Thank you for that kind introduction. I have been asked to speak today on the reform program for defence procurement - which is one of my key responsibilities as the responsible Parliamentary Secretary.
As you are aware the White Paper is due in coming months and will outline the future direction of the Government's strategic policy while also ensuring that this is securely tied to our future capability needs and budgetary position.
Also to be released will be details on the Government's Strategic Reform Program for Defence which takes in the Pappas Review of the defence budget undertaken by McKinsey's.
Obviously the Defence Materiel Organisation will be central to both of these goals and I have been working to ensure that DMO is well positioned to deliver on the intent of these documents. The DMO after all, represents about 45% of the defence budget.
However, today I wanted to focus on the future reform program as it relates directly to the work being undertaken by the DMO in procuring and sustaining capability for the ADF. Largely this involves a discussion of the Mortimer Review. I also wanted to discuss some of the significant reforms that we have already put in place over the previous year to help improve the way we are doing business right now.
The White Paper and Industry
Before I do that I just wanted to make some brief comments about the White Paper and its effects on Industry as I know a lot of you in the audience are interested in this topic.
I’m obviously aware of the concerns expressed by industry of projects delayed due to the White Paper. If this was true it would have the potential to disrupt the investment and workforce planning of defence companies. To investigate this I asked the Australian Industry Group's Defence Council and the Australian Industry Defence Network to provide a list of projects that they believed were delayed due to White Paper considerations.
I combined this information with other publicly available information regarding what projects were due for first and second pass consideration in the financial years 2007-08 and 2008-09. I then asked the DMO to analyse this list to establish if any of these projects have been delayed by White Paper considerations.
I can report that only a small number of projects, three first pass and one second pass decision, have been delayed due to White Paper considerations.
I cannot name the projects for reasons of protecting information contained in the White Paper, but I am satisfied with this analysis. I also believe that these projects all involved quite legitimate consideration of matching capabilities and force structures with Australia’s likely strategic priorities.
This of course does not mean that projects do not suffer delays for other reasons, such as project interdependencies, delays with FMS and technology issues.
At the same time, when industry raises these concerns it is worth considering that in the last budget Defence had to reprogram $1.7 billion because the materiel contracted for could not be delivered.
We should also not lose sight of the high levels of defence materiel we will be procuring over the next decade. Over 80 per cent of the ADF’s war fighting equipment will need to be replaced over the next decade; well in excess of $100 billion worth of materiel acquisition and sustainment will be procured.
A new defence capability plan, emanating from the White Paper, is expected to be released mid-year, and this will articulate the capability to be acquired over the next decade.
It’s also worth highlighting the position Australia has adopted compared to the rest of the world. In a time when most defence budgets, and as a consequence procurement budgets, are under pressure the Rudd Government has given a commitment to increase the defence budget by 3 per cent per annum in real terms out to 2017-18.
Recently the well respected organisation Janes Defence has listed the five golden markets for the international defence industry. That is the five markets where there is the greatest prospect for growth. I was very happy to read that they have listed Australia as the second best ‘golden market’ in the world.
So I don’t think there’ll be a shortage of work for you over the next decade - which is also another reason why I want to ensure we have in place a reform program for defence procurement.
Reforming Defence Procurement
In my role as Parliamentary Secretary I have been charged by the Prime Minister with the responsibility of the development of an ongoing reform program for defence procurement.
The two main objectives of such a reform program are:
1. To deliver better results for the ADF, namely to deliver the ADF the capability it needs when it needs it; and
2. To deliver greater value for money for Australian taxpayers in this area
From the beginning of my time in this portfolio I quickly formed the view that any reform program in this area needs to align with four general principles if we are to achieve better results for the ADF and the taxpayer.
-- The importance of independent and accountable advice to Government on cost, risk, schedule and acquisition strategy for major projects - that is, advice concerning the commercial and industrial aspects of a procurement independent of the capability advice;
-- The need for greater transparency and accountability throughout the defence procurement process;
-- The need for the DMO to become more business-like. One of the reasons for this is that the DMO is easily one of the most significant contracting organisations in the country and it must function in a manner more consistent with modern financial and commercial disciplines; and
-- The importance of the maintenance of the close relationship between Defence and the DMO in both procurement and sustainment activities so that ADF operational and capability requirements inform the DMO’s work.
The Mortimer Review
Central to the development of this program of reforms has been the Review of Defence Procurement and Sustainment that was conducted by Mr David Mortimer AO last year - titled ‘Going to the Next Level’.
The review was designed to develop a comprehensive program of reforms that built on the strengths of the Kinnaird reforms.
You are due to hear from Mr Mortimer today and I would encourage you to listen carefully to his presentation. I am very grateful for the work that Mr Mortimer undertook for the Government.
The Government's response to the review has been drafted and is now under the consideration of the Minister and his Cabinet colleagues.
Many of you would be aware that some of the recommendations were quite contentious within the Defence Organisation. I took the view after the release of Mr Mortimer's report, and on the basis of my own experience, that deeper and longer lasting change would be achieved by working through the Mortimer recommendations with the defence leadership, and in particular the CDF.
