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Foreign Affairs, Defence and Trade References Committee
21/03/2018
Impact of Defence training activities and facilities on rural and regional communities

ABLONG, Mr Marc, Acting Deputy Secretary, Strategic Policy and Intelligence, Department of Defence

BOURNE, Mr Andrew, Assistant Secretary, Commercial and Government Services, Department of Finance

GALTON, Brigadier Matthew, Director General, Capital Facilities and Infrastructure Branch, Department of Defence

GRZESKOWIAK, Mr Steven, Deputy Secretary, Estate and Infrastructure Group, Department of Defence

HUNT, Mr Nicholas, First Assistant Secretary, Commercial and Government Services, Department of Finance

SPOUSE, Mr David, First Assistant Secretary, Financial Services, Department of Defence

WOOD, Mrs Jane, Acting Assistant Secretary, Non-Materiel Procurement, Department of Defence

Committee met at 17:02

CHAIR ( Senator Gallacher ): I declare open this public hearing of the Senate Foreign Affairs, Defence and Trade References Committee. This public hearing is for the committee's inquiry into the impact of Defence training activities and facilities on rural and regional communities. This is a public hearing, and a Hansard transcript of proceedings is being made. We're also streaming live via the web, which can be found at www.aph.gov.au.

I welcome everyone here today. Before the committee starts taking evidence I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee. Such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. While the committee prefers all evidence to be given in public, under the Senate's resolutions witnesses have the right to request to be heard in private session. If you would like any of your evidence to be heard in camera, please don't hesitate to let the committee know. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground which is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. As noted previously, such a request may be made at any other time.

I now welcome representatives from the Department of Defence and the Department of Finance. The Senate has resolved that an officer of a department of the Commonwealth or of a state shall not be asked to give opinions on matters of policy and shall be given a reasonable opportunity to refer questions asked of the officer to superior officers or a minister. This resolution prohibits only questions asking for opinions on matters of policy, and does not preclude questions asking for explanations of policies or factual questions about when and how the policies were adopted. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. Would anybody like to make a brief opening statement before we proceed?

Mr Grzeskowiak : Senator, no, we don't have an opening statement.

CHAIR: Well, I have an opening statement! Basically, we've referred a number of questions on notice to you. I thought that the inquiry was proceeding in a very collegiate and collaborative fashion right around the country and in order to facilitate the early and easy access to information to compile our report, we took the fairly unusual step, I think, to forward to you on 2 February a series of questions on notice with a view to having a response prior to a 19 February hearing. The 19 February hearing was cancelled. It's now 21 March and, as of today's date, we have no response to our questions on notice. So would someone like to give a full and complete explanation of what's going on there?

Mr Grzeskowiak : Senator, I apologise for those answers not being available. They have been drafted. They're obviously stuck in the clearance process. I wasn't actually aware that they hadn't been passed to the committee. We should be in a position to provide answers now to those questions, if that's what you'd like to do.

CHAIR: Well, I suppose that the way that we structured it, Mr Grzeskowiak, was that we had five pages, basically, of questions with different topics. We could try, but I don't think that in the two hours we've got tonight that we've got the time to go through each one of those topics and issues.

Mr Grzeskowiak : We have drafted a response, and it's obviously in the clearance process somewhere. They are definitely coming.

CHAIR: Yes—

Mr Grzeskowiak : They are pretty long responses, so hopefully they will give you the information you need.

CHAIR: Well, yes. I think that was the exact point that the committee deliberated on. It thought: 'What can we get out of a hearing where it's deduced from transcript? It's not always in a coherent, procedural way that people ask questions. We'd be best off putting it on notice and getting a complete response, and then asking additional questions which we've prepared for tonight.' If you're saying it's in the process and being ticked off by the minister's office—is it the department or the minister? Where are they? We're all sinners! We know what it's like to get a minister who doesn't want to tick off on questions on notice.

Mr Grzeskowiak : My understanding is that it's still in the department. I certainly know that I've cleared the responses. I believe it's still in the department—I've just been advised that.

CHAIR: Okay. Well, it would be my view that we would go to the additional questions in the two hours we've allocated tonight, and we await your response. But I will point out, once again, that we thought we were operating in a very collegiate and cooperative way. We've made substantial progress and we put questions on notice for ease of collection of the information to incorporate into the report. And it's a little disappointing, I suppose, to put it on the record, that on 21 March we haven't got what we expected on 19 February.

Okay. So, if get rid of that one, the next one I would have is a very specific example which will warm up all combatants at your end of the table. This is a submission we received from the Eyre Peninsula—Regional Development Australia Whyalla and Eyre Peninsula—specifically in relation to Cultana. It goes to a specific issue. It said:

RDAWEP is aware that several medium sized businesses with local facilities and operations in the region bid for work on substantial components of the project (up to $6 million value). It was reported by 1 local Tier 2 SME that they invested up to $40,000 in preparing quotes and tender documents for work at Cultana. The company was informed that their quote was used by the EPC to bid for the project. When the EPC bidder was successful, the local company was subsequently advised that they must reduce their final quote by more than 10% in order to secure a contract for the work. Although the local company reduced its price, it was unable to fully meet this demand. The EPC then engaged an interstate contractor for the work who operated on a fly in fly out basis. It is beyond belief that a company incurring substantial travel and accommodation costs for its staff could undertake the same work at a lower cost than a local company with no travel or accommodation costs. This was not an isolated incident as several local businesses reported similar experiences.

In that paragraph is basically the genesis of what the entire inquiry was all about—that local business would compete but be unable to get the work. Do you refute that as not factual? Do you know anything about that? Is that just hands-off for Defence because, now you've got a tier 1 contractor, they can go out and do what they like in the marketplace?

Mr Grzeskowiak : I don't think I can answer that specific case, because I'm not sure which contract it is. It may well be the current contract for the Cultana redevelopment, for which St Hilliers is the prime, or it may well be something from some years ago. You're aware that, with the local industry capability pilot that we're running on six projects at the moment, our stated intention is that local industry be engaged by whichever is the managing contractor or head contract during the development and early stages of a project so that local industry has the best opportunity to bid and be part of that process. Generally, particularly with head contracts, Defence does not get involved in the supplier relationships below our contract with either a head or a managing contractor. But, clearly, the reason we're piloting this local industry capability plan is so that we can facilitate local industries getting a better chance of competing for our work. I'd be happy to take that on notice and take it away and have a look at it and see if we can understand the detail, but I don't think we'd have the detail about that specific case here today.

Senator FAWCETT: You used the word 'local' a number of times there. You will recall earlier in this inquiry we came to the realisation that Defence's understanding of 'local' was far, far broader than what we would call 'local' companies in an area like Port Augusta and Whyalla when it comes to Cultana. Do you have an agreed definition of what 'local' is with the primes or tier 1 contractors that you engage in reference to the pilot you're talking about? Is that locality dependent? Have you engaged—for example, I'll take my own state of South Australia—with the communities around Cultana and Adelaide to get an understanding of which capabilities exist in the regional towns and which only exist in Adelaide and therefore, across the spectrum of potential work, what is considered 'local'?

Mr Grzeskowiak : From a Defence perspective, we haven't sought to define, in detail, what 'local' means. We've certainly spoken to South Australian government people about their process there. I've spoken to Northern Territory government people about their process and their definition of 'local'. Between that state and territory the definitions are quite different. From a Northern Territory perspective, for example, any Northern Territory based business is considered local, whereas in South Australia it's more narrowed down to various regions within South Australia. So we haven't sought to define it specifically, and we'd rather take a flexible approach—

Senator FAWCETT: I've got to say, though, Mr Grzeskowiak, I think that's an issue because, if we are saying to tier 1s, 'We want local companies to have the opportunity,' and they consider 'local' to be the southern half of Australia or the broader state base, that's very different to, perhaps, the intent of the policy—in Defence parlance, the commander's intent—

Mr Grzeskowiak : Yes, I understand.

