ACTING CHAIR (Senator Ferris) —I declare open this meeting of the Senate Foreign Affairs, Defence and Trade Legislation Committee. I welcome Senator Newman, the minister representing the Minister for Defence, and officers of the Department of Defence.

The committee will consider particulars of proposed expenditure for the Department of Defence, the Defence Housing Authority and the Department of Veterans' Affairs, in that order. The committee has before it particulars of proposed expenditure for the year ending 30 June 2000, documents A and B, and the portfolio budget statements for the Department of Defence.

The committee will first consider the portfolio overview and major corporate issues. Then, as moneys which were previously appropriated to many of the 14 groups in the former accounting system have this year been distributed across the 22 outputs, the committee will consider both the outputs and the former groups. Instead of the outputs being considered in numerical sequence, they have been grouped by manager, together with the corresponding group from the former system. After all the outputs have been considered, the remaining nine groups will be considered in numerical order.

In order to assist Hansard in the early publication of the transcript of these hearings, the written questions on notice will not be incorporated in the proof Hansard transcript. The chair will state for the record that written questions have been received from a particular senator and that these questions will be forwarded to the department for answer. When officers are first called upon to answer a question, they should state clearly their names and positions.

Today's hearing will be suspended for lunch between approximately 12.30 p.m. and 1.30 p.m., and for dinner between 6.30 p.m. and 7.30 p.m., concluding for the day at approximately 11 p.m. We will take tea breaks at approximately 10.45 a.m., and 3.30 and 9 p.m., as required.

I remind colleagues that the Senate Finance and Public Administration Legislation Committee is continuing its inquiry into the format and content of the portfolio budget statements. The committee would welcome any input from senators about the structure and content of them. Please take the time to put on the Hansard record any comments you wish to make about the documents as we work out way through them.

Finally, the committee has agreed that the deadline for provision of answers to questions taken on notice at these hearings is Friday, 16 July 1999. Minister, do you wish to make an opening statement?

Senator Newman —No, thank you, Madam Chair.

ACTING CHAIR —Under the portfolio overview, are there any questions on the Defence Reform Program?

Senator WEST —May I start with a general comment, Madam Chair? As someone who has looked at four PBSs in this process, I believe it would be very helpful if the PBSs were in the same format. Of the four departments I have looked at, no two have done it the same way. If you think that the change has been hard enough when you are looking at only one PBS, I suggest you try looking at four, or maybe the whole 20[hyphen]odd or whatever there are of them, when no two of them are done in the same way. That is not meant as a criticism—not of these departmental officers, anyway, but probably of Finance in not providing the departments with clear enough guidelines or outlines of what should be in a PBS to meet the requirements of all the different departments, considering how each department varies in its reporting needs. That is the first comment, even criticism, that I want to get on the record in relation to this
process. It has been very confusing and time consuming from our perspective, and I can only assume it has been the same for the departments.

In that respect, I would like to ask—I am happy for you to take this question on notice—what the cost to the department has been, in terms of personnel time, of making this move across to accrual accounting. I suspect that, because a lot of the personnel involved are senior officers and are therefore not on overtime but paid a flat salary, you cannot tell us that in monetary terms. Also, were any consultancies involved? Did the department have to employ any consultancies to work on this? If so, what were the specifications, the recipient and the tender contracts?

Some of the departments started doing accrual accounting as early as 1992. When did Defence first start using accrual accounting, and what historical information is available on programs on an accrual basis? Can that be provided along with the corresponding cash based information? I would like to know also what issues have been raised by the community and industry groups in relation to understanding the new budget reporting arrangements.

More importantly—I put these questions on notice because I am sure they will have to go on notice; if you have got the answers here I will be pleased—for each administered item listed in resource summaries contained in the portfolio budget statements, can the department provide an estimate of expenses for 1999-2000, 2000-01, 2001-02 and 2002-03. Can estimates be provided for any administered items that are expected within the period of forward estimates but that do not take effect until after 1999-2000.

For each departmental output group and sub[hyphen]output listed in the resource summaries contained in the PBS, can the agency provide an estimate of the expenses for 1999-2000, 2000-01, 2001-02 and 2002-03. Can estimates be provided for any outputs that are expected within the period of the forward estimates but that do not take effect until after 1999-2000. I am happy for those to go on notice.

ACTING CHAIR —Thank you, Senator West. Are there any questions on the Defence Reform Program?

Senator HOGG —May I interpose there that I am aware of the response which was given through Senator Newman to a question on notice from Senator Ray, and which the department kindly provided to me. I think this goes beyond that particular answer. I think it is looking to generate a bit more history.

Mr Lewincamp —Senator West has raised a whole range of issues there, some that I think I can respond to and some that we will have to take on notice. As Senator Hogg has mentioned, in answer to a question on notice from Senator Ray on 9 March 1999 we provided quite a bit of data about the cost to date of the introduction of accrual accounting and budgeting, and that included an outline of the contractors we have used to date and the sort of work they have done. I will need to look more carefully at your question now to see how much beyond that particular answer your question goes, but I think most of that is covered in the answer to Senator Ray's question.

On the question of the overall format of the portfolio budget statements, we are unaware of what other departments have done so we are unable to make the comparison you have made. I can say that all departments are operating to guidelines that have been put out by the Department of Finance and Administration and are operating in accordance with those guidelines. The guidelines, by the way, went to the JCPAA for their clearance and comment, and they approved those guidelines before they came out to departments.

There are some differences with the Defence budget which might explain why it looks a little different. One is the global outlays. The second is that we have only one outcome, and so all our structure is within one outcome whereas most other departments have several outcomes. This would lead to superficial differences in the format.

We have also added information within our portfolio budget statements that is strictly not necessary according to the guidelines. As I mentioned at the technical briefing, that is both the overview section and the section on the group information, neither of which is required under the guidelines at the moment but which we thought was additional information which would be very useful for the committee in coming to grips with the Defence portfolio. So there are a number of issues there which will have some impact on the way the Defence portfolio budget statements are structured that make them slightly different from those of other departments.

The final question I would have, Senator, is exactly what information you want on the forward estimates period. It has not been part of the portfolio budget statements to provide the level of detail that you are now seeking across the forward estimates period. The appropriation is only for the year 1999[hyphen]2000, and the detail you are seeking seems to go well beyond that. Our projections for the forward estimates period are only projections. They are not budget allocations. So I am wondering about the question you have about that detail.

Senator WEST —It gets a bit confusing with this method of accounting. What we are looking for is when a decision has been made but the money is not going to be spent this year but will be coming up in forward years for expenditure. We are not necessarily looking for the details, but we are looking for the forward planning of it. You are getting money coming through in lumps, if I can describe it like that.

Mr Lewincamp —We are planning to expend all the money given to us this year.

Senator HOGG —But in some of those it is not identifiable whether it is going to be expenditure this year or expenditure in the forward years because, in some of the descriptions across some of the items in the outputs, the output is across a three[hyphen]year period in some instances. Yes, I understand, but we cannot capture how much of that against that particular item is for this year and how much is for the forward years. I do not know whether we are making a rod for our own backs, but it is a confusion that lies within there because we have now moved to outcomes and outputs and we are thinking down the track where we need to look at the annual report that is based on outcomes and outputs. As I understood it, this system would allow us in the longer term to be able to say, `That was the output that was going to be achieved this year,' and go to the annual report and tick that it has been achieved.

Mr Lewincamp —That is true.

Mr Tonkin —That is right. Each of the outputs that are in our PBS this year is an annual output rather than continuing in nature. It is not a case of a portion of output 1 being delivered this year and another portion next year. We will deliver, this year, the output described at the level of performance set out, funded by the appropriations appropriated this year. You will be able—when the annual reports come round in the output structure, which is a year and a bit hence—to compare what we said in this document today with what we delivered for each of those 22 outputs. It will be expressed, `This is what we said we would do, in dollars and performance terms. This is what we achieved in performance terms and this is what it cost.' That will be there. That is how it will be structured.

Senator HOGG —With the greatest of respect, Mr Tonkin, in my view that will be about as clear as mud. That is why we are going to spend this time trawling over this PBS. I
understand that what you say is in good faith, but my reading of the document thus far and my expectations of how that will be reported do not lead me to the conclusion that that will be crystal clear at all. Anyway, we can get into the detail of that as we go through.

Mr Lewincamp —What happens with the accrual budgeting here is that we are now accounting for all of the accrual expenses that are incurred during the coming year, 1999-2000. I think what lies behind your question is a suggestion that some of those accrual expenses will not involve cash payments until later on, later into the forward estimates period and well beyond that. But that has always been the case with Defence budgeting, even under cash budgeting—the notion of forward commitment.

Senator HOGG —Except that you cannot identify the accrual expenditure.

Mr Lewincamp —The whole PBS is the identification of the accrual expenditure.

Senator HOGG —Yes, but in one big lump.

Mr Lewincamp —In the group sections and in the output sections, we have broken it down by categories of expenditure. This does not differ from the cash based budgeting. Where we have a major equipment project that we commit to now and spend only $4 million or $5 million, and then spend $4 billion or $5 billion over the next 20 years, it is the same principle. Here we are capturing the forward commitment and the forward liability under accrual expenses, in a way that we have not done in the past.

Senator HOGG —Some of this might well be best left until we get into individual outputs, where we can identify some of the problems that I think exist within the document. As an example, though, I have just opened up at—for what it is worth—output 14 on page 99. The following statement appears:

Infrastucture works at Delamere air weapons range are scheduled to begin in 1999-2000, with completion scheduled to be achieved over the following two years. These works include accommodation and repair facilities, preparation of equipment installation sites and access roads.

From the information then shown in pages 100 to 102, however, one does not know what the allocation for that is in this year or what stage is meant to be achieved during this 12 months, given that it is now going to stretch over a further two years. What we are looking for is this: if this is a report card system, then fine, I think that is very healthy—I have not come to my general comment about the PBS, which I think I should make before we go too much further—but that does not enable us to say yes, otherwise in 12 months time you will come along with the annual report and you will say `Tick.'

Mr Lewincamp —The reason we have done that is that we have tried to capture in each of the outputs the work that we are doing to enhance those outputs over time—in other words, the projects that we have in the pipeline to increase the capability represented by those outputs.

Senator HOGG —We accept that, but how do we test it?

Mr Lewincamp —On the question of Delamere, for example: on page 34, in the major facilities section, in table 1.17 you will see, under Northern Territory, an approved project cost of $12.3 million, with an estimated expenditure of half a million in 1999[hyphen]2000. That gives you the traditional input type of break[hyphen]out of the major equipment expenditure and the major facilities expenditure. So there are ways of cross[hyphen]referencing some of that future development work.

Senator HOGG —It goes to the other comment that I made in one of the technical briefings that I had. We need a `Guide to the galaxy' to get us through the PBSs.

Senator WEST —Everything is cross[hyphen]referenced.

Senator HOGG —As my first general comment I want to put on the record my thanks to the officers of Defence for the technical briefing that we had. As you would be aware, it went for nearly three hours. Whilst that was enlightening, it has not led me to resile from my opinion of the PBS. The first test the PBS should pass is readability—including being understandable—with transparency and then accountability in the longer term. I cannot say anything about the accountability side because that will come up in the annual report, but in terms of readability and understandability, whilst cross[hyphen]referencing has just been alluded to, there is no ready cross[hyphen]referencing for people such as I in going through it. It has to be reasonably understandable to one and all.

Senator West alluded to part of the problem, that there is no consistency from your PBS to Veterans Affairs' PBS to that of Foreign Affairs. I note that in yours, for example, there are `goals'—very good—and there is `preparedness' and, as you look in, `performance targets'. When you go to our friends over there in Foreign Affairs, you find they have general `effectiveness indicators'. They have `milestones', which have been renamed already as millstones. You do not have any millstones in your PBS at this stage. Maybe that is something we can look—

Senator QUIRKE —They are still floating!

Senator HOGG —Maybe that is something we can look forward to in the future. But you would understand that there is a great degree of confusion as people try to translate what is in your PBS and to interpret and understand that, as opposed to what is in another PBS. I understand from your comments, Mr Lewincamp, that you are not necessarily wedded to what others are doing in their PBSs, whilst you have got a general set of guidelines brought down through Finance and Administration. I am going to appear before the Senate Finance and Public Administration Legislation Committee to make a few comments about the `Guide to the galaxy' that they should issue to people trying to get through the PBS.

We get into yours and find there are `key objectives' and there are `goals', `performance indicators', `capability enhancement initiatives', `preparedness' and so on. Relating what you are doing to what someone else is doing and coming up with a clear picture is difficult indeed. That is my broad comment on the PBS.

While we are in this broad area: in the technical briefing that we were provided with, we went through a range of issues on pages 18 through to 21, which show the basic construction of the accounts. As I understand it, you have had to adapt a number of changes in going from the cash system to the accrual and the outputs system. Would you outline for us, so we have got it on the record, what changes had to be made when you went from the cash system to the accrual and the outputs system. What are the major differences, so that we can recognise them?

Mr Lewincamp —I think the more important of the two initiatives is the move to output management—that is, managing on the basis of the products and the services that Defence delivers to government.

Senator HOGG —How does an output differ from last year's, where I think you had objectives?

Mr Lewincamp —The outputs do not differ so much from the objectives as from the basis upon which the resources were allocated under the old system. Under the old system, the appropriations were for departmental activities and they were governed largely by inputs: you were given a certain amount of money to engage in a certain number of activities, without any clear understanding on the part of government of exactly what Defence was delivering
for the dollars being given to it. The principal difference here is a much more explicit focus on the products and services being delivered and the cost of delivering them.

Previously, appropriations were made under `running cost expenditure', for example. If you go back many years you see that we got different appropriations for salaries, for travel, for facilities, for all sorts of different input categories. Progressively, over the last few years, we have moved to a situation where now appropriations are being made for the outcome and the outputs that we deliver for government. That is quite a difference in focus.

Senator HOGG —Let me take you back to last year's PBS—it does not matter which one we look at. The headings were `Strategies' for the financial year, `Performance measures' for the year and `Performance forecast' for the year. On this occasion we do not have those sorts of headings—which I understand. In some areas there is talk about `goals' and there are headings such as `Description', `Composition' and `Performance information', which comes under a number of subheadings—`Preparedness', `Capability enhancement initiatives' and so on.

Mr Lewincamp —Last year also we used to report on performance, but the way in which the appropriations were given to us was not performance related. That is the point I am making.

Senator HOGG —That is the problem, because in reading the annual report we never thought we got a report on that performance. We got a fairly global sort of statement. I am just wondering if we are looking to become too pedantic in saying what the outcomes and the outputs should be.

Mr Lewincamp —I do not agree. The other difference I should mention is that last year the performance information you got was based around organisational groups and not about outputs. Again it was about a particular organisational entity. We gave you that information based around 14 groups. We have now identified the 22 products and services that we think Defence delivers to government—the government has signed up to those—and we are now putting in place costing and performance information related to those outputs, so that in the annual report you will see our performance against those outputs.

I should mention that this is a progressive implementation. The government has introduced a very big change. We have done it from 1 July this year and we will need one to two years, at least, to refine the information that you have there based around the outputs, in terms of both the financial information and non-financial information so that it becomes increasingly more meaningful.

Senator HOGG —This is not a criticism of what has been done. It is purely and simply registering the frustration in trying to interpret what is there. In output 4, for example, $252 million is being spent. Without getting into that particular output, I must say that $252 million is not to be sneezed at. Looking at the performance targets for 1999-2000 shown in the table there, we ask ourselves: how do we know at the end of the day that we have got value for money for that $252.7 million? That is really what our task is about.

Mr Lewincamp —I agree.

Senator HOGG —Looking at the performance indicators there, I do not get much reassurance. If everyone just goes down the list and says, for example, `Yes, we did 4,349 ship days; we achieved 100 per cent of training objectives; unforeseen operations were not planned; assistance to the community was provided as required; we did 1,800 days on national tasks,' that does not seem to me to be very much of an assessment. Or am I now not understanding
the sort of assessment that we are going to get on the performance indicators? Are we going to get some sort of analysis that says, `In terms of the 15 Fremantle class patrol boats, we had hoped to do this, this, this and that and we achieved this, this, this and that'?

Mr Lewincamp —The annual report at the end of the year will look at each of those performance indicators and give you a report of what was actually achieved. We will say, for example, that we did 1,800 days of patrol, and the report will include an assessment then of the number of fishing boats intercepted, the number of boardings and things of that sort, to give you an idea of what was actually achieved by conducting those patrol days. But in advance we cannot actually tell you what those patrol boat days will achieve, apart from actually doing them. So the first deliverable is to do them.

Senator HOGG —That is the common problem I have with all the tables that are here. We are buying a pig in a poke, in the sense that they are very broad in their descriptions—and there are substantial numbers of dollars being spent.

Mr Lewincamp —As I say, progressively over the next two to three years you will find that this will improve in quality, in terms of the amount of information that you have, both about what we are intending to do and about what we actually achieve. But a thing like the 1,800 days is the requirement from government to us, to provide that number of days for that particular task. So it is part of our tasking directive and we have to meet that.

Mr Tonkin —The challenge we confront, Senator, is that our outputs have to be structured in a form which is a continuing problem for Defence, of how we express our outputs. Our outputs have to be expressed and managed in a way in which we can direct and exercise the resources effectively. So our outputs are force element group based. The example of patrol boats is a good one. It is a capability which can do a range of things. What we are budgeting for or undertaking to do for government is a certain level of patrol boat capability, which you can express in numbers of hulls in the water, number of days at sea and so on. Those patrol boats are then deployed across a range of activities.

We could seek to express our outputs against the range of activities which were predicted to be delivered. That is another way of approaching the whole equation. The difficulty with that is: how do you then manage the allocation of those resources? Many of those activities run across a range of force elements; often they run across the services. You might take as an example the illegal immigration boats which are being tracked. They are being tracked by patrol boats and by maritime reconnaissance aircraft—there are two services and two force element groups involved there. Sometimes surface combatants, frigates, are chasing them as well, so there are three groups involved.

That is happening because of a specific tasking. If we try to predict at the beginning of the budget year what that tasking will be, the only certainty I can offer you is that we will be substantially incorrect. Events occur which you cannot predict, and the whole point of having our capability is to give us that flexibility.

So we are never going to get a perfect, predictive set at the beginning of the budget year. What we can offer to government, and what we can seek to explain to the Senate and to the parliament more generally, is the broad level of capability we can offer. As we get more expert at expressing this, I believe we can certainly do it better and give more comprehensiveness and ensure that, when we report, we do pick up the sorts of things that Mr Lewincamp says—that we did not just do 1,800 patrol days, but that that generated the following outcomes for government and the people.

Senator HOGG —I understand what you are saying, Mr Tonkin, and I do not disagree with you, but I must say that the expectation created in my mind was different from what I see before me. I thought we would be able to be a bit more precise, because this is setting the base for how we will view that annual report in 15 months time when it is brought down. If we do not understand what the ground rules are now, in 15 months time we will be at complete odds as to why you have not reported on the indicators that you said you were going to report on, that, really, this is a meaningless sort of task and at the end of the day all we should do is just throw our hands up in the air and say, `Let's go back to square one and start again.'

Mr Lewincamp —Senator, I have to disagree; I do not think we are saying that to you. We are providing you with meaningful performance indicators here in each of the output sections. Yes, we have agreed that they can be refined further, but I think they are meaningful as they stand at the moment.

Senator HOGG —As I say, on page 71 of the PBS it says:

Non[hyphen]Combat Related Tasks

. Assistance to the Community (Output 21).

That is noted, `As required.'

Mr Lewincamp —That is that you have patrol boats ready for things like search and rescue, assistance in the case of disasters and that we have a capability that is ready for the government to use when necessary. We cannot predict when those things will happen.

Senator HOGG —I accept that. But one would have thought there would have been some allocation against that particular output.

Senator WEST —Some contingency.

Senator HOGG —Some contingency, as my colleague has just said.

Mr Tonkin —It comes out at ship days at MLOC.

Mr Lewincamp —Yes. It is built into the preparedness of that capability.

Mr Tonkin —So if we maintain a deployable field hospital, it is there for operational purposes. If there is a tsunami in Papua New Guinea, we then deploy for that purpose. There is an opportunity cost in doing that—that is, while it is deployed, it is not available for some other purpose. What we then report is what we did, how much it cost and so on. But the fact is that we are not maintaining a deployable field hospital for the prospect of a tsunami in Papua New Guinea. That is not what we are funded for; that is not what the government budgets for.

Senator HOGG —I accept that. But it still makes it difficult for us, sitting here, trying to interpret this document in relation to what `as required' would mean. I am not trying to get into the nitty[hyphen]gritty of the questions on individual outputs; I am looking at the overall concept.

