Defence funding in the 2005/2006 Federal Budget and its impact on defence industry and future Defence capability projects
(Source: Australian Department of Defence; issued May 16, 2005)
Speech by Defense Minister Robert Hill at the Defence Watch Seminar
National Press Club
Canberra, Australia, May 16


Distinguished guests, ladies and gentlemen

Noting the nature of my audience, I will focus today on the capital acquisition side of the Defence Budget. However, in opening, I should make a few comments about the broader picture.

A previous ASPI Budget Brief was subtitled "the sinews of war". I think this is an appropriate phrase to use when considering the Defence Budget and its purpose. There is no doubt that Defence is an expensive business. Total resourcing available to the Department in 2005-6 will be $17.5 billion dollars and with many other calls on the Commonwealth’s revenues, we must continually ensure that we are spending this money wisely.

Nevertheless, in the present uncertain strategic environment, this Government is taking very seriously its responsibility to adequately fund Defence. This Budget once again more than meets our White Paper commitment to 3% real annual growth in Defence resourcing out to the end of the decade. The White Paper commitment now totals $28.9 billion over 13 years commencing in 2001-2, and represents the most specific long term funding commitment for Defence for more than 25 years. To date, this Government has provided $4.0 billion of these White Paper funds, and the 2005-6 Budget allocates a further $2.3 billion.

However, in all the many acres of newsprint devoted to last week’s Federal Budget, the general theme for Defence seemed to be "steady as she goes". Whilst it is true that the Treasurer’s $21.7 billion in across the board tax cuts was always going to be the main headline, there was a significant story within the Defence Budget papers that perhaps did not receive the attention it deserved.

I am, of course, referring to the $300 million in capital funding that was returned to the Defence Capability Plan from beyond the Forward Estimates. As you will remember, this funding was reprogrammed in previous Budgets because of an inability to spend it all on acquisition projects. This attracted quite some criticism – just about all of it directed at Defence, with Industry’s inability to keep to schedule going almost completely unnoticed! Others speculated that the money was gone, never to be seen again.

It therefore gives me some satisfaction to stand here today and report to you that significant reforms to the Defence Materiel Organisation have meant that this year, the organisation will spend some $3.1 billion on capital acquisition – 100% of its target. As a result of this increased performance and efficiency, the Government has delivered on its promise to return these additional funds to the Defence Capability Plan in 2005-6. In total, this will give the DMO some $3.85 billion dollars of taxpayer’s money to spend on acquisition next year.

It is sometimes hard to grasp the scope of such large numbers, or to gain a sense of what they mean. It is important to recognise that every dollar DMO spends is aimed at fielding and supporting the equipment that our troops need to do their jobs. It is almost trite to say that we in Government and the support arms of Defence owe it to our forces to deliver them the best equipment that the nation can afford. There is a genuine national imperative for all of us to get this right.

As examples of what these dollars will deliver, in the next financial year we aim to progress projects including:

--The acquisition of long range stand-off Air-to-Surface weapons for the F/A18 and the AP-3C Orion aircraft to improve our strike capability.

--Upgrading the F/A 18’s Electronic Warfare Self-Protection to safeguard the aircraft against emerging threats.

--Acquiring Tactical Unmanned Aerial Vehicles to improve airborne surveillance, reconnaissance and target acquisition for land forces.

--And completing early design work on the new amphibious deployment and sustainment system.

We also intend to progress the ‘long lead time’ items and sub-systems to be incorporated into the Air Warfare Destroyers, such as the AEGIS Integrated Combat System.

Of course, before we move to acquire this equipment, we must specify exactly what it is that we need, and how much it will cost. As the Head of Capability Development Group, Lieutenant General David Hurley is now clearly our single point of accountability for all aspects of capability definition and assessment. Under his stewardship we have seen the capability development process become much more robust, with a significant improvement in the quality of information being presented to government to allow better informed investment decisions.

The Department is focusing on early analysis to provide better information aimed at preventing projects developing problems during acquisition - an issue clearly identified by the Kinnaird Review. This early analysis includes greater attention to the costing of proposals –and this includes not just the cost of acquisition, but the through life running costs as well.

The man with the ultimate responsibility for ensuring that the $3.85 billion dollars I mentioned earlier is spent properly next year is of course Dr Stephen Gumley, the CEO of the DMO. Changes implemented under his leadership have been instrumental in improving the efficiency of DMO to the point where this capital reprogramming was possible. I would like to pay public tribute in this forum to both General Hurley and Dr Gumley for these achievements.

Notwithstanding these early gains, much remains to be done. For the first time this year, the Defence Portfolio Budget Statements included an entirely separate set of accounts for the DMO, as with prescription on 1 July the DMO will be financially autonomous from Defence. The intent of this initiative is to improve further on the quality of DMO services by introducing a more transparent relationship between the two organisations.