Senator FAWCETT: which is that, if a local company—in Cultana's case, Port Augusta or Whyalla—has the capacity, they are local for the definition of that particular training locality.

Mr Grzeskowiak : In the way we talked to the companies that we are dealing with in the pilots, we have these conversations, and we expect them, as part of their discovery process, to understand the local industry and structure the work that they're planning to give those local industries an opportunity to be part of that work. But, as we've said many times before, we still have to assess all of the bids, ultimately, through the lens of value for money, following the Commonwealth Procurement Rules. We're running a pilot so we can learn. The idea of the pilot is that the learnings from it will inform the broader Defence policy about local industry capabilities, and we've said that that broader Defence policy is due for release in the first half of this year. So that policy is in the process of being worked up at the moment. We are feeding in, and will continue to feed in, experiences from pilots that we're running at the moment, and what we're learning from these committees.

CHAIR: Just to be very clear: this submission is saying that it appears that the Department of Defence and other federal government agencies hold the belief that if an Australian EPC contractor is engaged then that is considered to be 'local'. Are you saying that's not correct?

Mr Grzeskowiak : It sounds to me like that is from prior to the pilot that we're running. It's fair to say that, if I take myself back a couple of years, certainly in the business that I'm in, in terms of estate and infrastructure, we go to the market looking for companies to deliver services, construction services or facilities management services, and our preference is for Australian companies to win that work, for fairly obvious reasons, but we've never had a preference for Australian companies from particular parts of Australia. Through the conversations that have evolved in this committee, we've started a trial of the local industry capability plans. It's fair to say that we're on a learning journey with that, and we still have the Commonwealth Procurement Rules, which are very clear that we cannot preferentially treat a company based on things like where it's located.

Senator FAWCETT: Let's follow that up. I refer to evidence presented by the South Australian Industry Advocate at the Port Augusta hearing that I know you were at. He reports—and this is on page 28 of our interim report, which I'm assuming you've read—

Mr Grzeskowiak : Yes.

Senator FAWCETT: that, when the Minister of Finance, Senator Cormann, spoke about the recent amendments to the Commonwealth procurement regulations, he acknowledged that Australia's obligations under free trade agreements and other treaties would also acknowledge that these do not preclude the Commonwealth from appropriately gathering information and looking at the full economic effects of procurement as part of the discussion-making process. This goes to the heart of the issue around value for money and how we determine that. It brings us back to the question I think I asked you in estimates. It's all very well to say, 'You have to comply with the Commonwealth procurement guidelines,' and we get that, but, if there is a course of action that would meet the minister's intent—in this case, in terms of meeting, if you like, the social licence obligations we have—and if we denude a community of the opportunity to create value out of a land mass, like Cultana, and the coastline, for tourism and fishing and other things, then we have an obligation under that social licence to say, 'How can we actually replace that value?' The whole model that Mr Nightingale presented was trying to provide a structured way to determine what the local economy is and then to bring that into a bid process so that you understand what the value for money is as part of that equation. So I come back to the question I asked in estimates: as part of the work that you've just told the Chair that you're doing for release later this year, are you considering that model in detail, and, if there are barriers, from your interpretation of the CPRs, will you identify those to us so that we can then work with Finance to see what changes are possible?

Mr Grzeskowiak : I will hand that question to Mr Ablong, who leads the part of the organisation that is working on the policy.

Mr Ablong : The short answer is yes, we are looking at those aspects. It's fair to say that as the changes to the Commonwealth Procurement Rules are relatively recent, we have not yet come to mature methodology for identifying economic benefits. That's one of the things that we are looking at in terms of the pilots: how you amass an economic benefit statement about a local region, how you conduct that economic benefit, and how far into the sort of social licence issues you can take an economic benefit analysis. We're still working those things through to be able to come to a more mature assessment of what the actual value-for-money proposition is. There is a lot of work currently being undertaken to build the economic models that we will use to be able to test those activities out. So, it is certainly something that is being worked through in detail as we start to build the policy.

Senator FAWCETT: My understanding, again from Mr Grzeskowiak, is that you had a very brief meeting with Mr Nightingale after that hearing. But, Mr Ablong, I'm concerned that I'm hearing that there may be a reinvention of the wheel here, whereas the evidence that the committee took in South Australia was that they had a methodology for identifying 'the region', they had a methodology for identifying—I'm looking at the evidence here—the benefit of using capital supply inputs and labour, and a weighting methodology applied to that as part of the whole value-for-money criteria. What struck us was that it sounded like a fairly well-developed, practised, well-received and well-exercised model. Have you met with Mr Nightingale to understand their model and see what we can learn from that, rather than potentially reinventing the wheel?

Mr Ablong : The model the South Australians use is one of the inputs that we're bringing into it. I personally haven't met with him, but I know the team has, in order to be able to get to the detail of that. It is certainly one of the inputs that we're using, yes.

CHAIR: If we could just further develop a few questions are around the same subject. This is a statement, and we'll put this as a question on notice as to you. 'As the initial stage of the project nears completion, there is little evidence that local supply-chain companies and contractors have been utilised to work on the project. Admittedly, there's been some use of local accommodation service providers, retailers and local labour, but this has been limited, and appears to be a relatively small proportion of the total proportion of the budget.' We would put a question like that to Defence, but is the tier 1 contractor required to report back to you in the terms of how much they've spent in the region? Can you give us a definitive answer on that?

Mr Grzeskowiak : If this is the Cultana redevelopment project, which has a company called St Hilliers as the head contractor—if I assume it's that contract—

CHAIR: Yes.

Mr Grzeskowiak : Then I think we are asking—are they part of the trial—

CHAIR: Just give me a question of fact—whether it is a relatively small proportion of the budget spend or not—isn't it?

Mr Grzeskowiak : They're not formally part of our local industry capability trial, because that project was more advanced at the time when we decided to launch that trial. We have worked with them to try to adopt the principles that we've put into the local industry capability plan trial. I'll take on notice our ability to get some information for you about the percentage of the work packages and the expenditure that is being conducted and expended in the local area, to Port Augusta and Whyalla.

CHAIR: It'll be the view of the committee, I'm sure, that this inquiry should seek detailed information from EPC contractors in regional areas about the number and types of goods and services, the use of local suppliers, and the proportion of the total project spend flowing into the local economy, because that's why we initiated it. This could be used to properly inform future policy decisions and to ensure that taxpayers are receiving value for money, so we're going to continue that line of inquiry. I accept the caveat that you've put there that you have a new trial in place and it may not have been applicable to this company, but surely we can ask them what they did. It's not an unreasonable question.

Mr Grzeskowiak : We can, and we will. Certainly, for those contracts that are running under the local industry capability and reporting regularly against the plan that would have been developed pre contract award for how that head contractor or managing contractor is going to engage the local community, we will be receiving regular reports about how that's going, and we will be holding those companies to account. We have talked extensively in these committees about that issue of Defence's ability across a broad spectrum of our activities to understand what our economic benefit is to a local area from the full spectrum of Defence activities. We've made the point that our systems at the moment are not gathering data in a granular enough way in all cases for us to be confident about figures. I might ask Mr Spouse, from our financial area, to just talk a little bit about that, if that's okay, because there may be some progress—

CHAIR: I'm happy to hear from Mr Spouse, but, Mr Grzeskowiak, I don't only sit on this committee; I sit on the Public Works Committee. We just approved the year 2017 financial report: $2 billion worth of expenditure. In that, for everything that Defence do, they give us FTEs, local engagement and detail—for every project. I'm just questioning why, in this side of the business, you don't apply the same diligence, because, if it were applied, we'd probably all be a lot clearer on what's actually happening on the ground.

