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Tuesday, 23 August 2011
Page: 5276


Senator MARK BISHOP (Western Australia) (20:48): I seek leave to speak for up to 20 minutes.

Leave granted.

Senator MARK BISHOP: I have spoken a number of times over the last 12 months on the subject of defence procurement. TonightI want to address current developments in this area and to set out some perspectives which I believe need to be understood. Let me first recap the current circumstances of procurement within defence. The budget for the purchase and sustainment of defence materiel over the next four years is almost $40 billion. Over coming decades the investment will total hundreds of billions flowing from recommendations of the 2009 white paper. In the face of disgraceful waste in procurement, in particular from inherited legacy programs, significant reforms have been and continue to be implemented. These reforms flow from several high-level reviews, principally the Kinnaird review of 2003, the Mortimer review of 2008, the Prowse review of a few years ago and more lately the reports of Mr Pappas of McKinsey and Co. and Dr Black and Mr Rizzo. Performance of our procurement processes has improved to a degree whereby it is now plain that delivery is happening within 0.7 per cent of budget estimates, against which time slippage is said to be more than 30 per cent. It is frequently claimed that continuing poor performance is due to its complexity for the following reasons: the life of many procurements can be up to 30 years; significant research is needed to achieve leading-edge technology in a world of rapid growth and sophistica­tion; Australia's operational circumstances are unique given remoteness and distance, and that uniqueness requires, of course, unique equipment; industry has variable capacity with gaps in critical areas, especially high-tech systems development; skills are in demand and hard to acquire, with stiff competition in particular coming from the mining sector; past investment has been very lumpy, depriving industry of continuity of investment and skills retention; industry has become dominated by international prime companies, making for greater globalisation and reduced compet­i­tion; competition between US-based and European industry leads to serious issues of intellectual property conflict, not to mention difficulty in systems integration, the eternal bugbear; and the needs of the three services are both different and varied.

That is all valid to some degree. It is true that governments over the years are accountable for many poor decisions and failures. These often span more than one gov­ernment, such are the time frames in­vol­ved. At the same time governments have sometimes been astute, in spite of military advice and failure, to purchase the approp­riate capability—for example, the new Hornet aircraft bought while we wait for the JSF.

We are not alone in this. In fact, we may be better placed as a result of our reforms than many other nations. However, one thing is constant regardless of the improving circum­stances, and that is the criticism made of the system and the attribution of fault. Let me give a string of examples. The military remain too susceptible to the latest gun runners' glossy catalogues and thereby can never be trusted with the chequebook. The military are under skilled, untrained and unable to make adequate technical assess­ment or project manage to the standard required—and incidentally are rotated too frequently. Civilians in the procurement and policy areas have no idea of military needs. Civilians and military are thereby mutually distrustful. Defence is constipated with bureaucratic process without any account­ability. DMO is too fat at 7,000 staff and impervious to Defence, military and industry needs. Both DMO and Defence are ignorant of commercial realities and the needs of industry for continuity and certainty of investment. Industry is comprised of cost plus gougers who over-promise and under-deliver. The military have unrealistic expec­tations of cost and time and constantly under­quote to obtain decisions. Past administrative reform destroyed service chiefs' responsibility through outsourcing and centralisation. Defence constantly fails in its administration, as evidenced by frequent ANAO reports. Contracting and tendering requirements are too onerous. Research and development needs are inadequately provided for, with a call for a return to the old cost plus, open-ended formula. The white paper was clearly too ambitious and unrealistic. Defence regularly fails to fully specify equipment detail, resulting in multiple tender and contract changes. Industry is never adequately consulted. Procurement decisions are too often based on inadequate or narrow advice without all options being thoroughly tested, especially with respect to viable local options. Industry, on the other hand, is too competitive and jealous to manage or consult collectively. Too much off-the-shelf product is modified for alleged Australian conditions or, alternatively, off-the-shelf purchases are too frequently sought in preference to Australian products. And, finally, govern­ment decision making is too slow and is impeding industry investment decisions. And so it goes on and on, ad infinitum.

