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Response to Senate Inquiry into Defence procurement



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Minister for Defence and Minister for Defence Materiel - Response to Senate Inquiry into Defence procurement

16 October 2012

The Government has now considered the Senate Standing Committee on Foreign Affairs, Defence

and Trade References Committee’s report into Procurement procedures for Defence capital projects.

In February 2011, the Senate referred the procurement procedures for Defence capital projects to

the Committee for inquiry and report. The Committee was asked, in particular, to:

 assess the procurement procedures utilised for major Defence capital projects currently underway or foreshadowed in the Defence White Paper;  assess the timeline proposed for Defence modernisation and procurement outlined in the Defence White Paper;  assess proposals arising from the Defence accountability reviews in regards to enhancing

accountability and disclosure for Defence procurement;  make recommendations for enhancing the availability of public information and parliamentary oversight and scrutiny of Defence procurement; and  undertake an assessment of the effectiveness of the Defence Materiel Organisation.

The Committee tabled its Report on 30 August 2012.

The report makes 28 recommendations relating to:

 strengthening accountability and realigning responsibilities;  increasing contestability and independence of advice to Government on major projects;  improving skills across all areas involved in the capability development and acquisition process;

 increasing public transparency of financial detail for capital projects;  building an improved test and evaluation capability;  providing industry with greater certainty about Defence’s intentions to enable it to invest with confidence; and

 two specific projects, SEA 1000 Future Submarines and AIR 8000 Phase 2 Battlefield Airlift (the Caribou Replacement project).

The Government agrees with the Committee’s assessment that it is important to continue to reform

Defence’s capability procurement processes. The Government has already initiated action on a

number of procurement reforms, including:

 project management accountability;  progress with the Projects of Concern process;  reforms to Support Ship Repair and Management Practices (the Rizzo Report);  capability and procurement reforms; and  reforms in the sustainment of Australia’s Collins Class submarines (the Coles Review).

The Government has also today announced a further range of important reforms to Defence

procurement to specifically improve reporting and accountability mechanisms.

The Government remains committed to progressing further capability development and

procurement reforms that will enhance the delivery of Defence capability projects, strengthen

Australian Defence industry and improve accountability.

The Government has carefully examined the Report to see what further reforms might be adopted.

Of the report’s 28 recommendations, the Government has:

 agreed in full to 13 recommendations relating to realigning responsibilities in Defence, improving contestability of advice, skilling Defence, capability development processes, test and evaluation and Defence industry (Recommendations 1, 7, 8, 12, 14, 18, 21, 22, 23, 24, 25, 27 and 28);

 agreed in principle to four recommendations (Recommendations 5, 10, 11 and 19);  agreed in part to seven recommendations (Recommendations 2, 3, 4, 6, 15, 16 and 26).

The Government has not agreed to four recommendations (Recommendations 9, 13, 17 and 20).

These recommendations are either inconsistent with the Kinnaird capability development reforms,

have been previously considered and rejected by Government or would not contribute to improving

procurement outcomes.

The Government’s response to the Report can be found below.

The Senate Standing Committee’s report is available at:

http://www.aph.gov.au/Parliamentary_Business/Committees/Senate_Committees?url=fadt_ctte/pr

ocurement/report/index.htm

Media contacts:

Minister Smith’s Office (Andrew Porter): 02 6277 7800 or 0419 474 392

Minister Clare’s Office (Annie Williams): 02 6277 7290 or 0428 040 522

SENATE STANDINGCOMMITTEEONFOREIGN AFFAIRS, DEFENCE AND TRADE REFERENCES COMMITTEE’S FINAL REPORT

PROCUREMENT PROCEDURES FOR DEFENCE CAPITAL PROJECTS

GOVERNMENT RESPONSE

Executive summary

1. The Government welcomes the Senate Standing Committee on Foreign Affairs, Defence and

Trade References Committee’s final report Procurement procedures for Defence capital projects.