Mr Grzeskowiak : David Spouse might be able to give you a bit of background about where we are and where we might move to in terms of the data collection process that we have, if that might help you on this question.

Mr Spouse : Our financial systems are largely designed, naturally enough, around paying suppliers. That fundamentally means that whoever the contract's with, and whatever their billing address and banking arrangements are, is the system that we use to pay those people, and that's the way that it's always been. That also means that, whilst it may be that the majority or even the vast majority of a payment is spent in that local area, particularly where you're dealing with prime contractors or tier 1 contractors that may operate right across Australia or internationally, there's no specific information in that payment necessarily about where the goods were delivered or where the service was provided. What is happening as part of the procurement reform framework is that, internally, all of the contracts and purchase orders that we raise will be required to relate to the postcode, if it's in Australia, where the goods and/or services are going to be provided. That will give us a better picture. I think—

CHAIR: Sorry—when you pay someone?

Mr Spouse : When a contract's placed or an order's put onto the financial system, there'll be a requirement for the people doing that to identify the postcode where the majority of the goods and services will be provided, which would give us a much better picture of where those amounts—

CHAIR: Can we just flesh that out a bit? Just give me a specific example. I live in 5084. So, if you were paying a supplier or a contractor—

Mr Spouse : In 5084, that would be—I'll take it back a step. Let's assume I'm a Melbourne based tier 1 contractor. When the contract's raised or the purchase order's raised, the parts of the purchase order, or the goods that are delivered to particular locations, where we're aware of those, would be identified against those postcodes. So, if I have a Melbourne based head office but all of the work's done in 5084, 5084 would be identified as the key location for the goods or services to be provided. Now, I wouldn't argue that that's a 100 per cent solution, but I think it would take us a lot further than we can currently provide.

Senator FAWCETT: Mr Spouse, it's a while since I've had a financial delegation in Defence, but even in the parliamentary system I sign off on things. My recollection, albeit from some years ago—so perhaps the system has changed; I can't imagine it's been diluted since those days—is that we needed very clear evidence in terms of the delivery of the product—

Mr Spouse : That's right.

Senator FAWCETT: before we could sign for the payment, whether it was buying an aircraft or buying whatever piece of equipment. If what we're asking the tier 1 supplier to do as the condition of their contract is that they're going to engage local companies to deliver X value of the contract, it doesn't seem to me to be beyond the normal due diligence process of the financial delegate signing a payment or approving a payment to have that information from the company beyond just the postcode, whether it's a rolled-up summary or it's an individual subcontractor. There are any number of ways you could have that identified.

Mr Spouse : That's right.

Senator FAWCETT: But a postcode? It seems like you're grasping to develop a new system that our current system, if we actually had the requirement there—if we said that we needed a building with three air conditioners and they have to prove they've built a building with three air conditioners, the fact that they now have to say, 'Three air conditioners delivered by Joe Bloggs Radio Rentals in Port Augusta,' doesn't seem to be that difficult.

Mr Spouse : In that case I think you're correct, in that, if there were a requirement as part of the development of the contract or the procurement that required that information, yes, we could do that. But that hasn't been a requirement under the previous Commonwealth procurement regs or under the Commonwealth Procurement Rules as they stand. It's an enhancement to our systems internally, and probably to our procurement requirements, that we would have to take on board. Then there's a question of the amount of effort involved in doing that, and back again into the value-for-money sort of equation. Undoubtedly, that sort of information is available, but it needs to be right at the start of the process rather than as part of what the financial system can represent out of the current specifications.

CHAIR: Can the Commonwealth Procurement Rules require a contractor to provide a local industry participation plan as part of the bid process? Is that possible?

Mr Hunt : The Commonwealth Procurement Rules are quite broad about what constitutes economic benefits for the purposes of assessing economic benefits, so I'm sure there are instances where, if it were determined that that was the appropriate consideration of economic benefits in a particular procurement, such a plan could be sought from potential suppliers. I don't think there's anything in the rules to preclude that explicitly. But the rules are at a fairly high level. They provide a set of principles, and they give agencies a certain amount of latitude to determine what constitutes economic benefits in the context—

CHAIR: So it's possible that, as part of a tender process, a local procurement engagement strategy would be part of the bid process? I see Brigadier Galton nodding—it doesn't get onto Hansard though; that's the problem.

Mr Grzeskowiak : But that is exactly what we're doing with the local industry capability plan. We have a schedule in the tender that requires the head or managing contractor, in their bid to us for the work, to explain how they have engaged local industry in assembling that bid and how they will engage local industry if they are the successful tenderer.

CHAIR: So, if we're dealing with people who have a discussion point about Cultana, you're saying that was prior to this?

Mr Grzeskowiak : It was.

CHAIR: Okay. Just for clarity there: Hilliers would have engaged in what year to get the commencement date that they got? Would they have been bidding in 2015-16?

Brig. Galton : I think 2015. I'll have to confirm that for you though; I haven't got that here. But it was certainly—

CHAIR: It was clearly well outside what we've been talking about—

Brig. Galton : Yes, it was generally before we had the ICP.

CHAIR: And the expectation that we've delivered as a result of an inquiry has coincided with a contractor coming in with a different set of rules?

Mr Grzeskowiak : That may well be the case.

Mr Ablong : Senator, if I could just add a little there, as you will know from estimates, we are doing much more work on the Australian Industry Capability, (AIC), plans for major capital and for other procurements, and it goes to that sort of detail. The translation of that into the work that Mr Grzeskowiak is talking about is very similar. The Industry Capability Plan will go down to those levels of being able to ask the fundamental questions about how they're engaging local industries, and it will get the same level of scrutiny as we do with the AIC plans.

CHAIR: Okay. I know we're talking at cross-purposes if we accept that Hilliers's bid in 2015 was under a different set of circumstances, but I think these points are indicative of the types of questions we've heard all around the country. There's another point here where a business submitted a quote for a work package and was subsequently not contacted by the EPC. When it tried to contact the EPC for feedback, communications were not returned. And a perception there from local suppliers is that that might be a questionable trade practice, like: 'You've taken my quote. You haven't acknowledged it. I've tried to ring you and seek some feedback, and there's been no communication whatsoever.' People think that's not a good look, to put it frankly. We can put that to you specifically. We could probably even get the name of the business if you want it.

Brig. Galton : If I could get who it was—because it's certainly not a practice that we want to see at all. In fact, our tier 1 contractors are strongly encouraged, and it is best practice for them, to make sure that feedback is given to tenderers that are unsuccessful. The unsuccessful tenderers shouldn't even need to ask for that. That's something that will be given to them if they wish to have it. If you have the specifics there, I'll certainly follow it up.

CHAIR: I don't know how many of you at that end of the table have been to Whyalla, but certainly at this end of the table there are at least two. I've seen an industry participation sheet which listed purchases from the drive-in bottle shop at the Westland Hotel, Hungry Jack's, haircuts and coffees. Whilst those things are all acknowledged as part of the local economy, that's not really where the local business community was looking to get any of their employment of apprentices and increased investment in their businesses. Some of the circulated documentation was quite light on, so to speak, and may have even have been tongue in cheek—if someone was taking the piss, to be perfectly frank—saying: 'This is how we engaged with the local community. We went to the Bottle & Bird and we got two chickens and some pizzas for the after-hours gang.' People were seriously looking at this as an effort to fully engage, go in and build businesses and employ people on the back of your considerable investment in the area.