To do this DMO and Defence will enter into agreements which will specify the services to be delivered by each to ensure that each organisation is fully accountable for the areas in which they have responsibility and authority. The DMO is developing as an organisation that rivals private-sector best practice in project management.

There are other benefits to prescription of the DMO. The DMO’s performance in delivering acquisition and sustainment services will become more visible to Defence, Government and the public. Dr Gumley has been given more powers to flexibly adjust resources to provide these services more effectively and efficiently.

I would like to extend my gratitude to members of the Defence Procurement Advisory Board. The Board was established by the Government to make available a broad base of experience to provide advice and support to the CEO on strategic issues.

The Board also reports regularly to me through its Chairman, Mr David Mortimer, on implementation of the recommendations of the Kinnaird review. The Board has expressed its view that substantial progress has been made to date and improvements in many aspects of the capability development cycle are leading to better outcomes. Their involvement has been invaluable in ensuring that the Defence Procurement Review has not been just another paperweight on people's office shelves, but a template to guide lasting improvements.

At no time did the Government expect to be able to identify savings from implementing the Defence Procurement Review, but it did expect significant improvement in the information available to it to make informed investment decisions. It did expect DMO to operate in a more business like manner, focussed on its performance and outcomes. I am pleased to be able to say these objectives are being achieved. Some of the benefits will take some time to achieve, but we are well on the way.

Of course, process improvement plans are one thing – but they have to be implemented by people. I have mentioned Dr Gumley and General Hurley - but leaders alone cannot produce these gains. They must be supported by capable managers and hard working staff. One of the key reforms in this area has been the introduction of the "best person for the job" recruitment policy in DMO. Widely advertised vacancies and competitive selection processes have produced what I view as a very capable and well balanced team of executives and project managers. Drawn from a wide variety of military, public service and industry backgrounds, the new DMO executive team is one of the key planks in the reform strategy.

This is also flowing down to lower levels of the organisation. Dr Gumley’s drive to professionalise the DMO and increase skills across the organisation has already raised the number of DMO project staff who are now chartered practicing members of their relevant professional association. And several hundred other DMO staff are currently in the process of upgrading and documenting their skills to qualify for such recognition. Training courses and professional development opportunities are now a routine part of DMO staff progression.

We are of course asking Defence Industry to do its part in this skills drive. In order to manage an ambitious acquisition programme and deliver Defence equipment on time, the quality and quantity of specialist skills available to defence industry needs to increase. In short, we need more engineers, specialist technicians, key trades people and project managers.

As this skills shortage poses a risk to the on-time delivery of ADF capability, the Government has announced that under the Skilling Australia’s Defence Industry initiative it will inject up to 0.5% of the money spent on major capital equipment projects to generate additional skilled positions, improve the skills of existing employees and improve the quality and quantity of skills training in Defence industry. This equates to some $20m per annum, or $200 million over the decade – a not insignificant sum of money.
Proposals have been sought from selected companies in the shipbuilding sector initially as this is an early priority, and these are currently under consideration. Proposals from selected companies covering other sectors where there are critical shortages are also being sought. Subject to satisfactory assessments, I anticipate that spending on the programme will commence in the coming financial year.

The Government has shown the colour of its money in relation to building a skilled workforce. In return I also think it is reasonable to expect defence industry to allocate a higher proportion of profits than it does presently to skills development, infrastructure and self funded research and development. Through such commitment, project risks will be further reduced and Australian defence industry will continue to be globally competitive and very profitable.


The Defence – Industry relationship

I would now like to share with you some observations about the type of co-operative relationship between Defence and Industry that we can build when we turn our minds to it.

Last month I announced that 10 new Bushmaster vehicles were to be deployed to southern Iraq with the Al Muthanna Task Group. This deployment of the vehicles was at the request of Chief of Army, who required additional transport protection for ADF personnel based in the southern province of Iraq. Although an earlier version was trialled in East Timor, this is the first operational deployment for the mature vehicle.

Manufactured from Australian steel and employing ADI's specialist welding processes, the Bushmaster’s monocoque hull provides ballistic protection against most small arms fire and protection against vehicle mine blasts. ADI Limited and the Defence Materiel Organisation have worked hard and consistently over three years to produce a good vehicle that is Australian designed and manufactured and in which Army has great confidence.

The deployment of the Bushmaster vehicles is a further demonstration of the very good working relationship between Industry and Defence. This relationship is based on a principled approach with open communication on all issues, responsiveness to Defence’s needs, and a willingness from both parties ‘to get the job done.’ Without this relationship, ADF personnel on operations in southern Iraq would not have the additional transport protection offered by the state-of-the-art Bushmaster vehicle.

In addition to the Bushmasters, the Al Muthanna Task Group deployed with 40 Australian Light Armoured Vehicles. Defence decided that these vehicles were to have the same enhancements provided to ASLAVs already deployed in Baghdad – including the installation of spall protection, the bar armour system and a remote weapon station.