Mr Lewincamp —And it is a management challenge for us, Senator.

Senator HOGG —I am sure you will meet it, Mr Lewincamp—I am absolutely certain. For example, if you turn to page 101, where it refers to output 14, this is where I get to, equally, the readability and understandability of the document. Under `Preparedness' it says:

Output 14 elements are able to meet endorsed Operational Viability Periods without external re[hyphen]supply at MLOC.

That is noted under `Target' as, `Fully achieve.' The same type of comment occurs on the next line:

Output 14 elements are able to meet endorsed Sustainability Periods with external re[hyphen]supply support at MLOC.

That is also noted as, `Fully achieve.' All of that is very good but, as I asked, what does it mean? What does `fully achieve' mean?

Mr Lewincamp —Here we come up against another problem—that is, for a number of our capability outputs, the performance information would be classified at this level. That is an issue I think we ought to take up in addressing the future format and content of PBSs and how we give you meaningful performance information on things like our combat capabilities. Here we have a minimum level of capability, which is what MLOC refers to.

Senator HOGG —I understand that.

Mr Lewincamp —We set each year preparedness directives for all of our combat elements. This is referring to these elements being able to meet the requirements set out in those preparedness directives. The preparedness directives themselves are highly classified.

Senator WEST —But you mention them all the way through?

Senator HOGG —That is right.

Senator WEST —You are changing them and things like that. You are then going to tell us that it is highly classified and we cannot ask questions about it.

Senator HOGG —There is a billion dollars associated with this particular output. We are not trying to compromise any security aspect but we are supposed to be able to test what you put in this document when you say that you have achieved the output. Here we have `fully achieved'. Whether you have fully achieved it or not, to my way of thinking, cannot be tested. If you say that there are security implications, how are we to test that this has been fully achieved?

Mr Lewincamp —There is a separate issue here for the committee about ways in which we might brief you on these things outside an open session. Beyond that, the assurance that we give or the oversight of whether we achieve these things or not is a matter for the minister.

Senator HOGG —I understand. I have no doubt that, without trying to breach security, you cannot be overly open in some of these areas but they are being put forward as the basis of large amounts of defence expenditure—in this case over a billion dollars on output 14—and are not going to the nature of the output. It is the whole concept of being able to test. Estimates itself is a public scrutiny process and, as I understand it, in the estimates process we are not able to go into an in[hyphen]camera situation. If that is the case then that may be one specific issue that needs to be addressed if we are to get any meaningful sense out of the output process. Otherwise, you roll up to us—and this is no disrespect to you people—and tell us that you are going to spend $1.186 billion on this particular output and then the shutters go up. It is a security question.

Mr Tonkin —As part of the process of looking at how we have produced this year's review to see what else meaningfully and responsibly can be done within the bounds that we have got, if you turn to the next page, page 102, which has a whole series of flying hours spelt out, it was not all that long ago that the flying hours were classified. It was something we would never have mentioned. We have reviewed that.

Senator SCHACHT —Classified from whom? Us?

Mr Tonkin —Security classified.

Senator SCHACHT —So that we could not find out or the Russians could not find out? The Russians probably knew anyway.

Mr Lewincamp —In a sense flying hours again is an input measure. It does not actually tell you what you are generating. But it is a measure.

Mr Tonkin —We will therefore seek to have a look at how we can express this—

Senator HOGG —Just excuse me, Mr Tonkin. I am glad to hear Mr Lewincamp say that. It is an input measure in an output budget.

Mr Lewincamp —We recognise that.

Senator HOGG —You can understand the difficulties that we are having.

Senator WEST —Certainly you are having too.

Senator HOGG —Yes, in trying to get this budget to make some sense.

Mr Tonkin —There is a slight difficulty with generating outputs without inputs.

Senator HOGG —I understand that.

Mr Tonkin —The physics does not work.

Senator HOGG —I did see those tables there. While they are good, one has to go back to where the actual outputs are going to be measured in the annual report. I would suggest that that is going to be under your performance indicators.

Mr Lewincamp —Yes.

Senator HOGG —Is there anything else that is going to be used as a measure of the output? For example, in that output 14, there are a number of items under performance information for output 14—preparedness capability, enhancement initiatives. Will you be going through and giving an individual tick to the items that have occurred there, including things such as I see at the top of page 100, personnel? Is it your intention that in reporting on that output you will report on basically that nearly page and a half of items?

Mr Lewincamp —Yes.

Senator HOGG —What would you do with these performance indicators which have very little meaning to me and the public at large when we look at them and, rightly or wrongly, you tell us that there are security implications there and therefore you cannot go beyond?

Mr Lewincamp —We would tell you for a start whether we achieved it not. If there is no full achievement against these classified requirements, we will give an explanation of why there was not.

Senator HOGG —How will you be able to give an explanation if something is not fully achieved?

Mr Lewincamp —Very carefully.

Senator HOGG —My very point, Mr Lewincamp. I am not trying to be difficult; I am just trying to make sure that we all understand where we are going with the PBS. This is not a difficulty that we will have only now; we will have this difficulty into the future as well. I have picked those at random. I did not predetermine what outputs I was going to look at. I think that those two fairly much sum up the difficulties that I see in this area.

Air Marshal Riding —If I could make a point on those performance indicators? There are two issues: firstly, I think that it would be very useful for the committee if we provided a technical briefing on a lot of these phrases and acronyms that are used in respect of
preparedness, because they are widely used within Defence. I think it would be important that the committee understands this process of preparedness and the phrases and the acronyms that are used.

Secondly, I would make the point that we are reviewing all of the security classifications against our readiness and sustainability periods against all force elements. That review was commissioned about two months ago and it is progressing slowly. I believe we will be able to provide more understandable and clearer information in the future which will not infringe on the fundamental security issues that we need to protect.

Senator HOGG —Who is actually doing that?

Air Marshal Riding —That is being done in the Defence headquarters.

Senator HOGG —Is there a name for the review committee?

Air Marshal Riding —It is being done as part of the policy and planning process within the headquarters.

Senator HOGG —Whilst we are on this area—and I thank you very much for that, Air Marshal—I am going to jump around a fair bit here because it will depend on how things flow. If I can take you to page 7, in section 1—that does not mean that I have forgotten what has gone before there—there is a table there on performance indicators, under combat capability preparedness operations and then non[hyphen]combat related. The paragraph underneath interests me where it says:

Military capability is achieved by developing a force structure appropriately prepared for operations. Preparedness is a measurement of how ready (readiness) and how sustainable (sustainability) the whole or part of the ADF is to undertake military operations.

Then it goes on to list a number of qualities:

The readiness of forces to be committed to operations within a specified time is dependent on the availability and proficiency of personnel, equipment facilities and consumables.

So that defines, as I understand it, readiness. I understand from what you are saying to me—and have always said—that that is something that, for security reasons, cannot be divulged.

Sustainability is measured in terms of the ability to provide personnel, equipment, facilities and consumables to enable a force to complete its period of operations.

It would seem to me that that goes to what we were discussing on page 101 in output 14 a few minutes ago. Those are the characteristics by which you will test whether or not you have achieved an outcome—I suppose it would be—under one of the outputs. Is that correct?

Mr Lewincamp —An output.

Senator HOGG —Whether you have achieved one of the outputs. I know the general outcome is the defence of Australia; I understand that. But am I correct that you would be using a number of those criteria listed in that definition to test your own outputs? Is that correct?

Mr Lewincamp —Yes.

Mr Tonkin —The level of readiness and sustainability which has been set for that given output, because it will vary.

Senator HOGG —I understand that. Whilst we have a broad description there of `fully achieved', within the province of your own knowledge, you have far more specific details which would go to that definition. Is that correct?

Mr Lewincamp —For every force element that is contained within a particular output there will be defined readiness and sustainability levels, so the full achievement will be for all force elements within that output.

Senator SCHACHT —In the same table on page 101, the performance indicator which is from Output 14, which Senator Hogg has been talking about, the first dot point:

. . . elements are able to meet endorsed Operational Viability Periods without external re[hyphen]supply at MLOC—Fully achieve

You are saying that you will fully achieve that as the target in 1999[hyphen]2000 in the budget period. So when we get the annual report in 15 months time for 1999[hyphen]2000 you will change the tense to say `achieved'. Is that right?

Mr Lewincamp —If we have. If we have not, we will say so.

Senator SCHACHT —This raises the point that Senator Hogg was on about. What will you put in there to show that you have achieved it or, more importantly, you have not achieved it? What information—

Senator HOGG —That is the difficulty we got into.

Senator SCHACHT —Yes. If you go back to where you have got lists of flying hours or something like that, will you say `We only achieved 80 per cent of the flying hours because we ran out of petrol' or `There were five pilots down with diarrhoea or whatever?' Will we get that back as a reason why you did not achieve it?

Mr Lewincamp —Flying hours is one of the factors that contributes towards the unit's achievement of its readiness. It is not the only factor.

Senator SCHACHT —No; I understand that. But if that were the reason why you could not say `achieved' in 15 months time on this table, would we be able to ask the question: what are the detailed areas that meant that you did not achieve it? Then would it be non[hyphen]classified to say, `We did not achieve it because we did not have enough money to pay for the aviation fuel?'

Mr Tonkin —That is correct.

Air Marshal Riding —Yes, Senator, that is correct. Within the constraints of security, we would be reporting to you on why we did or did not achieve our targets. If that were aircrew availability or aircraft unserviceability, then that would be articulated.

Senator SCHACHT —What are the elements—and this is going to be the question of the chicken or the egg—that are classified that would affect performance that you could not tell us?

Senator WEST —Because they are classified they probably cannot tell us.

Senator SCHACHT —Because it is classified you cannot tell us?

Air Marshal Riding —The readiness and sustainability of our force is the fundamental capability that we have to undertake the defence tasks and, clearly, the full extent of that cannot be fully divulged in the public arena.

Senator SCHACHT —Could it be divulged to a private hearing of this committee?

Air Marshal Riding —I think we discussed that earlier.

Senator HOGG —We did discuss it. It does raise the real issue that—

Senator SCHACHT —Did they say yes?

Senator HOGG —No, it is an issue that we need to traverse. If we are now going to outputs—and it seems to me that those outputs need to be tested—we have the right to inform ourselves that value for money is being achieved, that the output is being achieved. It is not that we doubt the integrity of anyone sitting at this table, or anyone in Defence for that matter, but that is why we are elected to parliament. Part of our role is the scrutiny of what is happening.

I would see Defence as being fairly different from a number of other portfolio areas where you do have real security concerns and operational concerns. I do not think it is the desire of anyone from our side of politics to compromise any of the security arrangements that you people have in place. At the same time, we need to be able to apprise ourselves of the PBS that is being presented to us.

In previous years, this might not have been as blatant as it is under the new structure. The new structure now presents it more openly to us. We have gone down the path of trying to read and understand and have run into difficulties. Air Marshal, you made an offer for a private briefing on some of the acronyms and bases on which this document is made. That is very good. It is very helpful. But nonetheless the issue of accountability is the one that is paramount in my mind.

I do not believe the document to be all that readable. I know Defence is renowned for its jargon. If someone else picked that up and tried to understand what you people were saying there, most would get lost in the jargon very early on. I do not doubt that there is an endeavour by Defence to be transparent, so I am not questioning that, but I do not think the transparency is there. That raises the question of how we will translate all of this into accountability at the end of the day.

Air Marshal Riding —I just make one point: while it is a new deal for the committee, it is also very much a new deal for Defence. We are now focusing very much on output and outcomes rather than inputs, which have been our management regime since time immemorial.

Senator HOGG —We are in deep sympathy with you.

Air Marshal Riding —You can rest assured that we are wrestling with the same very obvious questions that come up when you do start talking about outputs rather than inputs.

Senator SCHACHT —I missed the earlier part of the discussion that Senator Hogg raised about the question of a private briefing. On the economics estimates committee, in questions 12 to 18 months ago about CSIRO and a number of commercial disputes they were having, the head of CSIRO, a former well[hyphen]known Defence person, offered and gave us a private briefing. If it had leaked, it could have easily compromised CSIRO's commercial position when they were in court. It was worth millions of dollars.

That briefing was given for over an hour. As far as I am aware, there has not been one word of that leaked, hinted at or inferred anywhere. The members of parliament accepted the responsibility that, if you get a private, in camera briefing, there are obligations that go with it. If you break those obligations, as a member of parliament, you will suffer a penalty in one way or other. There is no doubt about that. There is just the publicity that you broke them.

What we did at that time was use the opportunity to say that the estimates committee would hold an in camera briefing as part of their review of the annual report, as a broad description. That worked very well. I think it did CSIRO a lot of good. The members of the parliament were able to get a balanced briefing and a lot more information than they could on the record publicly. I have to say I cannot see why, in view of the layout now, that opportunity should
not be available. If you find that there are some things that are classified, and if a member of parliament chooses to break the classification, then they will have to take that as a pretty awesome responsibility.

Mr Tonkin —Madam Chairman, I think we will refer this issue to the minister. It is a matter of how the minister would wish to consider whether or not or how such a briefing would be provided and to which body. After all, there is the Joint Standing Committee on Foreign Affairs, Defence and Trade which gets briefed on certain classified issues as well. We will take the general issue on notice and refer it to the minister.

Senator SCHACHT —Mr Tonkin, I appreciate that. I am on the Joint Standing Committee on Foreign Affairs, Defence and Trade, on the Defence Subcommittee, as well as this committee. I have been on that committee nine out of 12 years and we have sat through extraordinarily detailed briefings. The only one you will not give us is Pine Gap. Nevertheless, at the time of the Gulf War, there was information given to that committee almost on a daily basis that was extremely sensitive. I know of no evidence leaking. I think the joint committee on defence has accepted that responsibility in particular. I think there is a good track record there, but I have to say—

Senator Newman —The problem is that, of course, Mr Brereton treated a DIO document in a totally improper manner. Therefore, that must colour the minister's response.

Senator SCHACHT —Minister, if you want to go back and say the odd document around the place has been leaked, then we will spend 13 years looking at your track record in opposition—

Senator Newman —It perhaps depends on exactly what kind of a document. If you are not prepared to accept that a DIO document is in a very special class of documents, Senator—

Senator SCHACHT —Well—

Senator Newman —then any assurances about the protection of sensitive information fall on deaf ears.

Senator SCHACHT —Well—

ACTING CHAIR —Order, Senator Schacht!

Senator Newman —We have said that we will take that to the minister and that is what we will do.

Senator SCHACHT —You interrupted, Minister. The point I was making is that that is the Joint Foreign Affairs, Defence and Trade Committee. This is the estimates committee. I would want to emphasise that I think it is the estimates committee that should have the in camera briefing as it is the one that is handling the questions about the budget, not the Joint Foreign Affairs, Defence and Trade Committee, and that does not have a specific responsibility at looking at the budget outlays—which we now call outcomes and outputs. It should be this committee. If members of the committee do not want to accept that responsibility of an in camera hearing, they should not attend it. That ought to be made very clear.

Senator HOGG —There are problems in a legislation committee being able to hold in camera sessions for estimates. We can for annual reports.

Senator SCHACHT —That is what I am saying. For the annual report, we did that for CSIRO as they did not want to put it on the record, because it would have affected their commercial position in legal challenge. That is the device we use. We also used it for Telstra over the COT cases.

Senator Newman —You are wasting your estimates time. There is going to be no different answer from the one he has got.

Senator SCHACHT —All I can say, Minister, is that I just wanted to emphasise that I think it ought to be looked at through the estimates committee.

ACTING CHAIR —Senator Schacht, I think Mr Tonkin has undertaken to raise that with the minister.

Mr Lewincamp —Senator, I have not answered the second half of your earlier question about the change from cash to accruals; we only talked about output management.

Senator HOGG —We will come to that, I have got no doubt. Just while we are on this: at the technical briefing that we had you were able to put outputs against each of the goals at pages 3 to 5. There are six goals over those three pages. Is the intention to report against those goals in the annual report, or is that intended to be just a good, brief, preliminary statement by way of entry into the PBS?

Mr Tonkin —I think it is the second rather than the first. The goals are broadly descriptive and longer term in nature. What we are setting out to have the funds appropriated against and will report on will be the outputs which we are delivering to achieve the outcome which the government is seeking. The goals are, in the context of this document, setting a broader and longer term context. You could not achieve `More Combat[hyphen]Ready Capability', `Stronger Future Capability', et cetera. They are continuing types of things. They are more contextual. They give us a broad framework.

Senator HOGG —Let us just go to a specific issue. For example, goal 3 is `Closer Alliances and International Strategic Relationships', which is specifically output 20. A sentence near the top of page 4 says:

In particular, we will work with the Indonesian military to support its transition away from political involvement and encourage its development as a conventional, externally oriented defence force.

Where do I find that in output 20?

Mr Lewincamp —It is implicit in the third dot point under `Significant Achievements Plan', but it is not explicit.

Senator HOGG —That is why I am confused. Again I just picked that one at random. That to me is a fairly significant part of the output. I would imagine that, subject to not breaching any secret information or anything such as that, that would be a little bit more than being `implicit in dot point 3' on page 119.

Mr Lewincamp —I agree.

Senator HOGG —But that is not the only such instance, and that is why I am asking the question. Senator West is champing at the bit to go to goal 4, but first could I just take you to goal 5.

Senator WEST —That is output 22.

Senator HOGG —The sentence under goal 5 that leapt out at me stated:

A revised ADF remuneration structure is being developed . . .

In output 22 where do I find that?

Mr Lewincamp —Goal 5, `Growing Skills and Knowledge', applies across all 22 outputs because it relates to our work force. It is not specific to output 22.

Senator HOGG —So it is all 22 outputs. I have read that as output 22.

Mr Lewincamp —It is all 22.

Senator WEST —So goal 6 is across all 22 as well.

Senator SCHACHT —Goals 5 and 6 are across all 22?

Mr Lewincamp —That is right.

Senator SCHACHT —So we will never know when you actually got Plugger kicking the 1,300th goal; we will not exactly know when you have kicked it?

Mr Lewincamp —This is one of the reasons why we have retained the group information. This is a question that would legitimately come up under the defence personnel executive, under the groups—to talk about our remuneration strategy.

Senator HOGG —I was not trying to get into the issue; I was trying to find out where. If I can then take you back to page 3 of the PBS, under the heading `Goal Two—Stronger Future Capability'—outputs 1 to 19—the second sentence in the second paragraph states:

In the coming year, Defence will establish an Office of the Revolution in Military Affairs to study the implications—

Senator WEST —I thought that was a lovely title.

Senator SCHACHT —It is a great title.

Senator HOGG —It is something that Mao would have been proud of.

Senator SCHACHT —I thought Gaddafi might have been using that title.

Senator HOGG —Again, that is across the 19 outputs so I cannot find it individually itemised in any of the outputs from 1 through to 19. Is that correct?

Senator WEST —Does that come under any of the groups?

Mr Lewincamp —This was a government election commitment at the last election.

Senator HOGG —Again, I am not wanting to debate the merits of it; I just want you to—

Mr Lewincamp —I understand. Output 1 is where it should be—sorry, output 22.

Air Marshal Riding —RMA will be under output 22.

Senator HOGG —Where do I find it within output 22?

Air Marshal Riding —Under the heading `Strategic Policy' and the dot points `Providing strategic advice on capability development' and `Formulating and analysing . . . new future scenarios'.

Senator SCHACHT —But there is no mention there of the Office of the Revolution in Military Affairs at all. Shouldn't that have been mentioned on page 124 so that you can get a cross[hyphen]reference?

Senator HOGG —I am not trying to be difficult. I am just trying to ask: where is the guide to the galaxy?

Senator WEST —Also, on output 22, under the heading `Strategic Policy', there is a fifth dot point which states, `Provide advice to, and support for, a range of national security for a.'

Mr Lewincamp —Remove the gap. I think it is supposed to be `fora'.

Senator HOGG —I thought there was something secret in there.

Mr Lewincamp —As in the plural of forum.

Senator SCHACHT —It is like forums—plural.

Senator WEST —If you had used `forums', we would have understood it—or if the gap had not appeared.

Senator HOGG —Before I turn you over to Senator West, who wants to talk about goal 4, I am trying to find the relationship between goals 1 to 6 and the various outputs. We were told in the briefing that certain goals applied to certain outputs and so on. I understand that. But how are we to pick up some quite specific things related in the front part of this document and then pick them up in here without some absolutely diabolical—

Air Marshal Riding —There is a cross[hyphen]referencing issue here, Senator. The point is that these specific objectives for 1999[hyphen]2000, grouped together under the broad goals for the way ahead for Defence of priorities set by the minister and the department, will be reported upon in the annual report. There will be that kind of activity, but I appreciate the fact that there is a lack of cross[hyphen]reference between the output performance indicators and these specific issues that have been identified as objectives that will be achieved in 1999[hyphen]2000.

