Difficulty with the numbers
Byline: Kym Bergmann / Canberra
After detailing a series of budget reductions, Defence Minister Stephen Smith has thrown into the mix an announcement on May 10 to acquire 10 C-27Js at a cost that seems to fluctuate. The initial Ministerial release referred to a price of $1.4 billion. The following day a media release from the US prime contractor L-3 said it estimated the contract to be valued at $600 million. The FMS price notified to Congress was $950 million. Then on June 3, Ministers Smith and Clare made a further announcement that Italian aircraft manufacturer Alenia had received an additional contract:
“The contract, which is worth around $63 million, will also provide Defence with the ability to compete and sublicense third parties, including Australian industry, to provide the maintenance services, training services and the ability to modify the C-27J capability.”
The L-3 media release of May 11 mentioned that the cost of the 10 aircraft from Alenia would be in the order of $300 million. While at first this might seem slightly on the low side for this aircraft the price was explained by Chief of Air Force David Brown to Senate Estimates on May 29 thus:
“With respect to FMS buys, I would like to point out that it is the US government’s best price. The US government has actually done a complete competition in terms of tender evaluation before this process. That is one of the advantages of FMS buys: we get pretty much the same price as the US government pays for an aircraft.”
In further evidence to Senate Estimates, DMO head Warren King and a number of others attempted to explain how the cost of the aircraft itself had gone from $30 million a copy to $40 million. This was primarily because of the need to add in additional equipment such as electronic warfare self protection.
Accepting that the aircraft as delivered by Alenia to L-3 and subsequently modified by them brings that part of the deal to $400 million, that still leaves a gap of $1 billion in the total cost to date to Australia. A Departmental spokesperson explained to APDR:
“A range of project elements are not involved in the FMS acquisition. This includes facilities, Australian logistics systems and while the US will provide test and evaluation under the FMS acquisition, Australia will conduct further test and evaluation for the Australian configuration, roles and environments to meet our needs for operational capability and airworthiness. Activities which provide opportunities for Australian industry include: logistics support; aircraft and support equipment maintenance, modification and upgrade; training; and facilities development and refurbishment or construction.”
Leaving out the cost of the airframes; support and maintenance services will be provided by L-3; Alenia; and the US FMS system itself. One of the advantages of buying things via FMS is that we take something “as is”, but in this case the RAAF plans to carry out its own program of test and evaluation.
In all of this no one has a problem with Alenia and the C27J – an excellent aircraft – or with L-3, an extremely competent and reputable supplier. The concern expressed by a number of observers is that Defence has made the selection of the C27J ahead of the Airbus Military C295 without the benefit of a thorough tender evaluation process. There has been a lot of ducking and weaving on this point, with everyone from the Defence Minister down insisting there has been a competition. In Senate Estimates, DMO Deputy CEO and General Manager Commercial, Harry Dunstall confirmed that there had been no tender process.
What has taken place is an evaluation of sorts based on various sources of information. The Department maintains that the FMS price was so competitive that there was no prospect of anyone else being able to match it – but it seems to have made this rapid decision based on imprecise supplier information. This is in spite of international competitions showing that the C295 is less expensive to buy and 50% less costly than the C27J to support and operate. If a supplier is asked simply to provide a price of an object it always tends to be on the high side because of a lack of definition about what exactly is required. This is one of the points made in an excellent paper by the Australian Strategic Policy Institute’s Andrew Davies – namely that the only way of obtaining reliable data is through a competitive tendering process.
Additionally, in analysing last year’s last decision to purchase the MH-60R helicopter via the FMS system, DMO itself concluded that by running a competition against the NH90 the eventual price was reduced by 25%. In other words, it seems that the FMS price can be reduced through competitive pressure.
To summarise the various figures: fly away cost of 10 basic C27Js about $300 million; L-3 contract value (to them) estimate $600 million; FMS notified amount to Congress $950 million; Ministerial announcement May 10 $1.4 billion; Senate Estimates 29 May precise number $1.404 billion, total following June 3 announcement $1.466 billion. This, the Australian taxpayer is assured, is the best possible deal that could be done.
The RAAF have made no secret of the fact that they have a longstanding desire to acquire the C-27J on performance grounds and indeed it does have the edge over the rival C295 in a number of areas – though by no means all of them. This was reinforced in Senate Estimates, with RAAF producing a list of things that the C-27J could do but the C295 could not – such as transporting the Army’s G-Wagons. It might have been worth exploring the issue of whether G-Wagon transportability is essential, or whether other ground mobility assets such as quads or trail bikes could have served as an adequate alternative – after all, the Caribou aircraft being replaced were too small to carry vehicles.
The Senators left the matter at that, but with respect this takes a superficial view of the situation. While the C-27J can carry a G-Wagon in most of its variants so can other assets, such as C-130s, C-17s and as a sling load by a Chinook. So the real issue that needed to be explored – and was not – was what is the most appropriate mix of transport assets to meet the needs of the ADF. And just as importantly in times of heavy budget cutbacks – what represents best value for money in achieving a desired outcome.