CHAIR —I declare open this meeting of the Senate Foreign Affairs, Defence and Trade References Committee. Today the committee commences its fifth public hearing into the defence materiel acquisitions and management framework. The terms of reference set by the Senate are available from the secretariat staff and copies have been placed near the entrance to the room. Today's hearing is open to the public. There will be a suspension of proceedings for lunch at 12.15 p.m. and we will resume at one o'clock. The hearing will adjourn at approximately 4 p.m.

Witnesses are reminded that evidence given to the committee is protected by parliamentary privilege. It is important for witnesses to be aware that the giving of false or misleading evidence to the committee may constitute a contempt of the Senate. If at any stage a witness wishes to give part of their evidence in camera, they should make that request to me, as chair, and the committee will consider the request. Should a witness expect to present evidence to the committee that reflects adversely on a person, the witness should give consideration to that evidence being given in camera. The committee is obliged to draw to the attention of a person any evidence which, in the committee's view, reflects adversely on that person and to offer that person an opportunity to respond.

An officer of a department of the Commonwealth shall not be asked to give opinions on matters of policy. However, officers may be asked to explain government policy, describe how it differs from alternative policies and provide information on the process by which a particular policy was arrived at. When witnesses are first called upon to answer a question, they should state clearly their name and the capacity in which they appear. Witnesses will be invited to make a brief opening statement to the committee before the committee embarks on its questions.

I welcome Vice Admiral Shalders and Air Marshal Houston. The DMO has lodged with us a submission. I invite you now to address the committee on our terms of reference and on the matters contained in that submission.

Vice Adm. Shalders —Mr Chairman and members of the committee, thank you for giving me the opportunity to appear before this committee. I would like to make an initial opening statement.

CHAIR —Please do.

Vice Adm. Shalders —As the Vice Chief of the Defence Force, I have a major role to play in the capability development arena. It is this role which I expect you wish to explore in more detail this morning. I am accompanied this morning by Air Marshal Angus Houston, Chief of Air Force, who is available to respond to your questions regarding capability management. There is a clear distinction, of course, between my role in the development of capability and the service chiefs' role in the management of that capability. We are both happy to explore those distinctions and the differences between current and future capability, should you wish to do so.

Before outlining briefly my role in capability development, the committee might find it useful if I address in general terms some of the process reforms Defence is pursuing. I suggest I should do that, because a robust capability development process is critical to successful acquisition. In the past, before the acquisition projects began, capability requirements for some projects were inadequately defined. When the capability requirement evolved subsequently, causing changes in the scope of the project, the inevitable results were increased costs and delayed deliveries. In other cases where the capability was defined at an early stage, it was sometimes done without reference to the cost and risk drivers. This significantly increased the risk of cost and schedule overruns. To overcome those problems, my capability staff work with the DMO staff to further develop a revised capability development process.

As a matter of routine, capability requirements are now accompanied by operational and support concepts. They articulate clearly how the equipment will be used and supported. Function and performance specifications and test concept documents will also be developed at this time. Improved capability definition before government approval is sought will help to ensure that costs and risks are better understood. My particular role in capability development is to drive that process—in particular, the requirements process—to support the government's ownership interests in Defence, balancing the interests of government as customer and owner through advice on investment decisions necessary for defence capability development. An essential feature of this work is making continual capability/cost schedule trade-off judgments on the development options which might be available for current and future capability.

The primary forum for those sorts of decisions is the Defence Capability Committee, which I chair and which meets monthly. Defence Capability Committee members represent all key stakeholders, thereby enabling a joint and coherent approach to capability development. Through the Defence Capability Committee, individual major capital investment proposals are scrutinised to ensure, firstly, that there is consistency with the government endorsed strategic requirements currently articulated in the Defence white paper and the Defence Capability Plan; secondly, that the committee look at whole-of-life and whole-of-capability perspective—we are trying to ensure an acceptable return on capital expenditure and we review every project to ensure that there are no unmanageable strategic, technical, schedule or financial risks; and, finally, that we provide a rigorous and independent scrutiny of capability, cost, schedule and risk.

A recently introduced process guide called the Capability Systems Life Cycle Management Manual provides the framework for this work. The manual details an end to end process for managing defence capability from its inception, through the acquisition and in-service phases, through to its eventual disposal. If it would help the committee, I am happy to provide an updated version of that manual. I trust that these opening remarks will have assisted in setting the scene. The Chief of Air Force and I look forward to answering your questions.

CHAIR —Thank you.

Air Marshal Houston —I will say a few words about my job as capability manager. The ultimate customers of the DMO are the three service chiefs. We manage our respective service outputs. In my case, I manage the Air Force capability output, and obviously I do that with the support of the DMO and other service providers. Fundamentally, the DMO acquires for me the equipment that I need to raise that capability. It then provides the through-life support for those capabilities so that I can provide options for government whenever anything operational happens. The assets are then assigned for operational use under Commander Australian Theatre. That is how the system works. I manage that capability. Essentially, I have a raise, train and maintain capability function, as do my other colleagues in Army and Navy.

Senator JOHNSTON —Admiral Shalders, who is on the Defence Capability Committee?

Vice Adm. Shalders —As I have indicated, I chair that committee. The deputy chair is the Deputy Secretary Strategy and Policy. The three service deputy chairs are on the committee and represent the users. My head of capability systems, who is responsible for determining that requirement activity, sits on the committee, as does a DMO representative at the two-star level. In addition to those members—they essentially represent the users and providers—we also have the Chief Defence Scientist, who provides scientific support to projects that we might be looking at. The First Assistant Secretary Capability Investment Review is a member of the committee; his staff provide the secretariat to the committee. We have an infrastructure representative, again at the two-star level. Other members can be invited, depending on the subject matter that we are looking at. For example, the Deputy Secretary Intelligence and Security will sit on the committee, if we are looking at an intelligence project. Others are invited as required, depending on the subject matter.

Senator JOHNSTON —It strikes me that the committee has very good operational expertise; but, in terms of identifying potential cost drivers and other developmental problems, I am concerned that the personnel are too heavily weighted on the operational side. How do you respond to that?

Vice Adm. Shalders —No. I believe that the expertise you talk about is brought to the committee in three ways. Firstly, the staff of the head of capability systems work very closely to those sorts of issues; the capability and cost trade-off activity is their bread and butter. So that level of review and research is represented to the committee through the head of capability systems and through the papers that are put to the committee by that staff. In addition, the DMO is represented on the committee and, again, these papers that are brought to the committee are not solely done by the project staff. There is a very close engagement between the DMO staff and the capability systems staff, as the requirement is developed and as the project is put together. The third way is through the DSTO representative; the chief of Defence Science has people working on these projects as they come forward. So I believe we do get a fairly balanced view of the cost, risk and all the other issues that that high-level committee needs to take account of.

