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BFCSA: Australia to pay multi-million-dollar penalties to French submarine builders if deal collapses

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Australia to pay multi-million-dollar penalties to French submarine builders if deal collapses

ABC News 15 May 2019

Andrew Greene


Australia will be forced to make multi-million-dollar compensation payments to France if the future submarine program is terminated, according to leaked figures obtained by the ABC.

The "break payments" are outlined in the confidential Strategic Partnering Agreement (SPA) that guides the $50 billion project, which was signed in February by France and Australia's defence ministers.

In 2016, former prime minister Malcolm Turnbull announced Naval Group (then known as DCNS) had beaten rival bids from Germany and Japan to build 12 new submarines for the Royal Australian Navy over the next three decades.

The ABC has now obtained a section of the confidential SPA document, prepared last year, detailing at which point certain "break payments" will be invoked if Australia decides to walk away from the massive contract.

Defence industry expert Andrew Davies said it was standard practice to include financial penalties if a military project was terminated before completion, as well as clauses for damages in the event of non-performance by a company.

"It cost defence around $20 million to extricate itself from the ill-fated Super Seasprite naval helicopter project," Dr Davies said.

According to the future submarine SPA, Naval Group would receive a 90 million euro (about $140 million) break payment if the company completed the basic design, but the Defence Department then decided not to proceed further.

Similarly, a break payment of 250 million euros (about $404 million) would apply if the French delivered a detailed submarine design and Australia then chose to go no further.

In the event Australia accepted its first completed submarine but decided to cancel all future orders, the Commonwealth would have to pay the French company 220 million euros (about $355 million).

The break fee decreases according to the number of completed submarines accepted.

The Department of Defence confirmed the SPA included "provisions to manage termination on a fair and equitable basis, depending on the circumstances leading to termination".

However, a Defence spokesperson told the ABC it would be "inappropriate to discuss the details of commercial arrangements agreed with Naval Group".

Dr Davies said when the time came for a future government to approve the submarine designs, it would need to look carefully at the costs and benefits of proceeding.

"If for whatever reason we decide that we have better things to spend our money on, the costs are small compared to the overall cost of the project, and it could make sense to pay them and walk away," he said.

"Hopefully future decision-makers won't be swayed by the sunk costs of getting to those points."

Last month, Naval Group publicly acknowledged numerous cultural differences and difficulties with Australian Defence officials working on the submarine program.

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