Senator SCHACHT —In the annual report, will there be any reporting on what has happened with each of the goals? Will we get a description in the annual report of how these six goals have gone, irrespective of the cross[hyphen]referencing?

Mr Tonkin —It is my intention that it would not report on the goals because the goals are, as I said, a broad contextual statement of where we are going over a number of years. What we will try to do in the annual report is to be quite precise, under each of the 22 outputs, about what we said we were going to achieve and give you an accountable way of seeing whether we did or did not achieve against each of those outputs, which contributes over time to these broadly expressed goals. The goals are there as an internal thing. On reflection, it is probably unhelpful to present the key objectives in the way we have against these goals, because all it has managed to achieve is to confuse rather than to assist.

Senator SCHACHT —I have to say, Mr Tonkin, that in the private briefing we had with the officers of the department—which was very, very useful—we raised the matter of how these goals had appeared. We expressed the view then that by putting them in you have only created more confusion. If you had stuck to outcomes and outputs—

Mr Tonkin —The intention was to give a useful overview. It has not worked as well as we would have desired.

Senator SCHACHT —The foreign affairs department called them `milestones' rather than `goals'.

Senator HOGG —We have been through that.

Senator SCHACHT —We started calling them `millstones' because Foreign Affairs got into the same quagmire as I think you have. Senator Hogg has raised a very good point: you have put in objectives but, by the time the annual report comes out in 12 months time, how will you report against them? Goal 3 states:

In particular, we will work with the Indonesian military to support its transition away from political involvement and encourage development as a conventional, externally oriented defence force.

In 12 months time, if you do have it in the annual report, why would you not make a comment under the objectives, `This has developed in the right way. We are pleased with the outcome, that the military in Indonesia has become an externally oriented defence force'? Would you put that in the annual report as an achievement under the goals, or would you write it somewhere in an output?

I can see that you can actually measure that. If the military do not withdraw from the politics of Indonesia and from interfering in some way which we as democrats might oppose, you can say, `It has failed.' Or, if they have withdrawn and there is a democratic parliament that is actually giving directions to the Defence Force, you can say, `This has been a major achievement.' But then you might say, `This is classified. We do not want to write that either way because we do not want to offend the Indonesian military,' and then we go to that other argument.

Air Marshal Riding —Certainly, within the outputs, we would be reporting that sort of output achievement. It would depend upon whether it is useful for us to provide in the annual report an overview of our achievement ahead of the detail in the back on output achievement and making sure that it is appropriately cross[hyphen]referenced, which it is not at the moment. You have quite rightly picked up on that.

We would certainly be very interested in your view as to whether that overview, both for our objectives and for our achievement as we would report it in the defence report, is useful. As Mr Tonkin said, if it is not, we can just go straight to the very technical, hard[hyphen]edged, hard[hyphen]nosed reporting without that overview, which I would have thought would have been of some assistance.

Senator SCHACHT —At the time of the private briefing I expressed my view that the goals are actually creating more confusion and it is not relevant for them to be in the document in the way they are, because I do not think you can chase them all down. They are nice descriptions but, if you are really relying on outcomes and outputs and you cannot relate them to those, we cannot chase them down.

Air Marshal Riding —They are relatable but it is not clear.

Senator SCHACHT —But where?

Air Marshal Riding —As you read this document from an uninformed position, it is not clear what the connections are.

Senator SCHACHT —Are you sure you know what the connections are? Are you sure that, if you went back in the next couple of weeks, you could tie all those paragraphs under the six goals into—

Air Marshal Riding —I think, broadly, one way or another, we could link them up.

Senator SCHACHT —You could link them up?

Air Marshal Riding —We might be a bit obtuse, but we would get there.

Senator HOGG —You have supported what I said in the first instance, so I do not want to put words in your mouth. This has to be readable and understandable to people. Whilst it might be a good working document for you and us, the whole aim of this game to me is that there is a transparency and an understandability for the average person. If anyone claimed that they would pick up the Defence PBS as night[hyphen]time reading, I think you would question—

Senator WEST —They would have to be an insomniac.

Senator HOGG —You would have to question something about them—I do not know what it would be.

Senator Newman —Their honesty?

Senator HOGG —It could be that, Minister, as well as a range of other things. Nonetheless, I think there is a responsibility for this to be in a fairly readable style.

Before I get back to those questions that I was going to ask about pages 18 to 21, let me just take you to page 6, which talks about the outcome, `The prevention or defeat of armed force against Australia or its interests'. The following paragraph tends to clarify that, saying in part:

Prevention, in this context, includes all parts that contribute to a more stable and certain international environment, such as peacekeeping and assistance in overseas disaster[hyphen]relief operations.

It goes on, however:

Armed force includes incidents of acts of terrorism and other breakdowns of order within Australia which may require Defence aid to the civil power.

In my previous readings of PBSs—I have been through three now—I have not seen that phrase `other breakdowns of order within Australia which may require Defence aid to the civil power'. Is that something new that has been added, and, if it has been added, why?

Mr Tonkin —It has always been part of the Defence responsibility. There always has been a provision for Defence aid to the civil power. The words used to be `defence including civil defence' and things like that, which was a shorthand to cover that sort of thing. This is perhaps more explicitly expressed, but there has been absolutely no change in the intended scale or scope of Defence responsibility.

Senator HOGG —I have looked at previous PBSs and I have tried to find it. This is a change—

Mr Lewincamp —I will explain why this section is actually in the PBS. It covered some legal advice that was sought by the Department of Finance and Administration about whether the outcomes put forward by departments were sufficiently broad and comprehensive to cover all expenditure intended by departments. The legal advice offered to the Department of Finance and Administration indicated that our outcome might be a bit too specific to include some of these other items. That is why we have an explanatory paragraph underneath the outcome which indicates the intent of the words in the outcome, to ensure that all of the money that we are appropriated against that outcome can legitimately be spent on things such as overseas disaster relief operations, counterterrorism and a range of things of that sort.

Senator HOGG —I accept that, but, if I look into the previous PBSs, nowhere do I find the words `other breakdowns of order within Australia which may require Defence aid to the civil power'. What are `other breakdowns of order'? Do we know?

Air Marshal Riding —The Hilton bombing and the subsequent CHOGM meeting in the 1980s, for example, resulted in Defence being called upon to provide aid to the civil power. It is for those types of events where the law and order capacity in the civil environment is insufficient to deal with the particular circumstances, and there is legislation under which aid to the civil power can be provided. That is what is reflected there.

Senator HOGG —Do you have a broad list of contingencies that you would be likely to meet, in terms of that `other breakdowns of order'?

Mr Lewincamp —I think it would be better for us to take that on notice and give to you the circumstances in which the ADF can be called out in aid to the civil power. It would be better to come from that angle rather than trying to guess what contingencies they might meet.

Senator SCHACHT —I was just thinking of that phrase, `Call out.' Is that defined in the legislation, that you have to make certain legal decisions about the call[hyphen]out to help in the civil area?

Mr Tonkin —Call[hyphen]out tends to be in the context of the reserve, Senator.

Senator SCHACHT —That is what I want to get to. You are not calling out the reserves.

Air Marshal Riding —No, Senator.

Mr Tonkin —This is where the permanent forces would be requested by the appropriate government authority.

Senator SCHACHT —Let us just deal with the reserves. Could the reserves be used for a call[hyphen]out for a civil disturbance, legally?

Senator WEST —For breakdowns of order.

Mr Tonkin —I would like to take that on notice.

Air Marshal Riding —I think we will take that on notice. We need to find the legislation detail and provide it to you.

Senator SCHACHT —On the same point, in an industrial dispute, could this phrase be used for the Defence Force to be used to remove a picket line if the police could not do it?

Mr Tonkin —I think I would like to take that on notice, too.

Senator SCHACHT —I am sure the Defence Force would like to, as well. If police refused to remove a picket line because of their own industrial position, or whatever else, it is possible then that the Army, the professional service, could be called on to remove the picket line?

Mr Tonkin —I would not wish to speculate on that sort of an issue, Madam Acting Chair.

ACTING CHAIR —Senator Schacht, I think the officers have indicated that they will take the questions on notice.

Senator SCHACHT —Major General Peter Dunn, who has come to the table, might be willing to proffer some view at the moment.

Major Gen. Dunn —If the military is to be used to support police action in that situation you have described, they do require a formal declaration.

Senator SCHACHT —A declaration by whom?

Major Gen. Dunn —By the Governor[hyphen]General. With regard to the use of the reserves, which was your previous question, the call[hyphen]out relates to defence of Australia tasks, and it is confined to that at the moment.

Senator SCHACHT —Thank you.

Senator HOGG —While we are in this broad area, could I raise another issue on the performance indicators. I see that there is a note to a number of the performance indicators that occurs throughout the document, which says:

Valid only for CPD98, judgement for CPD99 yet to be made.

Getting myself around the acronyms, I found out that CPD is the CDF's preparedness directive. As I say, it is not just a note against one set of performance indicators; it is against quite a number. My way of interpreting that note is that it is valid only for the CDF's preparedness directive 1998 and that judgment for the CDF's preparedness directive 1999 is yet to be made. Does that mean that the performance indicators are being based on out[hyphen]of[hyphen]date judgments?

Air Marshal Riding —The CPD98 and CPD98 Amendment List No. 1 are the directives under which the ADF is being held at readiness and sustainability periods. CPD99 is currently being developed and it will set the new parameters for readiness and sustainability for the year 1999[hyphen]2000.

Senator HOGG —Now you have confused me.

Air Marshal Riding —CPD99 has not yet been issued.

Senator HOGG —It has not been promulgated at this stage—I understand that. I understand that there is a degree of sensitivity in the preparedness directives. I do not want to get to the exact nature of what is in there. But, if the budget were prepared on CPD98, how significant a change will there be to CPD99 such that it changes the performance indicators that were there for each output?

Air Marshal Riding —There will be some variation based on the changing strategic circumstances. Until that preparedness directive is finalised and CDF issues it, neither COMAST nor the service chiefs can declare their readiness and sustainability requirements to meet that CDF preparedness directive. However, whatever level of readiness and sustainability is declared in CPD99, it will be achieved within the resource constraints of the 1999[hyphen]2000 budget.

Senator HOGG —It just seems odd to me that in framing together a number of outputs for 1999[hyphen]2000 it would be based on CPD98 rather than on CPD99. I do not know whether I understand your internal organisation well enough, but, as an outsider looking in, it just seems to me that when we come to the 2000[hyphen]2001 budget you would be basing that on the preparedness directives germane to that year.

Mr Lewincamp —One of the things that we have noted at the front of this PBS is that the consequences of the government's increased preparedness requirements levied on Defence in March of this year have not yet flowed through all of the figures in the PBS. One of the consequences may well be to adjust the resources given to different outputs. We are not yet seeing the consequences of that flowing through. On page 97, which is the first page on which I could find—

Senator HOGG —Isn't it coincidental?

Mr Lewincamp —that footnote that you mentioned.

Senator HOGG —That is the page that I am at.

Mr Lewincamp —As the VCDF has mentioned, we would still expect the preparedness requirements levied on this particular output under CPD99 to be fully achieved. The one in the column that is likely to change, or may change, as a result of adjusting resources for the preparedness requirements could well be the flying hours. We may make some adjustments to the number of hours for those aircraft, for example, as a result of funding the increased preparedness requirements. That has not yet flowed through the PBS.

Senator HOGG —Without trying to see how many tables it applies to, except that it was something that I kept coming across—

Mr Lewincamp —I think it is the Air Force outputs.

Senator HOGG —Is it mainly Air Force?

Mr Tonkin —I think so.

Senator HOGG —It is in outputs 16, 19—it is in quite a few. It struck me as a note that was there for a reasonable purpose and it seems to me that it obviously is not going to be insignificant.

Mr Tonkin —It is one of the products of the timing of budget documentation. Once we moved from an August budget to a May budget, it became much more difficult to include within budget documentation the full set of what you are planning to do in the coming financial year because you are actually preparing this material just around Christmas or a bit
thereafter and so you are reaching a long way forward in making these projections. There are benefits in having the budget in place before the end of the financial year but one of the defects is that it cannot incorporate some of the decisions as comprehensively as previously. So it is a matter of the cycle.

The change from CPD98 to CPD99 will not vary the outputs of Defence; it will vary some of the balances of performances within some of those outputs. Those variations will be reported to this committee in the additional estimates process so we will be able to track them. If CPD99 changed something you would see that variation appearing in those documents so you can track the way it has shifted.

Senator HOGG —Can I therefore assume that in next year's budget we will have a similar note valid only for CPD99 and the judgment for CPD00 yet to be made? Is that a reasonable assumption on how this will flow through? I am just trying to get to the process.

Mr Tonkin —It could well be, Senator. It just depends upon the cycle time of when the preparedness directives are issued, of how much a variation there might be, and how enduring CPD99 might be. It could be that CPD99 has a longer duration. That depends upon the nature of strategic circumstances and so on. If the givens do not change very much then you can set the setting and you can stay pretty much at it.

Senator HOGG —This gets back to the earlier question that I raised about our ability to understand the performance indicators.

Air Marshal Riding —We simply cannot regulate the real world outcomes that are occurring every day in a total, quite unpredictable way and our response to them in a time frame such that will satisfy the preparation of this documentation.

Senator HOGG —I accept that, but nonetheless CPD98 or 99 is a fairly fundamental basis on which the outputs for this year 1999[hyphen]2000 have been made or will be varied at some stage. It just seems to me that, whilst it appears as very much a small one line there, it is something that should be considered to be significant. Thank you for that explanation.

Proceedings suspended from 10.43 a.m. to 11.02 a.m.

Senator WEST —The first sentence of the second paragraph on goal 4 says:

To assist efficient service delivery, Defence is taking steps to promote the development of the skills and capacities needed from the civil sector.

Can somebody give me some indication what that precisely means, please?

Air Marshal Riding —Senator, the skills and capacities we need from the civil sector are those support functions we are currently in the process of testing for outsourcing. In many areas the industry has not had experience in maintaining combat systems. As an example, the F111 combat capability has previously resided totally within the Air Force with some outsourcing of component repair. The intention is to test the whole of the deeper maintenance capability of the F111 fleet, and that will indeed demand that industry develops skills and capacities that it has not had before.

Senator WEST —So you are telling me that currently, with all the things that are being CSPed, the industry does not have the capacity and the capability—is that it—and they have to undergo additional training and develop new skills?

Mr Tonkin —As we progress through from the easier market testing areas such as garrison support, through clerical and administrative to a lot of the higher, more technical things, such as the Air Marshal has referred to, the scale of the challenge for industry rises quite
substantially and we need to ensure that there is capacity in industry to do those more skilled things particularly.

There is no question that at the lower end of the technological scale there is ample capacity in industry, as we have seen from the range of companies bidding in our garrison support things. We get in any one instance six or seven significant companies bidding. We want to make sure that when we get to the more complex things there is a robust competition and an effective ability to deliver the services that we want.

Senator WEST —Right. I think we are dealing with CSPing later on in the more specific questions looking along the lines of how you are going to reach the decision that the promotion of the development of the skills and capacities in the civil sector actually ceases to be efficient and beneficial in having them do it and how it is easier for you to do it. I will be wanting to know what the decision making process is going to be and what the guidelines and the criteria are going to be for those decisions to be arrived at because there are some fairly fundamental and significant decisions that have to be made. So I shall remember that.

When we had the private briefing we were told goal 4 related to output 21. Was that correct?

Mr Tonkin —I looked at that myself a second ago. It is not quite, because it is a two[hyphen]way equation. Output 21 is Defence's contribution to national support tasks—what we are doing to support broader national activities. Goal 4 goes beyond that to draw on the nation's capacity to assist the defence function to deliver defence capability more cost[hyphen]effectively. For example, I could just underline the sentence you took, the one about using airlines during contingencies.

Senator WEST —That was going to be my next question: where were both of those actually appearing in output 21—in fact, where were both of those appearing in the outputs?

Mr Tonkin —The second one you would not find in output 21. It relates to the earlier outputs, the capability outputs in particular. To give a simple example, during a large exercise, Crocodile 99, when moving large bodies of people about, we would routinely use the airlines on a contract basis to provide transportation. So that is a cost we would pay which might well come up against the land force capability output, which, from memory, is 11, so it is a minor cost element inside that activity. That is a `for instance' of where that sort of activity would appear.

Senator WEST —Okay, thank you.

Senator SCHACHT —Mr Tonkin, you say the cost of paying that service provided by the airlines to shift people to exercise Crocodile 99 is in output 11. Which line would that be on page 90?

Mr Tonkin —It would be under `Other expenses'. Look at table 3.11.2.

Senator SCHACHT —So the budget of just over $1 million—

Mr Tonkin —Billion.

Senator SCHACHT —would be in that cost?

Mr Tonkin —Yes.

Senator SCHACHT —If we asked you to take it on notice, you could provide a breakdown of that, of what the airlines got paid?

Mr Tonkin —They have not been paid anything yet. It is prospective.

Senator SCHACHT —Okay. For 1998[hyphen]99, on the accrual, it was estimated at just over $1 million. If we asked the question, you could provide us—if you took it on notice—with what was paid to the airlines in 1998[hyphen]99?

Mr Tonkin —We have not completed the 1998[hyphen]99 financial year.

Senator SCHACHT —I know we have not. That is what I am saying. We would have to ask the question at the appropriate time at the end of 1998[hyphen]99 or at the annual report or the supplementary estimates.

Mr Tonkin —At the annual report. How much we spent on airline contracts to support army training operations—that sort of question.

Senator SCHACHT —But it would not be mentioned as a specific role?

Mr Tonkin —No.

Senator SCHACHT —Because, you would say, it is too small?

Mr Tonkin —Yes.

Senator HOGG —If we can go back to the introduction—we seem to be all over the place—in the fourth paragraph on page v it says:

In accordance with the whole[hyphen]of[hyphen]government reforms, Defence is developing a new performance and resource management framework that builds on and integrates a number of current reforms and initiatives in Defence management.

Could you elaborate on what that means? Is that another new initiative or is it something that is already happening?

Mr Lewincamp —It is something that is already happening. In fact, this same issue has come up in the last two years at the PBS hearing. Rather than respond in an ad hoc fashion to each of the individual management changes that are occurring, we set out 2[half ] years ago to put in place an integrated resource framework that encompassed and captured output management, accrual budgeting, better performance management, better management systems, and training and education of our people in order to respond in a holistic way to all the things that are happening at the moment. We have been progressively implementing that over the last 2[half ] years, so this is an ongoing initiative.

Senator HOGG —Is there a finite conclusion to this or is it something that is developmental forever more?

Mr Lewincamp —There are some clear milestones and end points in it.

Senator HOGG —You have got milestones? Good.

Mr Lewincamp —Yes, we do.

Senator HOGG —I would be interested in the milestones.

Mr Lewincamp —I can give you milestones. It would be nice to say that this is a time limited initiative, but that will only happen if there is no further change in overall public sector management or Defence management. I cannot see that happening, so we are trying to put in place a flexible arrangement that can continue to adapt to new initiatives as they come up.

A couple of milestones. We are implementing a new financial management information system. It is called Project ROMAN. One of the milestones is that the first phase of that will be operational on 1 July this year. It will be fully implemented within a further 18 months across the Defence portfolio. This will provide us the systems support needed for accrual and output management. There are a number of others.

Senator HOGG —Just on that, if one looks to page viii, under `Output costing' it says:

At present, Defence's management information systems do not directly capture output costs. This is being addressed in the upgrade and replacement of these systems over the next one to two years.

Is that part of that Project ROMAN initiative that you have just referred to?

Mr Lewincamp —No, it is a slightly broader issue. Project ROMAN is the financial management information system. We need to integrate that with non[hyphen]financial performance information as well, but ROMAN will provide a considerable amount of functionality for costing of outputs.

Senator HOGG —So there are some outputs that are not directly costed. Is that the correct way to interpret what is there?

Mr Lewincamp —The current process involves us both allocating and attributing costs against the outputs. Some of the things that we are engaged in can be directly allocated to a particular output; and there are some costs within the department that we cannot just say, `That is specifically related to output 1 and nothing else'—for example, financial management services.

What we do is attribute the cost of financial management services across all of the outputs because one of the requirements in the new framework, in terms of the guidelines set by government, is that the full cost of the Defence activity has to be captured against the outputs; they did not want a separate section that says, `Management', `Corporate overheads' or other things. So there is a whole range of corporate functions, including financial management, personnel management and a number of others, that are attributed across all the outputs, usually on the basis of the proportion of the budget expended in that output or the number of people working in that output.