Senator JOHNSTON —How long has the committee been operational in terms of our strategic requirements?

Vice Adm. Shalders —This committee or its predecessors—it has had a number of different names over the years—has really been part of the capability development process, to my certain knowledge, since the early eighties, and I believe predecessors were probably around prior to that. It is currently titled the Defence Capability Committee. It was previously, until July this year, called the Defence Capability and Investment Committee. The change of title was driven by a new committee that took the title of Defence Capability Investment Committee in July this year. That new committee comprises the service chiefs, the CDF and the secretary and the Under Secretary Defence Materiel. That is a higher level committee than the one that I chair. Its primary focus is to look at the balance of investment rather than the nitty-gritty detail that the Defence Capability Committee needs to become involved in.

Senator JOHNSTON —How often does it meet?

Vice Adm. Shalders —The Defence Capability Committee meets monthly. The higher level committee, the Defence Capability Investment Committee, is currently meeting monthly but, in the fullness of time, I would expect it probably to revert to about every three months.

Senator JOHNSTON —Which committee member provides the committee with expertise in cost management?

Vice Adm. Shalders —There are two primary inputs there. Firstly, the First Assistant Secretary Capability Investment Review is a member of the chief finance officer's group. He and his staff are looking at both financial matters and programming matters. Advice such as how the financial part of the project fits into the overall Defence financial program comes from the First Assistant Secretary Capability Investment Review. The other area where advice is provided to the committee is through the DMO representative. I should also say that I have painted a picture of the DMO being in one box and the capability systems staff being in another. In actual fact, the two are working very closely together, even at that requirements development stage, which is the bit that I am primarily responsible for. So it is not one body providing one bit of information; hopefully, it is a team approach all the way through.

Senator JOHNSTON —Where do these capability ideas and concepts come from? What is their genesis before they come to the committee for deliberation and formulation of a response?

Vice Adm. Shalders —Normally the genesis of a project is driven by a need to provide some capability. Capability analysis looks at what we can achieve now, what we need to achieve in the future, what therefore is the gap between what we have now and what we might need in the future, what risks that gap might create and what the options are for reducing that gap in capability between now and the future. Primarily, that analysis is affected by the capability system staff who work for me. That really is the genesis of most new projects.

Air Marshal Houston —I would add that we in Air Force have just identified a requirement, and it relates to the fact that we need to have an air training capability for the future. At this stage that requirement resides in Air Force. We are working up a study on pilot training and, once it has been published, I expect it will become the basis for the way we go in the future with pilot training. At this stage we do not have any fixed solution. We are looking at all the options. Clearly, we need to have some form of platform as part of that system, but we want to leverage off the synthetic environment that everybody uses these days. The other side of it is whether we ourselves will provide this training or get industry to provide it and, if we do get industry to provide it, what our involvement in it will be and so forth. Those are the sorts of things being looked at in this study. I expect that the study will come up with some conclusions. Then, at that point or some point in the future, we will define an Air Force requirement which we will pass to the VCDF and his capability staff. They will then take and develop our broad concepts into a capability requirement that can be defined precisely with costings and so on. That is how it is working in this particular case.

Senator JOHNSTON —I can understand exactly why a significant motivation exists for flight training systems that do not involve stress on airframes and all that sort of thing. After having visited Edinburgh, I can see the huge benefits that flow from that. But I come back to the selection of platforms, accessories and all those sorts of things. Let us take helicopters, for instance. There are two options: one is to buy off the shelf and the other is to completely modify and come up with a set of unique requirements. Where is the genesis for that assessment? How do we go through that process at the very beginning, identifying where it will lead?

Vice Adm. Shalders —I also should have added to my earlier answer that I think in many cases we are talking about a capability that exists currently which will fall off the end of the earth. The life of type will expire and the capability will expire and, therefore, it will need to be replaced. So it is not all `blue sky' thinking, which perhaps I gave the impression of in my first answer. In many cases there will be a need to replace a capability, and that does tend to drive many of the projects that we are looking at. I am not sure whether that impacts on the question you have just asked me.

Senator JOHNSTON —Not really. I want to know why, in the face of other countries that are happy with a particular type of product, we seem to want to go down a more complex path that engages us in significant delays and substantial cost without getting the operational benefit. Where does the idea come from? Is it your capability section that says, `Here's a helicopter on the shelf that we can have tomorrow; we now want to change it in this degree'? Away we go, and we are two years behind schedule and substantially cost damaged.

Air Marshal Houston —Perhaps I can give another example. The VCDF has a project on the books at the moment, which is Air 7000. That is looking at the future of the maritime patrol and response capability, which is essentially to replace the AP3C. As you probably heard at Edinburgh last week, the AP3C airframe runs out of life in about 2015, and we then have to decide what we will have do to replace or provide for that capability that the P3 has provided us with for many years.

There are a number of options. If you start at the top, obviously we are moving into a new era where we might be able to leverage off uninhabited air vehicles. Uninhabited air vehicles will provide a very good surveillance capability, and so we need to look at that. But the P3 also provides a number of war-fighting roles in support of the Navy and its prime role is probably antisubmarine warfare. As a UAV will not be able to provide that capability, we will probably have to have some sort of manned platform to do it. In terms of the manned platforms that might be available, at present the staff are looking at everything from a brand-new turboprop aircraft to taking the AP3C, scrapping most of it and then rebuilding it as a P3. Obviously there are costs associated with all of those options, and there are quite a few options.

That process has already started and I was briefed on it yesterday. We know already that a brand new turboprop aircraft that the US Navy will probably develop will be prohibitively expensive, and so we are also looking at options in terms of refurbishing the P3. Ultimately, all of this is analysed over a number of years. It goes through our committee systems and we eventually come up with a number of options. We then pick a preferred option, and that is usually the option that will go forward. But at this stage we do not have any fixed views about how we will solve that particular problem. That is just one example.

We are not locked into new equipment. We are not locked into an Australian orphan. In fact, the feeling in the department at the moment is that, wherever possible, we want something that is the same as other people operate so that we can reduce the logistic burden associated with it. We have got far too many orphans in our system at the moment, and we need to get smarter in the way we acquire equipment and maintain it.

Senator JOHNSTON —Tell me about the people who are doing the evaluation and the scrutinising of the various options and coming up with a recommended plan. Who are they, what experience do they have and are you happy with the resources that they have at their disposal?