Government understands the importance of reform to Defence’s capability procurement. This is why

Government has already initiated action on a number of procurement reforms, including:

a. project management accountability;

b. progress with the Projects of Concern process;

c. reforms to Support Ship Repair and Management Practices (the Rizzo Report);

d. capability and procurement reforms; and

e. reforms in the sustainment of Australia’s Collins Class submarines (the Coles Review).

2. This is also why the lessons learnt from the Coles Review will also play an important role in the

development of the Future Submarine Project, including the need to take a long term view of

maintenance and sustainment of the Future Submarine from the outset of the project.

3. The Government remains committed to progressing further capability development and

procurement reforms that will enhance the delivery of Defence capability projects, strengthen

Australian Defence industry and improve accountability. In this light, Government has carefully

examined this 334 page report to see what further insights might be offered. From this review, of

the report’s 28 recommendations, the Government has:

a. agreed in full to 13 recommendations;

b. agreed in principle to four recommendations (Recommendations 5, 10, 11 and 19);

c. agreed in part to seven recommendations (Recommendations 2, 3, 4, 6, 15, 16 and 26).

4. The Government notes the report’s emphasis on increasing the role of the Capability Managers,

which is why the Government has also agreed Recommendations 2, 3 and 4 in part. These

recommendations relate broadly to increasing and enhancing the role of Capability Managers in

capability acquisition, and Defence supports this intent. In this respect, Defence has already

undertaken a range of initiatives to strengthen the role of Capability Manager’s in this process.

However, Defence does not agree to the aspects of these recommendations that suggest

transferring financial resources for acquisition to Capability Managers. Funding following

government approval is provided to Defence Materiel Organisation (DMO) to improve DMO’s

authority and accountability for outcomes (that is, the delivery of the materiel equipment elements

of a project).

5. Apart from agreeing to these 24 recommendations, for the remaining four recommendations,

these were not agreed as follows:

a. Recommendation 9 (DMO’s independence). The Committee’s recommendation is inconsistent the

Government’s previous public advice. The DMO will continue as it is, as a prescribed agency. Both

the Kinnaird and Mortimer reports have previously recommended DMO become an executive

agency. However, governments of both political persuasions have not accepted these

recommendations.

b. Recommendation 13 (Capability Managers have sole responsibility for acquisition projects).

Having the Capability Managers with sole responsibility for acquisition projects is contrary to the

current business model approved by Government following the Kinnaird Review. A recent review

undertaken by Independent Project Analysis Inc, an independent international benchmarking

organisation, made the observation the current organisational structure with materiel equipment

acquisition centralised in DMO is consistent with best practice. Nevertheless, cognisant of the intent

of this recommendation, Defence will examine Recommendations 2, 3 and 4 to ensure the primacy

of the Capability Managers is maintained in the acquisition process.

c. Recommendation 17 (Respond publicly to the Committee’s criticisms about lessons not learnt and

current planning on submarines). As SEA 1000 is still pre-first pass, it is premature to respond to

criticisms raised by the Committee. The project will be brought through the normal first and second

pass process to ensure appropriate lessons are applied and the necessary contestability is applied

to affirm this.

d. Recommendation 20 (Publish as an addendum to its portfolio budget statements). The reporting

requirements proposed by this recommendation would mix data from pre-second pass activities,

when option sets are being developed, against costs detailed in an acquisition contract versus the

evolving costs for the sustainment of a capability as it matures and ages. The existing Portfolio

Budget Statement reporting enables data to be appropriately compared via the extant reporting

mechanisms and avoids creating significant overheads with little obvious benefit.

Overview of report

1. The Senate Standing Committee on Foreign Affairs, Defence and Trade References Committee’s

final report Procurement procedures for Defence capital projects was reviewed based on the eight

specific areas and 28 recommendations contained in the report. Table 1 summarises the report’s

structure and the Government’s response to each recommendation.