Sadly, there is some truth to many of these, and many examples can be cited in support. Some, however, are patently wrong and result from poor information and poor communication. Some are historic and cultural. This reflects very different paradigms between government and industry, and within government, all of which is in fact centuries old. However, in combination, these are all symptoms of unsatisfactory policy and administration.

To be fair, governments have been tightly focused on these issues for almost a decade. The question therefore is: have we made any progress? My view at this time is that progress has been made since Kinnaird and Mortimer. In coming to this general conclusion, I make the following observa­tions in support. Lead times are very long for some projects. For example, the current AWD project, which will cost $8 billion for three ships, actually began almost 10 years ago. Part of the administrative failing in Defence can be attributed to previous reforms not part of Kinnaird or Mortimer. Adherence to budget, while assisted no doubt by a number of large off-the-shelf purchases, is pleasing to see. Much of the bad publicity, all well deserved, is almost exclusively attached to legacy projects. Allegations by industry seeking to blame government for slow decision making on projects, thereby affecting their business planning, are simply wrong. A number of legacy projects of concern have either been sensibly scrapped at the cost of $1.5 billion or restored to health. The experience since Mortimer in particular has shown that continuing refinement of those reforms is necessary. Continuing scrutiny by both parliamentary committees and the ANAO is essential, as is diligent ministerial oversight. In addition to these general observations, there are two other large elephants not to be ignored. First is defence industry policy and second, perhaps a large subset of the first, is naval shipbuilding itself. These subjects are very much alive as we progress through the production of LHDs in Spain and AWDs in Adelaide, not to mention 12 new submarines sometime in the future.

Having participated in this debate over the years I have come to some very positive views on progress being made, but analysis of the causes of problems is needed rather than of the symptoms. It has been the view of many commentators, and indeed of past ministers, that Defence is dysfunctional in some respects. That is not to say that much credit is not due for its many responsibilities, nor does it mean that everyone in Defence is incompetent; quite the opposite. However, it is a very large organisation. It has a long history and an accumulation of reforms which overlap even more frequently than constant changes to senior management. In short, it seems to me that in procurement it is not so much a matter of institutional structure or relationships within it, but the way in which it works—in the management-speak of Dr Black: governance, account­ability, training and culture.

From my perspective, these matters are difficult to comment on. While we see evidence of dysfunctionality around these themes on a regular basis, we do not have much visibility of the causes of failure. What we do have, however, are regular reports from ANAO and management initiated reviews which, while valuable, are in themselves limited. I say limited because they never deal with the whole, nor does the recent report by Dr Black. It excluded the ADF, the DMO and the DSTO, the operations of which are part of the problem. There are also ad hoc reports such as the Rizzo report into naval maintenance, which is very insightful indeed. From both the ANAO report Acceptance into service of Navy capability and Rizzo, we have a very clear picture of what has happened in the Navy at least. The centralisation and out­sourcing of maintenance functions in the past has resulted in the disempowerment of Navy to manage its own ships. Maintenance became someone else's problem, hence the expression 'learned helplessness'. Further, Navy has been almost totally deskilled in the technical area. This does not bode well for the future with such a massive shipbuilding program underway. What was once a clear and direct hierarchy of authority with clear role definition and clear lines of account­ability became a matrix model unsuited for the task. That is not to say the efficiencies sought were not well motivated, just that the management nous to make it work fell into a hole. Thankfully, at least the RAAF seems to have resisted the deskilling and loss of responsibility. As ANAO has pointed out in considerable detail—detail to the nth degree—RAAF has retained its regulatory authority and skill base despite maintenance being outsourced. Of course, RAAF procure­ment is largely off-the-shelf assembly line production, but equally highly sophisticated in a technical sense. Army procurement is somewhat different, but only because of scale. Army, of course, has its own failures. Navy, however, attracts all the attention. Perhaps it is just the scope of the projects, their enormous cost and complexity, the lengthy time lines and the state of local industry. But look at the recent record—Seasprites, the FFGs, HMAS Westralia, amphibious ships, landing barges, submarines, lightweight torpedos and Sea King maintenance. In fact, naval ship building encapsulates the entire debate on defence procurement.

