Bubbly blunder: Munitions report reveals bizarre Defence champagne request

Part one of Defence’s Management of Contracts for the Supply of Munitions was undertaken by the Australian National Audit Office (ANAO) and published on 25 June this year.

The audit sought to provide independent assurance to the Parliament on Defence’s establishment of a new 10-year agreement valued at $1.2 billion with Thales for the continued management and operation of the Mulwala and Benalla facilities.

The agreement was intended to provide surety of supply of key munitions and components for the Australian Defence Force and maintain a domestic munitions manufacturing capability.

The audit evaluated Mulwala facility in NSW as the sole remaining manufacturing site of military propellants and high explosives in Australia as well as the nearby munitions facility at Benalla, Victoria, which uses some of the output of the Mulwala facility in its operations.

Both facilities are owned by the Commonwealth and operated by a third party, Australian Munitions, a wholly owned subsidiary of Thales Australia. Thales has managed and operated the facilities since 1999.

However, the audit also found a number of bizarre interactions between Defence and the defence industry company, including a November 2016 email exchange in which a ‘Defence official sought assistance from and provided information to Thales on Defence committee processes and internal Defence thinking and positioning’.

“Defence records indicate that in May 2017, this Defence official also solicited a bottle of champagne from a Thales representative,” according to the audit.

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“In a response on the same day, the Thales representative acknowledged that they had previously offered the gift to the Defence official. The email exchange indicated that the initial offer had been conditional on the Mulwala Redevelopment Project being removed from the Projects of Concern list.

“The initial offer of a gift was not recorded in Defence’s gifts and benefits register. Both email exchanges evidenced unethical conduct. The Defence official subsequently commenced employment with Thales Australia (Australian Munitions) in April 2019.

“The exchange relating to the solicitation of a gift was copied to two other persons, the one-star military officer supervisor of the Defence official and another Thales representative. There is no evidence of the supervisor taking any action following receipt of the email, such as initiating review or disciplinary action.”

In conclusion of the evaluation, the audit found that Defence’s management of probity was not effective and there was evidence of unethical conduct, Defence’s conduct of the sole source procurement for the operation and maintenance of the Mulwala and Benalla facilities beyond June 2020 was partly effective, Defence’s planning for the operation and maintenance of the facilities beyond the expiry of the 2015–20 interim contract was partly effective, and Defence’s conduct of the sole source procurement process to establish the 2020–30 contractual arrangements was partly effective.

Eight recommendations were provided to Defence aimed at improving procurement planning; advice to decision makers; management of probity risks and issues; compliance with record keeping requirements; and traceability of negotiation directions and outcomes.

Defence agreed to the eight recommendations.

The audit follows the implementation of a Guided Weapons and Explosive Ordnance (GWEO) enterprise announced as a key government priority in the 2023 Defence Strategic Review and the domestic manufacture of GWEO and munitions was one of seven Sovereign Defence Industrial Priorities announced by the Australian government in the Defence Industry Development Strategy in April 2024.

Chief of Guided Weapons and Explosive Ordnance Group, Air Marshal Leon Phillips, OAM, speaking about the release of the ANAO Performance Audit into Defence's Management of Contracts for the Supply of Munitions, said the ANAO has identified important governance failures and probity gaps.

“The Australian National Audit Office has completed the first of two performance audits into Defence’s procurement process to establish the Strategic Domestic Munitions Manufacturing contract in the period 2016-2018. The audit also reviewed the precursor arrangements,” AIRMSHL Phillips said.

“Defence takes these findings very seriously and is committed to taking appropriate action to address the findings of this audit. As Chief of Guided Weapons and Explosive Ordnance I commit to addressing these findings and fully support the Secretary and Chief of Defence Force’s response to the audit, as set out in their letter to the Acting Auditor-General of 7 June 2024:

“We accept the findings and the recommendations of the report. The identified issues are not evidence of the standard expected and we commit to their remediation through the continual education and training of staff. This includes an increased focus on the recording of decisions and compliance with Defence’s record keeping policies.

“Over the past eight years, since the activities in the audit occurred, Defence has taken significant steps to improve procurement policy assurance, governance arrangements and effective records management. Defence has also taken measures to strengthen its integrity frameworks including how it works with Defence industry.

“The newly formed Guided Weapons and Explosive Ordnance Group has also adopted these efforts and will continue to support the broader Defence enterprise efforts.”