Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Leading change in Defence Industry, Science and Personnel: address to the Joint Services Staff College, Weston, ACT, Thursday 1 May 1997

Introduction

Good evening and thank you for asking me here to talk with you about the Government's Defence Reform Program.

When I spoke to you last June, three short months after the Federal Election, I said this:

"As you point out in your Defence Industry policy paper, when it comes to strengthening defence industry capabilities over the last decade, there has been plenty of talk, but limited action". I added that this was "set to change under the Coalition Government".

I think you will agree that I am keeping my word. Our Defence Reform Program following the Defence Efficiency Review is the most far reaching shake up of the Defence Organisation in decades.

A Change in Philosophy

But let me take a step back. It is fundamentally important that we all understand why the Government has embarked on a program of reform. Not just reform of Defence - but reform of industrial relations, the public service and small business to name a few.

The changes to the Defence organisation are an important part of that program of reform.

I believe that the DER recognised that there was a change of philosophy that came with the change of government in March 1996 and that there was a need to adjust Defence's approach accordingly. Its findings and recommendations are a reflection of that change.

The need for a philosophical framework in which to work is something, I believe, talk about and put into practice. My guiding principles are the principles of free enterprise, of which I will speak of in more detail later.

When I addressed you last year, I predicted that a new culture would emerge in the Department of Defence and that this culture would embrace what I then termed micro-efficiencies. I stated then that this is particularly important in Defence where people get so used to dealing with a $10 billion cake that amounts in five or six figures are often regarded with disdain.

I note with some degree of satisfaction that such efficiencies as announced in the DER amount to almost 10% of the annual Defence budget. As the Review itself states, "ideas that defence is so important that inefficiency and waste - usually not so defined, but amounting to the same thing - should be tolerated are ill-conceived and damaging".

So it is important to note that while the DER recognised this change of culture and philosophy, the moves behind it predate its delivery, indeed even its announcement.

DER Philosophy

The DER itself was based on a number of philosophical premises.

It noted that Australia does not face any current direct and imminent threat of armed attack. But the end of the Cold War has made our regional strategic circumstances more complex, uncertain and demanding.

Therefore Defence needs to be organised for war and adapted for peace. This has profound implications for management practices and organisational structures.

Following from this point, there are very substantial savings to be gained from reducing duplication within Defence and making greater use of the community's resources.

The essence of the DER was to free up resources from support and administrative activities to strengthen the ADF's combat capabilities. As the DER report states:

"It would be wrong to ask the Australian taxpayer to provide more resources to defend Australia until Defence can show it is using efficiently and effectively the resources it has now."

Hence the DER examined the efficiency and effectiveness of such key Defence functions as:

. Higher Defence arrangements;

. The development and acquisition of military capabilities;

. Industry policy;

. Facilities, personnel management, education and training;

. Science and technology; and

. Logistics.

The DER was to recommend reforms in these and other key functions to produce the most efficient and effective defence force possible by:

. Eliminating duplication;

. Defining core and non-core defence business rigorously;

. Making appropriate use of commercialisation options; and

. Reflecting modern business practices.

Cabinet endorsed the review's recommendations and findings earlier this month. The Government has made the Secretary and the Chief of the Defence Force responsible for implementing the Defence Reform Program.

. Progress with implementation will be centrally monitored;

. Benchmarks are to be established against the DER's 70 findings and recommendations;

. The basic framework of the restructured Defence organisation and initial implementation plans are to be in place by 1 July 1997.

I should emphasise at this point that sensible discussion of the more detailed issues of interest to you as AEEMA members must await completion of the implementation planning now underway.

The Defence Efficiency Review was necessary because in the last ten years of the Labor Government, spending declined as a percentage of GDP from 2.6% in 1986/87 to 1.9% in 1996/97. This is the lowest figure in my life time.

The Prime Minister has ruled out any decrease in the Defence budget and has agreed that savings generated by improved efficiency can be reinvested in more combat related functions. But the economic circumstances we inherited preclude any increase in the proportion of GDP devoted to Defence in the immediate future.

On the financial side, the report recommends one-off savings of over $500 million, mature annual savings of at least $770 million, with good prospects of reaching nearly $1,000 million.

On the personnel side, the DER recommends net staff reductions of some 3,100 civilian positions and 4,700 military positions, with about half of the military positions being recreated in combat and combat support.

