The Collins Class Submarine Story

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The Collins Class Submarine Story Page 28

by Peter Yule


  held within the navy. They argue that for a fixed price contract

  with a high degree of risk, dividends should have been paid only

  after the submarines were at sea, because: ‘As it was when they

  found things didn’t work like they should there was no money left

  to fix them and this led to bitterness toward Kockums and ASC.’5

  Most former executives of ASC and its shareholders agree

  that the contract provided for ample early payments, with over

  75 per cent of total payments received before the launch of the

  first submarine. Geoff Davis saw the contract as generous, with

  ASC making good profits and paying substantial dividends to its

  shareholders. About six months after winning the contract, Davis,

  as chairman of ASC, recommended to the board that $4 million be

  distributed to the shareholders – ‘we were not there to play games

  but had to maintain the financial performance of our businesses’.

  P är Bunke agrees that hindsight suggests ASC should have kept

  more money in reserve, but points out that the company had no

  further contracts and there was a strong feeling there was no pur-

  pose in retaining money in the company. He emphasises that until

  1993 ASC believed it was covered by its insurance policy for

  faulty design and workmanship, so there was no need to keep

  large amounts of money in reserve.

  For Kockums the Australian submarine project restored finan-

  cial health to a struggling company, so much so that 1990 was the

  most profitable year in the company’s 140-year history.6 How-

  ever, Kockums was not able to invest these profits into its subma-

  rine business, as most of the money was funnelled into the parent

  company, Celsius, which used it to buy moribund Swedish defence

  companies.

  Oscar Hughes was criticised in the Auditor-General’s report

  for paying ASC too much before the program was sufficiently

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  advanced, and he agrees that ASC probably paid dividends that

  were too high in relation to the risks taken to that stage. How-

  ever, he thinks the audit report showed little understanding of

  commercial realities:

  It is important to get back to basics. Any purchase of any

  item (that is not paid for in full up front) needs a deposit

  covering the whole order. In the end you pay one way or

  another for the product you get. . . . it is not unreasonable to

  take into account that ASC will be placing orders for

  materials for six submarines – there was a huge upfront cost

  to get hundreds of companies around the world to start

  producing things for the project. On the basis of the size of

  the contract, it was not unreasonable to make large early

  payments to get the thing going, otherwise the contractor

  would have had to borrow working capital and the interest

  on this would have been an extra cost to the purchaser.

  . . . If the contractor is not to receive any profits until the

  end of the project, this will be reflected in the price of the

  submarines. If after the first two or three years you’ve spent

  70 per cent of your money and yet you do not get paid for

  many years till final delivery, the profit margin would be

  much less and the pricing of the project would differ greatly.

  The contractor would have charged more if profits had been

  delayed . . . it would have been an illusion to keep money

  from ASC.

  In May 1987 ASC had signed a contract setting down the

  price for delivering six submarines and a schedule for payments.

  If the Commonwealth had insisted on later or lower payments,

  ASC would probably have walked away from the negotiations.

  The consortium partners realised it was a high-risk development

  project and, given that the Commonwealth insisted on a fixed

  price contract with only a small contingency, it is hard to see that

  they would have accepted lower payments for the critical early

  phase of setting up the project.

  Oscar Hughes points out that ASC retained substantial cash

  reserves in spite of its shareholder dividends. This actually led

  to one of the first instances of bad publicity for the project, when

  ASC used some of its cash reserves to buy a Boeing 747 which was

  leased to Qantas. This was presented in the press as an example

  ‘ O N T I M E A N D O N B U D G E T ’

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  of waste and extravagance, although it was a safe, high return

  investment for reserved capital.7

  There were two further aspects ignored by the company’s crit-

  ics. Firstly, ASC had a lengthy dispute with the Australian Taxa-

  tion Office, with the tax office insisting that the profits must be

  distributed or incur heavy tax. Secondly, at all stages the Com-

  monwealth government through AIDC was a major shareholder

  in ASC and at no stage did it oppose the payment of dividends –

  on the contrary it appears that AIDC always voted in favour of

  them.8

  P är Bunke believes ASC’s early profits were due as much to

  luck as to good management, as the Australian dollar appreciated

  at a time of high interest rates in the late 1980s and early 1990s.

  At the start of the project the objective of doing 70 per cent of the

  work in Australia seemed difficult but the revaluation meant that

  the 70 per cent of payments made in Australian dollars were worth

  much more than had been anticipated at the start of the project.

  This made it much easier for the project to achieve the required

  Australian content. Conversely, payments in foreign currency were

  far less than had been anticipated.

