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Joint Committee of Public Accounts and Audit - 21/09/2011 - Auditor-General's reports Nos 16 to 46 (2010-11)

BOND, Mr Kim, Senior Director, Performance Audit Services Branch, Australian National Audit Office

CAHILL, Mr Matt, Group Executive Director, Performance Audit Services Group, Australian National Audit Office

CHAPMAN, Mr Steve, Deputy Auditor-General, Australian National Audit Office

HOLBERT, Ms Fran, Executive Director, Performance Audit Services Group, Australian National Audit Office

JENKIN, Mr Mark, Head Defence Support Operations Division, Department of Defence

LEWIS, Mr Simon, Deputy Secretary Defence Support, Department of Defence

OWENS, Mr John, Head Infrastructure Division Defence Support, Department of Defence

Committee met at 12:30

CHAIR ( Mr Oakeshott ): I declare open today's public hearing which will examine Audit report No. 41: Maintenance of the defence estate. I welcome representatives from the Australian National Audit Office and the Department of Defence. Participants are asked to remember that only members of the committee can put questions to witnesses if this hearing is to constitute formal proceedings of the parliament and attract parliamentary privilege. If other participants wish to raise issues for discussion, they should direct comments to the committee. It will not be possible for participants to directly respond to each other.

Given the short time available, statements and comments by witnesses should be relevant and succinct. That would be appreciated. Although the committee does not require you to give evidence under oath, I advise you that these hearings are formal proceedings of the parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attract parliamentary privilege.

Before we go to opening statements, I acknowledge the Indonesian delegation that is here for the public hearing; the member for Herbert, who obviously has a keen interest in defence estate matters from a local member's perspective; and others who are here as well. Mr Lewis, do you have an opening statement?

Mr Lewis : I do, if I may. Defence acknowledges the findings noted in the ANAO report in relation to the maintenance of defence estate and agrees to each of the two recommendations. Defence is currently reviewing its infrastructure appraisal process. The review will consider the appropriate use of specialist advice to improve collection and assessment of information on the condition, utilisation and contribution to defence capability. The aim of the review is to improve the quality and consistency of the infrastructure appraisal process to better inform decision makers. It is expected that this review will be completed by June 2012.

Defence has also commenced a project to conduct baseline assessments of the condition of engineering services provided at seven key bases. This will be a progressive program, with the remaining key bases to be assessed by 2015.

Defence is currently developing a defence estate strategy that will provide the strategic direction for use and management of the estate. While Defence acknowledges that more funds may be needed to maintain the defence estate to required standards, Defence must consider this against other priorities. Defence does and will continue to allocate increased funding on an opportunity basis.

Defence has completed the first stage of a review of its contracting model for the future acquisition of activities currently delivered through the comprehensive maintenance services, garrison support services and base services contracts. Stage 1 consisted of a review of the current contractual arrangements against industry-leading practice and consultation with current and prospective industry providers to inform the development of options that best represents defence requirements and be industry aligned.

Three proposed bundling options were presented at the defence and industry conference on 28 June 2011. Each of which presented an alternative approach to the bundling of services and also the approach to market strategy. The next stage is to assess the merits of each option, identify the preferred option and develop a relevant approach.

Delivery of estate maintenance has also been reviewed as part of this activity, including looking at industry best practice and capacity, service packaging, risk-sharing arrangements and performance remuneration models in contracted service delivery. Defence has already introduced further initiatives for delivery of low-cost estate works, including changes to the current arrangement for delivery of higher cost or complex maintenance works, nationally bundled projects and medium capital maintenance works. An example of this is the current training area ranges improvement program, which is being delivered centrally through a national delivery team. Defence is undertaking significant activity across all functional areas, including estate maintenance, as part of our strategic reform program and is committed to pursuing ongoing continuous improvements in the management of our complex estate footprint as part of our overall reform agenda. That completes my opening statement. We are happy to take questions.

CHAIR: Does anyone else have an opening statement?

Mr Chapman : As this is Mr Cahill's final appearance, he has the honour of making a very brief statement.

Mr Cahill : The defence estate is the largest holding in Australia, comprising just under 400 Commonwealth owned properties including 72 major bases, 355 domestic leases and over 220 overseas leases. The land, buildings and infrastructure that make up the defence estate has a value of more than $20 billion. As you will know from our report, the ANAO examined the effectiveness of the management of maintenance of the defence estate, taking particular account of planning and delivery aspects. Maintaining the estate is a substantial task, especially as defence seeks to balance its competing demands for funds while concurrently developing capability to meet the ADF's future needs.