Mr Grzeskowiak : If I might respond to that: the information that was provided was factually correct and was the information that we could make available, drawing from the systems that we have. There are, as we've discussed, a whole range of issues. I was at Port Augusta when we had that hearing. It is the sorts of issues that were raised in the hearing initially at Port Augusta and then at Rockhampton and a range of other places that we're trying to address with the local industry capability plans as a pilot and that the department is trying to address through its broader industry engagement planning process.

Cultana is a particularly interesting place for us, in that it's not a place where Defence has a base and therefore a large and regular presence. It is a place where Defence trains, and therefore that's a sort of sporadic coming and going. The project that St Hilliers are running for is spending of—I think, from memory—around $75 million in upgrading the training facilities for the expanded range there. It is a once-in-a-generation project. In that capital investment infrastructure sense, once that project's finished, we won't be back in Cultana spending a lot of infrastructure money for a long time. There'll be a regular small amount of maintenance for fences and earthworks and the like. So expectations that the sort of project we're running in a place like Cultana, particularly in the infrastructure sense, can build and sustain an industry would be ambitious, at best.

CHAIR: I accept that. But there are other things happening on the Eyre Peninsula which will potentially allow those economies to grow. I don't think a coalition government was around when Cultana went through the fairly arduous task of expanding its boundaries, then with people not being able to fish where they wanted to fish or to go where they wanted to go for their recreation. It was one of the few places in Australia where you had an opportunity to rebuild some community support, albeit with only $75 million. I hazard a guess that you have probably blown that opportunity because you didn't fully engage. There is, and was, a lot of antipathy through all that process, getting up to where you actually are now. There was probably an opportunity, albeit with a small investment of $75 million—which is a large amount for a regional community like Whyalla or Port Augusta—to build some long-lasting goodwill, which I honestly think you blew.

Mr Grzeskowiak : We'll come back to one of the earlier questions on how we're going with that particular project in terms of local, in terms of the work packages and the value of local.

CHAIR: I just want the facts to speak for themselves. Clearly we found here that you're doing enormously valuable work all around the country. You've got tremendous goodwill and community support. You're just not able to easily articulate the economic indicators that you are probably providing.

Mr Grzeskowiak : And that's true. It is difficult for us to get into enough detail in many cases to demonstrate that.

Senator FAWCETT: You talked about the sporadic nature of capital investment in upgrades. I'm interested to know with your pilot whether you are only looking at those once-in-a-decade type capital investments or whether you are also looking at recurrent expenditure. The example I'll use—it's not actually federal; it's state—is the example that was given to me in Whyalla. State government entities like the hospital used to use the local gas bottle supplier. So he was able to have a business that had through-put to retain a range of gases and be available at short notice. They then let a whole-of-government contract and they didn't go through him anymore. When the hospital ran out of a particular gas they came knocking on his door at midnight. It was like, 'Not my problem—I don't need to carry that gas anymore, because you don't buy it from me.' So clearly there is a benefit to both the government agency and the local community from using those recurrent suppliers for small things. Does your pilot, the industry capability plan, look at those smaller recurrent type activities as well as the ability to build things?

Mr Grzeskowiak : At the moment, the pilot is focusing on capital expenditure. We have got six projects running under the pilot, but in the capital expenditure world we're really applying the principles to any new project that we start. Certainly in the area I have responsibility for, which is capital expenditure for infrastructure but also service, hard and soft facilities management, which is a significant part of the budget, we are in long-term contracts that were placed around three years ago that could run for up to 10 years. And we do some things through those contracts that seek to employ particularly small and medium enterprises and seek to employ Indigenous owned companies. I think what we see through most of that work is that, with the companies that have the bulk of the work, which are delivering services like catering, cleaning, laundry, access control, grounds maintenance, building maintenance, the people that do that work are either direct employees of our prime contractors or subcontractors to them. Almost exclusively for most of that work those people would be local people working for those companies, and therefore most of the subcontractors would be fairly local. You're probably not going to be on call to fix air conditioning in accommodation rooms if you live a thousand kilometres away from where we need that work done. So the nature of that business tends to be that the majority—not all—of work is delivered by people who live within travelling distance of the base, either as employees of Spotless or Broadspectrum or Brookfield and Johnson Controls or Wilson Security, or are small or medium sized subcontractors who might be called in for electrical or plumbing or specialist work. Again, they're going to be people who live within sensible travelling distance of the places where that work is being delivered.

So we're fairly confident that we've got strong local engagement through that side of the business. As we strategized those contracts when they were put in place some years ago we mapped the country in terms of regions and we deliberately put in place options so that, if we had a problem with one of our tier 1s, then another one could pick it up and just pass on the various subcontracts.

Senator FAWCETT: The difference to the local community is that, if you are an employee of Spotless or whoever, you are essentially working pay cheque to pay cheque and you don't have a chance to build a business and capacity. My understanding is that in the pilot—and clarify if I'm wrong here—one of the aspects in your capital works is breaking down packages of work so that SMEs can bid for that. From the local community perspective, particularly a regional community, if the service contract were broken down so that, rather than having to supply electrical maintenance to every defence base in Queensland, for example, you just provided it to the ones in Rockhampton, that would allow a business to actually win the contract with Defence. The capacity-building aspect comes through holding the direct contract. By the time other people have clipped the ticket and you are the subcontractor or the employee, there's not a lot of potential to grow capacity and to invest in people and training and then have the ability to bid for larger contracts. So on that services side are you going to take a similar approach and look at breaking down those packages to areas that SMEs can realistically bid for?

Mr Grzeskowiak : It's not something that I'm actively doing at the moment. There is a mixed economy on the services side of delivery of services by the primes using their own employees and delivery of services by the primes outsourcing to a range of subcontractors of different scale and location. I would hesitate to say whether it's 50-50, 60-40 or whatever at this point, but a significant amount of the work that is delivered through those service contracts is by subcontractors to the tier 1 primes. Many of those would have reasonably long-term or medium-term agreements between the primes and the various subcontractors that would give them some surety of work. I couldn't get into the fine detail here. It's not an area of focus at the moment. I think when we get the whole-of-department industry engagement plan we'll have a look at that and see if there is more work that we need to do on it.

Senator FAWCETT: Thank you.

Senator REYNOLDS: Good afternoon. I've got some questions specifically in relation to some Western Australian bases. My apologies if these issues have been covered previously. I have just come onto this committee for this inquiry. The first is something that I have raised before at estimates—access to military museums. I want to raise the Army Museum of WA in Fremantle. In my experience it's probably the second best after the War Memorial here. It is an outstanding museum. Unfortunately, it's in artillery barracks that are Safe Base Charlie. The Army History Unit runs it. They rely on arts for tour guides and to maintain it. It's been a little challenging to get it opened up. Artillery Barracks would be a fantastic facility for tourism because it's in the heart of Fremantle. We could get the foreign tourists who come through on the ships and we could get the locals. People can't get in and see this amazing museum we've got because it is at Safe Base Charlie. Nobody has looked into arrangements. My understanding is that it is Safe Base Charlie for convenience, because I don't think there are any units in there that would warrant that. The feedback I've had is that it's a bit more convenient to keep it at Safe Base Charlie. That way they can keep the facility closed and it's easier to manage. That might be a bit of an exaggeration. I know that the committee has discussed access to other military museums around the country. You might need to take this on notice, but we have had this discussion before, last year.

CHAIR: It's something the committee will be putting to you. We had the same evidence in Victoria—if people could access those museum facilities, it would be an economic benefit, plus it ties into the community.