  The Australian government had agreed that ASC and its sub-

  contractors could keep the interest on advance payments and the

  high interest rates of the era made this a useful source of income,

  particularly as the rise in the dollar meant that there was substan-

  tially more spare cash than had been anticipated.

  P är Bunke says that the project was always financially strong

  and the Commonwealth’s expenditure on the submarines, after

  allowing for inflation, was well within the original parameters as

  the launch of the first submarine approached. It is so rare for the

  projected cost of a defence project to bear any resemblance to the

  final cost that it seems extraordinary that this was not commented

  on at the time. The only explanation would appear to be an inabil-

  ity to understand the impact of inflation. Thus, at June 1986 prices

  the cost of the project was to be $3.892 billion; by December 1993

  the estimated cost was $4.989 million – an increase of about 28 per

  cent, which was less than the rate of inflation over that period.9

  After six years the project was on budget. Was it also on sched-

  ule? In Kim Beazley’s press release announcing that ASC had been

  awarded the new submarine contract, the proposed schedule had

  the first submarine being launched in 1994, with the remaining

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  five submarines follo
wing over the next five years, to see the final

  submarine in the water in 1999. Fairly early on in the project

  this was revised to have the first launch in 1993 and, after several

  minor revisions, the launch was set for 23 August 1993.

  The project’s quarterly reports in the early 1990s have a strong

  focus on the schedule. Thus, in June 1990 it was reported that

  the project was ‘generally on cost and schedule’ but there were

  some ‘pressure points’, notably Kockums’ design and fabrication

  activity was behind, ASC’s procurement activity was behind, and

  the insurance for the last five submarines had not been agreed.

  Nonetheless it was believed that these would not delay the launch

  of the first submarine. By September 1990 Collins was 38 per

  cent completed, which implied a ‘seven month slippage against the

  original plan and three months against the current plan’. However,

  after this time the ‘slippage’ gradually reduced as ASC put more

  resources into Collins, although this had consequences for the later

  submarines. In March 1992 ‘significant pressures’ still remained

  on the production schedule for Collins, but the launch had been

  set for 23 August 1993, which happened to be Don Williams’

  birthday. Coincidence or not, it is widely believed that the launch

  was rushed to make sure it happened on this anniversary.

  P är Bunke recalls that ASC had graphs on the production of

  each submarine, showing how it was going against the schedule

  and the work that still needed to be done. By 1992 the graph for

  the first submarine was nearly vertical, showing that it could not

  be ready on time, and because of the delays in the first submarine

  the graphs were growing steeper for the later boats.

  In hindsight, most involved with the project think that the

  schedule was always over-ambitious for a massive development

  project. Ross Milton points out that the sheer complexity of

  the project, with about half a million often unique items to be

  designed, procured and installed in each submarine, meant that

  any delay in any part of the production process had a ripple effect

  on the whole project.

  Despite the pressures Don Williams and Oscar Hughes insisted

  that Collins must be launched as scheduled – the band was booked,

  the caterers had their orders and the Prime Minister was rehearsing

  his speech.

  But more seriously, Hughes saw maintaining the schedule as

  critical for the success of the project. He believed that: ‘Once you

  ‘ O N T I M E A N D O N B U D G E T ’

  189

  take your eyes off the schedule you never get back in control –

  launching the boat and keeping to the time scale helped to focus

  people’s minds. Once you let an eel go, you can never grasp it

  again!’10

  While attention in the early years was focused almost entirely

  on the progress of Collins, construction of all the other submarines had begun according to schedule. However, as the schedule for

  the launch of Collins became tighter, work on the other sub-

  marines suffered. As early as the spring of 1991, section 100 of

  Farncomb was sent to Newcastle for completion to free up space

  and resources at ASC, and over the next few years the attention

  of ASC and the project office was far more on Collins than on the

  later submarines.

  On 23 August 1993 a crowd of 4500 saw the launch of HMAS

  Collins. Several dignitaries spoke, but the only words anyone

  recalls are those of Don Williams: ‘We’ve launched on time and

  on budget, so put that in your pipe and smoke it.’