Table 1: Summary of Recommendations

Recommendation Category Recommendation No Response

Realignment of responsibilities Recommendation 1 Agree Recommendation 2Recommendation 3Recommendation 4

Agree (in part)

Contestability and independence Recommendation 5 Agree (in principle) Recommendation 6 Agree (in part) Recommendation 7 Agree Recommendation 8 Agree Recommendation 9 Disagree Recommendation 10 Agree (in principle) Recommendation 11 Agree (in principle)

Skilling Defence Recommendation 12 Agree

Recommendation Category Recommendation No Response Recommendation 13 Disagree Recommendation 14 Agree Recommendation 15 Agreed (in part)

Future submarines SEA 1000 Recommendation 16 Agreed (in part) Recommendation 17 Disagree AIR 8000 Phase 2 (Battlefield Airlift - Caribou replacement)

Recommendation 18 Agree

Capability development and public information Recommendation 19 Agree (in principle) Recommendation 20 Disagree

T&E - building capability Recommendation 21 Agree Recommendation 22 Agree Recommendation 23 Agree Recommendation 24 Agree Recommendation 25 Agree

Defence industry Recommendation 26 Agreed (in part)

Recommendation 27 Agree Recommendation 28 Agree

Analysis of report’s findings

2. The report suggests there is a growing disconnect between strategic guidance and capability

development, confused accountabilities, poor appreciation of risk, and a need for structural reform

in Defence procurement. Government supports the thrust of the report’s findings and Defence is

already implementing a number of initiatives which will address some of the Committee’s concerns.

3. In particular, Government has already initiated action on a number of procurement reforms,

including:

a. project management accountability;

b. progress with the Projects of Concern process;

c. reforms to Support Ship Repair and Management Practices (the Rizzo Report);

d. capability and procurement reforms; and

e. reforms in the sustainment of Australia’s Collins Class submarines (the Coles Review).

4. This is also why the lessons learnt from the Coles Review will also play an important role in the

development of the Future Submarine Project, including the need to take a long term view of

maintenance and sustainment of the Future Submarine from the outset of the project.

5. Nevertheless, Government will draw upon the advice in the Committee’s report and integrate this

advice into existing reforms. Within Defence, the Capability Development and Materiel Reform

Committee will progress such matters.

Areas of agreement

6. The following are areas where there is broad agreement with the report:

a. The need for continuous improvement, as evidenced already with a range of capability

development and acquisition reforms.

b. Providing personnel with the right skilling to perform their duties.

c. Recognising there are critical skills (eg engineers) where Defence needs to attract these skilled

personnel.

d. Where possible, encouraging longer tenures.

e. As per the Black Review, Defence agrees there is a need for an alignment of accountability and

responsibility.

f. While risk management policies and procedures are in place, further training in the application of

these may be worth exploring.

g. Building an improved test and evaluation (T&E) capability, including the development of an equal

stakeholder relationship between the Services T&E organisations and the Defence Science and

Technology Organisation (DSTO), enabling the early engagement (pre-first pass) of T&E activities

for the identification and mitigation of risks.

7. The rationale for agreeing in principle to these four recommendations is as follows:

a. Recommendation 5 (Mandatory gate reviews). Recommendation 5 reflects current practice as

defined in Gate Review policy documentation. However, Gate Reviews have not been held for ‘DCP

Entry’ as there is currently no clear milestone for this event and at that point there is often little for

the Defence Materiel Organisation (DMO) to review. The first clear and useful milestone is Project

Initiation and Review Board (PIRB) and corresponding Project Initiation and Options Definition Gate

Reviews have been instituted.

b. Recommendation 10 (DSTO’s independent advice). While, there is no precedent for a Ministerial

Directive to a Defence group head, the Chief Defence Scientist (CDS) is currently required by

government to advise on technical risks for all major capability submissions. This was confirmed in

the government’s response to the Mortimer Report. Defence’s existing processes ensure that DSTO

advice is both independent and available without modification and CDS’s advice on technical risks is

included verbatim in the submission to Cabinet.