Vice Adm. Shalders —Those people reside within my staff at that early stage of the process—that is, the capability systems people. Yes, they have expertise within their own group of people, but they are also able to tap expertise throughout the department and, importantly, under our current processes, also in industry. Perhaps a good example of that would be Air 9000, which is a project which is attempting to rationalise the number of types of helicopters that we have. That project is some years away from reaching its eventual completion, but the people who are looking at Air 9000, both within the DMO and within my staff, have sufficient expertise within their resident staff but they also tap very much into industry and, in this case, into DSTO and other overseas agencies.

Could I also make another point, which I think you might have been leading to, Senator. In utopia, we would probably not wish to customise any product. If we could buy it off the shelf, we would. We know through bitter experiences, as the committee has heard, that every time you customise something, it is going to cost you more. But I think the point we should make is that Australia's requirements are very often different from others who might have a product to sell. It would be negligent of us not to take account of those differences where they occur. An example I could give you there would be that a helicopter that might work quite capably and quite well off the back of a ship in the North Atlantic might not do the same thing off north Australia. So we have to take account of those differences. Those differences should drive any customisation that we might need to make, and I think the principle is that we would try to avoid customising where we could, but sometimes we just have to.

Senator JOHNSTON —So are you currently happy with the level of articulation of your capability section to the DMO, such that they have a clear plan to go forward with?

Vice Adm. Shalders —I think we could do better, and I think—

Senator JOHNSTON —Let us pause there. In what regard can we do better? Give us the benefit of your wish list of what you would like to see, because we have had a number of major problems and we have to front up to them and try to learn from these issues.

Vice Adm. Shalders —I think if we can specify in as much detail as possible what the ultimate capability requirement is going to be, it will allow DMO to satisfy that requirement better. Money spent up front is money that you save tenfold further down the acquisition track. So if we can define the requirement in sufficient detail for the DMO to then try to meet that requirement, that will assist them in the future. The other thing I would say is that we need to ensure that we have this teaming approach between my side—the requirements development people—and the DMO. I think the committee has taken evidence on this particular subject from others prior to this. I think Mr White had something to say about this issue.

Senator JOHNSTON —Mr White is the next question.

Vice Adm. Shalders —So those two areas are probably critical. We need to define the requirement sufficient for DMO to be able to try and meet it, and then we need to work very closely with DMO and with others in a teaming approach. I think our current two-pass approval process does assist in driving us towards meeting both of those aims.

Senator JOHNSTON —Could you just take us through that two-pass approval process in detail again, if you would be so kind.

Vice Adm. Shalders —The first pass is basically seeking broad approval based on an operational concept, broad indicators of capability, broad options that might meet that capability and broad figures of cost. Under the process that we now use, that broad indication goes forward through to the National Security Committee of cabinet, and we are given approval to continue investigating. So at that first pass, it is all fairly broad figures. The second pass is where we come back to government with a firm idea of what the capability is going to look like, what it is going to cost, what the schedule risks might be and what the cost risks might be. After that second-pass approval—again, taken by cabinet—we can go to contract. So the point I am trying to make is that it is a matter of detail.

Senator SANDY MACDONALD —You talked about defining the detail of capability. Does that detail change? I take the example of the AEW&C. Because there was a delay by either the capability committee or the government—I am not quite sure which—the capability changed from needing X number of aircraft to having Y number of aircraft and the cost escalated to more than the original contract. You said you talk about defining the detail, but did the definition of detail and the capability requirement change there?

Vice Adm. Shalders —I will give you a general answer to the question, and then come back to the AEW&C example and ask the Chief of Air Force to comment. The general response is that yes, the detail will obviously become more precise as we go through to the second pass. We should not be surprised by that, because of course the more research you are able to bring to bear the more fidelity to detail. If that did not occur we would obviously not be doing the right thing. As to the specifics of AEW&C and how they changed, I believe Air Marshal Houston was involved in that.

Air Marshal Houston —No, I was not involved in it, but I think there were concerns about the project in the first instance. Essentially, it was reconsidered for a while and then resurrected. I am not across the detail of that; we can perhaps come back to you on notice if you would like us to do that.

Vice Adm. Shalders —Air Vice Marshal Gray will be here this afternoon and he can answer on the specific detail of that.

Senator SANDY MACDONALD —Do you think the capability changed?

Air Marshal Houston —No, I do not. In fact, I think if you have a look at the AEW&C you will see that it is the new way of doing business. From the time we stood up the project within the DMO it has been a model for how we should do business in the future. Currently, it is ahead of schedule—

Senator SANDY MACDONALD —The capability did not change but the cost did?

Air Marshal Houston —No, the capability did not change; in fact—

Senator SANDY MACDONALD —No; the capability did not change but the cost did.

Air Marshal Houston —I think that is true; yes. I am not across the detail of that. If you ask Air Vice Marshal Gray this afternoon he will be able to give you the background. Just taking the subject of the definition of the operational concept—the concept for operation—in the Air Force Capability Management Board yesterday we reviewed the AEW&C and the latest version of the concept of operations. It is much more developed now than it was when the project was approved. The reasons for that are that we are learning much more about the capability that is to be provided and we are doing a lot more work in terms of how we might employ that new capability when it is brought into service.

Senator SANDY MACDONALD —Is it an off-the-shelf purchase?

Air Marshal Houston —No, it is not. In fact, there is not really an off-the-shelf option when you are buying an AEW&C. The current state-of-the-art option would be the Boeing 737 Wedgetail we are buying, and a number of other nations are looking at buying the equipment we have signed up for. We are essentially the launch customer for this form of AEW&C. Obviously, we looked at other options that might be available, but the AEW&Cs fielded by the Americans and the British are essentially Boeing 707 derivatives. They are not a practical proposition at this time. They would not have met our needs and, furthermore, I think they would probably have been more expensive than what we are buying now.

Vice Adm. Shalders —Mr Chairman, I want to add to the answer that I gave a few moments ago. There are three other members of the Defence Capability Committee I unfortunately forgot: the chief finance officer is there, the head of defence personnel is also a member and the head of knowledge systems. It is a group of about 12 people.

Senator JOHNSTON —I want to come back to the two-pass system: how long have we had it in place?

Vice Adm. Shalders —I believe it is only about 12 months but, again, I will take advice from the DMO on that. It is relatively new.

Senator JOHNSTON —Do we have the capacity to go back and reconcile the original prospectus for each of the major 20 projects that we have on the go now? Can we reconcile what we know today as to the costs and the capability success? Not in that order—let us talk about capability success first. Do we survey what we first thought was going to be our capability success with this project as to what we actually achieve over an historical period?

