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Defence capability reform

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Minister for Defence and Minister for Defence Materiel - Defence Capability Reform

16 October 2012

Minister for Defence Stephen Smith and Minister for Defence Materiel Jason Clare today announced

the next phase of reforms to Defence procurement to specifically improve reporting and

accountability mechanisms.

Over the past 18 months, the Government has announced a series of reforms to strengthen

procurement processes within Defence.

These include:

 Reforms to Project management accountability (announced in May 2011);  Reforms to strengthen the Projects of Concern process (announced in June 2011);  Reforms to Support Ship Repair and Management Practices - the Rizzo Report (announced in July 2011);

 Reforms in the Sustainment of Australia’s Collins Class submarines - the Coles Review (announced in August 2011);  Reforms to the Defence Capability Plan (announced July 2, 2012)

Implementation of all these reforms is well underway, with the majority already implemented.

An update on the implementation of these reforms is attached.

Today, the Ministers announce the next phase of reforms to improve Defence’s procurement


Strengthened project accountability and reporting

Poor management of projects has included failure on a number of occasions to keep Government

fully informed about changes to a project’s approved scope, cost or schedule. It is not appropriate

for Defence to vary from the approved scope, cost or schedule, without approval from the original

decision maker or delegated approval authority.

Earlier this year, at Government direction, Defence conducted an acquisition baseline review audit

of all approved projects within the DMO to ensure they were being progressed within approved

scope, cost and schedule. This review found that while all projects were within approved budget,

two projects reported variation against the approved scope and around 20 percent of projects were

late against the approved schedule.

This audit identified a number of projects which have not met the reporting standards expected by

Government, including:

 Land 144 Phase 1- Countermine Capability;  Land 134 Phase 1-Combat Training Centre - Live Instrumented System;

 Joint Project 2059 Phase 2-Bulk Liquid Distribution;  Joint Project 2059 Phase 3-Water Purification and Desalination; and  Land 40 Phase 2 - (Direct Fire Support Weapon - Lightweight Automatic Grenade Launcher)

In response to this audit, the Government has directed that Defence implement a new regime of

reporting on variations to original project approvals. Project approval submissions will include clear

thresholds for reporting to Government and the approval authority for variations to cost, scope and

schedule. Variations that breach these thresholds must be referred for consideration to the original

decision maker, whether that is the Minister, the Minister and the Minister for Finance and

Deregulation or the National Security Committee of the Cabinet. These thresholds will be

incorporated into individual Project Directives as announced in May last year.

Managing Contractors

The Defence Materiel Organisation (DMO) will pilot the use of a managing contractor model for the

delivery of Defence capability. The managing contractor model has been used successfully

throughout Australia by both public and private sector organisations, particularly for the delivery of

infrastructure projects. It has proved a highly flexible delivery model and could be tailored for

defence capability projects, including the delivery of both acquisition and sustainment activities.

DMO intends to recommend the first project to pilot the managing contractor delivery model by the

end of this year. In the first instance, the pilot will focus on a land acquisition project at the lower

end of complexity to test the delivery model. Subject to the outcomes of the pilot, DMO will

consider the application of the model for other acquisition and sustainment activities.

The managing contractor model will further develop the close working relationship between Defence

and industry and seeks to improve effectiveness and efficiency in project delivery.

Strengthened Performance Assessments

In August last year, the Minister for Defence released the “Review of the Defence Accountability

Framework” (the Black Review) which was commissioned by the then Secretary of the Department

of Defence and the then Chief of the Defence Force and conducted by Dr Rufus Black.

The Black Review was the first comprehensive review to examine personal and institutional

accountability in Defence as a whole.

It found that there were significant problems with performance in many parts of the Defence


The Black Review stated “…Defence has reached a point in its history where there is a strong case

to redesign its accountability system…. the current arrangements are under stress and their failure

damages Defence.”

These failures damage Defence, weaken ADF capability and cost taxpayers money.

To further improve performance and enhance accountability in the DMO, in addition to the reforms

announced last year, the Chief Executive Officer (CEO) of the DMO, Mr Warren King, will implement

strengthened personal accountability by requiring personal accountability reports from each DMO

senior executive on a quarterly basis. These reports will require senior executives to certify their

performance to the CEO over the previous quarter.

Early Indicators and Warning

In May 2011, the Ministers announced the establishment of an Early Indicators and Warning

(EI&W) system for the assessment of all major capability projects.

The EI&W system was initially focussed on DMO and Capability Development Group (CDG) major

capability equipment acquisition projects. Under today’s further reform, this system has now been

extended to all major projects across the Defence Portfolio, including facilities projects and IT

projects managed by the Chief Information Officer.

