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Australian Minister Promises Procurement Reform

Address by The Hon. Greg Combet MP
Australian Parliamentary Secretary for Defence Procurement
National Security Dinner, Hyatt Hotel, Canberra ACT

My responsibility as the Parliamentary Secretary for Defence Procurement is two-fold - to help make sure that the ADF obtains the equipment and capability that it needs, and to ensure that this is achieved in a timely and cost-effective manner.

To help organise the work within my portfolio I have developed a work program comprising five key areas.

The first is the intensive management of ‘projects of concern’.

The second area of work is the monitoring of major current projects that have a significant economic and strategic value.

The third is the planning of future major projects.

The fourth area of work involves the development of defence industry policy.

The fifth and final area of my work is the development of an ongoing reform program for the Defence Materiel Organisation (DMO) and the defence procurement process. This is the area which I wish to focus on tonight.

For all of these areas I report directly to the Minister for Defence, Joel Fitzgibbon, who is responsible for these matters in Cabinet.

The need for reform

As I have indicated I wish to focus tonight on my responsibility to develop an ongoing program of reforms for the DMO and the procurement process.

There are a number of reasons why a program of reforms is needed:

-- The scale and importance of defence procurement and sustainment;
-- Strategic and economic trends;
-- Poor performance on some key projects; and the
-- Broader Defence reform program.

The first reason is the sheer scale and importance of the work conducted by the DMO.

The DMO is larger in terms of staff and budget than 10 of the 19 Australian Government departments. It has over 7000 employees and a budget this year of $9.6 billion, equivalent to approximately 44% of the Defence budget, or just under one per cent of Australia’s GDP.

The DMO is currently managing more than 230 projects over the value of $20m, and approximately 180 minor projects. It is also responsible for the sustainment of over 100 fleets within the ADF. In total approximately $100 billion worth of projects and sustainment are currently under management.

It is a significant responsibility which is set to grow over the next ten to fifteen years as the ADF replaces approximately 80 per cent of its war fighting equipment.

Because of the sheer scale of Government expenditure and the vital importance of equipping the ADF it is incumbent upon Government to constantly improve performance in defence procurement and sustainment.

The second reason why it is important for a reform program to be put in place involves the emerging strategic and economic trends.

As economies in our region grow, so too will their expenditure on defence.

We are already seeing this occur. A recent ASPI Report by Dr Andrew Davies noted that military expenditure by some countries in the region over the last decade has increased by a factor of four, while others have more than doubled their spending. The Prime Minister recently highlighted this challenge, drawing attention to the need to bolster our naval capacity.

This economic and military expansion means that Australia must ensure it is getting the very best value from our limited resources so we can maintain our strategic weight. It will also mean that maintaining a technological edge in our military capabilities will become more expensive – again another reason for ensuring greater efficiency.

The current global and domestic economic outlook will also place pressures on our budgetary situation. We currently face an uncertain global economic outlook coupled with the domestic challenges of an ageing population and inflationary pressure. All of this points to the need for greater fiscal discipline – something that the Rudd Government has stated in clear terms with a $22 billion surplus.

I know that the Treasurer and Finance Minister are very interested in seeing more efficient and focused defence expenditure, notwithstanding the Government’s commitment to 3% real growth in the defence budget. They are both taking an interest in my work.
The Defence Minister has also been working hard to restore some discipline to the broader defence budget in order to eliminate waste and inefficiency that grew in this area under the Howard Government. He has announced a budget audit and also ordered the Department to find savings equivalent to $1 billion a year – which will be reinvested in Defence on priority programs.

Given these strategic and economic factors it is clear that we need to ensure that our defence procurement and sustainment budget is spent as efficiently as possible.

The third reason for reform involves the recent performance of some key projects.

The cost, schedule and sustainment performance of the DMO and the procurement process has a very real impact on the ADF’s ability to perform in different operational theatres and to respond to different strategic threats. It is therefore imperative that we achieve the best performance we can in the delivery of military equipment.

The DMO and the Capability Development Group by and large do a great job. But it is not always the case. Already after only ten months in Government the Minister has been forced to take action on some poor performing projects – the most notorious example being the Seasprite helicopter project which was cancelled.

The mismanagement of the Seasprite Helicopter project under the Howard Government resulted in a loss of over $1 billion of taxpayers money for no result. This was money that has not contributed to the ADF’s capability in any way. Not only have we lost this money our naval aviation capability, especially in the area of anti-submarine warfare, has suffered.

The Minister also recently announced the cancellation of the contract for Joint Project 129 – which involved the acquisition of tactical unmanned aerial vehicles (UAVs). What should have been a relatively easy off the shelf acquisition has now resulted in a two year delay in the project. Defence has now been tasked by the Minister to find an off the shelf solution that can be put in theatre as soon as possible.