Vice Adm. Shalders —I do not want to duck that question but it is probably a question that Admiral Scarce would be better able to answer than I can. I only say that because you are looking backwards at the end of what can be a very extended process.

Senator JOHNSTON —You know what I am looking at: I am looking at how successfully you get it right at the front end.

Vice Adm. Shalders —The requirements phase?

Senator JOHNSTON —You are telling us how much it is going to cost and how well it is going to perform. I want to know whether you are looking down the line to see, `When we said that, how do we measure up in reality?'

Vice Adm. Shalders —Again, I can give you an example from my own service and I am sure the Chief of Air Force can give you an Air Force example. In the Navy, we go through an acceptance process both from the acquisition organisation, DMO, and the Navy separately. The capability manager goes through an acceptance process. So at the end of a ship build—I will use the example of the minehunter, coastal—the DMO will accept from the builder that this minehunter meets the contracted requirement. In addition to that, the Chief of Navy will go through his process, which is called acceptance into naval service, and he will say, `Yes, as the capability manager I'm comfortable to accept this ship from you, DMO, the acquirer.' As to whether the capability that was set out, in this case some seven years ago, has been met at the cost that we thought that we were going to achieve seven years ago, DMO would be able to give you that sort of audit statement. Admiral Scarce, I am sure, can answer that question in some detail, should you need him to. That is a Navy example; I am sure there are similar Air Force examples.

Air Marshal Houston —I believe you were extensively briefed on the AP3C when you were Edinburgh last week. That aircraft was accepted by the DMO from the contractor and then following that, some time later, that aircraft was accepted into Air Force service. As part of that process, there is an operational test and evaluation phase where we look at all aspects of the capability that is to be delivered and we compare it against what was expected to be delivered. In answer to your question: yes, we do that, and I think the materiel to check on the top 20 projects, the last 20 that have been delivered, would be on the record somewhere. If we have a look at the AP3C, we have a project that has been delivered on cost. It was delivered 3[half ] years late because of software integration problems, but what we have got now is arguably the best maritime patrol aircraft in the world. As far as I am concerned, as the Chief of Air force, I am very happy with the solution to the requirement that we had to upgrade the old PC3 aircraft to give us an effective maritime patrol capability to take us into the middle of the next decade.

Senator JOHNSTON —I was anticipating you saying that the capability does measure up well—that certainly is what we have come to understand—but the problem seems to lie, historically and recurrently, with the cost and developmental understanding at the capability assessment front end, if I can use very rough layman's terms. We do achieve high capability very well, but there are usually major cost and time delays along the way. Am I right in that?

Air Marshal Houston —If I could come back to that, because there is something I would draw your attention to. Perhaps you would like to do a comparison between our experience with the P3 upgrade and the experience of the UK MOD with the upgrade of the Nimrod aircraft. Essentially, they are in a lot more trouble than we are. Our upgrade was a very challenging upgrade with some very demanding, reasonably high-risk, software integration. We have achieved that and we have achieved it on cost. I would invite you to have a look at what is happening at the moment with the Nimrod in the UK.

Senator JOHNSTON —I actually did not think that we were in any trouble with that upgrade of the P3.

Air Marshal Houston —No, not at all, but it was late. We are still learning an awful lot about software integration. It is a high-priority area within the DMO. All of their executives are being trained in the perils of software integration, and we are addressing the challenge of software integration because it is a relatively new thing that we are dealing with. Projects that have a high level of software integration usually are late because of the difficulties associated with that activity.

Vice Adm. Shalders —Senator Johnston, I would like to return to a comment that you made which I do not agree with. I think you said that `usually' we have cost and schedule delays.

Senator JOHNSTON —I am talking about the 20 top projects.

Vice Adm. Shalders —I think that we are improving there, and the DMO will undoubtedly talk to you about those things this afternoon. But projects come to my mind and we have talked about one of them this morning—the AEW&C project, which is a complex project. We have rolled out the first aircraft on time, on schedule and on cost. Air 87 also is on time at this stage. It is a very complex project with a long way to go. Those are some of the major projects and DMO will be able to give you more examples. I believe we are improving, so I do not think it is fair to say that usually we have cost and schedule slippage.

Senator JOHNSTON —Let me clarify that. We are improving but the glitches, the delays—ever so short sometimes—and the potential capability issues seem to flow from a failure at the front end to anticipate little things like the foreign exchange risk, for instance, that cost a lot of money. These things concern me. We have not even broached that issue at the capability end. Historically, I would really like to see a reconciliation of these major projects in terms of what we set out to achieve, particularly on the cost side of the equation and the time frame. The capability is very satisfactory but the time and the cost seem to be the problems, from the point of view of an educated observer of this process that we are engaged in. Do not get me wrong; I am not full of negativity on this. Can I take you to the issue that you mentioned in relation to Mr White. At the top of page 65 of the Hansard transcript of the hearings of the Foreign Affairs, Defence and Trade References Committee on 27 September, where we discussed capability and front-end project management, Mr White said:

I think the best way to improve that interaction would be to move a lot more of the source selection process into the capability development end of the structure. In a sense I should declare my own origins ...

To put that into context, he is suggesting there that a lot more of the DMO cost expertise be moved into your capability section. We have been discussing enhancing the DMO's capability cost analysis expertise, and he is saying, `No, shift them closer to the operational end.' What comments do you have on that? You can take it on notice, if you like.

Vice Adm. Shalders —No, I am happy to talk to it, because I am aware that another witness in the inquiry, Dr Williams—who I think is also going to be here this afternoon—had a quite contrary view to Hugh White's.

Senator JOHNSTON —Yes, he did.

Vice Adm. Shalders —I would like to give our current arrangements a chance to work. As I said to you before, I am very keen that the teaming approach be forced to work. I do not think we are too far off the mark in our current structures, provided both sides of that very complicated activity are working together as well as they should. I do not think that Mr White's proposal is necessarily the way to go. I fall down on Dr Williams's view, which is: let us leave it where it is. The reason that I take that point of view is that Dr Williams has worked on both sides of the equation. As Hugh White has indicated, he has only worked at one end of it. Dr Williams is here this afternoon. I believe. and you might want to poll him a little more on that. He has worked on both sides. My personal point of view is that I think we are okay, provided the teaming arrangement—the partnership activity—works as well as it should.

Air Marshal Houston —If I could add to that, I think if you go back about 20 years our approach was very much where the source selection was done at the capability development end. Looking at some of the equipment we bought, we bought a lot of customised equipment when perhaps we would have been better off buying something that was more off the shelf or something that was common with other operators. I think the way we are doing it now is much more sophisticated. I would strongly support what the Vice Chief of the Defence Force has just said, in that the teaming approach is really the key to it all. I think the last thing we need is to make the decision in isolation in some part of the organisation. What is important is that we work together in a very cooperative way as a team and make a corporate and collegiate decision.

