Senator MARK BISHOP (4:41 PM) —by leave—I move:

I rise to talk to Audit report No. 40 of 2005-06: Performance audit: procurement of explosive ordnance for the Australian Defence Force (Army): Department of Defence, Defence Materiel Organisation. From Afghanistan to the Solomons, our forces are stretched, yet the government is stretching its credibility with the latest peccadillo outlined in the audit report before the chair for discussion this afternoon. Yet again it has bungled the buying of major defence items, this time ordnance. The Auditor-General, fresh from finding fault with the purchase of 22 Tiger helicopters, is now highly critical of Defence’s purchase buying of ordnance. Findings from the report before the chair include: a failure by Defence to follow government guidelines in purchasing ordnance; a failure to rein in a startling propensity for prepayments; a failure to safeguard against significant risk when it comes to storing and servicing ordnance; and a failure to keep its main leasing and purchasing agreement up to date, making it more than difficult to manage the SAMS agreement.

Closer scrutiny of this report card on Defence’s procurement activities makes for most disappointing reading. Once again, when it comes to economic management and accountability, Defence fails to make the grade. It chalks its first black mark against financial management specifically in the area of prepayments. This seems to be a bad habit to which Defence has become more than accustomed. It pays virtually up front for goods worth tens of millions of dollars in return for benefits that never materialise. Take in this instance the purchase of key munitions to maintain stocks. Defence paid $44.9 million on a $50 million contract up front for this particular ordnance. The largest purchase under this agreement was a tranche of Bolide missiles. Defence paid $33 million or 90 per cent of the total cost to suppliers Saab back in 2003. This was on condition that it received the goods ahead of schedule, yet three years later Defence is still waiting for a number of these benefits to become apparent, to materialise.

But this is not the worst example of Defence being taken for a ride because of its penchant for prepayments. Officials at estimates a fortnight ago confirmed what was laid out by the Auditor. In some instances, Defence has paid the entire price up front for a number of munitions for very little return and, in some cases, no delivery. This is in spite of assurances before previous Senate estimates that such a practice would be reined in. It seems from the Auditor’s reports that prepayments remained the preferred option for Defence to balance its budget books at the end of each financial year. It is a practice whereby Defence, finding itself in the black in one year, uses this money as an up-front payment on equipment for the following year. It is a devil-may-care attitude as to whether this will result in any benefit to the taxpayer. Incidentally, Defence advised the Auditor mid last year that it was reviewing this practice. I suppose we will see.

Defence’s second black mark is notched up in the area of inventory management. Here it received a real blasting from the Auditor. It appears that Defence has spent a total of $212 million on ordnance it cannot use. When I followed this up at Senate estimates the week before last, I was told that nearly half of Defence’s $2.4 billion worth of ordnance was currently incapable of being used. The Auditor also criticised Defence for not having the technical data to store and maintain this particular ordnance. This exposed it to significant risk regarding safety. This is in spite of setting up its own specialist group within the DMO to overcome or to keep tabs on this particular problem. The Guided Weapons and Explosive Ordnance Branch should audit and assess whether guided and explosive weapons are safe and suitable.

Defence officials assured the committee at estimates that they now have the technical know-how to safely store the particular ordnance. They also admitted that unusable explosive ordnance is being stored at Orchard Hills in Penrith, a main population centre west of Sydney. This is not just bullets, but grenades and missiles. But the greatest concern remains the way Defence have managed their own Strategic Agreement for Munitions Supply, or SAMS, which I referred to briefly earlier. In short, SAMS assures Australia can meet its ordnance capability and sets out how much we pay for munitions. It is under this agreement that Defence pays $800 million over a 16-year lease to munitions suppliers ADI. Incidentally, ADI was the beneficiary of another series of prepayments under this particular agreement. Yet, when auditors went to check on this critical contract, they found Defence had not kept it up to date for each of the last five years. That says a lot about how Defence manage their business. The Auditor made no less than 15 recommendations to ensure Defence lift their game in the procurement of ordnance—bombs, warheads and rockets and guided and ballistic missiles and artillery. As I said, Defence have agreed to these 15 recommendations. We were led to believe at estimates that improvements have already begun. I will certainly follow that up at the next round of estimates.

Meanwhile, it is worth noting that, since becoming Minister for Defence, Dr Nelson has called for no less than nine reviews within his own department. I think it is fair to say that we do not need reviews; we need reform and we need that reform urgently. Dr Nelson has been taking charge, but the government has been doing too little for too long. Dr Nelson is about to find out what is happening in his own department. This government’s self-professed record of economic management is being severely undermined by its continuing mishandling of defence procurement. Urgent reform is needed to ensure there is accountability for how taxpayers’ money is being spent in the procurement of anything from missiles to particular brands of bullets. Our troops, as is often stated, are giving first-class service in a number of operations all over the world. Our troops depend on the professional procurement of defence goods. Our troops need to rely on their minister to give them the best equipment at all times and act in their best interests when it comes to procuring and providing them with that essential equipment. There is a lesson here for the new minister, Dr Nelson: read the Auditor’s reports and right the wrongs identified repeatedly in the administration of Defence. Only then will you master your department and ensure our troops’ first-class service is being backed by top-grade procurement. I seek leave to continue my remarks.

Leave granted; debate adjourned.