But it would be misleading to concentrate on the numbers solely. The DER was far more than that. It also made numerous recommendations aimed at improving the effectiveness of the Defence organisation.

For example, the report reaffirmed the utility of the separate service identities and the desirability of preserving their individual, unit and formation competencies.

However it also made far reaching recommendations concerning the role of the service chiefs, the Secretary and CDF, in a more integrated Defence organisation. Our organisations and practices need to recognise that joint forces will be fundamental to the ADF's ability to meet the demands of the next century.

In equipment terms we need to build an increasingly technology-intensive defence force. This will require new equipment and upgrades on one hand, and better use of existing equipment on the other hand.

DER and Industry Policy

This then brings me to the issue of industry policy. As I mentioned earlier, Defence policy development under this Government - and especially with respect to my portfolio responsibilities - did not begin with the DER, nor will it end with it.

A number of the DER's findings and recommendations on defence industry policy were already policy issues about which I had spoken about extensively and had become existing policies of the Government, or were being considered before the DER was announced. Those relating to my portfolio include:

. the need to be cognisant of the sole customer, or monopoly purchaser, role that Defence has in some industry sectors;

. the requirement for a non-interventionist industry policy and the fundamental need for competition;

. the need to set up support arrangements as part of any original acquisition;

. consideration of industry issues at each stage of the material cycle but particularly at the pre-approval stage;

. bettering DSTO's links to industry;

. the important role of simulation technology;

. the need for greater professionalism in project management staff;

. the minimisation of military specifications in acquisition; and

. the expansion of commercial support and completion of the privatisation effort.

The Defence Reform Program now provides the basis upon which to accelerate this process of change.

The Review says that a fundamental element of defence policy for industry should be to use the widest possible range of industrial support in peace. This is because that support will surely be necessary in war.

To free up resources for reinvestment in combat-related capabilities and activities, the DER envisaged market testing some 12,950 positions over the next four years. This will determine which functions can be done more efficiently by the private sector and which remain in-house.

By way of comparison, in the five years of the Commercial Support Program under the previous Labor Government less than 5,500 positions were market tested.

In the longer term, the shift of up to 10 per cent of the Defence budget to investment in the sharp end will translate directly into greater business opportunities. Specific details as to how DER-generated savings will be spent, however, will not be available until completion of the Strategic Review now underway.

Having spoken about a number of the general findings and recommendations the DER made on industry policy, I would like to touch upon two areas in greater detail. These are defence exports and the privatisation of the government's share of ADI and ASC.

Defence exports

The competitiveness of the world defence market has greatly influenced the nature of the relationship between governments and defence industry.

DER recognises that, just as there are areas of marketing that are best left to industry, "legitimate exports of defence goods and services invariably require government-to-government agreement, not least because respectable countries will only sell ... to approved countries - not to individuals or companies".

Increasingly, success in overseas markets is the result of the joint activity of companies and governments. The UK, US and France, between them the largest sellers on the defence market, have developed successful mechanisms for combining the strengths of government to achieve major success in export markets.

In the UK, the Defence Export Services Organisation has been an integral part of developing the booming UK defence industry. DESO is identified in DER as a very good example of a Government providing sales support to its defence industry.

This is not surprising. The British defence industry enjoys a 25% share of the world defence markets, up from 16% in 1994. Britain's defence industry now employs 360,000 people, and is the country's single largest exporter.

But Australia's circumstances are different to those of the UK, certainly with respect to the size of defence exports, but also in the amount of indigenous development undertaken by Australian companies. While any Australian equivalent would need to be on a much smaller scale consistent with the scope for defence-related exports, I believe the best model for the sales support Defence should provide to Australian industry is a DESO-like organisation.

However, what of the role of industry itself?

As I stated to you last year, and is stated in DER, "While [government] support is necessary ..., it is invariably true that the main player is the exporting company itself, which identifies prospects and chases sales through its own marketing and sales staff, local agents, and relationships with local companies."

What I urge you to think about today is co-operation. The lesson that must be learnt from the overseas experience is that companies operating alone in the world defence market face an uphill struggle. Even the larger Australian companies are dwarfed by many of their giant opponents.

Australian companies must make a commitment to working in partnership - with each other and with this Government. However, just as I ask you for a "whole of industry" approach, the Government needs to ensure that it maintains a "whole of government" approach to defence exports.