Senator HOGG —Just taking those two initiatives, one where the management systems are obviously being upgraded, where does one find those in the PBS? Can one find them in the PBS?

Mr Lewincamp —You can certainly find them under group 14, on pages 164 and 165. If you look at the top of page 165, the second dot point down specifically refers to Project ROMAN.

Senator HOGG —Yes.

Mr Lewincamp —It should also be in output 22. I am trying to find it.

Senator HOGG —I found output 22. It is on pages 124 and 125.

Mr Lewincamp —It is not explicit there. It underpins a number of the achievements listed there, but it is not separately mentioned. It is seen more as a supporting measure than a specific deliverable in itself.

Senator HOGG —How are we supposed to know these things from where we sit? You have the advantage of having put the documentation together and can see where these things fit in and underpin different programs. How are we supposed to identify those? An equally important question is: how important is it for us to obtain a reasonable understanding of what is happening that we need to do it at all?

Mr Lewincamp —The issue here is that the sorts of things we are talking about—management systems, financial management systems—are not outputs that Defence delivers to government so it is not easy to capture them in outputs 1 to 22. In essence, they are preconditions. They are part of what the Defence organisation does to run itself effectively and efficiently and are captured more clearly under the groups. Again, one of the reasons why we have kept the groups there is so that you can get some sense of what we are doing in terms of financial management or personnel management or logistic management. But they are not outputs, as such; they are more inputs. They are preconditions or contributing factors towards the successful delivery of the outputs.

Senator HOGG —I must say that I went through the individual groups and, whilst I do not have a lot of questions on each of the individual groups, there are some groups where I have more questions than others. The questions just leap out at you there, whereas when you look at the outputs the questions do not leap out at you at all—you are looking through that maze. I have no more questions on the opening section.

Senator SCHACHT —Mr Tonkin, I refer to page 6—which has been mentioned before—headed `Defence outcome and outputs'. When I read that, I must say that I get a more defined picture about what you are trying to achieve than I do by reading the goals. If you had not put the goals in this document and just stuck to the defence outcome and outputs on page 6, I probably would have found this to be a more satisfying document. You may not have given me enough leads elsewhere to chase things up, because what is in the goals are a number of interesting comments, but I would have thought that, if you stuck to something like page 6 in the future for this accrual accounting system—defence outcome and outputs, with those four dot points listing which outputs they are covered by—that would be a much more structured way to proceed than having those goals running at almost cross[hyphen]purposes.

Mr Tonkin —Thank you, Senator. We are a learning organisation.

Senator WEST —It might not be to our benefit.

Senator SCHACHT —I know it might not be to our benefit, but I suspect that in the long run it probably will be because all we are going to get is gobbledegook about goals. They will always be written up in abstruse ways about whether or not they have been achieved, and then we will be told they are covered by security factors, et cetera.

Mr Tonkin —Madam Acting Chair, we would probably still seek to provide some sort of a summary overview, even if we did it by output, because we believe it is useful for the odd insomniac reader of the document—

Senator SCHACHT —There are at least four of us.

Mr Tonkin —to be able to capture in some few pages the broad nature of the deliverables we are offering. We think that broad overview is helpful. It is more the context it has been presented in which has perhaps been confusing in this instance.

Senator BROWNHILL —Madam Acting Chair, if we actually moved on to capital budget or financial statements or got into some of the actual specifics, a lot of these questions that have been asked might actually eventuate into reality—

Senator SCHACHT —I would not hold your breath.

Senator BROWNHILL —or we might get very clear replies to some of the questions.

Senator HOGG —I think we have been doing very well. I think we have progressed very well.

Senator SCHACHT —With all due respect, Senator Brownhill, we could spend three weeks on the six goals and still be no clearer about outputs and outcomes than when we started. That is why I just make the point: I do not know what the document is that Defence has used to get these goals and how they are kicked around, and there are useful things for an opposition to chase up on the odd paragraph here and there, Mr Tonkin. Thank you for those.

ACTING CHAIR —Can I just clarify, Senator Schacht: we are still on portfolio overview?

Senator SCHACHT —Yes.

Senator HOGG —I am about to move.

Senator SCHACHT —It seems to me that if you jump from page 2 to page 6 it is a cleaner document. Whether in the end we are going to get more information in 18 months time, when the annual report comes down after the first full year of accrual accounting, the proof will be in the eating of the pudding. We may then go back to look at some of those goals, at where they have disappeared to, Mr Tonkin.

Senator HOGG —Can we move to the Defence Reform Program?

Senator SCHACHT —Can I just say that occasionally we may come back to page 7, table 1.1, performance indicators, which are the overall ones that relate to specific outcomes.

ACTING CHAIR —I think the officers realise we are all working through this with patience.

Senator HOGG —On the Defence Reform Program, can I acknowledge the assistance of Mr Lewincamp and others in providing me with a document which—

Senator WEST —You have got and nobody else has.

Senator HOGG —I do not know if this has been supplied just to me. That is what I am trying to clarify. It is a document which was forwarded to the secretary of the committee which arose out of the briefing. It is this document.

Mr Lewincamp —It was forwarded to the secretary of the committee.

Senator HOGG —Yes, forwarded to the secretary of the committee, who forwarded a copy on to me.

ACTING CHAIR —For distribution?

Senator HOGG —I do not know. Was it distributed to other members? We are not sure whether it was distributed to other members of the committee. That is why I am just taking a couple of minutes to try and identify the document. It is a letter dated 3 June. The reference is RFP136/1999. It has provided me with a number of tables on the Defence Reform Program, the cumulative personnel reductions, the cumulative resources available for reinvestment 1997[hyphen]98 through to 2002[hyphen]03, and a further document headed `Defence Reform Program reinvestment 1997[hyphen]98 to 2002[hyphen]03'. That document has not been provided to all members of the committee?

Senator WEST —It might have been.

Senator SCHACHT —It may have been. Can we get a copy of that now?

Mr Lewincamp —What we tried to do in that document—

Senator HOGG —Would you just explain briefly, for the benefit of the committee, the purpose of the document and how it came about as a result of the briefing that you gave to us?

Mr Lewincamp —It came about for two reasons. One is that at the last hearing on the PAES last year and the supplementary hearing, you asked us to give a reconciliation of DRP savings and reinvestment through the various documents since the 1998[hyphen]99 PBS. That was the 1998[hyphen]99 PBS, the 1997[hyphen]98 annual report and then the PAES in 1998[hyphen]99. We provided that. Then, slightly in advance of the technical briefing, you asked for that same reconciliation to be extended over this budget and the forward estimates period. So we have now provided that in a single table which shows the DRP reinvestment and savings right across that period.

Senator HOGG —That is correct. For the sake of those who may read the Hansard of these estimates at some stage, would it be useful if we had them incorporated in Hansard ?

Mr Lewincamp —Certainly, that is possible.

Senator HOGG —I think that might be worth while. It is clearly designed to give a trail of what has happened in the Defence Reform Program and it is a document that has been, as
you have outlined, prepared by you. I must thank you very much for it and compliment your staff on the preparation of the document.

ACTING CHAIR —Is it the wish of the committee that the document be incorporated in the transcript of evidence? The minister has not objected and there being no other objection, it is so ordered.

Department of Defence

RFP 136/1999

3 June 1999

Mr Paul Barsdell

Secretary

Senate Defence, Foreign Affairs and Trade Legislation Committee

Parliament House

CANBERRA ACT 2600

Dear Paul

At the Supplementary Hearings before the Senate Legislation Committee on 5 May, I gave an undertaking to Senator Hogg to provide a summary of all Defence Reform Program resource efficiencies and personnel reductions from the 1997[hyphen]98 Annual Report to the 1999[hyphen]2003 Forward Estimates. I have also included a summary of the reinvestment of the resource efficiencies into new or enhanced capabilities for the ADF. The information is attached.

Should Senator Hogg need further explanation of the information provided, I would be happy to elaborate in person or by correspondence.

Yours sincerely

(signed)

Jon Collings

for

Frank Lewincamp

First Assistant Secretary

Resources and Financial Programs

Attachments

Annex A contains an explanation of the cumulative personnel reductions (both military and civilian), by category of reform and Group for the period 1997[hyphen]98 to 2002[hyphen]03.

Annex B contains a summary of all Defence Reform Program cumulative resources available for reinvestment by category of reform and Group for the period 1997[hyphen]98 to 2002[hyphen]03.

Annex C contains a summary of Defence Reform Program reinvestment for the period 1997[hyphen]98 to 2002[hyphen]03.

Defence Reform Program Reinvestment (1997/98 to 2002/03)*

Defence Reform Program—Cumulative Resources Available for Reinvestment (1997/98 to 2002/03) *

Explanatory Notes to Table:

A) These notes relate to instances where there has been a material reduction in savings in any particular Group. Overall however the level of Defence Reform Program savings is greater than that originally forecast. The majority of variations relate to changes in the timing and scope of activities, transfers between categories of reform and Groups or the influence of actual rather than forecast outcomes.

1) The savings forecast in 1998[hyphen]99 related to the collocation of the operational level command headquarters. As a decision on the collocated Headquarters has not yet been made, the previously programmed savings are not likely to be realised until further detailed work on the planning for the collocated Headquarters is completed.

2[hyphen]5) This variation relates to the recosting of Defence Reform Program savings at the time of the 1989[hyphen]99 Additional Estimates and revisions to the allocations of savings to better reflect where overhead savings are being made.

6) This change reflects the impact of the error in DRP savings calculations over the Forward Estimates Period.

7[hyphen]9) This variation relates to the recosting of Defence Reform Program savings at the time of the 1989[hyphen]99 Additional Estimates and revisions to the allocations of savings to better reflect where overhead savings are being made.

10) The revisions represent the reallocation of one off property disposals into a separate category and the recosting of Defence Reform Program Savings at the time of the 1999[hyphen]00 Additional Estimates.

11) These estimated savings related to the integration of strategic level policy staffs. Following the establishment of the National Support Division, there are no savings attributable to Group1.

12) This change reflects the impact of the error in DRP savings calculations over the Forward Estimates Period.

13[hyphen]14) These variations relate to the recosting of Defence Reform Program Savings at the time of the 1999[hyphen]00 Additional Estimates and the consequent distribution of overhead savings to better reflect the categories against which savings are being achieved.

15) This variation relates to a number of factors; the reallocation of $10m per annum in savings relating to food management to the `unallocated' category, changes to Group 6 savings as a result of the recost of Defence Reform Program savings at the time of the 1999[hyphen]00 Additional Estimates and changes to the number and mix of Service personnel to be saved as actual outcomes are known and better estimates of the forward program are made.

16) These variations relate to the recosting of Defence Reform Program Savings at the time of the 1999[hyphen]00 Additional Estimates and the consequent distribution of overhead savings to better reflect the categories against which savings are being achieved.

17) The scope for achieveing these initiatives has been reviewed and alternate savings will be found.

18[hyphen]19) These variations relate to the recosting of Defence Reform Program Savings at the time of the 1999[hyphen]00 Additional Estimates and the consequent distribution of overhead savings to better reflect the categories against which savings are being achieved.

20) This change reflects in part the impact of the error in DRP savings calculations over the Forward Estimates Period and a review of the level of savings which might be achievable by Navy in this category of reform because the retention of the ADF at 50,000 has resulted in adjustments to the level of savings available in Navy training functions.

21) These variations relate to the recosting of Defence Reform Program Savings at the time of the 1989[hyphen]99 Additional Estimates and the consequent distribution of overhead savings to better reflect the categories against which savings are being achieved.

22) Group 1 has transferred its administrative personnel resources to Group 13.

23) This change reflects the impact of the error in DRP savings calculations over the Forward Estimates Period.

24[hyphen]29) These variations relate to the recosting of Defence Reform Program Savings at the time of the 1999[hyphen]00 Additional Estimates and the consequent distribution of overhead savings to better reflect the categories against which savings are being achieved.

Defence Reform Program—Cumulative Personnel Reductions (1997/98 to 2002/03) *

Explanatory Notes to Table:

These notes relate to instances where there has been a material reduction in savings in a particular Group. Overall, however, the level of Defence Reform Program savings is greater than that originally forecast. The majority of variations relate to changes in the timing and scope of activities, transfers between categories of reform and Groups or the impact of actual rather than forecast outcomes.

1[hyphen]2) The savings forecast in the 1998[hyphen]99 PBS related to the collocation of the operational level command headquarters. As a decision on the collocated Headquarters has not yet been made, the previously programmed savings are not likely to be realised until further detailed work on the planning for the collocated Headquarters is completed.

3) This variation relates to a minor reduction in civil personnel due to more recent information on actual savings.

4) The variation in civilian numbers reflects the revised assessment of civilians to be saved under the various Intelligence reforms.

5[hyphen]7) These changes reflect updates to the DRP savings plan within the Intelligence Group.

8[hyphen]9) The DRP initiative to civilianise some positions within Capability Development Division will not now proceed

10) This change relates to a DRP initiative to enhance the development of strategic guidance within Defence Headquarters.

11[hyphen]12) These changes reflect revisions to the Acquisition civilianisation plan that has been affected in part by the lower than forecast appointment of qualified civilians into positions within Acquisition.

16) This saving relates to a DRP initiative to rationalise the Geographic Information Organisation. It was not included in the 1989[hyphen]99 PBS.

14[hyphen]15) This reflects a revision to the outcome of the market testing program which is not scheduled to be completed until 1999[hyphen]2000

16) 99 civilian personnel savings were recorded in the 1998/99 Portfolio Budget Statement against the Science and Technology function relating to support personnel. These personnel savings achievements have been transferred to Corporate Support (89) and to Defence Estate (10).

17[hyphen]18) The change to civilian personnel numbers reflects the actual number to be achieved. The changes to the Service workforce represent better estimates of the likely mix of Service personnel savings.

19) These estimated savings related to the integration of strategic level policy staffs. Following the establishment of the National Support Division, there are no savings attributable to Group 1.

20) The changes to civilian and Service personnel numbers reflect both actual outcomes of market testing and rationalisation activities and better forecasts of future activities. The mix of Service personnel to be saved is still being refined.

21) These savings have been transferred to the Administrative Support category.

22) The variation represents the latest estimate. However, the level of savings in this area in Defence Personnel Executive is subject to internal review.

23[hyphen]24) This change reflects in part the impact of the error in DRP savings calculations over the Forward Estimates period and a review of the level of savings which might be achievable by Navy in this category of reform. The retention of the ADF at 50,000 has resulted in adjustments to the level of savings available in Navy training functions.

25) Group 1 has transferred its administrative personnel resources to Group 13

26) This change reflects the impact of the error in DRP savings calculations over the Forward Estimates period.

27) These changes have resulted from the actual outcomes of market testing of Garrison Support services in Northern Queensland, South Queensland and Western Australia.

27) These revisions relate to the current forecast personnel reductions in Group 14. The Group 14 savings target will be achieved with a lower then forecast level of actual personnel savings.

Senator HOGG —The document consists of a number of pages which I think Mr Lewincamp would have a fresh copy of. I have scribbled on mine. Can I take you, Mr Lewincamp, to the first part of that document and that is the Defence Reform Program, cumulative personnel reductions 1997[hyphen]98 to 2002[hyphen]2003. As I understand the document that has been presented, if we look at defence control and management under group 2, the 1999[hyphen]2000 budget indicates that there will be cumulative personnel savings there of 102 whereas, if we look back to the 1998[hyphen]99 PBS, the figure in brackets underneath 19 tells me that that is what was in the PBS, is that correct?

Mr Lewincamp —That is true.

Senator HOGG —I think I am interpreting that the right way.

Mr Lewincamp —Yes, you are. There has been a change in the estimate of the personnel reductions that will occur.

Senator HOGG —So I have got that part right. The other part that seems to have changed is that, at the top, we now have 2002[hyphen]2003 estimate, whereas in the original PBS, we had 2001[hyphen]2002 and then mature.

Mr Lewincamp —It is the addition of the final year of the forward estimates period as we roll forward a year.

Senator HOGG —Right. My question is, though: is there a mature year beyond 2002[hyphen]2003?

Mr Lewincamp —In some cases yes: in some cases, the initiatives have reached maturity in that year; in some cases, there is a year or two more before they reach maturity.

Senator HOGG —So I cannot necessarily read from that table where something still has to come to maturity?

Mr Lewincamp —No, that is true.

Senator HOGG —It seems to me, if we can go back to that defence control and management group 1, that originally for 2001[hyphen]2002 for the APS in group 2, there were going to be 22 positions and now that is out to 109: is that correct?

Mr Lewincamp —That is true.

Senator HOGG —Do we know what brings that about?

Mr Lewincamp —I can probably find it. Can I take that on notice?

Senator HOGG —I think there will be a number of these things that you will need to take on notice. I just thought, if there was a ready explanation, it would have been helpful.

Mr Tonkin —In broad terms, Senator, it will come about by the rationalisation of what was the navy office in the old structure to the navy headquarters component of the new Australian Defence Headquarters. There was significant downsizing in that area and we are picking up, I would expect there, the larger than initially anticipated reduction. I would like to confirm that, but that is my feeling.

Senator HOGG —So your gut feeling, if I can put it that way, is that we are looking at a number of people who will be made redundant under that program.

Mr Tonkin —Not necessarily made redundant, Senator. There are reductions in that area. Some of those people may be redeployed elsewhere; other people may leave; not everybody affected by the Defence Reform Program is made redundant.

Mr Lewincamp —Senator, as a general explanation—

Senator HOGG —No, I understand that.

Mr Lewincamp —For a change of that magnitude, my initial assumption would be that we have changed the category against which the saving is being recorded: we have done a transfer somewhere internally. I would not expect a change of that magnitude just on a particular initiative.

Mr Tonkin —So there are two explanations—one of them is right.

Senator Newman —And taking it on notice is the wisest and quickest thing to do.

Senator HOGG —Which is part of my problem with the DRP and following it through. I would imagine that the government is as interested in the explanations that are given as to anything else.

Mr Lewincamp —Senator, you might remember at the last hearing we spoke about some of these changes. Because we had changed the categories against which we reported them since the start of the DRP, we had also changed allocation of particular initiatives between some
of the groups. I made the point at the time that the really important issue here is the bottom line rather than the way in which—

Senator HOGG —I am going to come to the bottom line.

Mr Lewincamp —the issues are recorded against particular groups.

Senator HOGG —It just seems to me though, Mr Lewincamp, that it is a bit of a moveable feast, that it is very hard to follow from hearing to hearing as to what is actually taking place. It does interest me because I am just concerned that the right outcomes are being achieved.

I take you to the total on that page for defence control and management. I note that the figure for that is now out to 188; the mature figure that I had provided by you last year was 109; the figure at 2001[hyphen]02 is 105. So there is a bit of a blow out there which I have now had two different explanations for. But then if you look at the total ADF, the 2001[hyphen]02 figure for the total ADF positions is 278. That tallies up with what you provided me with on the previous occasion, except that I had a mature figure of 497 ADF positions. That 497 was not shown in the table that was provided to me, yet at 2002[hyphen]03, there is a number shown of 224 ADF positions. So instead of 497 positions, according to the table you provided me with last year around this time, it is now down to 224, which seems a substantial—

Mr Tonkin —It is not down, Senator. There is a distinction between 2002[hyphen]03 and a mature number, and the difference there will be, if I can hazard, is that there are certain initiatives which will be beyond 2002[hyphen]03.

Mr Lewincamp —Senator, I come back to the point that we are still talking about, savings within one initiative. In defence command and management group initiatives, there are—

Senator HOGG —I accept that.

Mr Lewincamp —10 or 11 others—

Senator HOGG —We will come to those, too.

Mr Lewincamp —and we have made adjustments about a number of particular initiatives and how they are recorded within these and they have moved around. If I take you to the table at the bottom which talks about total personnel reductions, at the end of that whole section—at the end of the fourth page—you will see in 2001 and 2002, against an estimate last year of 11,175, we are now estimating overall ADF reductions of 11,414—so it has gone up. It has not gone down as shown against a particular initiative.

Senator HOGG —That is why I am confused and I want to come to this. If we go to the next column, near that 11,175 that you are just looking at, in 2002 and 2003, it says 11,757. The mature figure that I had provided by you last year was some 14,001. So, whilst you are correct that you have gone up from 11,175 to 11,414, the mature figure that you provided me with for 1998[hyphen]99 was 14,001, and the mature figure for APS positions was 3,587, which equates reasonably closely to your figure of 3,647. However, that is a substantial number of positions—2,300 in terms of ADF. So, whilst I was not trying to do a line[hyphen]by[hyphen]line analysis of the various programs that you are attributing the changes to, you are quite correct—there is a major shift on the bottom line, but a major shift of 2,300 positions. That is in round figures. All I am interested in is that you seem to be going in the direction, for APS positions, at maturity, of being within ballpark figures, and that is fair enough. But, in terms of ADF positions, do you have maturity on this document? Maybe there is another column or two
missing which takes the mature position for ADF positions. But, if there are no further mature positions for ADF, where is the figure of 2,300?