General Dynamics Land Systems-Australia from their maintenance facility in Adelaide, managed the spall installation and subcontracted the fabrication of the bar armour system to four local engineering workshops. Armatec Australasia provided the spall kits and labour for actual installation, and the GDLS workforce was supplemented with six Army tradesmen and 44 Tenix staff from Bandiana. Kongsberg, the manufacturer of the remote weapon station, provided a fast track delivery of the weapon stations from Norway. The Defence Materiel Organisation closely managed all this work to ensure it met the requirements and the tight time schedule.

This combined effort was a unique and significant event, highlighting the collective determination of Australian industry to support the deployment of Australian soldiers to Iraq. I congratulate all parties involved for their focus and commitment to the aim I outlined earlier – giving our troops the equipment they need to do the job.


Armidale Class Patrol Boats

Another success story for Defence and Industry was the arrival last week of the first of the Armidale Class Patrol Boats in its homeport of Darwin for hand over to Defence tomorrow as contracted.

Delivering this capability within 17 months of signing the contract was no simple task and demonstrates the ability of Australian industry to design and construct and DMO to manage the delivery of this important class of ships for the Navy on time, on budget and with excellent capability.

The Armidale Class patrol boats are at the leading edge of international patrol boat design and construction combining endurance, improved sea keeping and advanced onboard systems.

The contract is with Defence Maritime Services (DMS) who manages the overall contract for the supply of twelve ships, as well as provides for integrated maintenance, logistic and crew-training support to the vessels throughout their operational lives. Austal Ships, subcontracted by DMS, is building the vessels at its Henderson shipyard in Western Australia.


NorthWest Shelf Surveillance

The confidence in the new Armidale class vessels was instrumental in the Government’s decision to progress the Protecting Australia’s North West Shelf election policy, which will acquire an additional two Armidale class boats. As you will have noted in the Budget, the Government has funded the delivery of this policy with $101 million in new money over four years.

The North West Shelf is arguably Australia’s most valuable resource project with some of the largest oil and gas platforms in the world. It produces billions of dollars worth of liquefied natural gas and oil each year.

The recent contract secured by this Government to sell $25 billion worth of liquefied natural gas to China emphasises the growing importance of this resource to Australia’s economy and the need to protect it, particularly in times of global uncertainty.

Allocating dedicated military assets to protect these fields will provide a strong deterrent to would be attackers, and will send a strong signal to major customers that the Australian Government is willing to dedicate significant resources to securing the supply of natural resources from the NorthWest Shelf.


Wedgetail

One final example that I would like to touch on is the Wedgetail Airborne Early Warning and Control Project.

The Government’s decision last year to exercise the option to acquire two additional aircraft included the decision to transfer the Aircraft Modification Line from the United States to Amberley in Queensland with a commensurate increase of $60m in the Australian Industry component.

The first aircraft successfully completed its flight certification program in March of this year. Some of you will have seen the aircraft when it visited various bases in Australia and the Avalon Airshow in March. The second aircraft is on schedule to begin mission testing in June and transition of the Aircraft Modification Line to Australia is well advanced. The modification of the third aircraft will commence on schedule in Brisbane in December this year.

This project is the very model of a successful Defence acquisition. It is a highly complex first-of-type platform, being delivered on time and within budget with significant Australian involvement. The DMO project manager Norm Gray and his team deserve great credit for this performance. I would like to think that upcoming projects like the Air Warfare Destroyer will be able to reproduce this type of success.


Joint Strike Fighter

Of course, while we are delivering projects in the here and now, we are also planning for the future. I can announce today that the Government has approved Australia’s participation in negotiations for the next phase of the US$200 billion Joint Strike Fighter programme. Commencing next week, Defence will lead an Australian Government delegation which will commence discussions on the Production, Sustainment and Follow on Development Memorandum of Understanding.

Whilst there is much work still to be done to fully analyse the JSF capability, DSTO studies and Air Force simulation activities have supported the original conclusion that the JSF will mature to meet Australia’s future air combat force needs. Financial modelling and analysis also supports the view that up to 100 Conventional Take Off and Landing JSF’s can be acquired within the original project budget.

Subject to satisfactory negotiations, a co-operative agreement is expected to be signed in late 2006, and this would form the mechanism under which industry will have the opportunity to bid for work in subsequent phases of the project.


Conclusion

It is easy for a politician to stand up and say that we ask a lot of our Defence Forces and that we owe it to them to resource them properly. It is quite another to deliver on this statement.

However, in this instance, I think I can say with confidence that the Howard Government has made good on its promises. We have delivered real increases in Defence funding. We have introduced efficiency reforms to make sure the money is properly spent. We have provided additional supplementation for the cost of operations where necessary – and we have done all this whilst repaying Labor debt, delivering sustained growth, low inflation, record high employment and responsible surpluses.

Thanks you for your attendance here today and your interest in Defence.

-ends-




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