Indeed, in pursuing this whole of government approach - and separate to the DER - I have simplified the export approvals process, making it less cumbersome and lengthy, bringing together a number of previously separate processes under a one-stop shop concept with Defence exercising pre-eminent responsibility for export approvals.

ADI/ASC privatisation

As a former Shadow Minister for Privatisation, I have a particular interest in Government Business Enterprises.

It is not the role of Government to compete directly against the private sector. The principles of free enterprise to which I referred to earlier define for us the business of Government. Namely that it is two fold. Government should do those things which the private sector cannot or will not do and provide for those people who cannot provide for themselves.

Hence there are a number of GBEs that no longer need to be exclusively in public hands. Their status can change because they have diversified over time, or because the private sector can now fill their role effectively. The partial privatisation of Telstra is a good example of this instance.

In essence, there is no economic justification for maintaining businesses in government ownership, where they are engaged in competition with private companies. Privatisation, under the circumstances I have described, provides the opportunity for the private sector to operate these businesses in a more efficient fashion.

The Government is committed to privatisation where appropriate. For example, the privatisation process has begun for AIDC and the Federal Airports. Prior to the release of the DER, the Government announced its preparedness to privatise ADI.

The DER urged Defence to look to industry to marshall the resources to supply the goods and services that Defence demands. This philosophy led the DER to recommend that the Government sell its equity in ADI Ltd and the Australian Submarine Corporation.

The Government's proposed sale of ADI and its shareholding in ASC will only proceed on the basis that Australian strategic interests and essential industrial capabilities are maintained.

Adopting the most appropriate means of achieving these objectives will require the Government to consider a number of issues, including the backdrop of rationalisation of defence industry occurring globally and locally

DER and Acquisition

The Coalition won government believing that it had to provide far more adequate direction and guidance for industry with respect to the capabilities deemed to be integral to the maintenance of self-reliance and a sustainable defence industry.

Indeed, the DER recognised that the overwhelmingly dominant tool for the application of defence industry policy is the acquisition program.

Several of the DER's recommendations to improve Defence's effectiveness, and of particular interest to you, are those proposals for improving the effectiveness of the processes by which Defence defines what capabilities it needs, how it acquires those capabilities, and how it supports them in service.

The DER found that Defence needs to improve its co-ordination of the diverse elements which create a new capability, or enhance an existing capability. These elements include the availability of skilled personnel, the development of tactics and doctrine, and - crucially for industry - through-life support.

This more rounded approach to capability planning will be helped by the creation of an integrated, joint Defence Headquarters Staff. You will appreciate the significance to defence business of the DER's call for a single integrated, joint strategic policy organisation responsible for:

. Providing authoritative and clear direction for longer term planning;

. Determining optimal force preparedness levels; and

. Prioritising the development of war fighting capability.

The DER complemented these recommendations for reform of the capability development phase of the materiel cycle with proposals for reorganisation of the Defence materiel acquisition function.

As a first step, the Head of the Acquisition would get clear management authority over the resources assigned to the acquisition function, and clear accountability for acquisition process and outcomes.

The existing Acquisition organisation is presently focused on equipment users in Navy, Army, Air Force and Defence. The prevailing culture in these areas has been preoccupied with the relative performance of hardware at the expense of such issues as self-reliant through-life support, of which industry is a part.

Hence, the second step in improving the effectiveness of the acquisition function involves reorienting it towards equipment suppliers and industry issues. The Acquisition organisation would be reorganised into functional groups focusing on common industry sectors or equipment types.

The final structure of these "industry domains" will be settled in the course of the implementation planning. The Defence officials who manage the procurement of goods and services are best placed to develop detailed understanding of the dynamics of individual companies and of the sectors in which those companies operate. The quality of the people in these positions will be crucial to its success.

Tapping that detailed knowledge will enable effective input on industry issues in the planning of defence capability development. Hence the DER recommended implanting in each of the "industry domains" a small cell of industry specialists.

It envisaged each of these cells developing an intimate knowledge of the industry it is dealing with. The cells would advise capability planners, equipment procurers and related project teams and logisticians on:

. The viability, strengths and weaknesses of the companies involved; and

. How to write specifications to allow those companies to bid equitably as primes and, most importantly, as sub-contractors.