  P A R T 3

  ‘ A S T R A N G E S E N S E

  O F U N E A S E ’ 1 9 9 3 – 9 8

  C H A P T E R 17

  End of the honeymoon

  The launch of Collins was an impressive ceremony and the many

  attending dignitaries all appeared suitably awestruck by its size

  and complexity. But all was not what it seemed. The focus at ASC

  and the project office was on meeting the launch date, but the

  design was not completed, pipe fabrication in key areas was not

  finished, and some of the ‘steel plates’ were just timber painted

  black. The photographs looked good, but the submarine was far

  from ready for launching.1

  Two weeks after the launch, Collins was lifted out of the water

  for more than 10 months while construction work carried on. By

  June 1994 the work was almost completed but the submarine was

  now well behind schedule. The project office’s quarterly report

  explained that:

  A number of factors have contributed to the schedule

  slippage including late completion of submarine design and

  the consequent less than optimum level of completion of

  Collins at launch, delays in the delivery of combat system

  software, difficulties in the final installation and setting to

  work . . . and industrial disputes.

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  While Collins sat somewhat forlornly on the hard stand at

  ASC, it seemed that the activity in the boardroom was more fre-

  netic than in the shipyard. By the time Collins returned to the

  water there had been great changes in the leadership of both ASC

  and the project office.2

  The period from the signing of the contract to the launch

  of Collins was ‘the Don and Oscar show’, being dominated by

  the personalities of Don Williams and Oscar Hughes. Hughes

  reached retirement age in 1992, but his appointment was extended

  for another year until the launch. Hughes intimated that he

  would like to stay until Collins entered service, but he thinks

  there was a fear that he was becoming something of an Admi-

  ral Rickover, ‘who just stays on and on’, so there were no further

  extensions.3

  The new project director was Commodore Geoff Rose, an

  experienced submarine engineer. In early 1986, as a newly pro-

  moted captain and director of submarine maintenance and repair,

  he was just settling into the job when he was posted to the new

  submarine project to take over from Graham White as project

  manager. He ‘really didn’t wish to be part of it’, but orders are

  orders and in June 1986 Geoff Rose found himself at the project

  headquarters in Fyshwick. He was project manager for five years,

  then had a year in North America before being promoted to com-

  modore and posted back to the submarine project.

  Straightforward and determined, Rose did not have the politi-

  cal skills or subtlety of his predecessor. This was compounded by

  the reduced power of the project director, symbolised by the down-

  grading from a two-star to one-star position. Whereas Hughes

  had great political clout and knowledge of the system, Rose did

  not have access to the same people and was more reliant on oth-

  ers in the navy hierarchy whose primary interest may not always

  have been the success of the submarine project. Andy Millar, the

  project’s long-serving executive officer, summarised the change:

  ‘Geoff Rose’s pro
blem was that he was too nice – this was not

  something that had concerned Oscar Hughes.’

  Before Geoff Rose had settled into his new job, the other half

  of the ‘Don and Oscar show’ abruptly left the project. For several

  years Don Williams’ relations with Kockums had been deteriorat-

  ing, primarily because the Swedes felt that he ignored the interests

  of shareholders and was placing the company at risk by not hold-

  ing Rockwell to account for failure to deliver the combat system.

  E N D O F T H E H O N E Y M O O N

  195

  In 1993 he also lost the support of AIDC, which was becoming

  more involved in its investment in ASC under the influence of Peter

  Horobin, who was very active in plans for AIDC to promote ASC

  as a major force in Australia’s defence industries.

  Doug Callow of ASC recalls the circumstances of Don

  Williams’ departure:

  The day before he got the push I was with him and we’d gone

  up to Canberra . . . Don was at war with the Swedes [over

  the issue of defaulting Rockwell] and the chairman was a

  Swede . . . This is October 1993 now and I was actually

  asking Don whether he was pushing it too hard and there

  was a danger they’d turf him out. He recognised that but he

  was such a confident sort of guy I think he thought he could

  walk on water – or he knew he’d get a pay-off so it didn’t

  matter anyway. Either way he felt completely immune. We

  were up in Canberra for a meeting and just as we were going

  into the lift he got a phone call. It was the chairman and he

  was gone quite a long time and when he came back I asked

  him, ‘What’s happened? Have they given you the bullet?’

  And he said, ‘No, no, I’ve sweet-talked him.’ I came into

  work the next day and he wasn’t here. And I came in on

  Monday and he’d gone. It was that swift.4

  Geoff Rose was not consulted. He phoned ASC and asked

  to speak to Don Williams, only to be told that he had left the

  company.

  Williams was temporarily replaced by Chris Skilton, a mer-

  chant banker with AIDC, while the company conducted a search

  for a new managing director. The search ended in Vietnam, where

  Hans Ohff was working when the head-hunters called him. After

  the failure of Eglo Engineering’s bid for the submarine contract in

  1987, Ohff had been involved in the bidding for the Anzac frigate

 

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