We concluded that the management of the estate maintenance has not been fully effective. The planning of maintenance would be better served if Defence had in place authoritative long-term plans for the estate itself. Maintenance planning would also benefit from defence conducting an assessment of the condition of the estate facilities and infrastructure. I note the opening remarks of Mr Lewis in terms of the progress that has been made since the audit. In that regard, we made two recommendations, which Defence agreed to, which went to the heart of the planning and delivery of maintenance services and an improved contracting model. My colleagues and I are happy to assist the committee in its deliberations.

CHAIR: I am pleased to hear that the two recommendations have been accepted. I would like to clarify the evidence that was given in your opening statement. You mentioned mid next year. Was I right in understanding that that is in response to those recommendations about the defence estate strategy being accepted? You are expecting that that will be delivered by mid-next year and the hard decisions will be made in that?

Mr Lewis : We agreed to the recommendations. We need to agree an on approach and a process for implementing them. As you might imagine, we are talking about an estate, as Mr Cahill mentioned, with some 400 owned properties, 300 leased properties for which we have obligations, and over 25,000 buildings. So we have to put in place a process whereby we can actually do this work. We are planning to do it over a relatively short period of time and hopefully within the 2012 horizon. But I would not want to be promising that to the committee. We have tenders underway right now, and once we have those contracted resources on deck we will have a better sense of whether or not we can complete that work in 2012.

CHAIR: To clarify, the defence estate strategy is exactly what you were just talking about?

Mr Lewis : No, I am talking specifically about the recommendations in the report in relation to infrastructure assessment.

CHAIR: So how are you marrying those two together?

Mr Lewis : The broader estate strategy is close to finalisation at the present stage.

Mr Owens : Yes, it is in advanced draft form.

Mr Lewis : It is the overall context for the defence estate. It draws on material that is already available, including the white paper, which identifies the five principles linked to basing of defence. But the overall estate strategy will, in a sense, set a cornerstone for a lot of the other work we are doing, including in relation to infrastructure assessment.

CHAIR: I am trying to understand where the acceptance of these two recommendations fits in with the work that you already had underway and the work that you are going to complete over the next 12 months. I am trying to find the point of entry. What do you mean when you say you accept these recommendations?

Mr Lewis : I see. To go specifically to your query, there is now going to be more work invested in having a better understanding of the current standard of infrastructure across the defence estate than I think we would have planned to be doing prior to this audit being conducted. We cannot do all that internal to our resources, because we have limited resources. So we are going to be contracting in additional resources to assist us in relation to the infrastructure assessment proposals. There was some work that we had underway. I mentioned some of the work we were doing in relation to infrastructure works at our key bases, including in-ground infrastructure which is significantly ageing. We had initiated some work in relation to these engineering services, and to some extent that will lead to remediation programs at a number of key bases as well. But we will at the end of this assessment process I think have a much better sense for the overall standard of the Defence estate and, therefore, be better able to prioritise where we invest our scarce dollars. I think the ANAO report already gives you a bit of a feeling for the way in which that prioritisation process works, but it makes the point that the database of information on which we are reliant is deficient—and that is what we are trying to fix.

CHAIR: I am a mere commoner, and I am tired, but I just want to clarify this point. Will the recommendations accepted by Defence plug into the Defence estate strategy? I am assuming it is part of Force 2030. Is that right? I am trying to find the point of entry into what you mean when you say you have accepted these recommendations. How are you implementing that acceptance?

Mr Lewis : We will embed them into the governance for the Defence estate. I chair a committee called the Defence Estate Performance and Investment Committee. We will embed the work we do in relation to these recommendations into our processes and we will use that as part of our day-to-day work. When our committee meets and talks about the condition of the estate and where we invest our scarce dollars, we will draw on those recommendations very specifically to help make choices about how we allocate scarce dollars. Does that help you?

CHAIR: Yes, it does. I just wanted to get it clear in my head. Quite often people accept recommendations and nothing happens. I want to make sure something is going to happen.

Mr Lewis : We would be happy to come back in 12 months and tell you how we are going. The recommendations are good. As you know, we have a widely dispersed and ageing estate. Most of the buildings are of World War II vintage so, as you might expect, we have significant degradation in places. But we are also renewing parts of the estate through massive investments. As you know, through the white paper we have obtained significant funding. We are currently investing over $1 billion in our capital program in relation to new facilities. So we are dealing with the challenges of having new investment facilities sitting next to, in many cases, quite aged facilities, and we need a program for all of that.

CHAIR: This, I imagine, is an important part of Defence strategy generally. I would imagine there is no easy way to rationalise. I would imagine a really difficult part of your decision-making is going to be political management and expectation management at a community level in an environment of rationalisation. Do you have any reflections on how you are going to handle some really difficult community and political issues in what looks to be no easy rationalisation path for all the right reasons?