Nowhere else in the debate is so intense when it comes to local manufacture, adequacy of skills, continuity of investment, intellectual property, mixed operating systems between US and European, systems integration, corporate industry competence, project management and accountability, and the operating effectiveness in combination of Defence, DMO and industry. All this is against a background of a highly successful Anzac frigate project, a project regularly cited as an example of what can be done if only. Thus all credit to the minister for having a fresh look at the proposed submar­ines before we go too far down that track. I understand Mr Cole has now commenced his task and I hope his advice is both frank and fearless. He should challenge the group-think and unrealistic expectations which have grown up around this huge putative project. As Kinnaird and Mortimer advised: do the detailed work, ask the hard questions and fully test the expectations and assumptions upfront. To that extent the white paper should not be taken as prescriptive holy writ but as mere strategic guidance to direct contemporary outcomes for changing circum­stances, especially where off-the-shelf has been genuinely discounted as a serious option. I stress the word 'genuinely'. The last thing we need is more projects masquerading as off-the- shelf when they are clearly developmental. I do not want to rake over these coals for the sake of it, but we must not forget. I sincerely hope the reviews now being implemented will address the dramas of the past decade.

Finally, I want to address the matters of accountability. During my service on the various foreign affairs committees and defence and trade committees and on the Joint Committee on Public Accounts, I have seen significant improvements in the level of information coming from Defence. I must acknow­ledge that Defence, while often resistant and recalcitrant in providing in­formation, is making an effort to improve. Defence clearly acknowledges the need to reform its processes, and many changes have recently been made by the current gov­ern­ment. The establishment of the Independent Project Performance Office within DMO should help. This involves gate reviews for large and difficult projects, engaging inde­pen­dent experts from industry with a com­mercial background. This is clearly proven, good practice which works elsewhere in both government and industry. Likewise, the acceptance of Dr Black's recommendations to reduce and streamline the committee system. That is not to mention other organisational changes which hope­fully will bring more quality control and a tighter and more responsive system. Among those is the creation of the new associate secretary to better coordinate the activities of the Capability Development Group, the CDG, as well as a new division created for more internal effective contestability. The latter has been strongly promoted by those who remember the successes of the past. It is said that it will reinstate the capacity to internally challenge proposals within the CDG and the DMO more objectively and more compre­hensively. I have previously been critical of the CDG. It was here that previous authority held in the three services and elsewhere for capability planning and procurement was centralised. Strategically that was sensible as a means of bringing together the wish lists of the three services in a holistic manner. That is against budgetary disciplines, long-term defence planning, technical practicality and industry capacity. Questions have been posed about its technical competence to develop and pursue projects at the leading edge of technology against forceful interests, both external and internal. The criticism made by ASPI in particular, supported by others, including me, is that there must be more contestability within Defence on the advice going forward in support of all projects. The reforms of Dr Black address that directly.

As well, service chiefs have been restored as clients and must sign everything off. DSTO is to have a new probity board. All these reforms should help and I welcome them, though the proof of the pudding will be in the eating. We already know that the rapid succession of reviews, including scores of recommendations from ANAO, quickly sink into the mists of time or are usually overtaken by events. In particular, we should recognise the worth and professional tenacity of ANAO, who audit Defence so diligently. I do not know where we would be without them.

But I also acknowledge that cooperation from the bureaucracy—in particular, the DMO. With ANAO, it has began to produce an annual report on the progress of major reports. In fact, I would like to place on record my appreciation of Dr Gumley's work in support. I think the indicators show that the improvements being made are having an effect. That is against the background of tension between Defence and the DMO, where relationships are often strained, but also with respect to the quality of management. According to ANAO and Dr Black, administration is marked by a constant failure of administrative process and discipline across the board.

Many shortcomings are still being reformed following the Mortimer report and now following Dr Black's report as well. I think we are making useful progress but the challenges ahead, especially for Navy, are massive and should not be underestimated in any respect. The government is currently on the right track, but it is going to take some determination to ask the hard questions, no matter how heretical. We overlook the mistakes of the past and the symptoms of their persistence at our peril.

Senate adjourned at 21:0 8