Senator REYNOLDS: And there's some brilliant Army history. Just the way it's laid out and the material they've got there—Western Australians and tourists would like to see it.

Mr Grzeskowiak : And so would I. I've got close but never found the time to actually get there. I'll try and do that on my next visit to Western Australia.

Senator REYNOLDS: We'll have to remedy that.

Mr Grzeskowiak : If we were in Senate estimates, I would have a two-page brief on this and give you chapter and verse. But, regrettably, we're not. From memory, the Artillery Barracks is open five days a week at the moment, manned by volunteers and reservists. Five days a week is a reasonable opening period for a museum, you'd think. It's at Safe Base Charlie because it's a Defence establishment—it's an iconic Defence establishment—and that is our current security posture across the board.

Senator REYNOLDS: I understand that, but that's what we're having a look at. It's a bit of a catch 22. While it might be open, it's not open all hours. School groups and things have to book so that they can get a Reserve guide in, someone on arts. And, again, they're very arts constrained, as I understand. While you've got the security people who open the gate, it doesn't mean that the museum itself is open and able to take visitors through. The biggest tourist days down in Fremantle are on the weekends, with people on walking tours and experiencing other things in Fremantle. Again, I'm not being critical, because I understand the policy, but we're trying to look at whether there's a way we can open it up in a more sensible way, maybe with the community—the Fremantle council or others. I know the chair has talked about the grey nomads who go around the country and like to visit facilities. That's what I'm looking at—how do we make it far more accessible? At the moment, it's not.

Mr Grzeskowiak : We are, internally, looking at museums in the broad, for a range of reasons. I'll take your question on notice and get you some more detail.

Senator REYNOLDS: As I said, I'm very happy for you to take it on notice, because it's not estimates and you don't have the brief here. I think it's very germane to the things we're looking at. Secondly, coming back to base installations, last year I visited both Curtin and Learmonth, for different reasons, but again with Defence support, which was greatly appreciated. I also talked to the local communities about their engagements with Defence. In Derby, as you know, Curtin is perhaps not as well used as it could be, and it's got a very small staffing. In Derby, they've also got a very, very good Indigenous corporation. They have a lot of different businesses and business support. It's a classic example of where you've got a fantastic Indigenous community and corporation that would be well capable of doing base maintenance and support. When I went and had a look at the base, I don't know what the current contractors were doing, but it was in a disgusting state—the accommodation and some of the facilities. You've got Air Force personnel up there doing their best, but the local community can't remember ever being engaged in any sort of commercial sense or even having Air Force personnel coming down to the local IGA to buy a toilet roll. When the locals see plumbers or electricians flown in from Perth when you've got plumbers and electricians already in Derby who can do a lot of that work, they're wondering, and I'm wondering, why we're not doing more in Derby. I've had similar stories in Exmouth. I'm not as familiar with the local corporations there. But Derby and Exmouth have very strong Indigenous corporations and communities. The locals can do plumbing; they can do electrical work. They're certified. It seems very odd that, despite all the evidence we've had previously about all the great work that's being done, you've got two communities who are pretty much not engaged in any of the commercial opportunities there, particularly the local Aboriginal corporations.

Mr Grzeskowiak : Thanks for bringing it to my attention.

CHAIR: The deputy secretary is the Indigenous champion in Defence. I'm sure he can rectify it.

Mr Grzeskowiak : I am the Indigenous champion and very proud of the amount of work we've done in Defence in terms of the number and scale of contracts that we've let with Indigenous companies across Australia.

Senator REYNOLDS: I'm not saying you haven't, and I agree that great work is being done there. But in the north-west, where we've got two large bases, we've also got Yampi Sound. That's a different training area altogether. But I'm not seeing, and the locals aren't seeing, much engagement.

Mr Grzeskowiak : At Yampi Sound, through the Australian Wildlife Conservancy, we are heavily engaged with the Dambimangari people.

Senator REYNOLDS: Can we get some information on that, because I wasn't aware of that.

Mr Grzeskowiak : You may be aware—or you might not be aware—that just over a year ago we placed a contract for the ecological grounds management of the Yampi Sound training area.

Senator REYNOLDS: No, I wasn't aware of that.

Mr Grzeskowiak : It used to be managed by Broadspectrum, who generally look after the majority of Western Australia for us. We had an approach from the Australian Wildlife Conservancy which really hinged on the unique flora and fauna exists up in that particular corner of north-western Australia to the extent that there was a sliver of land that cuts through the Kimberley near the coast where Yampi Sound is. It is probably the only land left in Australia that is in the same ecological condition as it would have been before white settlement. The Australian Wildlife Conservancy, which is a not-for-profit, manages lots of land in Australia. We essentially agreed with Broadspectrum that they would step away from that part of their contract, which they did. Thank you to them for that.

AWC would be contracted to provide the services that Broadspectrum were providing in the main, but they would go further with their special expertise in land management and particularly conservation. They have people with PhDs up there doing research into particularly wildlife that has nowhere else to live in Australia and that we're trying to protect. Australian Wildlife Conservancy tell me that the ecological condition of the Yampi Sound training area exceeds that of any National Park in Australia, including Kakadu and the like. It's a jewel. As part of the agreement, we asked that AWC engage with the local Indigenous people there, which are the Dambimangari people, and AWC has employed directly some Dambimangari to help them with their work and, I think, has some contracts with them for parts of work as well. The reports I'm getting back are that that's working pretty well.

Senator REYNOLDS: Could you take that on notice and provide some further detail on that. That's terrific, I wasn't aware of that, so thank you. That is very good. In relation to Yampi Sound, one issue that I have been assisting on is where people have got mining tenement claims up in Yampi Sound. I'm not sure if you are particularly aware of this aspect of it, but it does come into the broader management issues. They have had great trouble getting agreements that would allow them to continue exploring their tenements in Yampi Sound.

Mr Grzeskowiak : There are a number of companies that, as we speak, are doing explorations on Yampi Sound or that need to transit through Yampi Sound to get to a piece of land which is outside of Yampi Sound because there is no other way of getting there. As you would be aware, the various licence agreements are largely let by the Western Australia government in terms of enabling mining exploration and then potentially, ultimately, actual mining. We work very closely with the Western Australian government on those matters. Clearly, from our perspective, our primary concern is the maintenance of Yampi Sound as a defence training area. It's an area that is used by a range of niche specialist training areas at the moment. It's an area that may have expanded use in the future, depending on the capabilities that are being brought in. So it's an area that we're very keen to preserve for defence training.

That's not to say that there cannot be economic mining activity taking place, subject to the various agreements through the Western Australian government. We would also have a concern about those activities and their potential impact on the ecology of the area. So, as and when there might be a request for actual mining activities, we'll play our part in negotiations through that process.

Senator REYNOLDS: I think you've just captured, perhaps unintentionally, some of the issues for the Western Australian exploration companies. Again, this is in the broader issue of the use of training areas. They'll have a look at the contracts, for example, at Woomera, where there is obviously the issue of unexploded ordinance and other issues. So they have a look at the contracts for there, and then they have a look at the contracts that the department has presented to them to sign for the Yampi Sound. I've got to say your staff have been fantastic. I raised the issue with them and they've come over and had good negotiations.

