable seamless transition from the current contract when it expires in mid-2020.
“Through its report 26 of 2015-16, the Australian National Audit Office recommended Defence consider options for the operation and maintenance of both Benalla and Mulwala and develop a plan for timely and cost-effective implementation. Defence undertook internal reviews and considered a number of options of how the facilities might be managed and operated in the future and conveyed a strategy which was agreed by Government. The announcement of Defence now entering into these negotiations is the part of the considered strategy and longer term operational plan,” the statement from a Defence spokesperson explained.
Given the last attempt to compete the operation of the facilities in 2014 ended badly under the Domestic Munitions Manufacturing Agreements (DMMA) program, ADM has concerns about how the Commonwealth will demonstrate value for money.
“Value for money for the Commonwealth and the Australian taxpayer must be achieved, Defence will work closely with Thales Australia to ensure this is both met and demonstrable in any proposed final arrangement,” a Defence spokesperson said.
The lack of detail in this response is hardly heartening. ADM will follow the program as it takes shape.