c. Recommendation 11 (DSTO and risk assessments). Defence agrees to strengthen the role of the

Technical Risk Assessment (TRA) in test and evaluation (T&E) by ensuring the TRA addresses the

potential for T&E. Defence is of the view that the TRA is best conducted by technical experts in

DSTO and should remain as independent advice. All submissions currently presented to

Government on major capital projects include advice on technical risks that are provided directly by

the Chief Defence Scientist. To ensure that the risks are appropriately described and presented,

DSTO provides training in technical risk assessment and has implemented a review group to ensure

the quality of TRAs.

d. Recommendation 19 (2013 White Paper). Recommendation 19 contends that, in developing the

2013 White Paper, Defence should ensure that all procurement proposals are costed and scheduled

realistically, and that industry should be comprehensively consulted prior to the inclusion of

procurement proposals. Defence notes that the approach taken in the development of this White

Paper is somewhat different to that used to develop the 2009 White Paper, and that procurement

proposals will continue to be developed and considered through the current two-pass capability

development process. Defence also considers that the way in which in the 2013 White Paper is

developed, the inclusion of capability proposals and the consultation processes are properly

decisions for Government.

8. The seven recommendations agreed in part are as follows:

a. Recommendations 2, 3 and 4 (Capability Managers, DMO and Capability Development Group

(CDG)). Both Kinnaird and Mortimer recommended that service chiefs should be accountable for

service specific procurements in the context of a stronger assurance role to ensure that there is

appropriate oversight and coordination of all elements necessary to introduce a capability. For

example, Kinnaird stated that “Capability managers will be accountable for monitoring and

reporting to Government for the whole of capability from the point where government approves a

particular capability option, that is at second pass approval, through to the time that the capability

is retired from service. During the acquisition phase, the capability manager monitors the

development of all capability elements, including equipment delivery by the DMO. This

responsibility does not imply any authority to directly instruct the DMO on any aspect of its function

as the manager of equipment acquisition.” In addition, a recent review undertaken by Independent

Project Analysis, an independent international benchmarking organisation, made the observation

that the current organisational structure with materiel equipment acquisition centralised in DMO is

consistent with best practice. However, Defence does not agree to the aspects of these

recommendations that suggest transferring financial resources for acquisition to Capability

Managers. Funding following government approval is provided to DMO to improve DMO’s authority

and accountability for outcomes (that is, the delivery of the materiel equipment elements of a

project). This approach has previously been agreed by Government following the Kinnaird review

and reinforced by the Mortimer review.

b. Recommendation 6 (Relocation of Independent Project Performance Office). The Independent

Project Performance Office (IPPO) was specifically formed in the DMO following the Mortimer

Review to improve DMO’s project management performance through the provision of expert

analysis, advice and assistance to DMO projects. This ensures the necessary commercial,

engineering and project management expertise is readily available and brought to bear in an

environment of management ownership, accountability and follow through. The relocation of the

IPPO outside of DMO would diminish the effectiveness of this arrangement. The remainder of

Recommendation 6 is agreed.

c. Recommendation 15 (streamlining and consolidation of skills). Defence does not agree to adopt

in full the recommended organisational changes specified in Recommendation 13. However,

Defence agrees that Strategic Policy Division and CDG should have more strategic analytical skills.

Defence agrees that DMO has the resources and support to build on the efforts already under way

to develop its multi-discipline skills base. Following from the recommendations of the Black review,

further work is currently being undertaken to build the skills base of CDG and DMO, including

optimising the utilisation of the Capability andTechnologyManagementCollege to provide better and

more focused support to CDG and DMO. The Australian Public Service (APS) Job Families and

business skilling initiatives will drive skill development of the military as well as the APS Strategy

workforce.

d. Recommendation 16 (Chief of Navy to manage SEA 1000). As you announced on 6 September

this year, Mr David Gould has been appointed as General Manager Submarines and he has been

given responsibility for the oversight of the maintenance of the current Collins Class fleet and the