A number of further improvements to the EI&W system have also been made. These include:

 enhanced monitoring and internal management processes;  closer scrutiny of projects that have been reported more than once;  improvements to the project management ICT monitoring systems; and  the introduction of automated alert mechanisms when a warning is triggered.

Negotiation Cell to Improve Commercial Outcomes for Defence

Defence will establish a highly skilled negotiation cell within DMO to significantly improve the DMO’s

conduct of commercial negotiations.

The cell will include members from outside the DMO who have significant commercial experience,

particularly in major contract negotiations. The DMO will initially draw on a number of highly

regarded external members who currently assist DMO as part of the Gate Review process. It is

intended that the external members will assist in mentoring and developing Departmental

personnel in the conduct of contract negotiations.

The cell members will be assigned to oversight or participate in negotiations, potentially as lead

negotiator, to drive better commercial outcomes for Defence when dealing with industry.

A pilot program is currently underway, utilising an external lead negotiator and external technical

adviser for negotiations with Rheinmetall MAN on Project Land 121Phase 3B.

Structural Reform

Minister Smith and Minister Clare have asked the CEO DMO to undertake a review of the structure

and functions of the various Divisions within DMO which manage capability projects.

The review will seek to establish the optimal structure for these Divisions to drive improved

performance, accountability and reporting in relation to projects.

This reform follows identification by the Government of a number of projects that have not been

managed as effectively as they should have been, including:

 LAND 106, the upgrade of the M113 armoured vehicle fleet;  LAND 112, upgrade of the ASLAV armoured vehicle fleet;  JP 2070, the acquisition of lightweight torpedos; and  AIR 5418, the acquisition of a new missile, the Joint Air Surface Standoff Missile (JASSM).

The first review will be a structural review into Land Systems Division, which has responsibility for a

number of problem projects, including:

 LAND 106, the upgrade of the M113 armoured vehicle fleet;  LAND 112, upgrade of the ASLAV armoured vehicle fleet;  Land 144 Phase 1 - Countermine Capability;  Land 134 Phase 1- Combat Training Centre - Live Instrumented System; and  Land 40 Phase 2 - (Direct Fire Support Weapon - Lightweight Automatic Grenade Launcher)

The review will be led by CEO DMO and will build on current business reforms being implemented

across the Division.

Attachment: Reform Implementation Update

An effectively functioning Defence organisation, including the Australian Defence Force (ADF), is a

critical part of protecting and defending Australia’s national security interests.

There will always be risk in complex, costly procurements involving cutting edge technology.

To minimise that risk and to manage it effectively, we need to continue to instil greater rigour and

greater individual and institutional accountability to our consideration and management of major

capability projects, both acquisition and sustainment.

This in particular applies to the early stages of projects - 80 per cent of problems with Defence

capability projects emerge in the first 20 per cent of the project’s life.

Project Management Accountability

In May last year, we announced a number of reforms to increase the level of project management

accountability including:

 project directives issued by the Secretary of the Department of Defence and the Chief of the Defence Force to ensure Defence acquisitions progress according to Government direction;  benchmarking all acquisition proposals against off-the-shelf options where available;  the introduction of a two-pass approval system for minor capital projects valued between $8

million and $20 million;  implementation of an Early Indicators and Warning system;  the expansion of the Gate Review system; and  the introduction of Quarterly Accountability Reports.

All of these reforms have now been implemented.

Projects of Concern

The Projects of Concern process was established by the Government in 2008 to focus the attention

of the highest levels of Government, Defence and industry on remediating problem projects.

This includes the establishment of a Project of Concern summit involving the Minister for Defence

Materiel meeting with senior Defence officials and CEOs of companies which have projects on the

Projects of Concern list.

In February last year, Minister Clare committed to holding biannual face-to-face meetings with

industry and Defence.

The first round of meetings was held in February 2011, followed by a second round in September

2011 and a third round in April this year. The next round of meetings is scheduled for the end of


The purpose of these meetings is simple - to make sure there is focus from the top of Government,

Defence and industry to remediate these projects.

It ensures that the senior Defence and industry people responsible for these projects are doing

everything necessary to remediate them.

Since inception, 19 projects in total have been placed on the list. Of those, 13 have been removed,

11 due to remediation and two cancelled (Watercraft for Amphibious Ships and Sea Sprite


In December 2011, a further three projects were removed from the Projects of Concern list -

halving the number of projects on the list in one year.

This cut the number of projects on the Projects of Concern list from 12 at the beginning of 2011 to

the current six.

In June last year, we announced a number of reforms to strengthen the Projects of Concern

process, including:

 the establishment of a more formal process for adding projects to the list;  the establishment of a more formal process for removing projects from the list;  the development of agreed remediation plans, including formal milestones for the removal of a project from the list;

 increased Ministerial involvement and oversight of the process; and  incentives for companies to fix projects on the list by taking into account the performance of companies in addressing Projects of Concern when evaluating their tenders for other projects.