What it has shown me in relation to this inquiry is that once they've got permissions from the state governments—again, they're very well aware of their environmental responsibilities and everything else—the issue is that, the current drafts of the contract with Defence are drafted in a way that makes it almost impossible. For them to raise money to explore they need to have some certainty of tenure, or at least of access, not only to explore but to mine, because there's no point exploring if they're not going to be able to do mining activities. In those areas that they're looking at—some of it is quite difficult terrain—if Defence is going to use that whole land, it's very difficult. It's better off telling them up-front, 'Actually, we're just going to ban you from all of this area that we think we're going to use,' rather than making them jump through very expensive hoops. A lot of them are very small businesses, so they spend a lot of money and many years up there, but they get to the point where they can't actually proceed or they can't raise money because they can't get some guarantee that if they find anything they can mine it.

It's not a criticism, but it's just something that I want this committee to look at further. How can we make the process work for Defence? And if there is land there that can be ecologically managed, and it's land that Defence are unlikely to use—as you know, a lot of these are very small areas, but they need access—is there a way that we can smooth the process so that explorers can continue exploring, having written certainty that they'll actually be able to mine?

Mr Grzeskowiak : We're looking at that at the moment; that issue had previously come to my attention. I do note that we've got several companies that are doing explorations, and therefore the process is clearly not impossible. We would seek to protect the Commonwealth's position diligently in these negotiations, but I'm not against having a look to see if we can't reach better agreements.

Senator REYNOLDS: Again, this is not in any way a criticism; it's just a practical smashing together of industries. In this case, junior explorers—who are generally mum-and-dad companies who put their everything into spending years exploring—find something, but if they can't actually get the guarantee that they can mine then they've lost all their money and they can't raise money to mine. So it's finding what Defence genuinely needs and is likely to need, and balancing it. I think it's getting closer, but I don't actually feel that it's there yet. So if we could get some further information on that, because it won't be the last time this issue occurs, with people wanting to explore and perhaps mine on Defence land.

Mr Grzeskowiak : Yes, we'll have a look at that. Maybe we should come and have a briefing with you, just to get into the detail a bit more from a Western Australian perspective.

Senator REYNOLDS: I raise it in the context of this and not just in estimates because this is a broader issue in terms of consistency across Commonwealth land and Defence land. There's other Defence land in Western Australia that will undoubtedly have minerals. How do we deal with it in a way that works better for Defence and also for those who would like to mine?

Mr Ablong : I could just add from a policy sense. You noted the activities at Woomera. We do try to develop a coexistence framework that allows other economic activities at the same time as Defence requirements are met. Sometimes that's a little harder than in other places. But as a general policy principle, our aim is to try and find the right middle ground that preserves the Commonwealth's needs to have training ranges. The parts of Australia in which Defence can train are actually shrinking in terms of the general development and encroachment on training ranges.

CHAIR: We have a red zone in Woomera. That's the point, isn't it?

Mr Ablong : Yes, it is. We find that coexistence framework that allows us to work at Woomera and—

CHAIR: That goes back to Senator Reynolds'    question: if you've got a designated red zone, don't go looking there because you ain't getting in!

Senator REYNOLDS: Part of the frustration is what is the process, because it is different. If we could have a look at a more standardised policy in relation to this—I don't think anybody I've met would disagree at all that Defence needs to protect its own interests and, also, safety issues. But, again, if we could just get more consistency and make it clearer.

CHAIR: Senator Moore, did you have a question?

Senator MOORE: As you know, we met in Darwin with a small operation that did work on employment for people with disabilities. They gave evidence to us about the fact that they missed out on targets. They built targets—

Mr Grzeskowiak : It's called Helping People Achieve—HPA.

Senator MOORE: That's right. I want to know, with the various ways Defence is looking at the contracts—and thank you very much for the work that's been done in simplifying some of the paperwork; I think that's a really good step!—is there any kind of process within Defence to give support to employees with disabilities? We've heard about working with Aboriginal and Islander companies, which is really positive. But I think, when we spoke with that particular group in Darwin, it had a deep impact for most of us: a small organisation that had had a very long relationship with Defence, and the impact on them of losing a contract.

Mr Grzeskowiak : Yes, I think you're right. I personally met with the—

Senator MOORE: Yes, they said you were going to—

Mr Grzeskowiak : managing director of that company in Darwin, and I've been involved with him subsequently. The difficulty there was that they'd got themselves into a position where they were doing a lot of work making wooden targets that Defence doesn't need anymore. We're not going to buy targets we can't use or need, and that is unfortunate.

We put a bit of focus into people with disabilities. For example, inside Defence, we're currently employing around 100 people with disabilities on a scheme that we have introduced over the last three years, where we've set up at various Defence bases—usually the bigger bases where there's lots going on—a team, using companies—a company called Help, I think, is one. We go to the market we use and they come in, because they're expert at helping people with disabilities integrate into the workplace, and we use them to do a range of tasks. They build up a capability to do a range of tasks that help the Defence base; the people there usually do administrative tasks and do their work. We've rolled that out progressively, and I think we're at eight or nine Defence bases now that employ around 100 people with disabilities—many of them people with mental disabilities rather than just physical disabilities. I've personally been to four or five of those centres, met with the people and talked with them. It is very satisfying when you see that the policies you're implementing are giving the chance of a job to people who maybe wouldn't have had the chance of a job before. That's one of the things we're doing internally at Defence.

We do seek to do other work. We've got something called the Dandelion Program, where we're actively employing people who are somewhere on the autism spectrum. They are really good at some types of work—I won't go into the detail of what they do, but they're very, very attentive to detail. That's working really well for us. We do work with several companies, just in the general course of business, that have their own disability employment programs, and we encourage that sort of thing. It's an area that we have got a little bit of a focus on, and it's going to be an area that we'll have a continuing focus on as we go forward. Defence has a disability champion in the same way that I'm a champion for Indigenous employment—we have a disability champion as well at the deputy secretary level—and that gives it visibility, and maintains visibility, within the department.

Senator MOORE: Can we get a little bit more information about that? I'd like to see that integrated into this report; that there's work with local companies and that there'd be focus—

Mr Grzeskowiak : On notice, we can give you a little bit more detail about the things I've just talked about.

Senator MOORE: That would be very useful. Thank you.

CHAIR: Could I go to Finance now and run through a number of questions. Is Finance aware of the South Australian Industry Participation Policy and how it runs parallel with their other procurement policies?

Mr Hunt : We're broadly aware of it.

CHAIR: Okay. Could the South Australian model of measuring economic benefit versus cost value for money be used at the national level? In a broad sense—we're not going to hold you to this; you've obviously got a minister that you're responsible to—could it be used on a broader national basis?

Mr Hunt : I don't know enough about the detail of the South Australian policy, but I can talk to you about the Australian government's policy.

CHAIR: The question is (a) are you aware of it, (b) could it be used on a national level, and (c) could the SA model be adopted within the current CPRs?

Mr Hunt : I don't think it could. I think the SA model has some mandatory weightings in it. We don't use mandatory weightings in the Commonwealth policy framework. The Commonwealth policy's devolved—individual agencies are responsible for their procurements. It's deliberately devolved to empower agencies to procure the goods and services that they need the way they need to.

CHAIR: You heard Senator Fawcett's example: when the local gas supplier was contracted to the hospital, he stocked the right gases and he had the capability in the area. When he lost the contract and you needed the gases, they weren't there.

Mr Hunt : Yes. That's a continuity-of-supply issue, and that should be part of the assessment of value for money. I note he said that was a state government example.

CHAIR: Yes.

Mr Hunt : The framework we have means that continuity of supply should be part of any assessment of value for money. That's part of the quality of the delivery of a contract.

CHAIR: From an exploratory point of view, would you be able to take on notice the changes that would be required to be made to the Commonwealth Procurement Rules to facilitate that South Australian model? You've said mandatory is the initial one that comes to mind.

Mr Hunt : I think you're talking about a different policy to the Commonwealth policy. I think we're hitting the area where you're asking me to provide an opinion on policy.