The Minister has also had to order the refresh of the tender for the medium to heavyweight part of phase 3 of Project Land 121 – a project to acquire trucks for the Army. Again poor performance has now meant a delay in Army receiving a fundamental capability.

Project failures such as these are plainly not acceptable to the Government or the taxpayer. More importantly it is not acceptable for the men and women of the ADF who rely on the delivery of this equipment for their work.

The examination of potential improvements in the system right from the entry of a project into the DCP is therefore warranted.

Fourthly, it is important to develop an ongoing reform program in this area as part of the broader reforms being undertaken within Defence.

The Government has set in place a substantial reform program within Defence which includes at its heart the development of a new White Paper.

The new Defence White Paper, along with the associated Force Structure Review, will provide a clear alignment between strategy, capability and budget to allow disciplined and cost effective choices to be made about major capital investments. The White Paper will also outline a clear description of the future capability that the ADF will be acquiring.

The Minister has also announced this year an audit of the Defence Budget which is being chaired by Mr George Pappas.

It will be very important that the future reform program to be undertaken in the area of defence procurement compliments this broader reform agenda – which can be summarised as ensuring Defence is made more efficient and effective, enabling the ADF to do its job with even greater confidence and capability.

The Mortimer Review

Procurement reform will be essential to this.

To facilitate this on 7 May this year I announced that a Defence Procurement and Sustainment Review would be conducted by Mr David Mortimer AO.

This fulfilled the commitment Labor gave at the last election to undertake a formal evaluation of the effectiveness of ongoing reforms to the DMO.

Mr Mortimer was selected to do this report on the basis of his extensive business experience and the high regard in which he is held by Government. He has been Chair of the Defence Procurement Advisory Board over the last four years. In this role he has overseen the implementation of a number of reforms in this area and had access to information on the current system and its performance. Due to this experience I believe he was very well placed to conduct this work.

Mr Mortimer has now presented his report, which is titled ‘Going to the Next Level’, to the Government. Last week the Minister tabled the report in Parliament and it is now publicly available. I would like to thank Mr Mortimer and his team for all of their work on the report.

The report reaches the conclusion that the recommendations that were implemented following the Kinnaird Review in 2003 have been very successful in improving the system but that more needs to be done.

The report contains 46 recommendations covering five different areas including:

-- the strategy and needs analysis of capability planning;
-- defining the requirements of capability;
-- the capability acquisition process;
-- sustaining and disposing of capability; and
-- driving cultural change in the Defence Materiel Organisation.

In considering the conclusions of the report it was evident to me that there were a number of principles that underpinned the recommendations.

These are extremely important principles that will guide the Government’s consideration of the report:

-- The importance of independent and accountable advice to Government on cost, risk schedule and acquisition strategy for major projects;
-- The need for greater transparency and accountability throughout the defence procurement process;
-- The need for the DMO to become more business-like; 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 informs the DMO’s work.

If properly applied, these principles should lead to better results for the ADF and Australian taxpayers.

I would now like to turn to consideration of some of the key recommendations designed to implement the principles I have outlined.

Firstly, the report recommends a greater involvement of the DMO in the procurement process prior to 2nd pass approval. It recommends that DMO takes greater responsibility for the development of cost, risk and schedule information as well as the acquisition strategy. The Capability Development Group (CDG) rightly would retain its responsibility as the capability experts defining the requirements of the capability to be acquired. The Defence Groups would also play an enhanced role by providing greater cost, risk and schedule information for their input to the capability.

In summary this means that at entry into the Defence Capability Plan (DCP), and at first and second pass, there will be more rigorous and independent cost, risk and schedule information available to the Government. Also those who are responsible for the eventual acquisition of the capability will be responsible for developing the acquisition strategy. This is important due to the escalation in cost estimates that we have seen in the past, especially those between entry into the DCP and 2nd pass approval, around 67 per cent according to ASPI’s analysis.

Mr Mortimer believes that this will lead to a more commercially disciplined process which offers far greater transparency and accountability.

To facilitate this he also recommends the enhancement of skills within both CDG and the DMO to ensure they are properly equipped and resourced to meet this task.

For the DMO he recommends the development of a new 3 star position to handle commercial matters. The individual filling this position would have extensive private sector experience and would be charged with ensuring the application of commercial discipline throughout the procurement process, developing the DMO’s contracting strategies, and driving cultural change.

Mr Mortimer also proposes that it be mandated for the CEO DMO to have extensive private sector experience. Since Dr Stephen Gumley was appointed this has been the case. The Government has been extremely impressed with Dr Gumley’s performance in this role and there is no doubt in my mind that without his commercial experience both the ADF and taxpayer would have been worse off during the time of his term.

Changing the Budget Structure

Mr Mortimer also recommends changing the budget structure of Defence and the DMO. He recommends that acquisition funding for major projects be directly appropriated to the DMO on the basis of a budget submission. Currently the funding for these projects goes to Defence which then allocates funds to the DMO.

