Defence’s administration of the Strategic Domestic Munitions Manufacturing (SDMM) contract has been only partly effective, providing limited assurance that value for money had been achieved, the Australian National Audit Office (ANAO) has found.
In its latest audit report, the ANAO said future needs of the SDMM contract, through which defence company Thales manufactures munitions for the Australian Defence Force (ADF), were constrained by the condition and configuration of plants at Benalla, Victoria, and Mulwala, NSW.
The ANAO said these constraints limited the extent the contract could support the resilient and scalable domestic manufacturing capability envisaged by the Australian Guided Weapons and Explosive Ordnance (GWEO) Plan.
“The contract was designed to sustain the long-term operation of the Benalla and Mulwala facilities, manage costs and deliver efficiencies over time,” it said.
“While industrial preparedness and manufacturing uplift activities were envisaged as an intended outcome of the contract, they were not included as core contract deliverables.”
Mulwala, established in 1943, and Benalla, established in 1994, are owned by the Commonwealth but managed by Thales.
The plant at Mulwala produces explosives and propellants for the ADF and commercial market. Benalla manufactures small arms and larger calibre ammunition for the ADF and sporting ammunition for the civilian market.
Both plants are regarded as national strategic assets, providing much of the industrial foundations to support and expand domestic production of guided weapons, explosive ordnance and other types of munitions.
The SDMM contract, worth around $1.86 billion, was signed in June 2020 and runs for ten years. That covers plant operation and upgrading as well as actual munitions production.
The ANAO said Defence placed an order for munitions each year, with orders for the first six years totalling $633 million.
It said the age and condition of equipment Benalla and Mulwala was affecting their capability and capacity to meet current and future manufacturing needs.
In July 2020, Thales advised Defence that a specific manufacturing line was nearing the end of its useful life and required upgrading to continue supporting existing production.
The company said that a major failure of obsolete equipment and unsupported control systems could impair certain production for up to 18 months while a replacement system was procured.
More broadly, Defence advised the ANAO that the Benalla and Mulwala facilities had sub-optimal production capacity and a dependence on offshore precursors and raw materials. Both needed further investment to meet the 2024 and 2026 National Defence Strategy (NDS) priorities.
The ANAO cites Thales’ challenges in forging M795 155mm artillery shells, with an initial order placed in 2020, followed by subsequent orders with extended delays. The deal was cancelled last year, with defence company Nioa awarded a contract to produce shells at its plant at Maryborough, Queensland.
SDMM includes probity provisions. The ANAO said in January 2024, Defence became aware of a close personal relationship between SDMM staff from Defence and Thales.
It subsequently applied internal procedures, including staff reassignment, probity training and exclusion from relevant procurement activities.
“While these actions were consistent with Defence policy, the absence of a documented contract specific probity plan limits the assurance available to Defence that probity risks arising from close working relationships are being identified in a timely manner and managed consistently,” the ANAO said.
In a response to the ANAO, Defence said it had strengthened governance, senior executive oversight and risk management and improved transparency since establishing the GWEO group in 2023.
“Defence welcomes the Auditor-General’s recognition of these ongoing improvements, including enhanced asset management, validation of contractor performance data, and the development of the Strategic Domestic Munitions Manufacturing Joint Strategic Plan,” it said.
Thales Australia said it was provided access to only a heavily redacted version of the final report.
“Within this constraint however, we acknowledge the constructive way the ANAO has engaged and sought to elicit our feedback on the limited extracts provided,” the company said.
“Notwithstanding this, Australia’s munitions and energetics ecosystem under SDMM is a key strategic asset for the nation, and the essential industrial element to realising the GWEO ambition outlined in the National Defence Strategy. Further, it is the envy of our allies and partners, many of whom shuttered similar facilities in pursuit of a post-Cold War peace dividend.”