by Peter Yule
some $80 million in what appeared to be excessive contract man-
agement fees. These figures placed further financial pressure on the
project and, as part of the negotiations, the entire cost basis of the
project was reviewed. As a result of this exercise, $90 million of
the logistics support funding was removed before the contract was
signed, to fund other elements such as training. This diversion was
to affect seemingly banal things such as the preparation of main-
tenance manuals, but the quality of manuals became a major issue
when the crews were blamed for many of the problems that later
emerged.
Although ASC and Rockwell were clearly the favoured bid-
ders, the Defence Department wanted to retain competition during
the contract negotiations. This became increasingly difficult from
P I C K I N G W I N N E R S 1 9 8 7
111
Christmas 1986 when the identity of the favourites was leaked.
Patrick Walters, then defence correspondent for the Sydney
Morning Herald, told Hans Ohff and John White that the AMS
bid was in trouble. Walters thinks this was the first suggestion to
the consortium that it was not a sure winner. Equally, the open
preference for Rockwell’s combat system was difficult to ignore.
In March 1987 Ron Dicker closed the Signaal office and the com-
pany withdrew from the contest, to the chagrin of Oscar Hughes,
who thereby lost what little leverage there was in negotiations
with the American company.
The Germans also considered leaving but they continued to
negotiate while AMS launched a barrage of public relations, Ger-
man government representations and offers of access to even more
advanced German technology. What really irked IKL/HDW was
the accusation that their design was ‘commercial’, yet the late pro-
posals of new technology simply convinced the navy that it had
been offered a commercial design, like an HDW third world cus-
tomer, rather than a design incorporating the advanced technol-
ogy available to the West German navy. Oscar Hughes tartly noted
that AMS’s final offer in November 1986 claimed its design incor-
porated the latest West German navy standards of noise reduction
but, now that AMS feared these did not match the Swedish pro-
posal, Australia was being offered access to previously withheld
German navy standards of noise reduction!21
This outcome emphasised the navy’s preference for its per-
formance objectives over most other criteria, including price. By
offering the MAK weapons discharge system (partly as a cost-
reduction measure), AMS was seen as not understanding what
the navy really wanted. The evaluation report noted the ‘lack of
understanding of the requirements and a preoccupation with an
essentially commercial approach caused the inclusion of the unsat-
isfactory handling and discharge system’.22
Contract negotiations continued throughout the early months
of 1987. The head of the Commonwealth negotiating team was
Peter Hider, an aeronautical engineer who had negotiated the
acquisition arrangements for the F/A-18 fighter aircraft, Aus-
tralia’s largest defence purchase before the new submarine. His
instructions were that the contract was to be a fixed price,
performance-based commercial contract rather than the tradi-
tional cost-plus contract with fixed specifications. Hider talked
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extensively to Harry Dalrymple and understood that the contract
was to set out performance requirements, rather than fix spec-
ifications such as displacement and engine power, as had been
the norm. The difficulty was that the consortia were unwilling to
provide firm guarantees for future performance.
The negotiations were further complicated by disagreements
within the consortia. Sometimes agreements would be reached
in the negotiation only to be retracted the next day after veto
by one or other head office. At one stage the ASC consortium
nearly collapsed as CBI demanded a more authoritative role in its
management structure, and the negotiations had to wait for Roger
Sprimont and Geoff Davis to restore sanity.23
A particularly disruptive factor was the issue of insurance.
Ron McLaren, Hider’s deputy for financial management, found
that the insurance issue raised some new questions for Aus-
tralian government procurement. Traditionally, the Common-
wealth had self-insured, that is, covered from its own revenues
the losses involved in any accident. Now, however, there were
concerns not about the actions of Commonwealth employees
but of contractor negligence. The contractor’s design and perfor-
mance obligations were fundamental in the nature of the contract,
so insurance was important because of its relationship to these
obligations.
The best solution was that the contractor should be liable in
the building yard (‘dry risk’) and the navy in the water (‘wet risk’)
but the division of responsibility was not always so clear. The
Commonwealth did not want insurance to relieve the contractor
of its obligations for design and performance, and problems were
compounded by the contractor having to arrange suitable com-
mercial insurance. Agreement on the scope and levels of insurance
was a complex task, especially as the costs escalated to around
$40 million against an allowance of only $5 million.