Senator JOHNSTON —Following on from that comment, how do we measure our success? What infrastructure benchmarks have we got in this very important area to determine how well we measure up—that is, knowing what we want, knowing what we are getting and getting what we want?

Air Marshal Houston —In Air Force we have an operational test and evaluation plan that looks at the capability that is being delivered against the capability that was defined at the front end and, whilst we do not have a set formal process that we use time and time again, we do that with every platform that we deliver.

Senator JOHNSTON —Is cost and time an element of that evaluation?

Air Marshal Houston —Clearly, cost and time is. We know AP3C was on budget and was 44 months late. I could give you other examples, but we always make that measurement.

Vice Adm. Shalders —The only thing I would add to that is: yes, we do measure it and we do report it. We report it to this committee, amongst other Senate committees, and it is reported of course in the annual report, both in terms of cost and schedule. In regard to the metrics that are used by the DMO, which I think is where you may be heading, I am sure they would be happy to describe those metrics in some detail.

Senator JOHNSTON —What is the turnover of personnel in your CS?

Vice Adm. Shalders —The CS division is largely military and, in general terms, the people in that organisation turn over every two to three years.

Senator JOHNSTON —Is that a problem?

Vice Adm. Shalders —It would be better if we had more continuity in the section because, as you could imagine, there is a fairly steep learning curve. I know the committee has taken evidence on this at other hearings. Yes, of course it would be better if we had more continuity but there are career development activities that impinge on that.

Senator JOHNSTON —Sorry; there are what activities?

Vice Adm. Shalders —Career development which, in general terms, forces the turnover.

Senator JOHNSTON —How do we deal with those issues? I would like to see, speaking quite dispassionately, the career options for service personnel—service men and women—enhanced as much as they can be on this side, because when the mistakes are made they are beauties. These are very important issues and we have got to have service men and women telling us what we need. It concerns me that the turnover in these areas is throwing away a lot of good experience.

Vice Adm. Shalders —That has been recognised in particular in Army, which is the example I will talk to, but it applies across the three services. We have recognised, not just in project management but in areas such as personnel, that this rapid turnover or this two- or three-year turnover is not good for our business. So with respect to this example, we are looking at streaming people into project management, such that, if you were to follow the project management stream, you might go through staff college and your first appointment post staff college might be in the DMO at the acquisition end of this cycle. Following that, you could come back into capability systems to work on the requirements end. In the ideal world, you would go back to perhaps the systems program office. That sort of career structure is being worked on and is available for some; similarly in other fields—personnel springs to mind. We recognise that there is a problem there. We are trying to build career streaming such that we can overcome that problem.

CHAIR —I will start with a bit of light relief this morning by going to the Bulletin of 21 August, in which the feature cover story was entitled `A Rocket for Defence'. The introductory, heavy typeface, teaser reads:

Australia's military is governed by a financially inept, bureaucratically overloaded and politically trespassed Defence Department.

It goes on to quote a paper—`Farewell to Arms'—which was circulated upon the retirement of Des Mueller. I am sure you are familiar with this article in which Mueller gives Defence a fairly scathing review as he exits that organisation. It states:

Mueller reserves some of his more cutting remarks for the two-year overhaul by Defence to modernise management practices to rid itself of its spendthrift image on new equipment. This, says Mueller, can occasionally “dissolve into a form of organisational theatre”.

In this article, he makes a fairly heavy attack on the `balanced scorecard' and makes a number of other points. An anonymous source—designated an `insider'—dismisses some of these criticisms by simply saying, `It's vintage Des.' The article goes on to say:

Financial management, or lack of it, is Defence's single largest problem—not strategic thinking.

I am bound to read out this colourful quote, Vice Admiral, so please appreciate it:

Some of Mueller's most trenchant comments concern the executive effectiveness of his own VCDF role. “Much of what I did, and often what I had to do because of my appointment, added little or no value,” is his frank assessment. “A significant amount of time was consumed being a performing seal, which meant balancing the organisational beach ball on my nose, clapping my flippers and catching fish thrown by the spectators.”

Perhaps the closing paragraph of this article is the most important, though, in many respects—apart from the comments about Mueller's style. It reads:

Defence has some new leadership with Cosgrove and ministerial oversight by Robert Hill. They could do worse than ask Mueller to submit formal recommendations. A performing-seal-turned-corporate-shark might be just what Russell Hill needs.

We are not a corporate shark in this committee, but we do have an oversight responsibility. Some of the things colourfully raised in this article are things that we are avidly concerned with and the basis of your submission and the discussion entered into this morning. Let me say that, in the world of journalism, some points are presented more colourfully than they might actually be in real life to attract attention. I am familiar with that. It has also been said on occasions that politicians exaggerate to make a point. I am not sure that that is true, but people believe it so let me register it.

I want to give you gentlemen a few minutes to comment, if you would, because this is a contemporary article—August—it is about contemporary circumstances and it quotes a ranking officer, an officer who, I think, thinks it is inappropriate to appear before this committee because recently retired officers ought to vacate the field. Yes, but the field has been left with a fairly heavy critique. Are there some comments that you would care to make about these propositions, which go to the financial management, the lack of a business culture or a business capability in assessing things and the problems with organisational structure? The balanced scorecard got a bit of a panning.

Vice Adm. Shalders —I would like to make two brief comments, in neither of which will I try to comment on what General Mueller said. He is obviously well able to comment for himself. I would say, though, that in two areas I think he understates—

CHAIR —It is a question of how much notice we take of it, really. This is in the public domain.

Vice Adm. Shalders —Exactly. If I could say that I believe he understates his contribution to this area. He said that he did not achieve much. In fact, the document that I have offered the committee this morning, the Capability Systems Life Cycle Management Manual 2002, is his work. This describes the process that we are now using. It describes, in large part, what your committee's terms of reference are attempting to achieve.

CHAIR —Can it therefore be seen that these are the comments of an extremely competent senior officer who had the vision but is frustrated about the take-up of the vision and the application of the changes that he wanted to make?

Vice Adm. Shalders —It would appear that he was frustrated. The point that I am trying to make is that he put in place a number of changes to a process that he saw as being flawed. Those changes are still working their way through the system. This manual that I am quoting from and speaking about was driven by General Mueller, and I applaud him for that. I also believe that he understates his role in terms of the way the DMO is now working. General Mueller, before he became VCDF, brought together the support side of what is now the DMO. His contribution there was equally significant. So I believe his comment about not being able to contribute too much is probably Aussie understatement at its extreme; he did a lot.