Mr Lewincamp —There are more mature figures, and we will need to generate the mature line for you. The conclusion I would draw from that analysis is that we are making the total civilian savings more quickly than we are making the total ADF savings.

Senator HOGG —Sorry, I missed a bit of that.

Mr Lewincamp —We are making the total civilian reductions more quickly than we are making the total ADF reductions. But there is still a mature line beyond the year 2002[hyphen]2003, and we will need to generate that figure for you to compare it to the 14,000 figure we gave you last year.

Senator HOGG —So those are positions that will not necessarily be around as a result of what has taken place with the DRP.

Mr Lewincamp —Can I remind you about the assumptions that underpin these figures? They are based on the market testings of functions in which ADF personnel are currently engaged and—we said—on the assumption that most of these would be won by private sector contractors, and that 90 per cent of the ADF positions would then be lost. This generates the forward figures that you have here. Remember that they are based on those very broad assumptions and the reality might be different.

Senator WEST —Because you are actually now giving an indication in goal four that industry is not able to get up to the speed that perhaps you would like it to get up to because you have got to take steps to promote the development of the skills and capacities needed in the civil sector.

Mr Lewincamp —There is an issue there of industry's capacity to respond, although I think that is going ahead reasonably well. But there are other areas where we will not make the savings in personnel until we have put in place rationalised processes, rationalisation of facilities and infrastructure and seed funding for systems enhancements in areas such as logistics. All of those things are prerequisites for us making the personnel savings.

Mr Tonkin —Take the establishment of the permanent location for the Commander Australian Theatre. It is presently in a temporary location in Sydney at Potts Point, conjointly with maritime headquarters, which is a subcommand. Land Command, which is another element, is at Victoria Barracks; Air Command, which is another element, is at Glenbrook. Bring those three together in one place and we will achieve some significant efficiencies. We cannot do that until we have actually got the location determined and the establishment constructed. That is something which is sitting at the moment beyond the tables that you are being provided with.

That takes you back to your line under the first one, command and management. I think you will find there is a difference of about 250, in round numbers, in miliary positions between where we think we will sit at the end of that table you have, 2003, and the earlier mature number that you have seen. The variance, in that case, is related to that sort of initiative. The same applies in the sorts of other examples that Mr Lewincamp has given you. So what we need to generate for you, as Mr Lewincamp said, is a revised, mature set across all these numbers which will still give you a number we believe is consistent, within the tolerances you get when you get the estimates of the outcomes of given market testing, with the numbers we have displayed before.

Senator HOGG —The reason I was interested in that difference was that I was just wondering how that was related to the commitment to go from 42,700 back to 50,000 for the Defence Force. Will that see a weakening in the number of positions that you have saved in the longer term?

Mr Tonkin —No. Essentially, you have to look at it in two parts. Holding the ADF at 50,000 rather than allowing it to come to whatever number the reform process would generate means that we are buying back military personnel assets. That is a reinvestment. We still go through the process of saving the people who are engaged in the support functions and the administrative functions, and we reinvest the resources we generate from that in combat and combat support areas. That reinvestment may be in strict dollar terms. In other words, we may take the position and the person. That person may have a set of skills which is not redeployable, so that person separates from the Defence Force, the dollars are generated and the dollars are used to pay for the reinvestment in another person who goes through the training and skills pipeline to provide that capability. That is one way of reinvesting.

Senator HOGG —And that assessment process is ongoing, isn't it? It really is moveable in that true sense?

Mr Tonkin —That process is ongoing. As we take each support area and market test it, for example, we genuinely do not know, as we are competing often with in[hyphen]house options. If you go back a couple of steps: you start with a function. In many cases it is a function that was done across a range of services or other areas. We rationalise that function in that we bring it together, we co[hyphen]locate it, we bring it under one order of group of management. We can then start to think of how we can better run that function, which is what we call our rationalisation process. That will generate a range of savings, both in overhead costs and in people terms. We can then look to reinvest that.

We then market test that. In the market testing, we are competing our own organisation against the best that industry can offer. We cannot predict in that process who will win that competition or what scale of human resources and overheads will be in the final cost of doing the business. We have made judgments in the estimated savings as to what we think the broad outcome is, which is what you see in those tables, but they broad judgments. When you get the actual decision, there is a certainty that there will be some variance from that. We hope the variance is with a greater saving than we predicted.

Senator HOGG —I accept that there will be a variance. That is not my problem. My problem is tracking the whole process and seeing that the savings that are claimed to be deliverable are deliverable and that they are reinvested as per the desire under the Defence Reform Program.

Mr Tonkin —That is why we are very careful to measure—to come back to the second part of my example—even if an individual is in an area where the function has been rationalised or market tested. So the person has been `saved', the person has the skills. Let us say that it is an Army person who has infantry combat skills who has been working for various postings or training, for whatever reasons, in a support or a logistics function. You then can then deploy that person with their current infantry combat skills into a needed position in infantry combat in that output. We still want to measure the capture of that saving, the person's cost and their overheads, record that as a saving against our target a $1 billion. We then reinvest those dollars, expressed as a person's personal salary, et cetera, into the combat force, and we measure that reinvestment.

In that way we get the full capture of our savings and the full expression of our reinvestment rather than short[hyphen]circuiting it and simply slipping the money from support into combat with no record of whether we achieved that efficiency gain or that reinvestment. It adds a bureaucratic step which I am sure some of my colleagues would rather we did not go through.

Senator HOGG —And which some of your colleagues would love, as well, I would think.

Mr Tonkin —In the interest of tidy bookkeeping, we want to go through that. It is like putting the sheep through the race—a bad analogy.

Mr Lewincamp —Can I add to that?

Senator HOGG —Before you add anything, I just want to go back and traverse a little bit. Who actually decided on the 42,700 that we originally had as the number under the DER; was that the committee?

Mr Lewincamp —I was going to add a point on this. We should not see the personnel reductions here as a target. They are indicative only. The target that we are trying to achieve is the saving of funds to reinvest in capability, so the true targets here are the dollar figures.

Senator HOGG —We will come to those in a minute.

Mr Lewincamp —It is possible, for example, that in this process an in[hyphen]house option will win because it can demonstrate it is more efficient than any of the private sector competitors in a particular competition, in which case we will not save the personnel numbers you see in this table but we will save the dollars and the dollars will contribute towards our overall DRP savings target. So in no sense should this civilian personnel reductions table or this ADF personnel reductions table be seen as a target that we are seeking to achieve, and it should not be seen that we have done something wrong if we have not achieved it.

Coming back to your question about the 42,700, that was an entirely notional figure, again, based on the assumptions of a possible outcome of market testing a certain number of positions. We identified a number of ADF people working in support type functions, and we said that if you proceed on the assumption that those functions are market tested and contracted out and that 90 per cent of the ADF positions working in those areas are then lost as a result, that generated the notional outcome of 42,700 as the residual number of ADF personnel.

Senator HOGG —Who was actually responsible for the decision; was that the review team?

Mr Tonkin —It is not a decision. It was not the review team. The review team calculated the effect of their savings, and that is addressed in very broad summary terms at page 54.

Senator HOGG —Of the purple book, the thin book?

Senator SCHACHT —The thin purple book.

Mr Tonkin —There is a summary at the top of page 54 which states that, in round numbers, they anticipated that 11,700 military positions and 9,000 civilians would be affected—on the way they calculated the numbers.

Senator SCHACHT —And this is all in the document?

Mr Tonkin —That was what they did. When we then looked at it as the Defence Reform Program, we went through the exercise of calculating the effect. It is a Defence derived estimate of why it might have happened. It has never been established as a target. It has never been mandated. It was a basis upon which to start to calculate what would be the reinvestment cost of where we might have been to where we want the Defence Force to be. You have got to have some base line to measure it against. It was an internally derived estimate. That is all
it has. It has no standing. It is not mandated, not government policy or anything else. It never was. We have consistently said this ever since we started.

Senator HOGG —So, based on Mr Lewincamp's explanation and on your explanation, you are saying that nothing more can be read into that first table we have just canvassed: that it is not necessarily a goal or something that has to be obtained; it is part of the process unfolding as these positions are market tested?

Mr Lewincamp —That is right. There may well be significant variations to this table which reflect considerable efficiency inside the organisation and savings achieved with particular functions, but not necessarily the positions lost.

Senator HOGG —It is possible that those additional people who are necessary to bring it back up to the 50,000 mark will still be in some of these areas that have been market tested?

Mr Tonkin —Yes, if the skills match, absolutely.

Senator HOGG —Do we have any idea of what quantity?

Mr Lewincamp —Not in advance of the process.

Senator HOGG —What mature figure would you expect to reach in terms of the ADF personnel reductions?

Mr Lewincamp —Again, these are the reductions and it is very hard to predict those in advance of the process of market testing. But remember that in parallel to this process of reductions under the DRP process we also have the buyback of personnel to maintain an ADF around 50,000. These are reductions—

Senator HOGG —And that buyback figure?

Mr Lewincamp —It is in table 1.4 on page 15.

Senator HOGG —So that is the 539?

Mr Lewincamp —Yes.

Senator HOGG —And that is an annual figure, is it?

Mr Lewincamp —Yes. That will be ongoing, yes. And again that is not a mature figure. That will also vary depending on what actually happens with the market testing program.

Senator HOGG —What processes do you have in place to assure us that the outcomes that are being achieved under the DRP are in effect happening, that it is not just someone shuffling numbers around on a piece of paper?

Mr Lewincamp —If we were just shuffling people around you would not see the dollar savings being generated. I come back to it: it is the savings table in terms of dollars that is the important issue here. If we are able to achieve something like 25 per cent or 30 per cent efficiency savings in a particular function and still maintain the service in[hyphen]house, that will have delivered what the DRP was looking for.

Mr Tonkin —So the first part of the process is that we have programmed the savings which we expect against all the groups which are undertaking the functions which are subject to the reforms. We have taken the money out of their budgets and each of their forward estimate years at the scale which has been anticipated in the review process. For example, Defence Corporate Support provides garrison support and clerical and administrative functions across the country. That group is tasked to produce certain contributions to each of the 22 defence outputs. It provides a lot of the basic levels of sustainment and has got to deliver that with
the resources that are allocated. Those resources are diminishing over time. It has to achieve efficiency gains through market testing and rationalisation in order to do that.

We have taken the resources away, so the first level of your assurance is the fact that those monies have been taken away and reinvested and yet the performance is still being expected to be achieved. So the first thing is that the money is there.

The second part is how it is being reinvested. We have the tables that you see in the front of the PBS which set out the reinvestment process—and we can go into those in greater depth if you wish. We also have established this DRP review team—to shorthand its title—which is tasked to look in more depth than we have been at all these processes of chasing down the savings, accounting for them, tracking them and reviewing the reinvestment to provide us with a, if you like, a form of internal audit on the process as well. So that overlays that process.

Senator HOGG —Could I just stop you there? The internal audit process is probably what I am very much interested in. Do we get access to how that internal audit process is progressing and, if so, in what way?

Mr Tonkin —I think what you will see, Senator, as we progressively report on DRP in these documents, annual reports and so on—the outcome of the work of the DRP SMART team, to pick up its acronym—that any variations will be reflected in the quality of what we are reporting. So it is there as an internal device for us to reassure ourselves, check our numbers and give us an enhanced depth of analysis, and that will be reflected in the accountability documents which we are presenting and in the sorts of material generated. A lot of this stuff is generated by the quite a small staff of that group. So you are seeing the outcomes of what they are doing already in this sort of material.

Mr Lewincamp —There is a breakdown in section 5 at the back of the PBS on page 192 of the savings from each of the groups. Page 193 shows the personnel and page 194 shows the reinvestment, and that gives you a breakdown by group against the particular initiatives. As Mr Tonkin has indicated, this is money that we are taking away from these groups. These tables are for 1999[hyphen]2000 only.

Senator HOGG —So the contribution for reinvestment for the provision for 50,000 ADF this year is $45.3 million—is that correct?

Mr Lewincamp —Yes.

Senator HOGG —And the transition costs for the DRP are at $29.1 million. Why are the transition costs in the DRP in that table on page 194 so heavily concentrated in group 8 whereas the provision for the ADF seems to be concentrated in groups 2 and 3 and negative in group 4? There are some transition costs indicated under group 2 for the $45.9 million but nothing under group 3.

Mr Lewincamp —The first line Defence Reform Program Transition costs amounting to $29.1 million have actually been allocated for specific initiatives. The $53 million in the line below is a centrally held provision. It has been held against the group 8 because it would be mainly related to redundancy costs this year. That will be allocated as necessary during the year but we anticipate that a large part of it will be in group 8. The $23.8 million is money related mainly to setting up a national service centre.

Senator HOGG —So there are no transition costs in the provision for the 50,000 ADF or are they incorporated within—

Mr Tonkin —It is a reinvestment rather than a going down. Transition costs are the costs of market testing the costs of redundancies, crudely put. It is not a reinvestment; it is an expression of an overhead.

Senator HOGG —I understand that now.

Senator WEST —On the DRP, you have market tested and got rid of all these ADF personnel. How many people have actually come under the employ of ADF or the department—I am thinking of ADF—that are now no longer in uniform and are actually part of the services provided by the private sector? You have got rid of all these uniformed people. How many people have been employed to fill the CSP positions?

Mr Lewincamp —We cannot give you an answer to that because we have a contract for the provision of a service and it is up to the contractor to determine how many people he or she needs to employ to provide the service. We have no figures for the number of personnel employed by contractors.

Senator SCHACHT —According to this list, over the last couple of years people have been leaving and—excluding the APS numbers on page 4 or 5 of this document—you have got, in 1997[hyphen]98 in the annual report, that 97 Navy personnel left, 277 Army and 133 Air Force. In 1998[hyphen]99 the plan was substantially bigger: 701 Navy, 1,909 Army and 716 Air Force left. Then it was revised for 1998[hyphen]99 but it was almost the same and only a couple have changed. When those service people left they got a separation or redundancy payment—whatever you want to call it—but you have no idea how many of those were subsequently re[hyphen]employed by the private sector providing the services when they were outsourced?

Mr Lewincamp —That is true. I should also add that not all of them would have left with a separation payment.

Mr Tonkin —In fact, very few.

Senator SCHACHT —Did they just leave because you sacked them?

Mr Tonkin —They left because at the end of their engagement they chose to—

Senator SCHACHT —The term of their engagement had been completed?

Mr Tonkin —Yes. The total number of redundancies for 1998[hyphen]99 for the ADF is: 148 for Navy, 9 for Army and 12 for Air Force, a total of 169.

Senator SCHACHT —Are they service people who took what we call a redundancy package?

Mr Tonkin —Yes, that is what my figures say.

Senator SCHACHT —In a number of other public sector areas—state and federal—when people leave the service and take a redundancy package they often have a rule that you cannot be re[hyphen]employed under contract, et cetera, doing the same sort of job for a number of years. Would the same rules apply to those 169 people?

Mr Lewincamp —The rule applies only to employment in the Commonwealth sector. Again, such a rule is not applied to people going into the private sector.

Senator SCHACHT —So there is no rule?

Mr Lewincamp —There is no rule.

Senator SCHACHT —Therefore, if there is no rule there is no need for you to keep a record.

Mr Lewincamp —No.

Senator SCHACHT —All the others who left were because their term of contract within the service had naturally expired?

Mr Tonkin —Yes.

Mr Lewincamp —I might add that, in terms of turnover of ADF personnel, it is quite considerable each year at around 10 per cent or 11 per cent. We are talking about 5,000 people a year, on average, leaving the services over a number of years. There is quite a bit of turbulence, if you like.

Senator WEST —That is a nice word to use for those that are leaving the defence force.

Senator SCHACHT —A bit of turbulence.

Senator WEST —Turbulence—I will remember that for a few more questions later on.

Mr Lewincamp —I am just trying to help my colleague, General Dunn, who will answer them.

Senator WEST —I am sure he is thanking you.

Senator SCHACHT —I will go to the revised 1998[hyphen]99 document provided to Senator Hogg and now to the committee, the 697, 1,909 and 716 figures from the services. When those positions went they were service positions and in the reform process they were identified as no longer required to be done by service people.

Mr Tonkin —That is correct.

Senator SCHACHT —How many of them are now being performed by outsourced private sector groups?

Mr Tonkin —We do not measure the positions. They were operating in the conduct of functions which we no longer wish to have undertaken within the Department of Defence or by the defence force. Those functions are now being performed by contractors or else, if it is an internal thing, there is simply no requirement because of rationalisation and we do not need as many people to do the job. It is not as if each position is transferred to the private sector; it is each chunk of activity that is transferred.

Senator SCHACHT —That is a good way to avoid answering the question.

Mr Tonkin —It is a fact.

Senator SCHACHT —By describing it as function you then cannot identify whether that job has actually gone or not. Then you say that the new function, which is a combination of three of these previous positions, is now performed by one person with a new function. Is that how you get around it?

Mr Tonkin —What we have done is to have market tested particular activities. Those particular activities had a previous work force performing them. We market test the activity. If the activity is retained in[hyphen]house because the in[hyphen]house option wins, the in[hyphen]house option will have won because it has reduced its cost structure, which will have reduced its work force as well as other overheads. So you might have had 50 positions; you might have 30 as a result. It will not be directly one to one; they will have restructured themselves as a new entity to do it, so you will not have a one[hyphen]to[hyphen]one comparison. Or else the functions have gone outside to private enterprise and all those positions have disappeared. Private enterprise provides the function as best they see fit to meet the standard of the contract.

Senator SCHACHT —But you could still provide a list of the jobs that—

Mr Tonkin —We could provide you with a list of the positions, the functions that have been market tested, and the number of positions which were in those functions when they were market tested.

Senator SCHACHT —The number of positions within those functions when they were market tested?

Mr Tonkin —The number of positions that were there. That is what we look at and it is part of the figures that come up.

Senator SCHACHT —Is it too difficult to provide us with that on notice?

Mr Tonkin —I do not think so, Senator.

Senator SCHACHT —When we go to this budget, 1999[hyphen]2000, in the PBS the figure down at the bottom, including the APS positions, is 6,210. Previously—

Mr Tonkin —I can give you them now if you would like.

Senator SCHACHT —In a written form or just by reading them into the record?

Mr Tonkin —In summary terms, there are only about nine different groups for contracts led by a major contractor this year under the Defence Reform Program, so I can tell you what they are.

Senator SCHACHT —What can you tell us? It is the bulk number? The positions previously there that have now been abolished because the function is taken over, you can now provide off that list to us?

Mr Tonkin —I can give you an example to see whether this meets the need.

Senator SCHACHT —Yes.

Mr Tonkin —In Support Command Australia we looked at the commercial vehicle management program—that is, managing vehicles which are non[hyphen]military vehicles. There were 18 positions in that. That function has now been undertaken by DASFLEET, which of course has been overtaken by National or something. There was PC9 integrated logistic support, also a Support Command activity. There were 20 positions affected by that process. That is now being undertaken by Air Flite.

Senator SCHACHT —That is fine, if you can provide those. How many pages would you have to read out?

Mr Lewincamp —These reductions are not all entirely the result of market testing. There are rationalisation processes internally that are also delivering savings. There will be some examples, too, where people are leaving from functions that are going to be market tested but have not yet been market tested, and therefore we are operating with reduced personnel in those areas. This list will not generate you the exact figures that are in this table.

Senator SCHACHT —Because this includes rationalisation as well?

Mr Lewincamp —Yes.

Senator SCHACHT —Do your records show how you separate rationalisation from market testing?

Mr Lewincamp —We will take that on notice and do our best to break these figures down for you.

Senator SCHACHT —What Mr Tonkin has outlined is pretty useful. Perhaps you could provide us with a printed list.

Mr Tonkin —We will provide you with the rest of those on notice.

Senator SCHACHT —Could I now go to the document now tabled. What was revised for 1998-99, including the APS figure, was 3,122. With this budget that now grows over the next 12 months to 6,210, nearly another 3,000. Is that correct?

Mr Lewincamp —Yes.

Senator SCHACHT —Are you at this stage able to provide on notice a list of the nearly 3,000 actual positions now anticipated to be covered by function that would be abolished?

Mr Lewincamp —We can, again with the proviso that what we are talking about here is an assumed outcome of positions lost. I need to keep making that point.