The rationale for this change is to improve the transparency and accountability of the DMO and expenditure on major acquisitions. Mr Mortimer sees no reason for Defence to be a “banker” for the DMO.

Mr Mortimer recommends no changes to the current funding structures for sustainment, rapid acquisitions, minor projects, or operations. This funding will still go directly to Defence and be provided to the DMO via the current arrangements such as materiel sustainment agreements.

The rationale for this is to ensure that the CDF, and the Service Chiefs, have the ability and flexibility to control operational and maintenance priorities. This will ensure they continue to meet their statutory duties to Government in regards to preparedness for operations.

An Executive Agency

To give effect to these changes Mr Mortimer's report recommends that the DMO become an executive agency while maintaining its prescribed agency functions.

As I said to the National Press Club it is the outcomes in procurement rather than the institutional structure of the DMO that is important for the Government. These outcomes include some of those I have outlined today. This is the context in which the Government will be considering the issue of an executive agency.

It's fair to say that within Defence this is the most contentious aspect of the report. This is the second time an independent report to Government has recommended such a change. On the face of it, this is not an especially radical recommendation.

It should be noted that the DMO is already a separate agency to Defence due to its nature as a prescribed agency under the Financial Management and Accountability Act. A move to an executive agency would bring the DMO into line with 66 other Commonwealth agencies that are either an executive or statutory authority with prescribed agency status. This includes Customs, the Office of National Assessments and a host of others.

It would mean that the DMO remains within the Defence portfolio, that the CEO reports directly to the Minister, that the DMO continues its obligations under the Financial Management and Accountability Act, and that the CEO assumes responsibility for staff management under the Public Service Act.

Both Kinnaird and Mortimer argue that Executive Agency status would further enhance the CEO’s ability to independently manage the DMO and to drive the necessary cultural change. Both assert that this is essential to improved procurement outcomes.

One of the reasons that the 2003 recommendation to make the DMO an executive agency was not acted upon involved apprehension that it may make the DMO, and in particular its role in sustainment, less responsive to the needs of the ADF and the authority of the Chief of the Defence Force. This remains a valid concern.

Whatever reforms are made, the DMO must remain responsive to the operational needs of the CDF and Service Chiefs - that is after all its’ principal function. The Government will not be implementing any institutional changes that adversely affect the ADF’s ability to conduct its operations.

The Review has attempted to address these concerns.

It recommended that DMO continue to maintain its presence on the Defence Committee, ensuring in line with Ministerial Directives, that the DMO remains responsive to the needs of the ADF. Ongoing membership of the Defence Committee would ensure that Defence has full oversight of DMO’s work and that the DMO retains its relationship and understanding about the broader Defence mission.

Mr Mortimer also recommended the continuation of the Defence Procurement Advisory Board which the CEO would report to and seek advice from. This board would continue to have the Secretary and Chief of Defence Force as members.

Further to this under an executive agency the Minister for Defence would appoint, remunerate or terminate the CEO of DMO only after seeking advice from the Secretary of Defence.

The Government does not have a predetermined view about this issue, and as you would expect the Minister and his Cabinet colleagues will be considering it extremely carefully.

Mr Mortimer also makes a number of other interesting recommendations including:

-- Greater use of off the shelf solutions in order to avoid some of the problems we have experienced in the past with developmental projects
-- Assessment of projects for their potential as public-private partnerships
-- Changes to the Cabinet processes to encourage a more efficient approval process; and
-- Greater fiscal discipline through a target of no real cost increases for major projects.

Time doesn't permit me to deal with these issues this evening however they are nonetheless important and will be carefully considered.

I just wanted to make a point on the cost of these reforms before I conclude.

The Government will seek to ensure in our response to the report that any proposals adopted are cost neutral. That is to say that the cost of implementation of an ongoing reform program will be offset by other alternative savings.

This is especially relevant for the consideration of the recommendation for the DMO to move towards an executive agency. It should be noted however that the majority of costs that would usually be involved in such a transformation have already been met following the DMO’s move to a prescribed agency in 2004.

The way forward

As I said earlier the Government is now in the process of considering its response to Mr Mortimer’s recommendations.

The Minister has already stated that he would like to see the Review considered ahead of the White Paper. The reason for this timing is that the Government believes that before the White Paper lists the capabilities to be acquired over the next decade we must have in place, or at least have begun implementation of, the procurement system that will be expected to deliver these capabilities.

But the principles I outlined earlier, including the need for greater commercial discipline throughout the procurement process, the need for independent advice to Government and the development of a more business–like DMO culture – are all important factors for the Government.

The Government is determined to get this right given the importance of this area. We are also determined that our response to the Report delivers a comprehensive reform program that will deliver better results for the ADF and taxpayer.

I have covered a lot of areas tonight and in short detail. Therefore I am happy to take questions on any of these or other recommendations or issues I have not been able to cover.

Address to the Australian Strategic Policy Institute