CHAIR —I accept what you are saying, but in a way it strengthens the argument he is putting, doesn't it? If it is true, here is a man who has achieved quite a lot, who has been quite an important figure in evolving the management structure in Defence and who has, as you say, been successful, saying these things at the conclusion of his career. Does that suggest that the problem is genuinely intractable or that he has got the story right, but making the changes in an organisation where people, not just structures, have to change is, in terms of cultural change, extremely difficult if not impossible?

Air Marshal Houston —I think we have to set the context for these remarks. The Defence organisation has gone through an incredible amount of change over the last three or four years—in fact, over the last 10 years. My own service has gone from a force of 23,000, to just over 13,000—13,196. There has been a lot of organisational change, there has been a lot of operational change and there has been a lot of cultural change. The effect of all that change is that we now have more capability than we had 13 years ago. A lot of our support functions have, obviously, been outsourced. Some of the things that are mentioned in that article are a consequence of the reform program. In Air Force we talk about gaining a soft landing from the effects of the reform program.

We have now got some problems with our systems. One of the biggest problems we have is that our financial management systems are inadequate for the task at hand. We are addressing all of those shortcomings in terms of those systems. You would be aware from the work that you have done already that we have some major problems, major shortcomings, with the standard defence supply system. That system came in 10 years ago when we had three single services and the three single services essentially customised the system to their own requirements. At the moment we are doing an awful lot of work to upgrade that system. Once we have achieved the upgrade of that system I think there will be a marked improvement in the way we manage costs, inventories and finances within the Department of Defence. I think we are headed in the right direction. The article suggests there is a fair bit of frustration, but we are all frustrated that we cannot get the financial management systems in in the short term. But to bring in financial systems to support the very complex processes that we are involved in—with acquisition, with through-life support and indeed with the management of probably the most complex business in Australia—takes time. We are addressing those issues and I think there will be a good solution around the corner.

CHAIR —One of the areas he raises here of particular concern is financial management. This is the point you finished on. What I understood you to say—and this is why I want to be particular about it—is that there are problems classically, as we know, in the financial management structure and they are being brought under control. Why should we feel confident—if we should—that it will successfully be brought under control?

Air Marshal Houston —One of the other things about the context that I should mention is that we have gone from a strictly cash based accounting system to an accrual based financial accounting system. In a complex organisation like Defence that is a very big transition. All of our systems were customised for a cash system. We now have to take on board the challenge of the accrual system. The chief finance officer within the department has been in the job for a short time. He has been recruited from the business sector. He and his team are working up a new business model and they are addressing all of the areas where we have deficiencies. I think they have done a magnificent job over the last two years.

Some of the problems with inventory management relate to the fact that we have had items on stock for many years. I do not know how many items are in our inventory but it is in the millions. Do we need to basically account for every legacy item that we have on stock to take account of the new accrual requirements? It is a tremendous challenge and it would cost a huge amount of money to do a 100 per cent inventory of all those items. We have some challenges but, in my view, the way we run finances in the department is better than it was five or 10 years ago—much better.

CHAIR —I understand the revolutionary change that accrual accounting has brought, not just in Defence but in the wider Public Service as well. I must say—this is a heresy because it runs against the ruling orthodoxy—that I am still not sure whether the accrual accounting outcomes are better than the previous system. But you have to work the system that you have and make it work effectively for you, and I guess it is for others to decide what the overall accounting system will be. The image I am getting in trying to form an image about how we measure these changes, evaluate their effectiveness and feel confident in signing off if we can is that, in this particular inquiry, the DMO is running as efficiently as it can and contributing as efficiently as it may to the overall Defence effort, and public dollars are not being wasted. The problem is that there is almost a constancy of change. There is not much of an opportunity to say, `This was the system before; here is the system now. How have things changed? How do you quantify improvement? How do you tie down efficiencies so that you can pinpoint what they were and be relatively confident that the outcome is better?' It is just that so many things that have happened interact and cross each other. Maybe the problem is that there needs to be no more change in structures for a time to give the organisation a chance to acquire the culture necessary to make the changes that have been structurally put in place effective.

Air Marshal Houston —The DMO has been in existence for only a little bit over 18 months. The consultant that looked at the DMO in the first instance said that it would take five years to bed it down. We are only 18 months into that process. Yet, when you look at the projects that have been started since the DMO started—the Vice Chief of the Defence Force just mentioned a couple of them: AEW&C, Eurocopter, Air 87—they are all going very well. They are on time and they are also on cost. So the outlook is a very positive one. Most of the problems that we have in the DMO are with projects that started many years ago. The ones that have been started since the DMO started, if you look at them, are all going well. I think there is quite often a lot of unfair criticism of the DMO when, in fact, those projects were started years ago—back in the mid-nineties or earlier. I think the outlook is a very positive one and that, in terms of financial management, the work we are doing in the Defence committee means we are heading in the right direction. There has been a lot of achievement in the financial management area. There is still a little way to go but it is much better than it was, say, three years ago, because we are coming to grips with the accrual accounting system. I think we are performing effectively as managers of the department. The proof is in the pudding. Look at how we are performing operationally. We have met all the government's requirements in terms of operations and, again, we have done that effectively.

Vice Adm. Shalders —Could I make a comment on the pace of change, on should we have an operational pause. That would be nice, but if I take you back to the utopia where we did not customise anything, I do not think that is possible. We need to understand that change will continue, and we need to work within it. Whether it is in the finance world or the capability requirements definition area, change is just part of our life. In terms of the terms of reference that you are looking at, there has been major change and, yes, it would be nice to have a period of stability to let it work its way through, but I do not think we will ever get to a stage where we do not have any change at all in this area.

CHAIR —No, I am talking about structurally changing something as massive as the accounting system or as massive as introducing the DMO structure. Certainly, those things evolve and, if they did not, you would ossify and die. But once you have got those structural changes in place—and my experience is with change in industry—you need to give long, strong signals, it seems to me, that, `These are the structures within which we work,' and then, if their culture is different to the goals of those structures, you need to encourage human beings to achieve the cultural change to make those structures work. Half the thing is the structure and the other half is the people who operate within that, and if their culture is different to the structural objectives, then you will never achieve it.

Air Marshal Houston —We have put an awful lot of effort into cultural change. I think one of the great achievements in the last three years—and, to be fair, to give Dr Hawke his credit—is that we now have got a leadership, values based culture within Defence that was never there before. If I go back 20 years, the whole environment in Defence was one of tribal infighting, a lack of cooperation, hidden agendas and so on.