Senator SCHACHT —I understand. You can put an asterisk next to the figure with that qualification. I understand and accept that.

Mr Tonkin —What we can provide is a list of those activities for which contracts are expected to be let this year. What we will provide is not the breakdown of the 2,900, but what we can provide is a list of the total number of positions which are affected by this process. There are 6,953 positions.

Senator HOGG —Is that the table on page 12?

Mr Tonkin —That is exactly right.

Senator SCHACHT —That is through to the year 2000, to the end of this financial year. Right?

Mr Tonkin —That is this coming year, yes, and from those activities at table 1.2—

Senator SCHACHT —And that is the cumulative number over the Defence Reform Program?

Mr Tonkin —No. That is the positions which will be market tested this fiscal year. From the outcome of that it has been anticipated that it will contribute to the variance that you see between 3,322 in the tabled document and 6,210, and between 2,481 APS and 3,157. Those activities will make a very substantial contribution to that increase in the number of positions no longer required.

Senator HOGG —But that is conceding that not all those positions being tested will be gone?

Mr Tonkin —That is right.

Senator SCHACHT —What is the difference between the list that you have just told me you will provide on notice—you mentioned the car fleet as a specific example, saying that 18 positions with regard to non-military vehicles are now outsourced—and the list on page 12, where you have got 501 Wing Amberley F111 workshop, with 60 positions and a decision to be announced October 1999? Is that a more general description of a group than you were reading out?

Mr Tonkin —No, what I was reading from was a list which was the outcome effect of what this table, 1.2, is predicting is going to happen.

Senator SCHACHT —This is the prediction over the next 12 months—

Mr Tonkin —Yes.

Senator SCHACHT —And the other is what has already happened?

Mr Tonkin —It is what has already happened.

Senator SCHACHT —But it is exactly the same classification?

Mr Tonkin —The same sort of thing.

Senator SCHACHT —At the top we have the words `decision announced'. Is October 1999 when it is going to implemented?

Mr Tonkin —No. It will be implemented slightly after that. We had one recently where we announced the decision on garrison support for ACT and southern New South Wales. The decision is announced, you then proceed with the final negotiations, there is then a time in the future when it comes into effect.

Senator SCHACHT —Do the people in the 60 positions in the F111 workshop at 501 Wing Amberley know that this is to be market tested and they have a chance of survival within the service or they could be outsourced?

Mr Tonkin —Yes. The areas which have been targeted for market testing are known well in advance; it is a long program. Usually, especially in the case of some of these, the process can take two years before we get to the decision point.

Senator SCHACHT —So the staff in those 60 positions will know in October 1999—all things being equal in the process of the market testing—what will happen to those 60 positions?

Mr Tonkin —What happened, yes.

Senator WEST —I am wondering how the decision is made to market test—how, when you actually say, `Yes, we will explore market testing' the yes or no decision to market test is made—and how the contracts are then awarded and how that process goes.

Mr Tonkin —There is a series of steps. Firstly, you review the nature of the function. What you want is a quality outcome at a cost[hyphen]effective price—that is your desired end state. You see whether you can achieve that outcome simply through reordering, reanalysing, rationalising, process re-engineering, all the various terms you can quote—

Senator WEST —This is all done internally?

Mr Tonkin —Internally. You want to see whether that outcome is sufficient to meet the test that you have applied. You would look at all that and ask, `Will that do? Is that sufficient?' You examine whether it is of a sufficient scale to be worth market testing. I can recall some instances in the past where we went two and three times around market testing an activity which employed 20 people.

It turns out that that is a silly thing to do because the cost of doing the exercise is not worthwhile. You have to make sure that the scale is worth the market testing because, if it is not a sufficient scale, you might not get sufficient bidders, for example. You want to make sure it aggregates effectively. Then you ask the following questions: is there an appropriate market available? Are the skills available? Are the companies available to do it? We looked for a while at whether we could market the overall library functions. The notion was: why would we provide libraries? It did not seem to be core business.

Senator SCHACHT —I suppose you are going to tell me that you have to improve efficiency.

Mr Tonkin —We looked at the process and there was not a market to provide the totality of library services.

Senator SCHACHT —Do you mean a competitive market?

Mr Tonkin —Not a competitive market. There is a market to provide some of the functions that go towards the provision of overall library services. You make a choice and say, `We will not market test libraries, but we will contract out some aspects, because there is a market for things like cataloguing.' You can buy that service in. You go through those questions and ask if it is worth doing. If the answer to all of those processes is yes, you then define the specification for the service that you want—the level of the provisioning and performance that you wish to see achieved. That forms a specification. You also go through the process of what forms the baseline cost of the activity.

All these steps are set out in the CSP manual in quite considerable detail. I will not bore you with the multiple steps. An in[hyphen]house option team will be established to bid against the process if you want an in[hyphen]house option or if it is feasible to do so. You then have a group of people who run the process. There is an evaluation team and a normal contract evaluation process. There is a high level form of review, then it goes to an appropriate delegate for decision. It then goes to the minister for noting and, after an appropriate period, it is announced. If you want to read it, the CSP manual is a public document.

Senator WEST —I want to be clear in my own mind that the testing is not done with some input from the private sector that is then likely to turn around and say, `Me too, me too, me too, me too.'

Mr Tonkin —We use consultants to assist us in the evaluation process. A panel of consultants is brought in to do that. Consultants are forbidden from participating if they want to be a service provider; they could not possibly be part of the consultancy process.

Senator WEST —They have not gone off and been a consultant to some of those that have put their hands up for contracts, have they?

Mr Tonkin —They have to make certain undertakings of impartiality. It is like dealing with the law office; they have to declare if they have any conflict of interest and that sort of thing.

Senator WEST —After they have finished their work with ADF, they then do not have the capacity to go off and be a consultant to one of those.

Mr Tonkin —They could go and be a consultant to someone who is then delivering us a service. Only a finite number of consultancy companies are in the market of advising on these sorts of processes. Some will have been engaged by us in the past and will have learned about our process. We are very open about the nature of our process. We have attempted to make sure that our market testing processes are world's best practice. We have gone through and reviewed that, talked to industry and got industry engaged. We ask the big companies that bid for us how we are doing. Can we do it better? Is it fair? We have modified the process in that sort of way.

We have no difficulty with a company that has advised us on method subsequently going and advising somebody else as to how to bid against that method. We do not see that as an unreasonable thing to do. It is not privileged information. The processes are there and public.

Senator WEST —So it is going to be someone who can afford to buy that consultant after they have done the consultancy process.

Mr Tonkin —A lot of the companies that are bidding for our processes are very substantial organisations. Serco Gardner Merchant is a worldwide organisation. Tenex is a big Australian company. These are big organisations. The judgment they make about what they want to invest is their business.

Senator WEST —They are, of course, not providing all of the services: I am thinking in terms of catering and guard duty and stuff like that.

Mr Tonkin —So far all the market testing outcomes in garrison support, in terms of prime contractors, have gone to large organisations. They may well have subcontractors at the local level delivering the service.

Senator WEST —That leads on to whether you have any comprehension or understanding of how many subcontractors are subcontracted.

Mr Tonkin —It is not essentially our business; it is their business.

Senator WEST —It is their business. Do you have any security clearances that are necessary for some of these subcontractors?

Mr Tonkin —Certainly, in some cases we do, but security clearances to a very high level are often not very likely with things like garrison support.

Senator WEST —Background checks may be better.

Mr Tonkin —As with any contractor working for us, if they want to employ people in a secure establishment, then the people they are proposing to employ have to go through the appropriate security vetting processes to whatever standard we require for access to the given site.

Senator WEST —Would you know how many subcontractors those contractors of yours have?

Mr Tonkin —No.

Senator WEST —Defence does not worry?

Mr Tonkin —That is one of the reasons why we are contracting the process out—to shift the burden of management for that function from us to somebody else.

Senator SCHACHT —You will not be employing John Friedrich and the National Safety Council, Victorian division, to provide security at Pine Gap again, will you?

Mr Tonkin —I have no knowledge of the issue that you raise.

Senator SCHACHT —I sat on a committee that dealt with that issue, which was rather interesting, to say the least. He did commit suicide some time afterwards. His committing suicide had nothing to do with Defence, I must say.

Mr Tonkin —We do go through processes when we look at bidders to make sure of their bona fides, the company's validity and those sorts of things.

Senator SCHACHT —This man, who was an illegal immigrant, ran a company that was providing preliminary security against demonstrators at Pine Gap. I thought it was always an interesting point. It was in the late 1980s before the National Security Council of Victoria went bankrupt. A joint foreign affairs, defence and trade committee investigated it and had a number of hearings, including with Mr Fredericks.

ACTING CHAIR —Are there further questions?

Senator SCHACHT —This is the point about outsourcing. A person who was the chief executive of an organisation, and who was clearly an illegal immigrant in this country, got the contract to provide security services to Pine Gap. That was not inside the base but when demonstrators from the anti[hyphen]nuclear movements were holding demonstrations outside Pine Gap. I think a number of his staff were providing services.

Mr Tonkin —I come back to the point that we do go through a process of looking at the bona fides of companies which are bidding. It is one of the characteristics and criteria that need to be passed in order to win a contract. When people are going to be engaged in areas which are of security significance, those people have to go through the appropriate security—

Senator SCHACHT —You would do better next time in making sure that an illegal immigrant running a company is not employed providing security.

ACTING CHAIR —Senator Schacht, I think you have made that point. Are there further questions?

Senator WEST —Once a contract has been awarded, what review processes are there in the delivery of the service?

Mr Tonkin —Each contract which is awarded has a contract manager. If you take garrison support, under the Defence Corporate Support program, this is an example where you might want to ask the question under group 13—if we ever get there.

Senator HOGG —We are going very fast down that path. Stop getting so excited.

Mr Tonkin —There is a management process in place in that organisation to monitor the performance of the contract against the specification. Taking the same example, we also have some fairly keen and attentive clients within the defence organisation who are rather observant if the performance of the contract, in terms of delivery to consumers, is not being met. There is a user assessment and a management process. There are performance milestones, standards and reviews set out in the contracts.

Senator SCHACHT —So far, where a company bidding has to get some sort of security clearance or check, has any company been rejected because they or their staff have not passed the security check?

Mr Tonkin —I cannot answer the question because it is really too broad, especially in the latter part. I am not sure whether we would want to answer the question of how many people have been rejected for security clearances. So far, from memory, there have been around 97 different CSP contracts entered into since about 1991. I think it would be somewhat difficult to go back and review every bidder for every contract to see whether any of them were ever knocked back or downgraded for that sort of factor.

Senator WEST —What, say, in the last two years?

Senator SCHACHT —What about since the reform program start? Surely there must be a record somewhere in the foggy bottom of Russell that presses a button on a computer that gives you the outcome of whether each of the firms have cleared the security check.

Mr Tonkin —I think you are overstating—

Senator SCHACHT —Overstating your ability.

Mr Tonkin —No, I think you are overstating the importance of a security check. You do not actually security check companies; you security check individuals.

Senator SCHACHT —Yes, that is what I am saying. But you would know that in the company they employed five people who did not meet the security check and then you would inform them that they could not be employed in the contract, presumably.

Mr Tonkin —We will take that on notice and see what, meaningfully, we can tell you.

Senator SCHACHT —I would hope you would because my experience as a member of the subcommittee that dealt with the National Safety Council in Victoria raised a number of useful and interesting issues.

Mr Tonkin —Just to get it clear from the point of view of the officers, the question is, in the last two years, say, what advice can we provide on whether or not proposed employees of contractors employed under the CSP process have been knocked back on security grounds? I do not believe that we will be able to—

Mr Lewincamp —Senator, without being provocative—

Senator SCHACHT —Be provocative, Mr Lewincamp; you are a very good public servant.

Mr Lewincamp —What purpose would this information serve?

Senator SCHACHT —The purpose is to see whether there has been anyone knocked back and what the process is. Presumably, the security agencies—ASIO or somebody; I do not know who does it—would have a record of it. It is their job; we pay them lots of money to do this job.

Mr Tonkin —They actually do it for us. Madam Chair, we will take the question on notice and—

Senator SCHACHT —If it is too difficult, Mr Tonkin, you will let me know that you cannot do it and I will make my judgment from there.

Mr Tonkin —Yes, we will do that.

Air Marshal Riding —Senator, would it help if we provided you with details of how we deal with the question of security clearances through the CSP process?

Senator SCHACHT —I sat through three committee hearings nearly 10 years ago on that. I would presume that for 99.9 per cent, for the level of security you need, you give them a tick.

Mr Tonkin —From my general observation, there are very few people who are knocked back for security clearances. It is quite a small number really, proportionally.

Senator SCHACHT —On the same level of table 1.2 on page 12, under `Market testing decisions expected for 1999[hyphen]2000', Mr Tonkin, could you and your officers describe some of the activities? In the 501 Wing at Amberley and then 503, particularly 501, at the moment they are all Air Force service people who have been trained to an appropriate level of 4 to be in the avionics workshop and weapons systems.

Mr Tonkin —They will be a mix of Air Force and civilian employees.

Senator SCHACHT —Already? But there will be APS civilians?

Mr Tonkin —Yes.

Senator SCHACHT —Right.

Mr Tonkin —There could well be in some cases some contractors already working in those. In fact, I am pretty sure there are. From the F111s, I remember seeing that there was a contractor—

Senator SCHACHT —That is an area of security. If someone obviously is fiddling around with the radar system of an F111, you would want to know that they are doing the right thing. In regard to the Australian Defence Force explosive ordnance project, can you explain to me what that project is? There are 525 positions. Is that the dump that has all the bombs and shells and bullets in it?

Major Gen. Mueller —Senator, could you please ask the question again?

Senator SCHACHT —Could you explain to me the nature of what is called the Australian Defence Force explosive ordnance project with 525 positions to be market tested?

Major Gen. Mueller —That is the market testing of those elements of the joint ammunition logistic organisation that are responsible for the receipt, storage, maintenance and issue of explosive ordnance, both guided and non[hyphen]guided, with some exceptions in the guided area because of security considerations.

Senator SCHACHT —What percentage are those 525 positions of the total number of people employed in the explosive ordnance project?

Major Gen. Mueller —I will take that question on notice; I will be able to give the answer later today.

Senator SCHACHT —Is it approximately half?

Major Gen. Mueller —No, probably about 500 out of 758, or something of that order.

Senator SCHACHT —Would most of these people in the 525—I use the term not in any way in a pejorative sense—be essentially storemen recording the ins and outs of the depots et cetera?

Major Gen. Mueller —A significant number are, but some would require adequate technical knowledge, for example, to undertake inspection of ordnance on receipt periodically during maintenance to ensure that it has not deteriorated and, of course, on issue. When, on issue, there is a requirement to integrate ammunition components which are normally stored separately, they would need adequate knowledge to be able to do that.

Senator WEST —Who else, apart from ADF personnel, have those sorts of qualifications?

Major Gen. Mueller —There are a number of members in the Australian Public Service who have them, and have had for many years.

Senator WEST —And work in this particular area?

Major Gen. Mueller —Yes, in this area. From memory, in Navy in particular.

Senator WEST —But they are people who are current? You are looking at market testing this. I am trying to think about out there in the wider public, outside the Public Service related to the ADF and the ADF itself. Where else would there be a significant number, in terms of hundreds of personnel, who would be able to undertake this sort of work?

Major Gen. Mueller —I think it is reasonable to assume that a significant number of these people, if the in[hyphen]house option does not win, will gain employment with the successful private bidder. Some of the levels of skills which are appropriate to the activities that these people perform, consistent with the observation made by Senator Schacht, do not require high degrees of competency in the sense that they can be acquired within a comparatively short time frame. It needs to be borne in mind that ammunition is, after all, made by civilians. I do not think there will be any difficulty in acquiring the appropriate level of competencies and maintaining them for this activity.

Senator WEST —There are not many in Australia.

ACTING CHAIR —Senator Schacht and Senator West, did you want to pursue this line of questioning. We are just over our determined lunch break, but I am happy to continue if your—

Senator SCHACHT —While I have Major General Mueller at the table, can I finish on this one about the ordnance project? I have other questions on the list.

ACTING CHAIR —All right.

Senator SCHACHT —In view of the sensitivity of controlling and monitoring our ammunition suppliers, do the bidders have to be Australian majority owned companies?

Major Gen. Mueller —The answer to that is that I do not know other than that they will be required under the terms of the statement of requirement to meet very tight technical regulatory demands. I can pursue that question; I do not know whether or not it is specified.

Senator SCHACHT —You mentioned that there are some exclusions.

Major Gen. Mueller —Yes.

Senator SCHACHT —We rapidly went through them.

Major Gen. Mueller —There are some intellectual property issues of a security nature with guided weapons principally of United States origin.

Senator SCHACHT —I see—and those would be the ones that are excluded from the market test?

Major Gen. Mueller —Yes, that is correct.

Senator WEST —So you going to have to keep those ordnance supplies and stuff separate from the CSP, are you?

Major Gen. Mueller —That is true.

ACTING CHAIR —The hearing of the committee is suspended.

Proceedings suspended from 12.35 p.m. to 1.33 p.m.

CHAIR —The committee is resumed. Senator Hogg.

Senator HOGG —It seems a long while ago—I have a window of opportunity and I might exploit it—but could I take you back to the chart of the figures that we were talking about. Whilst I understand that these are positions that are likely to alter as a result of the market testing, is it fair to say that, of the mature 14,000 in the ADF positions, some 50 per cent of those are going to be repackaged as providing that 7,200, the savings that are realised under that? Is that a fair way to characterise it?

Mr Tonkin —It depends whether they meet the right skills sets. Certainly there are 14,000 going down; there are 7,000 coming up. I would expect that you would not be able to find 7,000 of the 14,000 who would have the appropriate skills. It will be some lesser number than that because most of the reductions are coming in those support areas where the skills sets, generally speaking, may not be. Some of the people are retrainable, so they go through a process of being reskilled into something else. It is a mixture. You could not assume just half straight off; it will be a less than half number.

Senator HOGG —If I can move to the next set of charts, the ones headed `Defence Reform Program cumulative resources available for reinvestment by major initiative category', is it fair to say that the mature figures are not necessarily there for all programs?

Mr Lewincamp —Yes.

Senator HOGG —Or for all headings. So, at some stage, you would be able to provide me with those figures?

Mr Lewincamp —Yes.

Senator HOGG —On the third page of that section there is no mature amount in brackets for the total resources available for reinvestment. This is down the bottom of the page, under the $1,116.9 million.

Mr Lewincamp —Remember, that is the final year of the forward estimates brought forward. In 1998[hyphen]99 we would not have had that figure in the documents.

Senator HOGG —Do you have a figure now? If you have not, can you take that on notice and provide it to us. Does it exist?

Mr Tonkin —The figures in brackets were what was in the previous documentation.

Mr Lewincamp —Do we have a figure for that year?

Senator HOGG —It was my understanding that there was a mature figure.

Mr Tonkin —There was a mature figure, not a 2002[hyphen]03 figure.

Mr Lewincamp —We would have had a track to the mature future so, yes, we can generate that.

Senator HOGG —Can I take you back to the superannuation and the FBT. Superannuation is out to $156.3 million, as I understand the cumulative resources available for reinvestment, and FBT is $38.1 million. The superannuation is higher than that expected in the 1998[hyphen]99 figure, yet the FBT is substantially lower. Why is the superannuation higher when the FBT is lower?

Mr Tonkin —There is not a direct relationship between the two anyway.

Senator HOGG —I am not asking if there is a direct relationship. I understood that we were looking at a number of positions that have been market tested. I can understand that one would see a drop in the FBT. Why have we not seen a commensurate drop in the saving under superannuation?

Mr Tonkin —The superannuation would go up because superannuation costs are a function, effectively a mathematical function, of the number of positions being saved. So as we go back to—

Senator HOGG —So that is related to a direct number of positions being saved?

Mr Tonkin —This is the superannuation we pay in a given year for our current work force. So, if you are reducing the number of people you are employing, the employer contribution to superannuation is what is being harvested. As the personnel numbers, as we have discussed, have gone up slightly in that same year—take 2001[hyphen]02—so the super will go up as well, and it has. There is a direct relationship there.

Mr Lewincamp —In relation to the FBT, I understand that is a reassessment of the FBT payable in terms of the various allowances and conditions of service upon which we pay FBT. That is why it is reduced even though the numbers of personnel being saved are increasing. But I will take that on notice and give you a fuller answer.

Senator HOGG —If we turn to the next chart, which is `Defence Reform Program reinvestments', the new capital investment is $85.2 million in 1999[hyphen]2000, then $169.3 million, and going out to $138.5 million in 2002[hyphen]03. Given that the commitment has now been made to go back to 50,000, given that there is a significant problem of block obsolescence and real pressures for platform replacements that Defence will be facing over the next decade, is there sufficient being redirected from the DRP into new capital investment to meet the demands that will be placed upon Defence?