CHAIR: Okay.

Mr Hunt : I'm happy to talk about the Commonwealth policy.

CHAIR: Do the Commonwealth Procurement Rules enable economic benefit to the community to be considered during the procurement processes, as they currently stand?

Mr Hunt : The Commonwealth Procurement Rules, as of 1 March last year, include a clause requiring agencies to incorporate a consideration of economic benefits for contracts that are going to be over the value of $4 million for general procurement, or $7.5 million for construction procurement. As I said earlier, the procurement rules are at quite a high level. They establish a framework of principles and we do operate in a devolved framework, so it's really up to individual agencies to determine what constitutes economic benefit and what sort of weighting to give that. The procurement rules do make it clear that that is within the context of considering value for money, so it doesn't override value for money by any means. That's still the core rule.

But we do have some guidance that sits underneath that policy. It's not part of the rules; it's some guidance to help agencies implement that policy. Under the heading 'How can a supplier provide an economic benefit?', it says:

There are many ways that a supplier can provide an economic benefit to the Australian economy. Some examples include, but are not limited to …

So, clearly, this can be a broad range of issues. I won't go through all of the examples, but some of them are 'building, leasing or procuring infrastructure that supports Australian communities', 'using indigenous businesses', 'using SMEs in delivering goods and services, such as a subcontractor or a supplier' and 'sharing knowledge, skills and technology with SMEs'. So the policy framework is broad, as I said. here's a lot of latitude for agencies to work out what this means in the context of their procurement processes, and there's a range of issues that the policy highlights could be economic benefits provided by suppliers.

CHAIR: Why did we hit $4 million and $7.5 million? How were those thresholds determined?

Mr Hunt : I'm not sure.

CHAIR: Not as a result of trade agreements or anything like that?

Mr Hunt : This is before my time in this job, so—

CHAIR: Perhaps on notice—

Mr Hunt : Yes.

CHAIR: You've said that, over $4 million, economic benefit can be considered.

Mr Hunt : Well, the economic benefit has to be considered over $4 million.

CHAIR: I'm just curious as to why the lever was set at $4 million.

Mr Hunt : I can take that on notice.

CHAIR: Could we get some better detail on that. There are a number of exemptions under the CPRs. The most obvious one is Indigenous engagement. Is there scope for other exemptions? Is that a fixed list or an evolving list? Does disability come into it occasionally?

Mr Hunt : Disability is an exemption. I just want to clarify this. There are some exemptions from division 2 of the CPRs, not from the CPRs. The CPRs have two divisions. Division 1 provides the broad rule set that applies to all procurements. Division 2, which largely reflects a number of rules that come from our international trade agreements, has a further set of rules that apply to procurements over $80,000. Again, it's $7½ million for construction. The exemptions in the appendix to the CPRs are an exemption from division 2. For example, the Indigenous Procurement Policy draws on the Indigenous exemption to division 2, which means that, if you're engaging with an Indigenous business, you don't have to go to a full open-tender process if it's over $80,000. You still need to deliver value for money. You still need to demonstrate—

CHAIR: So it's up to $80,000?

Mr Hunt : It's $80,000 to $200,000.

CHAIR: What always intrigues me is: I think the American model is US$500,000. So we do this free trade agreement. They have a benchmark of US$500,000, and we have $80,000 to $200,000. Anyway, I won't go there—that's another subject. Is there scope, under current government policy, to expand the list of exemptions? Is it possible to do that?

Mr Hunt : The current list of exemptions represents government policy, and those exemptions have to be consistent with our trade agreements.

CHAIR: Right. So that's the framework.

Mr Hunt : Yes.

CHAIR: Throughout the inquiry, we've noted the complexity of the procurement system, and, in particular, the detailed documentation that's often required by Defence when people are tendering for contracts. Now, as part of the first-principles review, a slimmed-down version has been produced. Is Finance aware of any changes that could be made in the CPRs which would assist that? The feedback we get is: 'Well, if I was going to have to read all those regulations, fill all those papers out and do all that, I'd have to add money to the contract; it's probably not worth me doing it, and, if I am going to do it, I'm going to weight it heavily, because I don't know where this paperwork takes me—I can't estimate the time or the implications, or what hurdles I'll have to jump—so I'll just have to stick more money on the tendering process.' Is it possible in the CPRs to make it even more transparent and an easier protocol to navigate?

Mr Hunt : Well, the CPRs don't provide a lot of direct instruction about the volume and size of the procurement documentation. That's something that's really up to agencies to determine. Again, there are some broad, high-level rules about what you need to do, and you need to fully disclose to the market what the evaluation criteria are. So there is some documentation at a high level required, but the depth and detail of that is really for agencies.

CHAIR: So if it's not in the CPRs, is Finance aware of anything that could be done in the procurement process to make the process less onerous for SMEs when they tender for, say, Defence? Is that any part of your remit? Do you look at anything like that?

Mr Hunt : We are responsible for this broad high-level framework. As I said, there's nothing in the broad high-level framework that requires a particular size or volume of documentation, and often that comes back to the decisions that agencies have made about how to approach a particular procurement. Obviously, larger, more significant procurements have a higher level of documentation.

CHAIR: It's really up to Mr Spouse to answer, from Finance's perspective? That's a Defence finance issue?

Mr Hunt : Yes. I can't comment on Defence's procurement processes.

Mrs Wood : To address the issue around SMEs and the tender documentation, one of the things that Defence does—and it's a requirement of the Department of Finance—is that we use the Commonwealth contracting suite for tenders under $1 million. So what we consider low-value, low-risk in a Defence perspective. That's a very streamlined set of tools and templates that we use. As far as I'm aware—and Finance can probably provide more advice—it was developed in consultation with SMEs.

CHAIR: So we don't have a problem? Is that Defence's position?

Mr Grzeskowiak : I might comment there. Our contracts for our big contracts are quite thorough. They require the contractors to provide a whole range of information and a whole range of guarantees around a range of things—insurances of a range of various types, financial guarantees about viability of the company et cetera. So we do understand that parts of industry look at those contracts and find them a bit overwhelming. We've been using—particularly in the capital construction sense—a suite of contracts that has gradually evolved over the last 20 years or so. They're considered robust. We've developed leaner contracts for what we call our medium sized projects, smaller projects, because we do recognise that, clearly, the nature of the contract you enter into, the detail that needs to be provided, and the risk balance between risks we might take and risks the contractor might take need to be scalable to a point. We are always looking at our contract vehicles, looking for improvements we can make for a range of things, one of which would be feedback from industry on how they find our contracts. But—particularly in our bigger contracts—the reason we have the clauses we do comes from experience in dealing over a long period of time in the market sector that we deal in. From a Defence perspective, the contracts have proved robust in terms of us being able to deliver what we need to deliver reliably without seeing too many difficulties down the track. That's not to say there are never difficulties.

CHAIR: No.

Mr Grzeskowiak : We do hear and understand that new players, particularly, in this space view our contracts as very thorough, and we're attentive to incremental change of those contracts as we go on.

Mr Hunt : Can I just pick up on something that Mrs Wood said? I just wanted to provide a bit more detail about the Commonwealth contracting suite, which is something that Finance developed and we did do it in consultation with business. It's designed to minimise the burden on participating businesses, and particularly small and medium enterprises. So it kind of simplifies and streamlines the process, and it provides a standard set of documentation. But it is for lower-value procurements. It's mandatory up to $200,000, and then it can be used up to $1 million. It can be used as a basis for developing a contract for larger contracts as well.

CHAIR: And that's an instruction across all departments?