Mr Lewis : Put short, there is always a challenge in relation to changing the shape and disposition of the defence forces; there is no doubt about that. And it is always, at the heart of it, going to local politics. In terms of what we are doing, we have been doing work in relation to what a more rational estate consolidation footprint would look like. We have provided that work to the review team that is currently examining the Defence Force Posture Review. The reviewers currently have the review underway. The material we have been able to provide to them, which in a sense is our internal working documents in relation to a consolidated estate, has been fed into the process.

CHAIR: Okay. In reading my notes, I could not get my head around 'savings stream' and 'non-savings stream'. Under your strategic reform program the Defence estate is a non-savings stream yet maintenance is a savings stream. I do not get that.

Mr Lewis : That is a good query. It proceeds my arrival in Defence, but let me try and explain it. There are a large number of savings and non-savings streams attached to the strategic reform program. Some of the initiatives are designed just to improve the way we do business but do not actually have specific dollar savings attached to them. Others seem to make sense but do not have specific dollars attached to them—either because the dollars are very hard to identify or because the savings are well into the future.

CHAIR: Isn't everything a net saving though?

Mr Lewis : In the context of estate consolidation over the long term there is no doubt, but in the short term—and when I say 'short term' I am probably talking about the next five to 10 years—you almost certainly have to invest more because you need to create facilities at other places, you need to manage the transition, you need to close down facilities, you probably have to remediate the sites you are seeking to dispose of. In the case of Defence, we find that many of our sites require very significant remediation. We are seeing that at Maribyrnong right now and we have seen it at a whole bunch of others too. Even putting aside issues to do with heritage and the like, there is a very significant timing issue here. It is long-term savings, short-term costs.

My sense of it—and, as I said, it precedes my arrival by 12 months or more—was that those conducting the work in relation to the strategic review recognised that there are good reasons for pursuing consolidation but it would not be a stream likely to achieve any significant savings over the time frame of the SRP, closing in 2020.

Mrs D'ATH: You have talked about how the assessment process is now going to be a lot more comprehensive, picking up on the recommendations of the Audit Office, and you have talked about putting it out to tender. I am interested in the time frames for that. Is there a plan, and what are the time frames after that? I appreciate that once you have the assessment you are going to have a much better understanding and be able to go forward from there, but have you planned out what you are going to do once you get the assessment?

Mr Lewis : I believe the first round of our tenders are actually in the market now. Would you agree with that, Mr Jenkin?

Mr Jenkin : That is right.

Mr Lewis : We are actually in the market right now seeking the first round of tenderers able to support us in relation to this infrastructure assessment process.

Mrs D'ATH: You say 'the first round'. How many rounds are there going to be?

Mr Lewis : Once we have these providers and advisers on board, we may then want to have others to help because, as I mentioned, it is a very large program. We may want to be working through them, so we may even appoint some of them essentially as primes or managers in relation to other advisers to do a lot of the work. We may cascade this through a hierarchy of contracting arrangements. It depends on the outcome of our first tendering round, which is underway now. We are seeking to do that, I can assure you, through to about the middle of next year, all going well.

I did mention in my talking points that there is something else we are doing. It is another tendering process and I would not want the two to get confused. We have a range of comprehensive maintenance service contracts and garrison support service contracts across Australia right now. In three regions they are base support contracts, which include garrison and comprehensive maintenance, but in the other nine regions they are split. In total there are 12. We are looking at revising our strategy in relation to the provision of those services into the future as well, which could change the way in which we deliver maintenance services on the defence estate in future, in the next contracting round. That is a different tendering process to the one I talked about before.

The latter process we are still scoping with the market. We have had quite a number of engagements with industry already. I announced the three alternatives we are considering at the defence and industry conference in June and we are continuing to engage the industry in relation to those alternative models right now, because we need to make decisions about how to structure our approach to market in 2012 as to how we are going to get those services provided over the next three- to five-year time horizon.

Mrs D'ATH: What are the time frames for closing off the existing tenders? Do you have an end date for when you hope to have the new data, as far as the assessment of the estate goes?

Mr Lewis : Yes. I might be able to give you some dates. I will ask Mr Jenkin to provide some granularity. We have some quite precise detail on the time frames.

Mr Jenkin : The first approach is really to get in place a national project manager who will give us some expert advice on the process by which we should be doing this appraisal and using that information going forward. They will no doubt be used in doing some of the work as well, but the initial part of it is really to get someone in place who can be our technical adviser on what we should be doing in using the information and how to go about it on an ongoing basis—so an ongoing program of activity. As Mr Lewis has mentioned, we have gone out to procure a provider of those services for us. We are looking to basically have those contracts in place in mid- to late November as a national program manager for us to deliver a whole range of services. Included in that is looking at our process for infrastructure appraisal.

