The Collins Class Submarine Story
Page 28
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
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187
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