Air Marshal Riding —The block obsolescence problem that we face really starts to impact in the 2008, 2009, 2010 time frame. The period that we are covering here is somewhat short of that. However, there is no doubt that significantly difficult decisions are going to have to be made in respect of that investment program in the—

Senator HOGG —In the period beyond?

Air Marshal Riding —In the period beyond that to which you are referring.

Senator HOGG —So how far out does the reinvestment program go? What is the mature age of the program? Do we know?

Air Marshal Riding —The formal program we have is a five[hyphen]year program—the current year plus four. That is reflected in the internal planning document known as the `pink book'. Beyond that period, we are producing this year a Defence Future Directions Paper, which will look at the investment pressures for major capital equipment and facilities, along with other aspects of capability, including personnel, which will have to be accommodated. That future directions paper will be providing that initial guidance to start to bring together the demand side and the resource side of the equation.

Senator HOGG —So, really, the decision to proceed down the path of 50,000 ADF has impacted on the amount of resources that could have been allocated to new capital investment?

Mr Tonkin —Additional resources. I presume we are talking about table 1.4 in the book, or in the figures that have been given to you. What it is showing is a judgment about where the additional resources made available by the reform program might go. The question that is posed to Defence is: what is the appropriate balance between the resources that need to be allocated to current capability, or the force in being, and those which can be allocated to future capability? The line `New capital investment' relates to future capability and is additional to the amount of resources already allocated for that purpose.

We spend approximately $2.7 billion a year on new major capital investment. They are the resources being expended on the acquisition of new or enhanced capabilities. That is an ongoing program which stretches into the future. We also have to confront the fact that we need—and the government requires that we provide—capability today. A significant part of that capability requires a human element. The 50,000 ADF is an expression of the provision of that human element; it is a judgment call.

You asked the question: `Is there sufficient money being put aside to meet the block obsolescence in the future?' It ultimately becomes a matter of government policy as to how many resources the government believes are appropriate for Defence as a whole. We really cannot comment on that. Our job at the moment is to manage the outcomes with the resources that we have been allocated. There is a fair bit of material on the record to suggest that the resources we presently have, and are forecast to have available for new investment, will not be sufficient to meet the future capital investment required, in the 15 years beyond the turn of the millennium, to meet those new capability requirements while maintaining the current level of operating capability. We will get into a squeeze which needs to be addressed in some way. Either you reduce the amount of performance you expect out of the Defence Force at present or you scale down your capability in the future—

Senator HOGG —Or there will need to be a major capital injection.

Mr Tonkin —or else you increase the resources available to the activity as a whole.

Senator HOGG —That is right.

Mr Tonkin —That is a choice for government.

Senator HOGG —Are there likely to be other efficiencies that have not yet come to light in this program which will feed into the reinvestment program? If so, of what order? I am asking for a ballpark figure. Are we looking at 10 per cent?

Mr Tonkin —I do not think I would want to put a ballpark figure to it. I do not think that the efficiencies that come forward will be particularly material, in terms of the scale of what we have achieved to date, bearing in mind that we also have to have regard to the maintenance of market suitable levels of remuneration for our work force, a significant proponent of which must be productivity based in terms of their funding. So we need to be able to generate productivity gains to meet our work force demands on top of this. So anything significant that we get, you could argue, has to also address that other third cost pressure, which is the personnel cost pressure.

Senator HOGG —I think what I am trying to find out is: are there other efficiency gains that just get shoved into the DRP? How do we isolate them? How do we identify other gains that are not a result of the DRP? Are they just put in here as part of the DRP process and that is it? How do we segregate those out? Can it be done?

Mr Tonkin —The one line which we have added to table 1.4 is the $125 million in administrative savings you see in bold print on the third line. They are the additional set of measures directed by the then Minister for Defence at the commencement of the reform program which were additional to the DRP targets. We have explicitly recorded those.

Senator HOGG —Yes, I accept those.

Mr Tonkin —But we have now brought them to account as part of the total amount of resources available.

Senator SCHACHT —That is $66 million—

Mr Tonkin —Yes, because it is $125 million per annum. The question is `What was unallocated?' As we go further into the future—so the whole $125 million would have been unallocated—we can tip that into the bucket. Are there any large[hyphen]scale additional measures? There are none that I can foresee. In some instances, I expect that we will find that some aspects of the reform program will perform better than expected. In other words, we have not put a ceiling on the DRP savings. We would obviously want the DRP to be as successful as possible. As we go through each cycle, we may come back and report the fact that we now predict in some area that the level of, say, efficiency gains might be greater. Information technology may be an example where that might happen as we go forward with the consolidation and rationalisation of that function. But I cannot turn my mind to any large[hyphen]scale initiative, other than those, which is likely to occur.

By the time we get to a reasonable steady state, we will have achieved ongoing efficiency gains of the order of $1.6 billion to $1.7 billion per annum, going right back from 1990. That is a pretty reasonable harvesting of efficiency gains. Go from the Force Structure Review through the Commercial Support Program through the Defence Efficiency Review reform program, add them all together, and you end up with about $1.6 billion or $1.7 billion per annum.

Senator WEST —What is the breakdown of each of those?

Mr Tonkin —Before we got to the DRP, it was roughly $650 million per annum from Force Structure Review and pre defence reform Commercial Support Program savings. We build the DRP on the baseline of those savings.

Senator HOGG —Are there still savings coming out of those areas?

Mr Tonkin —No. Those savings are continuing in the sense that we have the mature state of those adjustments.

Senator HOGG —Right.

Mr Tonkin —They are fed into the base and that money has been reallocated and spent against our requirements—some on cost pressures and some on capability. We add the DRP on top of that. Is there scope for much more? There is always scope at the margins, but nothing material.

Senator HOGG —That is why I asked for a ballpark figure. I just want to get an idea of where we are at in terms of the savings and whether there is a great margin there to be still gained out of it. On the last occasion, Mr Tonkin, you might have said something about the hardest part of this process being still to come. I am just wondering if by that you are going to squeeze more out of it?

Mr Tonkin —No, what I meant by that was, if you take the market testing issues that we were discussing before lunch, some of those at the higher technology end are more complex to undertake than some of the more simple ones. That was the meaning of that phrase. It is not something else.

Mr Lewincamp —If you look at table 1.3 on page 14, about halfway down the page under the heading `Other', there is an unallocated line of savings that gets out to about $80 million per annum. They are other initiatives that we will have to find in order to generate the savings total required under the Defence Reform Program.

Senator HOGG —So they have not been identified yet?

Senator SCHACHT —But you have to find them.

Mr Lewincamp —We have to find them in order to achieve the totals.

Mr Tonkin —We have to find the owner of them.

Senator SCHACHT —That means, if you do not find that, you will impose it on some section of Defence.

Mr Tonkin —Some of the savings estimates in the DER report are more difficult to place against a target inside the organisation which will yield those savings. So, while we gather up the contributors, it is listed as unallocated.

Senator SCHACHT —Until you put the fire to their feet to make them cough it up. Is that true, Mr Tonkin?

Senator HOGG —So is that an unallocated amount?

Mr Tonkin —Until we find the area which is most appropriate to generate the savings.

Senator SCHACHT —But that would be driven from you at your level at the ADF at the top in allocating something like $81 million cumulative by the year 2002?

Mr Tonkin —It would be a collective Defence management decision, not just the ADF as contributor.

Senator SCHACHT —A collective Defence management decision. Oh dear, oh dear; is that how you describe arm breaking these days in Defence?

ACTING CHAIR —Senator Schacht, that is not helpful.

Senator SCHACHT —It is helpful. We know what we are talking about. The $81 million has not been found. It will be allocated. You will find, under the Defence Reform Program or elsewhere, that someone will have to bear the cost.

Mr Tonkin —We will either settle on the appropriate area that ought to be generating those efficiency gains under DER or, as Mr Lewincamp says, we will have to find additional efficiency gains elsewhere to generate those numbers.

Senator SCHACHT —In the coming financial year, it is $17 million. Is that right?

Senator WEST —Can I just go back on that? That is tagged with note 6 which says:

This provision has varied since the 1998[hyphen]99 Portfolio Budget Statement, due in part to the recosting of Defence Reform Program savings in 1998 . . .

As I do not have my last year's PBS with me, can you tell me what this provision varied from, please?

Mr Lewincamp —It was $12 million last year.

Senator SCHACHT —It was $12 million and it has now gone up $5 million this year.

Mr Lewincamp —Plus some price updating, so $4[half ] million.

Senator SCHACHT —I want to get this right. This figure is cumulative. The $17 million includes $12 million in the previous year. So this year will you be finding another $5 million? No?

Mr Lewincamp —No. The estimate for the cumulative saving by the end of 1999[hyphen]2000 made last year was $12 million; the estimate is now $17 million, cumulative by the end of this financial year.

Senator SCHACHT —So you have increased the cumulative figure by $5 million?

Mr Lewincamp —That is right.

Senator WEST —Is that because the rationing and catering savings, previously listed under the logistics category, are subject to review?

Mr Lewincamp —In part and also, as the explanation in the footnote says, because of the recosting of the program savings. The original savings were all costed, as you probably know, in 1996[hyphen]97 on then estimates of the savings to be achieved by reductions in personnel and rationalisation. We had to price update those.

Senator SCHACHT —Has it been because the same saving and resources have been found but, because of inflation or something else, it has gone up, or have you found extra savings to make the increase of $5 million?

Mr Lewincamp —This is an increase in the unallocated of $5 million.

Senator SCHACHT —How did you increase from last year to this year? The unallocated has gone up $5 million. You must have some idea of where it is being allocated to get the $5 million increase? I presume a dart is not being thrown at the board somewhere, is it?

Mr Tonkin —As the process has gone through and we have progressively reviewed what the targets are against the list of reform initiatives, there are some other figures, when you refine it, that have now come down a bit, so the balance goes into the unallocated. It is not a target; it is the result of the other targeted analysis.

Senator SCHACHT —Let me put it this way: can you provide us with a list for the year 1999[hyphen]2000 of the unallocated savings that total $17 million? It is not a mythical figure; something has happened in Defence for you to get $17 million.

Mr Tonkin —We will take that on notice or seek that advice and come back to you.

Senator SCHACHT —Why has it jumped so much for the following year of 2000[hyphen]01 from $17 million to $80 million?

Mr Tonkin —Because all of the achievements of Defence Reform Program savings are phased over time. The review teams at the time of the report analysed when levels of savings were likely to be achieved. It is a time phased process, so it is expected that the rate of realisation of savings would escalate over time. There is a significant step function overall in the amount of savings being achieved in that year.

Senator HOGG —Just on that one alone—that $80 million—that figure could be either higher or lower depending on outcomes in other parts of the program. Is that correct?

Mr Lewincamp —Yes, that is right.

Mr Tonkin —I think it is more particularly—

Senator HOGG —I am getting a nod from—

Mr Tonkin —I think it is at the margin because—

Senator HOGG —It is at the margin?

Mr Tonkin —there is a range of initiatives which were not allocated. What we will do on notice is tell you which initiatives fall into the presently untargeted group.

Senator SCHACHT —Thank you. And can you do that for the $17 million figure and can you do that for the big jump to $80 million figure?

Mr Tonkin —Yes.

Senator SCHACHT —Thank you.

Senator HOGG —Those can be identified without being—

Mr Tonkin —Yes. Targeting as we receive, as against—

Senator HOGG —And then, having worked through the program, you allocate those against one or the other initiatives?

Mr Tonkin —Yes, through either one or the other initiatives, or we say that it is a new initiative and it has got to be done somewhere else. But we have to find the area of the organisation that is going to undertake that initiative to generate the identified efficiency gain.

Senator HOGG —In respect of the $539 million that we see being required in the longer term for the $50,000 ADF project and the period leading up to that—that is the $45 million, the $338 million, the $434 million and then the $539 million—are you able to allocate how that resource will be used in terms of the reinvestment? Is it possible to say that it will go into Army, Navy or Air Force? Is it possible to do that?

Senator SCHACHT —That is when the brawl starts between services.

Mr Tonkin —I think we could take that on notice just to be able to work through how that is being reallocated against those three services. Essentially, it is a buying back across each of the three services.

Senator HOGG —That is right; you are increasing the numbers.

Mr Tonkin —If you want to know what the delta is that drives that, we can calculate that for you.

Senator HOGG —That would be good.

Mr Lewincamp —Accepting that this is again built on assumptions about what the draw down of the personnel is, the buyback will have to be based on the same assumptions about the results of market testing programs.

Senator HOGG —Yes, but this will give us some idea of where we are going for the supplementary estimates and the additional estimates.

Mr Tonkin —On the present planning and indicative basis, we will have a look at how we can split out how that is related to each of the services.

Senator HOGG —That would be helpful.

Senator SCHACHT —Besides being a matter of argument between the services wanting to get a cut of it, the real rationale for the reallocation of $539 million is based against the capability of achieving your overall outputs and outcomes for the overall Defence Force?

Mr Lewincamp —Yes.

Senator SCHACHT —So it is not the usual old style brawl between Army, Navy and Air Force—who wins the vote in a certain committee, who gets an extra destroyer and one less tank. Is that correct?

Mr Tonkin —We are seeking to drive our resource allocation process to determine what is the appropriate balance between the 22 outputs. That is the whole point of output budgets.

Senator SCHACHT —Yes, of course. The three services have all accepted that rational approach?

Mr Tonkin —Yes.

Senator SCHACHT —You say that with a dead straight face, Mr Tonkin. Congratulations. I just want to go back to table 1.2, which is in the Defence Reform Program that we are still on. I have a couple of extra questions. I got a good answer from General Mueller about the explosive ordinance project, the 525. The other heading that really stands out is `Defence Integrated Distribution System'. Is that another name for stores?

Mr Tonkin —And related things.

Major Gen. Mueller —The Defence Integrated Distribution System is a project whereby previously independent or semi[hyphen]independent distribution centres—in other words, warehouses and associated freight distribution—will be integrated into one coherent network in a way which I would describe as being consistent with best practice in the private sector.

Senator SCHACHT —That means that, wherever possible, the three services distribution will be done as one?

Major Gen. Mueller —Not wherever possible; it will be done as one—full stop.

Senator SCHACHT —That means the introduction of all those new technologies of bar coding and other things as well, if they have not already been introduced?

Major Gen. Mueller —Where they have not already been introduced. More importantly, it will lead to significant rationalisation. At this point in time, I would anticipate that the number of warehouses would be reduced. I would see an opportunity for significant improvements in cycle times across the distribution system.

Senator SCHACHT —With the 1,550 for the market testing, if the private sector is bidding and Brambles says—and I do not know whether they could be interested—`We've got a better warehouse at West Melbourne than you have at Laverton. Therefore, we can make this even more efficient by using one of our existing warehouses that has not only all the latest bar coding but automated fork lifts and shelving and so on,' does that come into the picture as well?

Major Gen. Mueller —Other than where there may be operational reasons where we would have a preference to specify, for example, that a particular warehousing activity or associated minor maintenance activity be carried out in a specific location. If market testing is to maximise the value that it adds to the activity, then we have to focus very much on specifying the outputs, but not telling the people who are bidding, including the in[hyphen]house option, how they are to deliver those outputs.

Senator HOGG —I understood that that project was very much involved also with the drawing together of a number of disparate inventory systems by which you kept—

Major Gen. Mueller —Sorry, what do you mean by inventory systems?

Senator HOGG —Computer systems which kept track of stock.

Major Gen. Mueller —That is a related but slightly separate issue. What you are alluding to here is the standard defence supply system, which in a previous Senate legislation committee I discovered is used in different ways by each of the services. That is a legacy which we have inherited, and amongst other things it is the task of the Joint Logistics System Agency to first of all rationalise the business processes that SDSS uses, so that wherever possible we use common processes. That will be reflected in the software package that complements those processes.

Senator HOGG —So how far off development is the program?

Major Gen. Mueller —We think we have got a solution. It becomes an issue of funding, and that involves my organisation putting forward a business case which can demonstrate an appropriate return on investment. It then must be considered in the context of competing bids for limited resources by my colleagues in Canberra.

Senator HOGG —Now that you have said all of that in those nice terms, where is it in here?

Senator SCHACHT —Where is it in the PBS?

Major Gen. Mueller —You will probably find somewhere in the PBS some comment with regard to the rationalised—

Senator HOGG —What output are you?

Major Gen. Mueller —Don't worry about the outputs. You look for us under group 6.

Senator SCHACHT —Support Command. Is that it?

Major Gen. Mueller —Yes. For example, on page 147 you will see:

. rationalising, standardising and improving common business practices;

. operating within a quality management system;

. . . . . . . . .

. migrating to integrated, reliable and user[hyphen]friendly information systems . . .

Senator WEST —What does that mean when it is not in military speak?

Senator Newman —A better system.

Major Gen. Mueller —It means that we integrate with reliable and user[hyphen]friendly information systems. I can assure you that some we have got at the moment are not user friendly. In other words, the demands on the individual who uses them are at times quite excessive.

Senator WEST —So this means you are going to get the support materiel to the pointy end more quickly?

Major Gen. Mueller —Yes, but it will also lead to a lot of other improvements, such as improved inventory management, improved asset visibility and so on.

Senator SCHACHT —We will come back to this later when we get to the section with the groups, but I just want to point out again a function of accrual accounting. It is rather interesting that you have there, Mr Tonkin, that the group contribution to outputs for 1999[hyphen]2000 is $1,700 million, as a one[hyphen]line contribution, whereas—and I will raise this again—there are some areas where I would have thought that in future it might be useful if you broke that figure down a bit and put it against your performance targets, et cetera. We have got goals 1 through 6 appearing again.

Mr Tonkin —Somewhere—Mr Lewincamp may help me—we actually show how that $1,700 million is split up.

Mr Lewincamp —It is at page 22.

Senator SCHACHT —This is designed to trap me all the time, is it?

Mr Tonkin —It is there to help you. Support Command Australia is shown there, at the top.

Senator SCHACHT —On page 22?

Mr Tonkin —On page 22 we have SCA—Support Command Australia—and, at the bottom of that column, the number you have just quoted, $1,720.4 million.

Senator SCHACHT —And then it is shown against group output, so I go to group output 1—on what page?—to find any explanation of the first part of that, how the $19 million is spent.

Mr Tonkin —You will not find it broken down, because we are not required to provide that sort of breakdown. The question you asked was how the Support Command contribution money has been broken up by output, and page 22 breaks it up by output.

Senator SCHACHT —Yes, and then you go to SCA, group output 1, $19 million. Where is the $19 million listed?

Mr Tonkin —It is not listed, because it is all part of either employment cost or another services cost. What we are reporting against each output is the presentation form which we have been asked to report in this first cycle of this documentation. What we have provided is the cross[hyphen]wall to show how the total of that group is spent.

Senator SCHACHT —Group output 1 is output 1. Is that right?

Mr Tonkin —Yes.

Senator SCHACHT —I go to output 1 on pages 61 through to 63, and an explanation of how the $19 million is spent is—of course, as you point out to me—utterly missing.

Mr Tonkin —That is right.

Senator SCHACHT —But now you are telling me that, if I asked you one by one—if I went through every one of those goddamn lines—you would tell me from the list somewhere in all those piles of files you have got that the $19 million was spent on capital and on wages or something? Is that right?

Mr Tonkin —It will be spent on a mixture of employees cost and, I would expect in that one, most of it will be spent under the heading of `other expenses' because that is what the Support Command Australia is providing.

Senator SCHACHT —Other expenses! So this just goes round and round. Then you will refer me back—I will say, `What about the other expenses?' and you will say, `Go back to
page 146 or that other table,' until finally, in desperation, I get a note saying, `You are due in another estimates committee' and I will go off defeated.

Mr Lewincamp —As a learning organisation.

Senator SCHACHT —That is a disowner.

Mr Lewincamp —Perhaps we should just delete the group costs.

Senator SCHACHT —The point is, I would argue—and I will come back to it; I did it in the briefing, Mr Lewincamp, as you know—that, on some of these figures, one line or to have $1,700 million with a two[hyphen]page explanation is a bit skimpy, quite frankly.

Mr Tonkin —But, again, as Mr Lewincamp points out, we were not required to provide any data on groups at all. We could have not had page 22.

Senator SCHACHT —Mr Tonkin, I understand that that is the agreement with DOFA on the layout. As this is a two[hyphen]way cooperative experience of accrual accounting, we are also making suggestions where we think it is not unreasonable to follow some piece of money down the right burrow and end up with the rabbit rather than the bloody ferret biting my fingers off or whatever because you will not give me the answer.

