AUSTRALIA'S biggest defence project is now in crisis, with the $8 billion construction of three Air Warfare Destroyers rocked by budget blowouts of almost $10 million a month amid fears it could eventually require a $1bn federal government bailout.
In a new blow to the nation's beleaguered manufacturing sector, an Australian National Audit Office report will today reveal that the AWD project was $106m over its $618m budget for 2012-13 - a wastage of more than $2m a week due to poor productivity in inefficient shipyards and excess costs for labour and materials.
It will show that $4.5bn - more than half - of the AWD project's $8bn budget has been spent even before the first of the three warships has been completed, and that budget overruns are eating deeply into the emergency reserve funds for the project.
There is growing alarm inside the Coalition that the former Labor government has bequeathed it a deeply flawed project that could eventually rival the troubled Collins Class submarine saga and force the government into a massive taxpayer-funded rescue package.
Industry sources believe the government may eventually be forced to inject up to $1bn to pay for the three ships.
The project, which aims to construct the most potent warships in the navy's history, is vital to the future of naval shipbuilding in Australia and any failure would raise serious doubts about Australia's capacity to build the planned 12 new submarines at a cost of up to $40bn. The AWD project has already been delayed by two years because of shipbuilding bungles, infighting between partners, Defence budget cuts and a cultural clash with the ship's Spanish designer, Navantia.
Today's ANAO report will go further, citing the urgent need for more efficient shipyard management by the ASC in Adelaide, a better understanding of the Spanish design drawings that have confounded local workers and a coherent plan to support the ships beyond the construction phase.
Unless the problems are quickly addressed, it is likely that the delivery schedule of the warships will once again be delayed beyond the current revised plan to deliver the first ship in March 2016 and the final ship in March 2019.
The critical nature of the ANAO report will intensify pressure on the government to conduct an independent review of the project. Defence is pushing for the review but the Department of Finance is blocking the move amid speculation that it is reluctant to approve a forensic examination of the failings within the government-owned shipbuilder ASC. The body responsible for the AWD project is the unwieldy and largely unaccountable AWD Alliance comprising ASC, the Defence Materiel Organisation and Ratheon Australia.
This alliance is fractured by internal disputes, with DMO privately blaming ASC for the AWD's problems, while ASC blames the Spanish designer Navantia and also has a poisonous relationship with its own AWD subcontractor and shipbuilding rival BAE Systems in Melbourne's Williamstown naval shipyard.
The secretive AWD Alliance has never publicly acknowledged the serious problems it faces and it still maintains it is on budget because its emergency contingency funds have not yet been exhausted.
The AWD project has been rescheduled twice since 2010, when The Australian revealed that faulty welding had botched the keel block for the first ship. In September last year the Gillard Labor government delayed the project by another year, on top of a previous 15-month delay, because of Labor's heavy cuts to the Defence budget and critical shortages of skills and manpower.
The construction of the AWDs involved 90 separate steel blocks being built at four shipyards: ASC in Adelaide, Forgacs in Newcastle, BAE in Melbourne and Navantia in Spain. But inexperience in naval shipbuilding in Australia after a decade between major projects has resulted in ASC performing poorly as shipbuilding manager, while Forgacs has struggled to cope with its workload.
ASC is critical of Navantia for providing Spanish design drawings for the destroyer that are not clear enough for Australian shipyard workers to follow.
The three ships will carry US-designed missile Defence systems and will give the navy the ability to escort troop convoys and destroy aircraft more than 150km away.