The contract negotiations were struggling against inadequate
time and the novel nature of the contract itself. McLaren considers
that Hider did 12 months work in six to get a soundly-constructed
contract concluded by the middle of 1987. As it was, when the
final contract was agreed with ASC, with a directed sub-contract
to Rockwell, several issues were unresolved. The document con-
tained $130 million worth of provisional price packages and the
insurance issue remained a source of contention, extended for the
P I C K I N G W I N N E R S 1 9 8 7
113
time being on a month-by-month basis. McLaren considers that
although the contract was thus in a sense incomplete it was not
flawed in concept or design. Peter Hider’s view is that while con-
straints on time became ‘a bit of an anvil against which to forge
agreements’, a greater problems was that: ‘We were dealing with
issues of a kind that had not been confronted before, most notably
(but not only) the insurance issues, and there was no ready source
of expertise or experience to deal with them.’24
Agreement was reached with Kockums on the basic ship’s
characteristics but, whereas Olle Holmdahl and Pelle Stenberg of
Kockums thought these were provisional and to be defined more
closely during detailed design, Greg Stuart and his negotiating
team were later to insist that they stood. For one, Holmdahl and
his Kockums team held that the contract said nothing about the
design’s noise performance above 10 knots.25
Fred Bennett, as the senior departmental off
icer, was acutely
aware of the need to conclude the contract negotiations. The
Opposition was taking a harder line against the project and this
cast doubt on it continuing after the election. Further, the viabil-
ity of the submarine force would be jeopardised by further delay,
and great costs in financial and management resources had already
been spent to bring the selection to the final stage.
Bennett used the German bid to leverage negotiations even
after the clear preference for Kockums had become apparent. Yet
at the end, with German participation no longer credible, there
were still unresolved issues. The night before finalising the con-
tract, procedures for costing changes to the specifications were still
unresolved and the compromise left the Commonwealth exposed
to cost increases over such changes. The next morning Bennett
had a letter on his desk from the Solicitor-General warning that
the proposed resolution with ASC did not adequately protect the
Commonwealth against cost increases from contract changes and
that the contract should be reconsidered.
Bennett felt he had little alternative but to proceed despite that
advice. He regarded the matter as one to be decided by managerial
judgment rather than legal opinion and intended to manage the
risk by tight control of change proposals.26 His options were either
to end the project in its current form or maintain the compromise
with ASC. Although he felt that Hans Ohff was potentially a better
manager of the construction phase than ASC, Bennett no longer
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had the German alternative. He decided that the contract had
to be signed, rather than risk collapse of the project and loss of
submarine capability.27
So Kim Beazley got what he wanted. The award of the contract
to ASC, covering the Kockums submarine and Rockwell com-
bat system, was announced on 18 May and the contracts were
signed in old Parliament House, Canberra, on 3 June 1987. With
a total project cost, incorporating the logistics support measures,
of $3.9 billion, the project just sneaked below the Minister’s price
boundary.
The success of the Swedish bid for the Australian submarine
was so unexpected that it is not surprising there were rumours
that it was achieved through underhand methods, the payment
of ‘commissions’ or even outright bribery. Allegations were whis-
pered that senior Labor ministers and key navy decision-makers
acquired new Saabs, or that the Labor Party was the recipient of
enormous ‘donations’ paid through a Swedish trucking company.
During the research for this book no evidence has been found to
support these rumours. When asked directly, Roger Sprimont said
that:
There is absolutely no way there was any underhand dealing.
The Australian structure is so complex that we would not
know who to bribe. Nothing untoward happened and I do
not think it could be done.
The German design team do not accept that there were legiti-
mate technical grounds for their loss and argue that the decision
was made at a higher level that the Swedish bid should win.