We had a series of roundtable negotiations based upon the principles I outlined a moment ago, which achieved significant consensus.
Once Cabinet has finalised its consideration, the Government's response will be released publicly. We intend to do this prior to the release of the White Paper sometime in late March or April.
The response will deliver a broad ranging program of reform targeted at all parts of the defence procurement process.
In pursuit of the objective to make the DMO run more like a business the reforms will involve the creation of a new Commercial Director, at the three star level within the DMO.
The head of DMO, Dr Gumley, has been requested by the Government to begin the search to fill this position. It is expected that the person will have significant private sector experience and the ability to understand the commercial issues that are associated with the domestic and international defence industry and markets.
The Commercial Director will be responsible for driving commercial change throughout the DMO. It will be his or her job to ensure that commercial factors and issues are considered throughout the whole defence procurement process and that a far greater level of discipline is applied to our procurement and sustainment activities.
I am keen to see the DMO develop the capacity to play a greater role in cost estimation, risk analysis and acquisition strategy. The Commercial Director will have important responsibilities in this regard, and will also serve as a liaison with industry.
The creation of this new role will greatly assist Dr Gumley in his management of what will be a very significant and challenging program of reforms.
Unfortunately, I am not able to share with you today any more on the specifics of the Government's response. However I believe you will share my view that it will be a solid set of reforms building on the Kinnaird review .
Given the long term nature of the implementation of some of the recommendations the Government will also outline a number of mechanisms which will allow for a full and public accounting of the progress of implementation.
I believe that as a result of the changes we will begin to see improvements in the way we deliver capability to the ADF and also on the return to taxpayers for their considerable investment.
Remediating Problem Projects
While the Mortimer Review has been the centrepiece of our reform efforts, and has received the consequent attention, it is not the only work we have done in this area.
I want to discuss two other major reforms that were implemented last year to the way the DMO conducts its business.
The first is the establishment of the Projects of Concern Unit within DMO.
Upon coming to Government it became apparent that while the vast majority of acquisition projects were performing well, there were a number of projects that were suffering from delays and/or budgetary pressures which were directly impacting upon the delivery of capability to the ADF.
To help alleviate these problems I set up a dedicated unit within the DMO to report to me regular on the progress of remediation.
The unit has been tasked with providing assistance and advice to the projects to help them get back on track, while also drawing detailed information from each project and providing it to Government on a monthly basis. This has allowed the Government to become more active in the management of these projects and has informed its decision making when it comes to how we should handle these projects.
To give you a further sense of the work being undertaken by the Unit I want to outline some of the various projects that it has worked on.
The first is the Seasprite Helicopter. Upon examination of this project from both a technical and commercial point of view it became quickly obvious that the problems underlying the project would not be overcome in a satisfactory way for Defence. This information allowed the Government to make the decision to cancel the project last year.
The Unit was also able to identify technical and commercial issues within Project JP129, a project to procure tactical unmanned aerial vehicles. These issues would have resulted in a lengthy delay in the delivery of that capability, a capability that could be well utilised in theatres such as Afghanistan.
Therefore in September last year the Government announced the cancellation of the contract at no cost to the Commonwealth. We are now well advanced in exploring other possible UAV systems that we can purchase and deploy as soon as possible.
Again early identification of technical and commercial issues associated with the procurement of medium to heavyweight trucks under Project Land 121 Ph 3 were identified by the unit. These problems would have resulted in the potential supply of trucks well over budget and schedule, and potentially lacking the capability needed.
The information gathered allowed the Government last year to announce the refresh of that tender before contract signature. The project is now developing a new way forward that will see a much better tender design that will deliver better results for the Army.
However, being placed on the projects of concern list does not necessarily mean automatic cancellation of the project or contract.
Indeed there have been a number of projects in which progress with longstanding issues has been made.
For example, last year I was pleased to see the contractual acceptance of the Adelaide Class Frigates, HMAS ships Sydney, Darwin and Melbourne after protracted problems. The Unit was heavily involved in managing this project and working with all parties to reach this significant milestone. We are now a big step closer to being able to deploy one of these frigates to the Gulf perhaps later this year.
Other success stories have included turn arounds in the procurement of the ARH Tiger Reconnaissance Helicopters and the upgrade of the M113 Armoured Personnel Carriers.
On the Tiger helicopters a deed was able to be signed last year which helped sort out a number of commercial issues that were delaying the project. With the M113s significant technical challenges have now been overcome and the project is back on track.
Just last month I was pleased to announce that some progress had been made on Project Air 5333 ‘Vigilare’ which will replace the ground based Air Defence Command & Control systems for the RAAF and will form a key component in the RAAF’s future Network Centric Warfare (NCW) capability.
This project has experienced a number of commercial and technical issues which has led to significant delays. However, we have now been able to work through a resolution of these issues and a deed has now been signed by the parties which will help move the project forward.
Another project that has experienced significant delay has been the ANZAC Anti-Ship Missile Defence (ASMD) Project. The ASMD project involves a comprehensive upgrade of the ANZAC Frigates including the addition of new phased array radar technology designed by local Australian company CEA Technologies.