CHAIR —It sounds like a political party.

Air Marshal Houston —Fortunately, if you go across the lake now and have a look at the way we work, you will see that we have strong leadership and we all fall in behind that leadership and work as a team. There is no tribal infighting. I have not seen any service rivalry like we used to have, say, back in the mid-eighties when we were fighting over scarce resources. We now recognise that resources are scarce and we work very well together. At the highest level, we take collegiate decisions and decisions that are in the national interest, not in the interests of individual services or individual groups within the organisation. So we have got away from that bureaucratic, tribal culture that we used to have and have moved to a much more positive culture of leadership, cooperation and a focus on people and on results, and I think it is a huge step in the right direction.

I would support your view that we need to give the DMO time to bed in. It is working very well at the highest level, and it is working wonderfully well down at the force element group level. My force element groups are getting fantastic support from the systems program officers. It is not perfect but, as I think as you saw when you were at Edinburgh the other day, it works wonderfully well and I am sure you found a very happy customer in Air Commodore Phil Byrne. So I would support what you say, Chair, in terms of perhaps allowing the DMO time to bed down because, sure, there is still a lot of work to be done, particularly in the systems area and the logistics process areas at the higher level, but we are well on the way. Give us the time and I am sure that, at the end of five years, you will see a model organisation which is world's best practice.

CHAIR —Senator Marshall has some questions on this point before I go on to my next set of questions.

Senator MARSHALL —In respect of what was a fairly glowing appraisal of the DMO since it has been created, I just want to take you to Australian National Audit Office report No. 13 1999-2000. I do not expect you to know the detail of it. It effectively said that the latest Defence risk management strategy indicates:

... that the risk of failure of Defence's major capital equipment acquisition is very high—

and that the risk will continue for several years. That is a bit of a concern, given that you have said effectively that all new projects have gone very well and it is only the old ones that have not. The Audit Office then scheduled a full performance audit to assess the status of major acquisition projects and the validity of project status reports provided to the government. The DMO then asked for a deferral of that for up to two years.

We have been going through a reform process for two years. You are saying it is going well for the projects it has handled. Why do you think it was necessary for the DMO to ask for a deferral, for up to two years, of an independent review of how that is going? Were you aware of that request to defer? Are you supportive of that? I am just wondering why we would want to avoid the Audit Office actually having a look at what is going on for that period of time.

Vice Adm. Shalders —I can give you an answer but Acting Under Secretary Defence Materiel will give you a more fulsome answer this afternoon, I am sure.

Senator MARSHALL —I am going to pursue that with him this afternoon.

Vice Adm. Shalders —My sense is that it comes to this issue of change that we have just been talking about. We have been through such a massive period of change in the DMO that I think the under secretary probably felt that an audit at the point when all those changes were still bedding down two years after creation might have been distracting. That is my sense of why he requested that deferral. I will make another comment on risk management within projects, and again the DMO staff can give you far more detail on this. Every project now is required to conduct risk management as part of its project management. The more important the project is, of course, the more detail that risk management plan goes into. A final comment in terms of monitoring and watching the top 20 projects, for example: each month the Defence committee takes a report from the under secretary on where those top 20 projects are, plus any other projects of interest or significance. So at the Defence committee level, the highest committee we have, there is constant monitoring of where the DMO is going with their most important projects. As to the detail of risk management, I am sure Admiral Scarce can give you more on that this afternoon.

Senator MARSHALL —It has also been said that the DMO loses a lot of expertise—they are unable to retain that—and that people running projects lack a depth of expertise on the range of technical, operational and market issues that is required to deal with the cost/capability trade-off issue. How do you see that running? Do you see that as a real problem? I wonder how that then relates back to what the Audit Office say about projects maintaining a high risk for several years into the future.

Air Marshal Houston —I think you could get a lot more specific detail from the people from the DMO but, from where I sit in Air Force, one of the things I have done with Mr Roche, the under secretary, is agree that people in key positions in the DMO—my aeronautical engineers, logisticians—will stay in those key positions for periods of up to five years. We picked five years because that seemed like a reasonable time and there are other considerations in terms of career for those individuals.

Senator MARSHALL —Does that five years coincide with the starting and finishing of projects, though, or is that just a five-year window? If projects are overlapping that, we are still going to have people moving mid-term through these projects.

Air Marshal Houston —Let me deal just with two projects initially and then I will mention another position. If you have a look at the AEW&C, we have Air Vice Marshal Gray in position for five years. At the end of five years we will almost be at the delivery point of the first aircraft here in Australia, so it was a five-year period that was struck. It was not related to any particular milestone of the project, but the initial part of the project and the part up to almost first aircraft delivery here in Australia will be under his stewardship. At the end of five years, will Air Vice Marshal Gray continue in that position? I would not like to speculate on that because we need to worry about his career as well, but that is one of the options.

If we look at the new air combat capability, a project has been set up there. Just to back up what VCDF said earlier on, that project team is a team that represents the vice chief, me and Mr Roche. It is a multidisciplinary team. The officer heading that up is Air Commodore John Harvey and, at this point, his appointment will be for five years. With the joint strike fighter, if we go five years from now, we are talking about 2007 or thereabouts. He will get through the first contract signature for the first batch of aircraft, and we will then have to review whether he continues in the job beyond that. Again, there are career considerations that we need to take account of with military people.

Vice Adm. Shalders —I would like to make a comment on personnel within the DMO and how they are managed. Again, this afternoon the Director General Materiel, People and Performance Branch can take this in more detail. My comment is that, prior to assuming my current position, I was the head of Defence personnel where we were responsible for HR policies in the broad. My experience in working with the DMO, part of that whole puzzle, was a very positive one. DMO has some outstandingly good training programs and general HR policies which attempt to get around the problems that you have raised—the possible lack of expertise, lack of depth and continuity. Some of the HR policies that are being pursued within the DMO are leading edge things that we, in the wider part of Defence, could learn from. I am sure Ms Isaacs would be happy to take you through some of those if you want more detail.

CHAIR —Could I just come in here on that point. We have a lot of evidence that supports what you have just said, but one of the problems that also seems to come through in the evidence that we have obtained is that, particularly where technical skill is required and that technical skill has been built up in association with a particular project—what people call domain expertise—the level of remuneration available to people in the public sector is less than to people in the private sector. That domain expertise is really a very tradeable good on the jobs market, and there is a tendency for headhunting or you lose it out the back door because people, at the end of the day, have to be concerned about the welfare of their own family and so forth. No criticism attaches to them, but it is a function of differing remuneration levels. That gives rise to the background thought: would the DMO be better off if it were cut loose and made an agency operating on commercial principles rather than being knitted into the department as it is now? Do you have any comment on that?