These industry cells would then be the point of contact in the Department for small to medium enterprises (SMEs). They will have the advantage of specialising in the industry of most relevant and applicable interest to small business and have both the influence and authority to have an impact on industry's concerns.

The regional offices I know gave comfort but I believe having access to the actual decisionmakers will be more effective for SMEs.

Through-Life Support

After acquisition the most significant "user" of industry policy are the logistics areas.

The DER suggested that there are substantial benefits in setting up arrangements for the through-life support of equipment as part of competition for the initial acquisition contract. You might recall I said this was to be the new policy when I spoke at the 1996 Procurement Conference.

The DER went on to suggest that Defence can best do this by defining the logistic "outputs" it needs and allowing industry to decide how best to provide those outputs under competitive conditions.

The DER called for the intimate involvement of the logisticians in these considerations. In order to achieve this, it envisaged the secondment of logisticians into the project teams.

The management arrangements to give effect to these structural and procedural recommendations are being sorted out in the implementation planning now underway.

DER and DSTO

I would like to finish off with a few words on the DER and the Defence Science and Technology Organisation.

As Minister for Defence Science it gives me considerable satisfaction to see DSTO used as a benchmark in the DER against which the rest of the Department can be measured in terms of efficiency and effectiveness.

The Review acknowledged the need to build an increasingly technology-intensive defence force and to exploit technology as effectively as possible.

Two of the key recommendations are:

a. that DSTO should develop further its advanced modelling and simulation capability; and

b. that there should be a program of concept or technology demonstrators, especially in the fast-moving high-technology areas.

The DER also supports DSTO's continued interaction with industry, and proposes to build on this.

As I stated in the opening address to the 1997 Simulation Technology and Training Conference in Canberra earlier this year, simulation is of growing importance in a Defence environment which faces increasing budgetary pressures and which needs to meet both the opportunities and challenges of accelerating advances in technology.

Defence will spend a substantial amount of money in simulator acquisitions over the next 10 years. Preliminary estimates for these acquisitions are up to $1.5 billion.

The starting point would be basic technical models of such matters as radar and sonar signatures, engine performance over the full range of possible operating conditions, and weapons effects. These would feed more comprehensive models of the performance of complete weapons and sensor systems. Complete battle space simulations would be the final step.

As many of you would be aware, DSTO is already well down the modelling and simulation track, with, for example, the System Simulation Centre, the Air Operations Simulation Centre, the Combat Systems Research Centre and many others.

The DER also noted its concern that Australia undertakes very little of the early development that would prepare Australian industry for adapting overseas equipment for local conditions.

Hence it suggested that Defence would be wise to invest in indigenous and collaborative development. It also called for carefully targeted development programs in industry, to which DSTO might contribute.

I note that the AEEMA submission to the DER supported strengthening links between industry and DSTO. One of my first industry priorities is to continue to improve the effective relationship between DSTO and industry.

I see industry participation in the development aspect of RD as a valuable contribution to the enhancing of Australian industry's capacity to support Defence. This means support in maintaining, adapting and upgrading existing equipment, as well support as in developing new capabilities.

Industry alliances and other collaborative arrangements are part of the Government's focus on strengthening the partnership between Defence and Australian industry.

There are now 18 Alliances between DSTO and Industry. On the one hand, are helping Australian companies to understand DSTO's capabilities and Defence priorities for RD. On the other hand they help DSTO gain a better appreciation of the capabilities and commercial requirements of industry.

Conclusion

As I said at the outset, when it comes to Defence Industry, I believe that actions speak louder than words. That is why the Prime Minister added Industry to my title and that is why I am proud of the speed with which we have tackled the problem.

Organisations like AEEMA have a key role to play in ensuring that Defence policy for industry evolves in a way that takes into account the diversity of interests involved and the need for policy implementers in the Department and policy stakeholders in industry for robust guidance.

In making its important contribution to this evolution of policy, the DER drew on submissions by AEEMA and other bodies representing industry. I would like to thank you for your submission and look forward to your continuing contribution to this vitally important process.

The DER recommendations on defence policy for industry will take their place with a range of other initiatives this Government has been pursuing since it took office. We began the process with my address to the 1996 Procurement Conference and more recently with the series of seminars that IIC Division has successfully run.

I would expect that all of these initiatives, and others will feed into the development of a new statement of strategic defence policy for industry planned which I plan to announce by the end of this year.