All of these reforms have now been implemented.

Reforms to Support Ship Repair and Management Practices

In July last year, we announced a number of reforms to support ship repair and management

practices through the Rizzo Report.

Since then a number of reforms have been implemented including:

 the establishment of a two star Navy Admiral as Head of Naval Engineering;  the Defence Materiel Organisation (DMO) Amphibious and Afloat Support Systems Program Office has been restructured and core maintenance practices strengthened;  a significant reduction in the backlog of incomplete maintenance and engineering activity

across the fleet;  the development of a Maritime Capability Business Model;  increased resourcing to key enablers of maritime capability; and  the establishment of Fleet Support Unit - Australia.

On 1 July this year the Defence Seaworthiness Management System commenced its phased

implementation with the Chief of Navy as the Defence Seaworthiness Authority. Work to increase

the interaction and decision making between Navy and DMO has also resulted in a new Materiel

Sustainment Agreement, reinforcing the necessity of productive working relationships between the

two groups.

The Rizzo Reform Program is entering the next phase of activity and is implementing change. This

involves inculcating a culture that identifies the seaworthiness of ships, submarines, and maritime

mission systems as a fundamental enabler of maritime capability.

Capability and Procurement Reform

These reforms complement a number of other important initiatives that were announced last year.

In 2011, we also accelerated the full implementation of all the Kinnaird and Mortimer

recommendations previously agreed by Government.

In 2003, the Kinnaird Report strengthened the two-pass approval system, the creation of the

Capability Development Group and the Defence Materiel Organisation as a prescribed agency under

the Financial Management and Accountability Act.

Most of the Kinnaird reforms have been implemented and have had a positive impact.

In 2008, the Mortimer Review into Defence Procurement and Sustainment made 46


The Government agreed to 42 of them in full and three in part.

Many of these recommendations have been implemented, including increased investment in

Defence industry skills and incorporation of improved commercial practices into Defence


Defence has accelerated the implementation of all outstanding agreed recommendations made by

Mortimer as a matter of priority.

This includes:

 project directives issued by the Secretary of the Department of Defence and the Chief of the Defence Force to ensure acquisitions progress according to Government direction; and  benchmarking all acquisition proposals against off-the-shelf options where available.

Implementation of these important reforms to capability development and procurement continues,

with specific action including:

 introducing new rigour into the management of so called ‘minor’ projects, including a modified two-pass approval system for minor capital equipment projects valued between $8 million and $20 million.

 implementing an Early Warning and Indicator system to address the early stages of capability planning and prevent problems early in the life of a project;  expanding the use of the Gate Review process for mature projects to ensure that the desired operational capability is being delivered; and  providing enhanced and more rigorous reporting to Government on high priority projects.

These reforms include the Government’s response to the Coles Review of the Sustainment of

Australia’s Collins Class submarines.

Defence Capability Plan (DCP)/Defence Capability Guide (DCG)

The Minister for Defence and the Minister for Defence Materiel Jason Clare announced on July 2

reforms to the Defence Capability Plan based on consultation with Australian Defence Industry.

On 10 July the Ministers released the DCP 2012.

Earlier this year, Minister Smith and Minister Clare met with Australian Defence industry

representatives and sought advice on ways to improve the DCP.

Based on Defence industry feedback, future public versions of the DCP will contain those priority

projects planned for either first or second pass approval over the four year Forward Estimates


The purpose of this reform is to align the DCP with the four-year Forward Estimates period in the

Budget and provide greater certainty for industry. This reform reflects consultations undertaken

with industry and aligns with industry’s focus on projects approaching Government consideration.

The public DCP will provide information for industry on project cost, schedule and local industry


As the public DCP will include only those projects approaching either first pass or second pass in the

four year Forward Estimates period, it will be a much more reliable guide of the Government’s

priorities for investment in Australian Defence Force (ADF) capability.

A new document to complement the public DCP, the 2012 Defence Capability Guide (DCG), was

released on October 5 and provides general guidance for industry on projects over the six year

period following the four years of the DCP.

The DCG will ensure that industry has information about the Government’s longer-term capability

intentions, noting that beyond the four year DCP, there is more uncertainty, and historically

projects are less well defined and have been subject to change, in terms of scope, cost and


Together the DCP and the DCG provide a 10 year program for defence capability acquisition, which

we are doing at the request of Australian Defence industry.

Media Contacts

Mr Smiths Office: Andrew Porter (02) 6277 7800 or 0419 474 392

Mr Clare’s Office: Annie Williams (02) 6277 7620 or 0428 040 522