Air Vice Marshal Houston —I do not think that a commercial agency operating outside the department would necessarily work as well as the current arrangement. One of the advantages of the current arrangement is that we have a nice blend between military and civilian people who provide a great service to the services. The main customers are obviously Army, Air Force and Navy. It is important that people within that materiel organisation have an understanding of what is done at the sharp end. If you had a commercial agency that, essentially, worked outside the department, there is no guarantee that we would have that sort of operational appreciation and that sort of operational understanding. Another thing that is probably important for you to realise is that I have airworthiness responsibilities. I am the ADF airworthiness authority. I have to exercise that responsibility through military, aeronautical and other specialist engineers within Air Force. I think a function like that would be much harder to perform if you had a commercial organisation basically doing all the work.

CHAIR —We do expect a lot of our service personnel. If the argument then is to retain the structure as it is, is a cost that ought to be recognised for doing that a loss of domain expertise, a loss of technical skill or a high turnover in that area as a constant, which we just have to live with? Or is there some way in which that can be dealt with within the current structure?

Air Marshal Houston —We do have a turnover in certain areas, but the cost of the personnel, particularly in the senior positions, is probably cheaper than it would be if we had a commercial organisation. I think that the Air Force people I have in the DMO are some of our best people. Given the level of remuneration they receive, the nation is getting a pretty good deal for the skills, expertise and experience that they bring to the table.

Senator SANDY MACDONALD —It goes without saying that a stable project management requires stable personnel. It has been put to us on a number of occasions that this is something that the DMO is aware of and is addressing. It seems that, historically, projects that have gone well have gone well because of that stable personnel. One of the things that came out of the article that the chair mentioned was the comparison of the Seasprite between New Zealand and Australia. I acknowledge what you say about the requirement for unique Australian capability, but that is an example. Why is the New Zealand capability so different from the Australian capability, and why do they have their aircraft doing whatever they are required to do and so differently from Australia's aircraft? I acknowledge that there were problems with the contractor. That is another problem. I want to focus on the capability. What differences do they have in capability requirement?

Vice Adm. Shalders —Our aircraft will be far more capable than the New Zealand aircraft. That does not excuse the delay, of course. That is caused by another—

Senator SANDY MACDONALD —I am not asking so much about the delay. I am asking about value for money and getting a product which will do almost everything we want without every bell and whistle on it. This comes up again and again. This is something that I have seen a couple of times: we spend an awful lot of money on a battlefield computer system when a visit to Dick Smith might have done the job. I know that that is a very poor example, because you are dealing with such enormous amounts of money in Defence, and I know that the question of capability acknowledges the possible risk assessment, the life of the equipment and all those sorts of things but, when you get a specific example like the New Zealand helicopter, why is its capability so different from ours?

Vice Adm. Shalders —I was just advised that the DMO is prepared to answer the detail of where we have got to with Seasprite. My comment is that the aircraft that the New Zealand Navy are operating from their ships is a very different aircraft from the one that we will ultimately operate from our ships. The systems fitted to our Seasprite will be far more capable than the New Zealand platform.

I guess a more general point I would make is that we need to be very sure that the requirements we are trying to satisfy are the requirements that fill the capability gap we might have identified. The effort spent up front or in the early stages in defining your requirement will pay off in the long run. I know I keep coming back to this, but it is the requirements definition that is so very important in any project. That is an area I am responsible for and it is an area that some of the process improvements I have talked about are homing in on. I cannot emphasise strongly enough how important it is to get that part right. I am not saying we did not get it right in this particular project, but it does illustrate the point of getting it right up front—as close as you can to a point that is going to satisfy the capability gap you might have identified.

Senator SANDY MACDONALD —In your opening statement, Vice Admiral, you talked about the desire to buy products that are increasingly interoperable—with the US defence forces, probably. Has that always been the case or do you think it is an increasing desire now? It seems to me that, in terms of value for money, questions of capability must increasingly relate to something that is almost completely interoperable with our major defence supplier and major defence partner.

Vice Adm. Shalders —I believe we have always had a requirement to be interoperable where we can. Also, I would say there is increasing emphasis on interoperability, particularly with our major alliance partner. In fact, the recent Australian-US ministerial talks took a paper on that very subject, so we are progressing and moving even more towards trying to become interoperable wherever we can. The only other comment I would make on interoperability is that, of course, you pay a premium when you try to keep up with those who are leading the field, particularly in terms of technology. The question that has to be answered, of course, is whether the premium is appropriate—whether you can afford it—and those are the sorts of cost-capability trade-off decisions we have to make all the time.

Senator SANDY MACDONALD —Who decides whether the premium is worth paying?

Vice Adm. Shalders —That is a decision that is taken right through the capability development cycle, starting off back in the services. For example, I am sure the Chief of Air Force would love to have Stealth fighters; can he afford to have Stealth fighters? That sort of trade-off decision is exercising his mind, his staff's minds and my staff's minds all the way through to final government approval. Whatever the size of the premium might be, in terms of whatever the acquisition might be, needs to be debated all the way through the process.

Senator JOHNSTON —Do we have total asset visibility? If we do not, what impact does that have on our capability?

Vice Adm. Shalders —Do you mean assets in terms of—

Senator JOHNSTON —Right across the board: supplies, stocks, parts, spares—the whole bit.

Vice Adm. Shalders —Yes, we have visibility of all our assets; they are on our systems. If you pursue that question with the experts from the DMO they will be able to give you a full run-down on that. But it is something we worry about all the time. Asset management is an area that we need to do more work on, but I am sure the experts can help you with that later.

CHAIR —I have a couple of further questions, but I wonder if you would not mind taking them on notice. I might ask one now, at the risk of straining friendships too far. Perhaps you can take us to the break by answering it, Air Marshal. It concerns the Audit Office's Audit report No. 30 2001-02: Test and evaluation of major defence equipment acquisitions. It made a number of recommendations with which Defence disagreed. They included the establishment of an independent office to have oversight of operational test and evaluation; the use of test and evaluation master plans to improve risk management and safety; and that all staff responsible for acquisition, maintenance and test and evaluation have `training and skills adequate to their responsibilities'. This is what the Audit Office came up with. That all seems perfectly proper, especially because test and evaluation seems to be fundamental to providing the feedback necessary to ensure that projects are progressing properly. Can you explain to us why Defence declined the recommendations?

Air Marshal Houston —I am sorry; I am not across the detail of that so I would prefer to take it on notice, if that is okay.

CHAIR —Okay. Thank you very much. It has been a very productive morning.