Future Submarine Project. Hence, the intent of this recommendation has been met, but

management of SEA 1000 will be overseen by Mr Gould rather than Chief of Navy. The remainder

of Recommendation 16 is agreed.

e. Recommendation 26 (Planning for investment). Defence recognises the importance of certainty

to industry and continues to improve the planning for the Public Defence Capability Plan within the

inherent limitations of the project development environment. The Public DCP is intended to provide

as much information as is known within the four year Forward Estimates period. The DCP and

Defence Capability Guide seek to provide as much information as possible, noting that an increasing

level of uncertainty is inevitable in the outer years. The Department will engage with industry to

address the level of information that can be generated and published about projects plans at early

stages of their development. Although Defence regards continuity as an important aspect of

maintaining the supply chain, the timely delivery of required military capabilities must remain the

key feature of capability planning. Defence agrees that to the extent permissible to protect

sensitive information, data on the reasoning and analysis underlying Defence’s demand can be

published. Defence agrees to publish information based on the most reliable cost estimates it is

able to generate, noting again the inherent uncertainty for projects in the outer years.

9. Notably, Defence has agreed to Recommendations 2, 3 and 4 in part. These recommendations

relate broadly to increasing and enhancing the role of Capability Managers in capability acquisition,

and Defence supports this intent. In this respect, Defence has already undertaken a range of

initiatives to strengthen the role of Capability Manager’s in this process, as outlined in paragraphs

14 to 16 below.

Aspects of report not agreed

10. Defence has not agreed to four recommendations on the basis that some activities are no

longer undertaken for very sound reasons or that, even reflecting the Committee’s considered

views, there are sound reasons to adopt an alternative approach in some cases.

11. The four recommendations not agreed are as follows:

a. Recommendation 9 - DMO becoming a statutorily independent agency. The Government has

previously considered whether DMO should be an executive agency, as has past governments. In

each case, the decision has been made after careful consideration to have DMO as a prescribed

agency.

b. Recommendation 13 - Service Chiefs as sole client with the contracted suppliers. The report

envisages the accountability for all service specific procurement items should be exclusively

transferred with budgets to Service Chiefs, who should be responsible for all procurement and

sustainment of their materiel. The Committee also envisages the movement of individuals between

DMO and the Capability Manager at varying times in the project phases. This recommendation is

quite contrary to the current business model approved by Government following the Kinnaird

Review. A recent review undertaken by Independent Project Analysis Inc, an independent

international benchmarking organisation, made the observation the current organisational structure

with materiel equipment acquisition centralised in DMO is consistent with best practice. Whilst not

agreeing to Recommendation 13, Defence will examine Recommendations 2, 3, 4 and 13 to ensure

the primacy of the Capability Managers’ role is maintained. Defence’s Capability Development and

Materiel Reform Committee will progress this matter.

c. Recommendation 17 - Respond publicly to the Committee’s criticisms about lessons not learnt

and current planning on submarines. As SEA 1000 is still pre-first pass, it is premature to respond

to criticisms raised by the Committee. The project will be brought through the normal first and

second pass process to ensure appropriate lessons are applied and the necessary contestability is

applied to affirm this.

d. Recommendation 20 - Additional PBS reporting. The reporting requirements proposed by this

recommendation would mix data from pre-second pass activities, when option sets are being

developed, against costs detailed in an acquisition contract versus the evolving costs for the

sustainment of a capability as it matures and ages. The existing Portfolio Budget Statement

reporting enables data to be appropriately compared via the extant reporting mechanisms and

avoids creating significant overheads with little obvious benefit.

Clarifications

12. Report contradictions. Defence considers that the report contains some internal contradictions

which means that accepting one recommendation would have an adverse impact on another of the

report’s recommendations. For example, the recommendations to empower the Capability Managers

(Recommendations 2, 3 and 13) are contrary to ensuring DMO’s independence, with adequate

resources (Recommendations 9 and 14). The Government understands the intent of the report and

intends to take a holistic perspective to both the report’s recommendations and extant reform

measures. Thus, for example, Defence is already updating the Memorandum of Arrangements

(MOA) between Defence and DMO. This MOA will be used to ensure the relationship between the

Capability Managers and DMO is adequately described and agreed.