Mr Hunt : It is, but it's very much targeted at the lower end of the contract range.

CHAIR: Excellent. Is that a publicly available document?

Mr Hunt : It is, yes. It's available through the internet, yes.

CHAIR: We might just ask the secretariat to get a copy of that. We can refer to that in our conclusions, perhaps. I just want to go back to an issue you touched on, Mr Grzeskowiak. Minister Pyne, in a recent speech, advised that his expectation was that SMEs would play an increasingly large role in delivering on defence industry policy, and he advised that the first ever Defence Industrial Capability Plan will be released in 2018. Could you give us an update on that plan and how it will fit into policies and plans such as the Defence Industry Participation Policy.

Mr Ablong : I might take that question. The Defence Industrial Capability Plan was a recommendation of the Defence Industry Policy Statement that the government released in 2016, where we set the general policy framework for our engagement with industry in order to deliver the Integrated Investment Program—the capital program—and the facilities program that is underpinning the white paper. The Defence Industrial Capability Plan effectively provides industry with a more specific set of activities associated with engaging in our investment program, and it defines those things that the government would like to be in sovereign Australian hands. So it has a sovereign industrial capabilities list that allows companies to understand what capabilities we will be putting particular emphasis on in terms of sovereignty. It also moves a lot of the work that we've done with respect to engagement with small to medium enterprises through the Centre for Defence Industry Capability to the next level of engagement. So we are looking to provide some additional detail on how we engage with small to medium enterprises in order to be able to deliver on Defence's capability needs. The Defence Industrial Capability Plan, as the minister said, should be released sometime this year. It is something that we've discussed with industry, and we workshop with them to get to a point where the policy prescriptions that are in that document are things that both the big end of industry—in terms of the prime contractors—and the small to medium enterprises can easily access and work within.

CHAIR: Does the Defence Industry Participation Policy get subsumed by the capability plan, or does it stand alone?

Mr Ablong : The Defence Industry Participation Policy is one element of the Defence Industrial Capability Plan. The Defence Industrial Capability Plan sits, if you like, directly below the Defence Industry Policy Statement, and there are a number of initiatives within it—the sovereign industrial capabilities part, the local industry participation policy and the Defence Industry Participation Policy—all of which are dealing with specific challenges that are faced either by small to medium enterprises or by large companies. We are providing the detail of how the companies in that particular problem set—whether it's small to medium enterprises or others—can engage in contracting work or engaging with us in the investment in the capabilities of the ADF.

CHAIR: It is a really bad analogy, but the only thing I can think of that is similar was the Button plan on manufacturing cars, where we didn't all make diffs; we made them all in one place. Transmissions were made there and other things were made there. Is it that style of thing?

Mr Ablong : It is less that and more that what the Defence Industrial Capability Plan does is identify those areas in the Integrated Investment Program where Australian industry is not just welcomed but encouraged and supported to deliver on sovereign capability. But you have different policy settings if you're a small to medium enterprise from those of a big company like Lockheed Martin, Boeing or any of the large prime contractors. So, rather than have a set of policy prescriptions that are the same for everybody from the big end of town through to the small to medium enterprises, we note that there are specific challenges for small to medium enterprises. That's dealt with in the Defence Industry Participation Policy. There are specific challenges for the large end of town. Those are dealt with elsewhere in the document. We're saying: 'If you are going to participate in the Integrated Investment Program and provide capabilities to Defence, these are the things that we want to be sovereign. Some will be at the big end of town; some will be at the little end of town. If you are in the small-to-medium enterprises, here are some things you might want to specifically start to deal with.'

CHAIR: I know Minister Pyne will have a lot of fun releasing this, and other people will try to pull it apart. For the industry it would provide some transparency and clarity about what they should do if they're in that niche: they should go that way or tune their organisation to take advantage of an opportunity that is slightly off centre to what they're doing at the moment.

Mr Ablong : Correct. If you're a small-to-medium enterprise that hasn't typically dealt with Defence in the past but have something that is of value, it points out how you as a small to medium enterprise can engage with the existing programs like the Defence Innovation Hub, the Next Generation Technologies Fund and other elements, through the Centre for Defence Industry Capability. They work with companies that have never worked with Defence in the past, which they call 'working with Defence 101', where they say, 'These are the sorts of things you need to think about if you want to work with Defence.' For those established companies that work in the Defence environment, we are trying to build skills, capabilities and quality standards so they are better able to take advantage of some of the new capability requirements we have coming through the Integrated Investment Program. For the larger companies we talk about their responsibilities in things like the Global Supply Chain Program. Most of the large prime contractors who work for Defence have signed up to the Global Supply Chain Program. They have responsibilities to work with small-to-medium enterprises. Beneath the Defence industry policy statement there are a number of different initiatives helping to either make you ready to work with Defence or provide you with support if you're going from one level of capability—for instance, a small-to-medium enterprise might have been doing very well working with Defence and is thinking about expanding their business to become a medium sized enterprise. We can do some things to help them. For the large end of town, the prime contractors, it's about working to identify areas in which they can support the rest of the industry.

CHAIR: The main thing is that the Defence Industry Participation Policy will still be there in amongst it all.

Mr Ablong : Absolutely. It sets some policy for things like the Australian Industry Capability program, which we've talked about in estimates, and advises companies what they need to do to better prepare those documents.

CHAIR: We note that the Centre for Defence Industry Capability is hosting a series of Introduction to the Defence Market Seminars in state capitals and regional areas between March and May of 2018. Are you able to update how they have gone, number of attendees, range of organisations represented and content delivered?

Mr Ablong : I can get you some specific details, because they have been doing a lot of work. We can take it on notice, but as of February of this year the Centre for Defence Industry Capability has received over 320 applications from Australian companies, of which 302 have been accepted and are being pushed through the various processes. We have received 26 applications for Capability Improvement Grants, of which 23 have been approved, with a total value of $942,337in grants so far. There are a number of things inside what the Centre for Defence Industry Capability is doing that are starting to impact upon industry's ability to engage with Defence, but I'll get you a more detailed brief and provide that to the committee.

CHAIR: Excellent. We found out in the additional estimates that the Local Industry Capability Plan pilot has been expanded to six projects?

Mr Ablong : Yes, it has.

CHAIR: You've added three sites?

Mr Ablong : We have.

CHAIR: What was the background for choosing those three additional projects?

Brig. Galton : The initial three were the Explosive Ordnance Logistics Reform Program, the Shoalwater Bay Training Area development and the HMAS Cerberus Redevelopment.

CHAIR: I remember the first one.

Brig. Galton : That went to PwC late last year. The three we're delivering are a program of works: the Townsville Field Training Area Mid-Term Refresh, the RAAF Base Townsville Mid-Term Refresh, and the HMAS Cairns Mid-Term Refresh. They're the six.

CHAIR: If you look at the explosive ordnance, there seemed to be a hell of a lot of concrete. I would have thought it better to get it locally rather than truck it in. Is that the decision-making process? Was it lending itself to local engagement?

Brig. Galton : Because it was 12 sites nationally, that one did lend itself to be able to break down the procurement by region. The strategy we're using for that is to have a series of five head contracts and one medium works contract. We're in the middle of that tendering process at the moment. In the last 48 hours I have been signing off the delegations for the first couple for the Northern Territory and Queensland, and the local participation is looking very good for those so far.

CHAIR: I can now start on our five pages of questions on notice, or I could give you an early mark if you promise to get in your homework and have the answers on notice answered.

Mr Grzeskowiak : I undertake that the homework will be provided as soon as humanly possible.

CHAIR: There being no further questions, we adjourn proceedings and await answers to questions on notice.

Committee adjourned at 18 : 36