This is an exciting project involving some of the world's best radar technologies, however it has also experienced some delays and budget pressures. I was pleased to announce last year that the project has now been able to successfully demonstrate CEA Technologies’ CEAFAR active phased array multi-function radar on HMAS Perth at sea.
This is a significant milestone and forms part of the Commonwealth's new risk mitigation strategy that aims to see the technology fully demonstrated before it is deployed to all of the frigates.
Finally I have also been monitoring the progress of the procurement of six airborne early warning and control aircraft, or as they will be known Wedgetail aircraft. This project has experienced some well publicised issues.
However, it is a vital capability for the ADF and we need it to succeed. In November last year there was a summit held in Canberra where we discussed how we are going to move things forward.
Following those discussions, Boeing and the Commonwealth agreed to enter into a modified test and evaluation program for the Wedgetail Aircraft, to be completed by the middle of this year. This program will determine if the aircraft system meets the specifications and how well it will perform operationally.
Simultaneously, Defence is also conducting an independent assessment of performance, supported by the Defence Science and Technology Organisation and the Massachusetts Institute of Technology (Lincoln Labs). This testing will determine the extent of any performance shortfalls based on flight test data, and options for rectifying any such shortfalls.
Subject to a successful outcome to the modified test and evaluation program, Boeing is planning to deliver an initial capability that is able to undertake training tasks and national peacetime roles by November 2009 and then progress to delivering a full capability in March 2010. That is the goal, and the Government wants to see it achieved.
I also wanted to take today as an opportunity to correct some of the media reporting on this project. I can confirm today that Boeing has not sought - or the Commonwealth agreed to - any change in the contract's terms in advance of the operational evaluation program and independent review.
While any comment on the outcomes of that test and evaluation program is premature I can say that all parties involved are highly committed to delivering a world class capability to the RAAF.
Due to the success of the Projects of Concern Unit I can announce today that I have asked Dr Gumley to ensure that the relevant institutional policies and procedures are put in place to make it a permanent fixture within the DMO, now, and into the future.
Increasing Transparency and Accountability
To conclude I just wanted to highlight some of the work that has been done to increase the transparency and accountability of the defence procurement process - another key objective in our reform program.
At the last election Labor committed to undertake independently validated reports on DMO's Top 30 projects. To help achieve this I announced in April last year that a pilot report would be completed by the Australian National Audit Office (ANAO) which would cover nine projects. This report titled the 'Defence Materiel Organisation Major Projects Report 2007-08' was completed and tabled in Parliament in November last year.
It covered nine of the major projects currently being undertaken by the DMO which included the:
-- Airborne Early Warning and Control Aircraft - the Wedgetail;
-- C-17 Globemaster III Heavy Airlifter;
-- Armed Reconnaissance Helicopter - the Tiger;
-- F/A Hornet Upgrade Program Phase 2;
-- Guided Missile Frigate Upgrade;
-- High Frequency Modernisation;
-- Collins Combat Replacement System;
-- Armidale Class Patrol Boat, and the
-- Bushranger Protected Mobility Vehicle - The Bushmaster.
These reports contain a full history and audit of the project's performance and explain all variations in cost and schedule for the project. This is by far the greatest amount of public information on each project that has ever been available.
We will continue to publish these reports on a annual basis and the next report will grow to 15 projects as we continue to expand to our eventual target of 30.
Another important aspect of increased transparency and accountability is improved feedback processes.
Therefore, we have been committed to reforming and improving the operation of the DMO Scorecard system, whereby every company with a contract above a certain threshold receives a scorecard of their performance on their specific contracts with the DMO. This has been running for some time now and gives companies important feedback on how its’ customer believes it is performing.
We have recently added to this by comparing a company’s performance, as assessed by the Scorecard, to other suppliers in that domain. This analysis allows companies to assess their performance against their direct competitors on a range of metrics, including cost, schedule delivery and technical performance.
A couple of companies have already told me that after receiving their Scorecards they went in and sat down with the DMO and went through the benchmarking in considerable detail – leading to improved contractor performance.
The benchmarking of the DMO is as important as the benchmarking of companies. I’m under no illusion that all the problems we confront in acquisition and sustainment lie at the feet of industry. That is why I’m very happy to continue the 360 Degree Scorecard performance whereby industry rates the Defence Materiel Organisation. This feedback is very useful for both the DMO and Government in assessing the performance of the DMO and individual divisions.
In conclusion can I emphasise that the main immediate objective for the Government in defence procurement is to get cracking on the implementation of the Mortimer reforms.
While there are many aspects of defence procurement that are working well there is still room for significant improvement and we are determined to deliver on that for the ADF and taxpayers.
I also wanted to note that my remarks today have been focused on the topic I was given, namely the reform of defence procurement. I intend to give another public address in the coming weeks on my work regarding industry policy and also offer some of my thoughts on the impact of the global financial crisis on the industry. (ends)
Click here for a related speech on “Australia’s Defence Policy” by The Hon. Warren Snowdon MP, Minister for Defence Science and Personnel.