Separate from that there is work going on which Mr Owens might want to talk about in the assessment in detail of engineering services at a range of bases, but particularly a set of important bases where we know the in-ground facilities need a detailed examination. We are looking at seven of those bases as a separate arrangement.

CHAIR: Without mentioning names or arrangements, you are essentially contracting out to qualified specialist staff—

Mr Jenkin : Correct. Specialist expertise is what we know we need to buy, yes.

Mr Lewis : The exercises here, including in relation to the in-ground infrastructure of those seven key bases, are around condition assessment—what work needs to be done and how. Because of the scale of the work involved in these things, before we can proceed to actually do any of these works inevitably that will be back to government for a decision and back to the public works committee for consideration because it will be way over the threshold for PWC consideration.

Mrs D'ATH: Just with what you have talked about on seeking to contract a national project manager to look at developing a proper assessment and planning process, where does this fit in with the move to the Garrison and Estate Management System?

Mr Lewis : The Garrison and Estate Management System is going to be our new IT system in support of managing the estate. This is a systems development project that we have the lead on. We are currently doing this through a rather ageing IT infrastructure. As the ANAO has commented, it is somewhat significantly deficient in terms of its ability to collect, categorise and then present information that is important for us to have in managing the estate. The Garrison and Estate Management System—or GEMS, as we call it—is a new system. It is going to give us a great deal of functionality that we presently do not have. We are doing it in very close conjunction with the Chief Information Officer Group because I believe it is a SAT based product. Like our other SAT based products it will give us great integration in our internal systems and it will give us much better management information for managing and making choices in relation to the operation of the estate. It is not an organisation as such; it is the system we are going to be operating on. We will use that across the Defence organisation.

We are quite optimistic that that is running pretty much on track. It might have been running a few weeks behind last time I checked, but it is pretty much on schedule—which is a bit surprising for an IT project! We have a lot of eggs in this basket. We need this thing to work because we need to get much better data and we need to get real-time data so that we are able to better manage the estate. We particularly feel the weight of this with the targeted introduction of the harmonised legislation coming in on 1 January this year. That places an even sterner test on us as an organisation and indeed on us as individuals in senior leadership roles in the organisation. So we are very much pushing the introduction of this new system so we have the organisational factors, the governance factors and the system factors in place to better manage the estate.

CHAIR: Just on that final point, how do you line up a mid-June Defence estate strategy with OH&S risk management on everyone's head?

Mr Lewis : In a sense, dealing with risk and safety is part of our job now. We have to deal with the fact that people are working in these 700 locations and in these many tens of thousands of buildings right now, so safety is not something that is going to start on 1 January next year. It actually is there today, it was there yesterday and we have to manage it tomorrow. There is no doubt that the focus of the harmonised legislation has created an additional stimulus for us to try and do what we can better and, to the extent that we need new systems, to bring them in earlier. We also have to be realistic about this. The improvements that we are talking about are a multi-year challenge for us. We have to deal with safety in the workplace today and also deal with improving our systems, organisational arrangements and governance over a period of time. But if we see something that is unsafe somewhere in the Defence workplace now, we have to deal with that right now. If it is unsafe and we do not have the funding to fix it then we will have to close it off, barricade it or do something else, because we are under an obligation to look after our people. We take that very seriously.

CHAIR: The process from here is that we as a committee will deliberate. One of the options for us would be to come back in a years time. There are a lot of articles of faith in the conversation we have been having about what is going to happen in the next six to 12 months.

Mr Lewis : I assume that we will have to come back in a years time.

CHAIR: To save you a trip, potentially, if we were to recommend that you should write to us in 12 months time reporting against the recommendations agreed on, that may save us all time and effort.

Mr Lewis : Yes. We would be very happy either way.

CHAIR: I am just flagging that that may be the point at which we end up. As you can see, we do not have the full committee here. I just flag that to see if you are comfortable with that as a potential option.

Mr Lewis : Very comfortable.

CHAIR: I do not think that there was anything for you to take on notice. Thank you for attending today and assisting the committee with its inquiry. We will deliberate and have an ongoing conversation with you. Thank you for accepting the recommendations from the ANAO. Many do not. It is good to see a service that does.

Mr Lewis : We very much appreciate the work of the ANAO.

CHAIR: Thank you. On behalf of the committee, I would like to thank all of the witnesses who have given evidence at the public hearing today. I would also like to thank Hansard and Broadcasting for their assistance. I declare the public hearing closed.

Committee adjourned 12:57