13. Capability Manager roles and joint capabilities. The report identifies that “capability managers

have been sidelined with CDG and DMO assuming key positions during the acquisition phase” and

“capability managers require the authority that now resides with CDG as departmental coordinator

and centre of power” (both quotes from para 15.39 of the report).

14. Defence has recognised that there is room for improvement in this areas and has made a

number of changes to its practices over the past six months to address these issues, including:

a. providing authority to Capability Managers through including them as a signatory, together with

CDG and DMO, on Materiel Acquisition Agreements (MAAs); and

b. the implementation of Capability Manager Steering Groups to assist Capability Managers to

review, monitor and control the process and progress for their post-second pass projects as these

projects progress through the acquisition process.

15. The report’s discussion on Capability Managers focuses on each of their capability areas. In this

context, Defence is also taking a number of steps to better integrate capability to support Joint

Force Operations and the Joint Force-in-Being. It is also important to recognise that while the

Service Chiefs and Deputy Secretary Intelligence and Security have clear and easily identifiable

responsibilities for the delivery of capabilities and materiel that will be operated in the maritime,

land, air and intelligence environments, there are some joint capabilities that do not fit neatly

within any one of their areas of responsibility alone.

16. This is particularly the case for joint command, control, communication, computer, intelligence,

surveillance, reconnaissance, electronic warfare and ICT-dependent operational capabilities. Under

Defence’s Capability Coordination Model, a Capability Coordinator is designated to ensure delivery

of a cohesive joint capability that will meet the needs of the Capability Managers and Chief of Joint

Operations. Where this model is invoked, the Capability Coordinator is required to engage closely

with the Services and Groups to ensure their requirements are understood, and that all parties are

kept informed of any issues and the status of the capability. The Vice Chief of Defence Force, as the

Joint Capability Authority, is responsible for:

a. ensuring that new and extant capabilities are developed in accordance with joint concepts and

doctrine;

b. appointing Capability Coordinators to be responsible for the delivery of joint capabilities that

service the ADF and Defence; and

c. providing the conceptual basis for the future joint force and integration of its component

capabilities.

17. Recommendation 18 - AIR 8000 Phase 2 Statement of Operational Requirement (SOR). This

recommendation implies Air Force did not intend to conduct T&E against the approved SOR. This is

not correct. As part of the acquisition process, T&E results from the United States Air Force (USAF)

for the capability will be reviewed and the Aerospace Operational Support Group will conduct T&E

against key requirements to provide early identification of potential issues with the AIR 8000 Phase

2 project that could delay introduction into service. Whilst formal T&E against the SOR was not

conducted prior to second pass, evaluation of the capability against the requirements was

completed using evidence available from both the manufacturer and USAF to further mitigate risk of

any non-compliance with the SOR.

18. Paragraph 8.54 - DSTO moral hazards and conflicts of interest. Paragraph 8.54 of the report

states “there is another matter of concern with potential conflicts of interest or moral hazard in that

the opportunities for collaborative activities and funding have in the past driven DSTO to

recommend a course of action that may not be in Defence’s best interest”, without any reference or

further details to validate this statement. Defence refutes this statement. As both a developer and

an adviser on technology to Defence, DSTO recognises the potential conflict of interest and has

established an independent Probity Board to advise the Chief Defence Scientist on how to manage

any potential conflicts, including through independent review of DSTO’s advice.

Way ahead

19. There are aspects of this report where its advice can be incorporated into existing reform

activities. The governance and oversight of all these activities will be provided by the Capability

Development and Materiel Reform Committee, which is chaired by the Chief Executive Officer

Defence Materiel Organisation. Such an approach avoids creating unnecessary, duplicative reporting

mechanisms.