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Thursday, 5 February 2009
Page: 413


Senator MARK BISHOP (11:27 AM) —Part way through his contribution, Senator Ronaldson said words to the effect of ‘no matter what the spin, it does not look right’. Sometimes if you look a little bit harder and read the actual language in the report, things become manifestly clear. In terms of the contribution just made and the CMAX report tabled late yesterday or early this morning, one just needs to make a few succinct comments. There were two critical findings. Firstly, there was no undue influence by the Prime Minister’s office—that is, there was no improper behaviour and a clean bill of health in terms of process and conduct. Secondly, the costs of the contract were appropriate and compared appropriately to like contracts. The cost of the contract, coming under $80,000, did not require the contract to be let out to public tender. The only recommendation by the ANAO went to what can properly be categorised as minor matters relating to file maintenance and record keeping. So in respect of all of the persons involved in this alleged affair, none have been found at fault and all have been cleared.

Let us now turn to the substance of the bill before the chamber, and I speak in support of the Auditor-General Amendment Bill 2008 [2009]. I want to address four key areas in respect of this bill: firstly, the background to the bill; secondly, the development of the ANAO; thirdly, oversight functions of the ANAO in the procurement processes within the Defence Materiel Organisation; and, finally, government initiatives that will enhance oversight and risk management within the Defence Materiel Organisation, or the DMO.

Firstly, the amendments in this bill stem from a review by the Joint Committee of Public Accounts and Audit back in 2001. They are technical in nature and received bipartisan support in that particular report. As a result, the amendments are not controversial. Madam Acting Deputy President, with your indulgence, I would like to briefly reflect on how we have arrived at this point. The Auditor-General Act 1997 has a history of bipartisan support. The act had its genesis in the work of the Joint Committee of Public Accounts and Audit. It is true to say that the office of Auditor-General was re-established as a result of direct and lengthy deliberations and considerations by the JCPAA. Between 1989 and 1996, the JCPAA produced three substantial reports into the role and modernisation of the office of Auditor-General. The committee looked specifically at how the functions of the Auditor-General could be improved. The main criteria was to provide functional independence for the committee’s and the organisation’s deliberations from executive government. The Keating government, back in 1993-94, endorsed the work of the JCPAA, and a bill was introduced in 1994 which gave effect to this work. Regrettably, that bill lapsed when parliament was prorogued ahead of the 1996 election and it fell to the incoming government to pick up the bat. That leads me back to the present and the bill before the chair today.

The aim of this bill is to improve oversight and accountability in governance while continuing to maintain procedural fairness. To that end, the bill will, firstly, provide clarification of the distribution of performance audit reports, and amendments will mandate that the Auditor-General must provide a copy of the final report to the chief executive of a department. Secondly, the Auditor-General is empowered to provide a copy or an extract from the report to any person or company with a special interest. Thirdly, discretion will allow for the distribution of reports or extracts by the Auditor to ministers who have a special interest. And, fourthly, provision is made for the inclusion of all written comments received on a proposed report to be included in the final report. The fourth point in particular is a most useful new development.

Next it extends existing disclosure and confidentiality provisions to allow disclosure of information to assist in the conduct of a performance audit. It prohibits recipients from using or disclosing that information and it provides that an offence is not committed if the Auditor-General has consented to the use or disclosure of the information. It must be said that these formal amendments bring into line much of what is currently internal administrative practice. They also reflect the recommendations of the 2001 JCPAA report. The bill clarifies the position of certificates issued by the A-G about disclosure of information that may be contrary to public interest. Finally, it updates offences and penalty provisions in accordance with the current criminal law policy.

Ultimately, this bill is about improving transparency, accountability and oversight of government. It meets the current government’s commitment to shine a light in the dark corners of our democratic processes and institutions. We came to government with a comprehensive agenda to increase public accountability and transparency at all levels, and our vigilance necessarily must extend to accountability systems that operate within departments. The point is that the Auditor-General plays a key role in the accountability framework of government, and in that respect the ANAO is a most critical organisation. Over many years in this place, I have had extensive dealings with the ANAO, particularly in respect of my experience in defence, foreign affairs and veterans’ matters. These departments have responsibility for large sums of taxpayer dollars. They also have a responsibility for implementing policy in the areas of national security and for care of our returned service personnel. The effectiveness of the ANAO lies in its expertise in getting to the bottom of whether we get value for money from those departments in the public sector. Its role in exposing waste is valued by members of this chamber, of all persuasions, as well as the public, and ANAO performance audits are the lifeblood of a lot of work done in this particular chamber.

Also, audits inform our opinions on what works and what does not. An obvious example of waste revealed by the ANAO, of what does not work, was the previous government’s Regional Partnerships program. On the other hand, defence procurement shows the valuable work of the ANAO in bringing about sustained improvements in government spending. The DMO are responsible for the delivery of goods and services that equip and sustain our Defence Force. They supply everything and anything from boots to body armour, from tanks to jet fighters. Once a need for a defence capability has been identified, the DMO plays a pivotal role. From the early two-pass approval process, it looks at cost effectiveness of platforms and the feasibility of life extension programs or upgrades. Assessments will include the ability of Australian industry to support the new capabilities to ensure we maintain defence self-reliance. They also provide costings for through-life support of the capabilities and schedules estimates. For this reason, the DMO is the largest project management, engineering and logistics organisation in Australia. As a general rule, minor procurement items have a cost of less than $20 million and major items have a cost in excess of $20 million. Minor items represent less than two per cent of acquisition budget. That is obviously because complex platforms such as the JSF and air warfare destroyers have a price tag of several billion dollars.

