The tender that blew up in the army's face
May 6, 2010
A project to source new equipment has been the subject of a Defence investigation, write Linton Besser and Dan Oakes.
Lieutenant Colonel Anthony Heath picked up the telephone and dialled a number in Hallam, 45 minutes south-east of Melbourne. The call was over within minutes, but it would spark a chain reaction, exposing Defence's suspect handling of a multimillion dollar tender, and derailing a decade-long effort to modernise Australia's infantry equipment.
It would be two years before Heath's boss revealed the wreckage to the Senate: ''The probity auditor identified that there were process breaches … and recommended its cancellation,'' Brigadier Bill Horrocks said in February.
Now, a Herald investigation can reveal for the first time that the world's wealthiest defence contractor, BAE Systems, was perceived to have been given favourable treatment on the $23 million tender by officials.
The results are being felt by Australia's frontline service personnel. Just days ago, the Herald has established, several army personnel were sent on pre-deployment training for a stint in Afghanistan without the backpacks they need.
Senator David Johnston, the opposition defence spokesman, said the Defence Materiel Organisation demonstrated an ''unacceptable level of accountability''.
''Whilst many areas within Defence require judicial intervention and investigation, I personally believe this area is at the top of the priority list, because there are just too many smoking guns to ignore,'' he said.
The project which Heath was running was meant to provide a giant leap into the future for troops fighting the Taliban - high-tech packs, webbing and pouches that would replace the ageing kit.
For years soldiers had been complaining through official channels of the repeated failures of their boots and packs, their body armour and their ammunition pouches, but these complaints had often fallen on deaf ears.
So in the early 1990s, a new scheme was developed to rid the Australian Defence Force of second-rate personal gear. It was more than a decade later that the DMO finally put out a tender for a suite of modern equipment which was lightweight, comfortable and suited to the fast, asymmetric wars of the future.
In the competition to win that tender, as many as nine companies were swiftly knocked out of the competition.
But in early June 2008, when Heath dialled that telephone number, he was calling one of these very companies that had already been eliminated, Plat-a-tac. Its chief executive, Ben Doyle-Cox, took the call.
Heath, he would later tell investigators, had asked him whether Plat-a-tac was interested in subcontracting to Defence's preferred tenderer for the project, or even to Defence.
But crucially, the contest was still on foot. There were two front-runners on the tender shortlist - the London-based BAE Systems, and a joint venture of two Australian firms, XTEK and CrossFire.
Assuming that it must have been XTEK and CrossFire which needed assistance, Doyle-Cox called a senior employee at XTEK to possibly line up a deal.
But he was wrong - it was BAE that needed help.
Heath has strongly disputed Doyle-Cox's version of the phone call (though not the fact he placed it). But alarm bells were ringing: no decision was meant to have been made yet about which of the bids was preferred.
Two things became obvious to XTEK and CrossFire. The first was that BAE Systems had already found favour in Heath's eyes because the Australian firms had not needed any help, nor asked Defence for any.
The second was puzzling. BAE Systems, which that year turned over £18.5 billion, must have had trouble meeting the tender requirements. How then could the firm possibly have been the preferred tenderer?
Heath's phone call was made less than two weeks after an extensive trial of the samples provided by both bidders, and three months before he recommended BAE win the contract in his formal report.
XTEK's executives waited for formal confirmation in early September that its bid had been ''set-aside''. Soon after, XTEK's chief executive, David Jarvis, and one of his senior employees revealed to Brigadier Bill Horrocks, who had ultimate oversight of the project, what they knew of the phone call. Horrocks called in Defence's internal investigators, the Inspector General.
BAE has gained a reputation for its ruthlessness. In February this year, it pleaded guilty to charges it had paid £29 million and $US9 million in bribes to the governments of the Czech Republic, Hungary and Saudi Arabia during the 1990s - and that the £135 million it had paid agents through offshore accounts since 2001 had not been subject to proper scrutiny.
The Herald is not suggesting Heath was party to any corrupt arrangement with BAE, but the company's guilty plea to the FBI indictment is an illustration of the tough, competitive environment in which such multimillion-dollar defence contracts are let.
Just two days after the meeting with Horrocks, Jarvis discovered a bundle of documents at his front door - it was the secret report on how the trial of gear provided by the tenderers was conducted.
Horrified, Jarvis delivered the documents to Horrocks the following day and the Defence Security Agency would later attempt, unsuccessfully, to locate the source of the leak.
Jarvis later told the Inspector General's investigators that when he delivered the documents to Horrocks, the DMO official had made an extraordinary comment: ''You want to be careful about the people you associate with,'' Horrocks was alleged to have said, ''like Peter Marshall''. Marshall, the chief executive of CrossFire, was Jarvis's joint venture partner on the $20 million tender at hand.
Marshall was already despised by top brass within the Defence Materiel Organisation. Four years earlier, he had helped expose a major contracting scandal in the same area of the DMO, involving an $8 million open tender for fleece jackets. An Inspector General's report revealed not only that the process had been predetermined by officials, but that one of the officials involved, Laurence Pain, had accepted a job with the winning contractor, Walkabout Leisure Wear, either during the tender evaluation or immediately after the contract was awarded.
Jarvis demanded Horrocks' alleged comment be investigated. Horrocks later denied the allegation to the Inspector General and was exonerated by his findings.
But something very wrong did occur during the tender. In January last year, the Inspector General of Defence recommended a probity auditor be appointed after discovering another, separate breach of protocol which Defence has refused to detail.
The lawyers DLA Phillips Fox, when they handed up their independent audit in May last year, came to the same conclusion - and found damage to the $23 million tender was irreversible. Two weeks ago Horrocks wrote to a Senate committee that ''there had been significant administrative breaches that included not following the planned sequence of events such as assessing value for money before completion of the detailed evaluation and tender documentation shortfalls''.
Heath's telephone call was also highly problematic. He gave an interview to the investigators denying Plat-a-tac's account of what had been said. But the DMO confirmed he had received formal counselling. He is now in a senior role working on the development of a new armoured vehicle.
Without a tape of the phone call, and with conflicting recollections of what was said, the Inspector General and Phillips Fox could not make a finding of actual bias. But officials say their reports did find the call alone demonstrated ''perceived bias'' and urged the government to cancel the entire project.
There are also questions about whether the Senate was kept fully informed. Eight days after DMO got the damning Phillips Fox report, its top brass sat before a routine Senate Estimates hearing and avoided the topic of the botched tender entirely. Asked about the progress of the soldier modernisation project, a senior official, Colin Sharp, said only: ''We have rolled out a number of things.''
Neither he, nor Horrocks, volunteered to the committee that a lynchpin tender was to be cancelled because of the failure of its management and at least two separate breaches of Commonwealth probity rules.
Six weeks later, in July last year, Horrocks wrote to Jarvis to admit, following XTEK's allegations of almost 12 months earlier, the tender had been suspect. ''To protect the integrity of the Commonwealth the process has been cancelled,'' he wrote.
The following day, Defence gazetted a new contract. It was a single-source purchase worth more than $2.7 million from Eagle Industries Inc in the US.
The company had not been a bidder during the tender competition for the new packs and webbing. Now the DMO had picked it directly for 1000 sets of gear - including packs for medical kits, grenades and ammunition - which were eerily similar to the items XTEK and CrossFire, and BAE, had spent millions on developing for the ADF.