Mr Lewincamp —But on that point, Senator, if I may, the focus of the hearing now ought to be on the outputs we deliver rather than the inputs that contribute to that output.

Senator SCHACHT —Okay. When we come to the annual report, for this column of 1.12 on page 22, in the annual report will I get an explanation of whether the $19 million met your outcome and outputs?

Mr Lewincamp —The principal explanation in the annual report will be looking at the total cost of each of the outputs.

Senator SCHACHT —The whole $1,700 million?

Mr Lewincamp —No, we are talking about the far right[hyphen]hand column here, which is the cost of the outputs.

Senator SCHACHT —Which will be output 1, $582 million?

Mr Lewincamp —That will be the principal explanation. We will provide for you an explanation of the output delivered in terms of the performance achieved and the cost that it took. At this stage I am not sure whether we will provide the group information.

Senator SCHACHT —So the cross[hyphen]referencing across output 1 is such that you get $582 million. There is the output that has been achieved, you will say. Then you go down the other way and you find your $1,700 million broken up as you go down the column, and then you will say, `That has also been achieved as an outcome and an output.' So what?

Mr Lewincamp —No. That is the cost of the service that was delivered in support of the outputs.

Senator SCHACHT —Is that an input, then?

Mr Lewincamp —It is. That is giving you a costing of Support Command Australia as an organisational unit.

Senator SCHACHT —Then it is not unreasonable, without destroying accrual accounting, to say of the input going down the column on page 22, the $1,720 million, that I want more of a break-up on each of those figures? If I want it, you can provide it?

Mr Lewincamp —I am not sure that we will continue to provide those figures in the future. That is now a matter for some consideration within our organisation and in consultation with the Department of Finance and Administration about the future requirement.

Senator SCHACHT —We know what they will say. It will be, `Don't provide anything ever.' That will save them—

ACTING CHAIR —Senator Schacht, is that a helpful comment?

Senator SCHACHT —It is a helpful comment. I am helping you, Chairman, about what Finance will try to do.

ACTING CHAIR —I think the officers would disagree. Have you got any further questions of substance?

Senator SCHACHT —So this table 1.12 will not appear again next year?

Mr Lewincamp —This was done to assist the senators' understanding about the contribution that our organisational units make to the production of the outputs.

Senator SCHACHT —And it is there by your good grace?

Mr Lewincamp —More or less. It was not a requirement under the reporting regulations.

Senator SCHACHT —It would be helpful if that table continued for a couple of years at least.

Senator Newman —Madam Chair, could I just say, as I said to the last committee at which I was present, that it is recognised that this process would be difficult for officials and also for senators. The best arrangement, surely, to not waste time but to make sure that everybody is accommodated as well as he or she can be for next time, is for committees to make recommendations about the format of the PBS or any other information that they felt was unhelpful or not in the best form possible. Could we not do that as part of a committee report rather than take up the time of the inquiry now?

Senator SCHACHT —I agree with you, Minister, but until Mr Lewincamp quite nicely explained to me that table 1.12 might disappear next year I would not have known to ask the question or raise it with the committee. Can I then put on notice to the department: which information in this PBS as part of a transitional arrangement will not be provided in next year's PBS?

Mr Tonkin —We could not provide an answer to that question on notice because we would not know by the time we got the answers back what it is. Firstly, we need, as the minister has just said, to receive the committee's views and to consider what the overall view of the people managing the process is. With all the best will in the world we cannot answer that question.

Senator SCHACHT —You did tell us that 1.12 will probably hit the fence next time around.

Mr Tonkin —It is not a required element under the present arrangements.

Senator SCHACHT —Could you list what are not the required elements?

Mr Tonkin —Everything in the budget overview and everything on groups.

Senator SCHACHT —Everything in the budget overview.

Mr Tonkin —The overview section is something which the Department of Defence put in the PBSs some years ago to assist the deliberation of the committee in looking at strategic issues in the consideration of the Defence estimates. It is not required as part of the structure before our budget measure statements. Material in relation to groups, similarly under output budgeting, is not required.

Senator SCHACHT —So section 4, from page 128 to 164—

Mr Tonkin —That is not required.

Senator SCHACHT —Not required?

Mr Tonkin —No.

Senator SCHACHT —I have to say that, if you are going to recommend that that gets knocked off, you will have a big brawl.

Senator Newman —Senator Schacht, you might like to recommend that it is not discontinued in the comments that are going to be made.

Senator SCHACHT —Are you suggesting that we cannot ask questions specifically about defence headquarters—Navy, Army, Air Force, Intelligence—under the groupings that most ordinary Australians understand because most of Australia has not picked up on accrual accounting yet, Mr Tonkin?

Mr Tonkin —I am not suggesting that at all, Senator.

Senator SCHACHT —You just said it was going to get knocked off.

Mr Tonkin —No, I did not, Senator. What I said quite clearly was—

Senator SCHACHT —You are not required.

Mr Tonkin —that in section 1 and section 4 it is not required. I did not say, nor did I intimate or indicate in any way, that it is our intention not to provide that. What I said was that I could not provide you and the committee, in the time provided for the answers to questions on notice, any answer to that question because the position will not be determined. That is what I said, not anything else.

ACTING CHAIR —Mr Lewincamp, did you want to make a comment at this point?

Mr Lewincamp —On page 196 of the PBS there is a checklist that indicates what is required under the guidelines.

Senator SCHACHT —Do you want to hear the sound of one hand clapping?

Mr Lewincamp —No. Senator. You asked what was required and what was not, a check of what is in here compared to this. This gives you that.

Senator SCHACHT —Thank you. You will be able to report back in your discussions with the Department of Finance and Administration about any views expressed at least by some senators that the excellent information you have given in section 4 and section 1 is most useful to us. I have already suggested to you that the goals listed may not be useful in one form because they do not seem to be able to be measurable nevertheless. I cannot chase down where the $19 million went.

Senator HOGG —I have just a couple more questions on this DRP. I notice that on page 10 the paragraph in the middle of the page says:

The Army has commenced the development of an expanded Ready Deployment Force. Other specific combat capability enhancements include the formation of the 1st Intelligence Battalion to support land task force operations, and the Chemical, Biological, and Radiological Response Unit to support the Olympics and provide ongoing counter[hyphen]terrorist capability.

On that last one, is that new?

Air Marshal Riding —No, Senator. It is providing ongoing counterterrorist capabilities. It is the role of the special forces.

Senator HOGG —All right. I needed to know what its status was so that I can follow that later on. Are both of those initiatives being funded out of the DRP? Is that correct?

Air Marshal Riding —We have not disaggregated the allocation of funds to the services to the extent that that conclusion could be drawn.

Mr Lewincamp —Certainly a number of the personnel components are being funded by the DRP as part of the buyback, which is why it is under the heading of `Retaining the Australian Defence Force at 50,000'.

Senator HOGG —So it comes under that umbrella?

Mr Lewincamp —Yes, some of the personnel for those units are being bought under this initiative.

Mr Tonkin —The raising of the Intelligence Battalion certainly is funded under DRP.

Senator HOGG —The other unit?

Air Marshal Riding —The CBR, the Chemical, Biological and Radiological Response Unit also is a new capability.

Mr Tonkin —There are lots of things that we do which are new which are not necessarily DRP funded, but are funded out of the overall—

Senator HOGG —No, it is just that it is under this section. I am wondering if it is being funded, and if so—

Mr Lewincamp —That is what I am saying: the people part is being funded by DRP but I am not sure that all the equipment is.

Senator HOGG —Where would we find it under the DRP?

Mr Lewincamp —It is part of the 50,000 buyback.

Senator HOGG —One last question on that 50,000 buyback: those figures are still fairly fluid, as I understand it, and there are still costings to be done there—is that correct?

Mr Lewincamp —It is explained in the front part of the PBS. Our executive, our senior body, has been looking again at the rate at which we should draw down to the 50,000. They are currently reviewing that. The portfolio budget statements are based upon achieving an average funded strength of 50,000 in this financial year, 1999[hyphen]2000. We think that might be a little quick and the actual average funding strength achieved might be slightly higher than 50,000. That is still being reviewed.

Senator WEST —If you do not reach the 50,000, you are obviously not going to have the same level of savings.

Mr Lewincamp —That is true.

Senator WEST —How is that going to affect your reinvestment programs?

Mr Lewincamp —If we have to fund additional personnel costs above what is budgeted here, we will find that within overall Defence funds.

Senator WEST —So your DRP reinvestment will continue at the same level? You will find the savings from somewhere else? Is that correct?

Mr Lewincamp —That is correct. If you look at the totals on page 15, table 1.4, the resources available for reinvestment are $474 million. The total reinvestment so far is $447 million. So there is still $27 million there on these projections that has not yet been allocated.

Senator WEST —Twenty[hyphen]seven million is not a large amount of money in your terms.

Mr Lewincamp —No, but the extent to which we will not achieve 50,000 will be reasonably small. The strength of the ADF, the actual strength on 1 July this year, we expect to be somewhere around 51,600, perhaps 51,800. It will come down quite close to 50,000 average funded strength next year. It might be 50,400, but 400 extra personnel would cost no more than $15 million or $20 million.

Senator WEST —And it is Air Force, looking at the table on pages 168 and 169, that has to do the biggest drawing down. Is that correct?

Mr Lewincamp —Yes, that is true.

Senator WEST —I suppose that is an appropriate thing to ask in Air Force, but I am interested that on page 169 there are no changes to the one star and above in Navy. They are due to drop six senior officers, 13 officers and 97 ORs. Army is due to drop 36 senior officers—they are also due to drop one star and above—313 officers and 651 ORs, and they are going up 750 in reserves. Air Force has to drop three one star and above, no senior officers, 172 officers and 1,705 ORs. When we get down to civilians, there is no change to the senior executive. You are going to maintain the 1999 senior executive, but senior officers are going to go up by 243 whilst the others will go down by 502. What is so special about the senior officers? When everybody else is going down and we have a senior Public Service grouping—

Mr Lewincamp —Can I make a couple of points about these tables. One is that the initial savings and reductions made under the DRP were made in the senior officer level and the one star and above level. If you look back at the first year or two of the program, there were some very quick reductions made at those levels.

Senator WEST —Yes, I recall that.

Mr Lewincamp —You would then expect to see not quite the same pro rata reductions continuing over the next couple of years. In terms of the senior officers, part of the explanation there is that there is a civilianisation process going on. These are overall numbers; these do not relate to DRP reductions, so you would expect some of that to go up. I cannot account for that complete figure. I would have to take that on notice.

Senator WEST —I am not talking about the increase in numbers in military.

Mr Lewincamp —I am talking about the civilian senior officers.

Senator WEST —Yes.

Mr Tonkin —It is primarily in acquisition and science and is primarily due, as Mr Lewincamp says, to the replacement. One of the recommendations in DER was to reduce the proportion of people in the Defence Force in the Acquisition Organisation. Those functions still have to be performed. It is necessary, therefore, to recruit people at that professional level, described as senior officers grades A, B and C, to do those functions. It is a matter of acquiring the right sorts of skilled people who fall into that category. If you want the job done, that is the category into which they fit. That is what drives the figures. If you take group 10, DSTO—and the same issue applies; we are trying to improve the quality of defence science—you have 120 gone up. If you look at group 9, acquisition, there are 20 which have gone up. What we are trying to do is to invest our human resources at the right skill levels, and the classification breakup of this places them into the category called senior officers.

Senator HOGG —Is this the appropriate place to ask a question to try to relate what one sees in those two tables on pages 168 and 169 to what is happening in the DRP?

Mr Tonkin —Yes.

Senator HOGG —If I could just take you, under group 2, to the officers and the other ranks and go down to Navy. My reading of the figures—and it might be a simplistic way of looking at it—is that there is an increase over the estimated 1998[hyphen]99 outcome of 317 in officer ranks and 427 in the other ranks. If you look at the next column, Army, you will find that the increase at the officer level is 338 and that in the other ranks it is 414. If you go to group 4, you will find there is an increase of 431 officers and an increase of 579 in other ranks.

Mr Tonkin —The other ranks have gone down, haven't they?

Senator WEST —The ORs in Air Force have actually gone down.

Senator HOGG —I am sorry, that has decreased.

Senator WEST —So the officers have gone up and the ORs have gone down.

Senator HOGG —I am just trying to put this all into the picture of what is happening under the DRP—the actual numbers.

Mr Lewincamp —This is the actual number of Army personnel operating within the Army group that has gone up.

Senator HOGG —That is correct.

Mr Lewincamp —So we are actually moving people in uniform back to where they ought to be: in uniform in Army units. That is what this table is indicating.

Senator HOGG —Let us look at Army, where the figure goes from 2,896 to 3,234.

Mr Lewincamp —That is right.

Senator HOGG —That is an increase of 338 officers.

Mr Lewincamp —Yes.

Mr Tonkin —If you look at the `total' column—right across the side—for Army as a total organisation, and take senior officers in Army, it has gone from 544 senior officers in Army in 1998[hyphen]99 down to 508 senior officers in 1999[hyphen]2000, across the total strength of the Army. So, as Mr Lewincamp is pointing out, we are reducing overall the size of that level of people in the Army, but those reductions are occurring in what we describe as the enabling groups; whereas in group 3, which is the group which delivers Army capability, the numbers have been adjusted—in that case slightly down, but the next level of officers has gone up from 2,896 last year in the general officer ranks to 3,234. So we are increasing the assets, the people, in the Army group to deliver Army capability while, overall, reducing the number of officers in the Army totally as we come down, which is precisely what we are trying to do.

Senator HOGG —All right. But there is only an increase of 414 in the other ranks. So it is almost—

Senator WEST —It is almost 1[half ] ORs to one officer.

Mr Tonkin —That brings you to the next aspect, that what we are doing is getting rid of a lot of support functions which employ lower classified, lower ranked people. As the technological complexity of our activities increases, you are going to have more people of higher levels, particularly officers, undertaking those functions. Even despite the changes we are making, we still broadly relate remuneration to rank: the more complex the task, the more you have to pay, the higher the rank.

Senator HOGG —So, in effect, we are seeing now a reflection of the changing structure that is coming about as a result of the DRP where proportionately there is a higher increase at the officer level than at the other ranks level. If that is the case, will that continue?

Air Marshal Riding —It will continue while outsourcing of support functions within the Army, Navy and Air Force continues.

Senator WEST —Does that mean you are going to have enough ORs to fill positions with all these officers? Are you going to have those force structure ratios—

Air Marshal Riding —We recruit at the base rank for officers and at the base rank for other ranks. We grow the structures from those two bases, with some flow through of other ranks into the officer ranks. But the vast majority of other ranks and officers are recruited directly into those corps.

Senator WEST —There used to be a formula: so many ORs to so many officers of each different level.

Air Marshal Riding —There was never any formula applied; it was really a case of the nature of the capability that you were referring to.

Senator WEST —So there was never any—

Air Marshal Riding —The higher the technology, generally, the lower the number of other ranks to officers.

Senator WEST —Looking at page 13, it says:

The Government has established a high level Strategic Management and Reporting Team to enhance the profile and maintain the momentum of the Defence Reform Program.

What is the need to enhance the profile?

Mr Tonkin —In reviewing our progress to date, we felt—and I have said this on the record in previous hearings—that we had not done as well as we should have or could have in explaining to our own organisation the broad intentions of DRP and the progress and achievements to date. One of the ways of assisting people with this process is to explain to them and show them the benefits of what is occurring as it is occurring, and also to have a general community understanding of what it is that we are doing. We believed, and the government believed, that having some extra effort in this area was a productive investment.

Senator WEST —So there has been the review done. Is the review—

Mr Tonkin —The review has not been done. We have established an organisation, a team, which is tasked with a range of functions, one of which is that.

Senator WEST —But even before that review has been completed you see the need to enhance the profile?

Mr Tonkin —That is a general assessment we have made ourselves at a management level. It did not require a review to do it; we formed our own conclusion.

Senator WEST —Is that an indication that morale is not as good as it used to be?

Mr Tonkin —Morale is always difficult when you are going through a process of this sort of change. We would certainly not wish to misrepresent the fact that there are some difficulties in people confronting change on this scale. You cannot change an organisation as we are doing, you cannot market test the range of positions, without individuals feeling affected and, in some ways, threatened by that process. That is unavoidable. What you can try and do is provide them with the best possible information so they can understand why you are doing it and what the time lines are, and so that you can run a process, which we do, of looking after the people affected in terms of outplacement counselling and so on. It is an overall package.

Senator WEST —Thank you.

ACTING CHAIR —We now move on to the budget summary.

Senator HOGG —Mr Lewincamp, you might answer the question that I asked you earlier this morning about the major changes in the Defence budget as a result of the move to accrual based accounting and output budgeting.

Mr Lewincamp —The key change in moving from a cash based budget to an accrual based budget is that you register the full cost of your activities, the full expenses and revenues, when they are incurred rather than simply when cash changes hands. Rather than registering, for example, cash expended on major capital equipment, you register consumption of the major capital equipment through depreciation; rather than registering the purchase of inventory items, you actually register the consumption of the inventory items; and when you are talking about employee costs you look at the full accrual cost, which includes things like accrued leave entitlements, superannuation benefits and things of that sort. So there is quite a distinct difference in terms of the expenses and revenues registered under an accrual system compared to those registered under a cash system.

There are some other elements about the way in which the budget itself is constructed as a result of that. On page 18, table 1.7 is probably the best table to talk about there, looking at the overall level of Defence funding.

The initial component of Defence funding is the cost of producing departmental outputs. You see at the start of that table that the cost of producing the outputs has two components: an appropriation from government and a capital use charge. Under the new accrual budgeting framework, the government has applied a 12 per cent capital use charge to the net asset base of an organisation. This is to indicate the opportunity cost of the funds the government ties up in the agency's activities; the 12 per cent taken as being six per cent as the cost of money and six per cent roughly as a risk factor. So the cost of our outputs includes a capital use charge, and that generates that figure—one[hyphen]third of the way down that table—of the revenue from government for the departmental outputs.

We also receive some revenues from independent sources—from sales of services, for example—and that gives you a total price of outputs. Also included in our budget now are administered expenses. You will recall under our previous cash based arrangements we talked about Defence function outlays and that was defined in last year's portfolio budget statement. That did not include administered items, and administered items for us consist largely of military superannuation. When you include the administered items, that gives you the total resourcing of the Defence outcome. Then there are two other elements of the funding for Defence. One is an equity injection and the other is receipts that we gain from the sale of specialist military equipment and assets. That gives you the total Defence funding line at the bottom.

Senator HOGG —Your total budget for the year is just over $18 billion?

Mr Lewincamp —No. I should distinguish between total funding of Defence and total budget. If you look at table 1.8 on the next page, page 19, it shows the total appropriations for Defence, and that is $17.5 billion. The two items that are not included in the appropriations that contribute towards the total Defence funding are the departmental revenues from independent sources and the capital receipts. Those two items give you your overall Defence funding but, because the revenue comes from non[hyphen]government appropriations, it is not part of our budget. The overall Defence budget, if you like, the full amount of the appropriations government gives to Defence, is $17.5 billion.

Senator QUIRKE —What does that represent as a percentage of GDP?

Mr Lewincamp —I am not sure what it represents as a percentage of GDP. The figure we have used in the past was Defence function outlays. Page 20, table 1.10, derives an equivalent figure because, of the $17.5 billion that we have talked about here, $4[half ] billion is capital use charge which the government supplements to us on 1 July and then charges us with on 30 June at the end of that year. So it is basically a book entry that is almost entirely notional. If you take that out and take out the administered items, the level of Defence funding that is the closest thing that was in the past Defence function outlays is $11.093 billion, on page 20, and that as a percentage of GDP is 1.8 per cent.

Senator QUIRKE —So, if you strip away all of the accounting stuff that we are now required to do here, you are talking about $11 billion of new money each year, which represents 1.8 per cent of GDP?

Mr Lewincamp —That is right. Our percentage of GDP is still falling slowly because Australia's GDP itself is increasing. But we are maintaining Defence funding at current levels in real terms and, if we continue to leave it at current levels in real terms, the percentage drops gradually.

Senator QUIRKE —I understand that.

Senator HOGG —You say that you are being maintained in real terms?

Mr Lewincamp —Yes, at zero per cent real growth. That was the government's commitment and that is reflected in this document. The table on page 20, over the forward estimates period, is zero per cent real growth. These prices are all out[hyphen]turned: that is, we have made an estimate based on government parameters on what the price and exchange variations would be for future years. So that explains the slight increase over that period, but that is based on zero per cent real growth on that figure.

Senator HOGG —It has been put to me that you are $750 million short?