In the next 10 to 15 years, it is estimated that 80 per cent of Defence’s fighting assets will be replaced or upgraded. New generation military hardware is on the cutting edge of a lot of new technologies. There is also the constant problem of integrating highly complex systems into existing platforms—all to be done within specified time frames. There is no point in continuing with the schedule slippages that result in capability delivery several years too late and out of date, which has become somewhat the norm in recent years. A classic example of that is, of course, the Seasprite helicopter project. It is an example of everything that can go wrong in the procurement process. That project involved an underestimation of the technical risks involved in integrating highly complex combat systems into 30-year-old copter shells. There were changes to specifications and protracted contract negotiations. There was also no proper schedule risk assessment. It was always a disaster waiting to happen.

That brings me to the core function of the DMO: risk management and risk pricing. There is a dollar attached to every risk. The failure to identify and mitigate risk levels significantly increases the cost of acquisitions. It can also lead to delayed delivery, which can compromise capability and operational safety. The DMO operates in a complex regulatory framework. Along with legislation, there are policies covering payments, open competition and mandatory reporting. There are internal audit services provided by the Inspector-General of the Australian Defence Force and external audit services provided by the ANAO. Through the work of the ANAO today, we see an improvement in decision-making processes based on lessons learnt. In this regard, the ANAO’s DMO Major projects report 2007-08 provides a relevant, concrete and up-to-date example of their work. That report was tabled last November and is instructive of the utility of the ANAO.

Defence procurement is a significant area of government spending and constantly attracts a great deal of public scrutiny. In 2007-08, the DMO spent something like $4 billion on major and minor equipment acquisitions. As I said before, those acquisitions are often complex and expensive. Generally, we pay a significant amount of the cost upfront. Priority, of course, is always given to current operations and the need to properly provide for and protect our people in the field. But it is not hard to see why problems occur. In 2003, the Senate Standing Committee on Foreign Affairs, Defence and Trade recommended that the Senate ask the Auditor-General to produce an annual report on the progress of major defence projects. A model for such a report could then be found in the work of the United Kingdom’s National Audit Office. A similar recommendation from the JCPAA followed in 2006, the goal being to improve transparency and accountability in major acquisition projects within both Defence and, more particularly, the DMO. It is fair to say that the recommendations of both committees followed years of reviews of procurement projects by the ANAO—reviews that highlighted a litany of schedule slippages and budget blow-outs.

The Rudd government committed to an annual report process in the lead-up to the last election. We followed through on that commitment with funding in the 2008 budget. The first annual report, as I said earlier, was tabled last November, and that has a list of some nine major acquisition projects that have been reviewed to date. It is a comprehensive cross-section of defence capabilities, major and minor, over the three services—Army, Navy and Air Force. There will be another 21 projects included in subsequent annual reports. It is a benchmark report—that is, it will provide a solid base from which to judge the effectiveness of project management by the DMO in years to come. The nature of the review and the report that was tabled last November was to develop proper processes within the DMO—processes that test and improve performance in the risk management of major acquisition projects.

The role of the ANAO has been to work collaboratively with the DMO to review that progress to date. Progress is going to be measured against cost, schedule and technical performance. It is not a combative or adversarial process. Its value lies in the aim of improving defence project management. To complement this work, the current government has announced the establishment of the Defence Systems Integration Technical Advisory, a joint venture between the DMO and the Defence Science and Technology Organisation. It will further support the monitoring and assessment of project risks. The task of this new unit is to monitor and assess integration risk as well as to perform systems engineering analysis—the two critical failures of the last 10 years. They will also evaluate alternative capability solutions. Presumably, this latter process is part of the first stage approval process in line with both Kinnaird and Mortimer recommendations—that is, the new unit will contribute to risk reduction efforts primarily in the early stages of major projects. This is done in the lead-up to final government approval as part of the two-part cabinet process.

Sometimes, rather arcane and technical press releases understate the significance of a particular development. That is certainly the case with the creation of this new organisation, the Defence Systems Integration Technical Advisory body. What has been the nature of major failure over the last 15 years in this area? The failure has been both of a conceptual nature and technical application. By this I mean that there has been a lack of comprehension of the degree of risk inherent in a project or in a critical aspect of a particular project. Frigate upgrades, helicopter purchases and communication systems development were all underappreciated, as were the scope of risk, the size of risk, the length of risk and the difficulty of integration as risk factors. Because of this misunderstanding or underappreciation of risk mitigation, strategies were not considered as the norm or adopted as the norm.

In the private sector the sheer size and consequences of this risk appraisal underappreciation would have had adverse consequences. Consequences could have included the ending of careers, serious capital write-offs in companies and the loss of expertise and notoriety. In some more notable cases the consequences would have been company busters.

As it stands, in recent years in government agencies, the risk and the cost were simply transferred to taxpayers. This is because at inception there was underappreciation or no appreciation of the magnitude of risk by relevant government agencies. Over time I cannot think of a more protracted or serious failure. If there is any doubt on that score, simply look at the file on the Seasprite helicopter purchase.

In my view, this new DSI-TA has the capacity to be of major benefit to the DMO and the government in the defence area. Over time it should radically impact on procurement practices within those organisations. I shall follow its work with interest and seek regular updates on its work, role, performance and outcomes at estimates.

Australia is not an orphan in its experience of failures in defence procurement processes. The US, the UK, Canada and much of Europe have all found themselves in the same boat. However, it is the quality of our accountability and oversight process that suggests we might be set apart in the future.

The amendments in this bill will strengthen the independence and effectiveness of the office of the Auditor-General. It is an issue dear to the heart of this government. Of course other lessons will be learnt and further improvements will be made in the future. But this is a critical step in the right direction—a step toward restoring public trust in government and governance. I commend this bill to the Senate.