The evaluation was controversial. The transformation of
the German design from clear favourite to failing to meet
many requirements was unexpected and the recalculation of the
designers’ claims caused uproar. Following the decision, J ürgen
Ritterhoff said:
This is an amazing situation. The RAN has ignored tendered
offers from the world’s best submarine designers, and
effectively told the Australian government that the Swede
doesn’t know how good his boat really is, and the German
cannot meet the navy’s requirements. In effect, both designers
are incompetent.28
P I C K I N G W I N N E R S 1 9 8 7
115
Hans Saeger and J ürgen Ritterhoff still think ‘it was hard for
the evaluation to make us a loser’. They believe their offer was
superior on every count, although they concede that: ‘Maybe we
were not flexible enough.’ Yet the Australian submarine opera-
tors and engineers believed they were well qualified to analyse
the German design after two decades of sustaining Oberon opera-
tions. Ritterhoff had read the Australian requirement as an exten-
sion of the Oberon design line and pursued a design philosophy
that avoided too radical a departure from that tradition, so the
Australians readily understood his approach.
To Oscar Hughes and the project team, the greater risk of the
Swedish proposal would be partially managed by designing it to
Swedish naval standards, which the Australians considered to be
‘fully professional’. Hughes was confident that the project could
manage the risk and that the more innovative Swedish design
would produce a more effective submarine for the 1990s and
beyond than would the German design ‘in which I had very little
confidence’.29
Hans Ohff believes that the Germans were too conservative
with their design and since the Swedes were agreeing to give
Australia everything it asked for the Germans should have
responded. The late 1980s was an era of risk-taking and he could
sense that the Australians were prepared to take a risk with their
submarine design in an effort to get the best – though he is certain
that they were not aware what an enormous risk the Swedish boat
really was. But Ohff says that message never got through to the
German designers, who remained with their strategy of satisfying
the base requirement and winning on price.
For Kockums, the Australian deal represented the possible sal-
vation of the company, while for HDW it was only one of many
export projects they were pursuing. Consequently the key people
at HDW did not concentrate on Australia and there was a con-
tinuously changing mood on HDW’s board. In contrast, Roger
Sprimont ‘made it his heart project’, and the Swedish marketing
was brilliant.
John Bannon, who was Premier of South Australia and presi-
dent of the Labor Party, always believed the Swedes would win.
He points to the enthusiasm for Swedish industrial methods in
the Labor movement in the 1970s and early 1980s.30 Although
some high-profile Labor leaders such as Paul Keating and Lionel
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Bowen supported the German bid, they were in a minority and the
general feeling in the Labor movement was very much in favour
of the Swedes.
Complementing the enthusiasm for Sweden in the Labor move-
ment, many in the submarine community came to support the
Kockums design. The Australian submariners, flushed with the
success of the Oberons’ weapons update and the glamour of their
operations in distant waters, were determined to have the most
advanced submarine they could persuade the government to buy.
They were not looking for a conservative, risk-free
design, but
something at the leading edge of technology – not a production-
line Volkswagen but a custom-made Ferrari. All these factors pro-
vided strong if subtle pressure in favour of the Swedish design.
P A R T 2
T H E H O N E Y M O O N
Y E A R S 1 9 8 7 – 9 2
C H A P T E R 11
‘Keen as mustard to do a good job’:
setting to work 1987–89
The contract between the Commonwealth and the Australian Sub-
marine Corporation was signed on 3 June 1987. Several days later
two members of the ASC team, Graeme Ching and Ross Milton,
were at Sydney airport and Milton remembers his companion say-
ing to him while watching the throng of business people: ‘I don’t
know what any of them are doing, but I know it’s not a patch on
what we’ve just done – sign a contract for $2.9 billion.’
Intense negotiations had continued until the night before the
contract was signed, and the ASC team were all exhausted. As Pelle
Stenberg recalls: ‘Everyone was dead beat – but the real work had
to start.’
Their focus had been entirely on winning the contract. While
the project definition study and the evaluation process had estab-
lished much of the framework for beginning the next phase, few
of those involved appreciated the enormity of the project. To some
extent this is not surprising as it was a project without precedent
in Australia – it was the country’s largest military contract and
it aimed to achieve the highest proportion of Australian indus-
try involvement of any major project, while at the same time
having the most multinational flavour, with the prime contractor
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having joint Swedish, American and Australian ownership and
sub-contractors coming from many countries.
The four shareholders in ASC had greatly differing back-
grounds and corporate cultures and brought diverse skills and
perspectives to the submarine project.
Until 1974 Kockums was primarily a commercial shipbuilder,
but it had been building submarines since 1914 and became the
design authority for Swedish submarines in 1950. During the next
30 years it designed and built five new classes of submarines for
the Swedish navy and had a close relationship with the navy and