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Speech to the Australian Strategic Policy Institute, Canberra



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Paper

by

Stephen Smith MP

Minister for Defence

to the

Australian Strategic Policy Institute

National Gallery of Australia

Canberra

Tuesday 19 July 2011

(check against delivery)

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Thank you Ian (Thomas, President, Boeing Australia and South Pacific) for that introduction.

I thank the Australian Strategic Policy Institute (ASPI) for the invitation to speak to you tonight.

I also thank Boeing for sponsoring this event.

I acknowledge my Ministerial colleague Jason Clare, Minister for Defence Materiel, Ambassador Jeffrey Bleich, United States Ambassador to Australia, Mr Andrew Shapiro, U.S. Assistant Secretary of State for Political Military Affairs, General David Hurley, Chief of the Defence Force, Mr Stephen Loosley, Chairman ASPI Council and MAJGEN (Retd) Peter Abigail, Executive Director ASPI.

Defence Officials, members of the Australian Defence Force, ladies and gentlemen.

ASPI provides an invaluable contribution to Australia’s national security and strategic debate.

It helps inform the public on a wide range of important security, strategic and Defence issues.

ASPI’s role as an independent policy Institute sees it well placed to provide an intelligent perspective on national security and strategic issues.

ASPI’s publications cover the range of security and strategic issues facing Australia: including international security trends, energy security, terrorism, Defence acquisitions and budgets, Defence accountability and transparency.

These challenges and more confront Defence: not the least our high operational tempo - Afghanistan, East Timor and the Solomon Islands.

Tonight I will speak on one of our significant challenges: Defence reform and greater Defence accountability, about more effective personal and institutional accountability in Defence.

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Defence Reform

An effectively functioning Defence organisation, including the Australian Defence Force, is a critical part of protecting and defending Australia’s national security interests.

Defence must support Australian Defence Force operations and plan for a wide range of future contingencies, including humanitarian assistance and disaster relief operations, regional stabilization missions, and contributions to international operations.

To meet these challenges, Defence must operate efficiently and use the resources provided to it by Government in a cost effective and value for money manner.

When this does not occur we need to be held accountable. All Defence institutions need to be held accountable.

Too often in the past we have seen adverse outcomes where Defence has not operated effectively or efficiently, and where despite adverse outcomes, institutional accountability has not come to the fore. In recent months I have spoken about such outcomes:

• $40 million spent on the construction of six watercraft for HMAS Kanimbla and HMAS Manoora which were, because of their dimensions and weight, never suitable to be launched from these ships; and

• The failure of our amphibious ship fleet earlier this year.

Before my time as Defence Minister, we saw the cancellation of the Sea Sprite project after the wasting of $1.4 billion of taxpayers’ funds, with no capability at all able to be delivered to the Australian Defence Force.

Many of these issues were raised recently by ASPI’s report on the “Control and Administration of the Department of Defence”. Quite rightly, they do need to be addressed. They will be and they are.

Our guiding principle here must be to prevent such adverse outcomes before they emerge and solve them if they emerge: our guiding principal here must be prevention, not more post mortems.

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As a consequence, it is vital that we continue the ongoing Defence reform program, including the full implementation of the Mortimer and Kinnaird reforms previously adopted by Government and the pursuit of new reform initiatives where challenges still exist or emerge.

Reform - Procurement and sustainment

Procurement and sustainment of capability are not without very serious challenges.

Your own Mark Thomson has described it, “while planning for new capability is easy, delivering it can be very difficult”.

I would go further: while planning for capability may sometimes be easy, it as well involves a range of challenges and risks.

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

To minimize that risk and to manage it effectively, we need to instill greater rigour and greater individual and institutional accountability to our consideration and management of major capability projects, both acquisition and sustainment.

Greater personal and institutional accountability will bring much more effective ownership of the outcomes and greater incentive to reduce or eliminate adverse outcomes.

Over the last three months Defence Materiel Minister Clare and I have announced a range of important reforms to improve Defence’s performance in capability development and procurement.

They include reforms to Defence’s budgeting process, to capability acquisition and development, and to the maintenance and sustainment of equipment in service.

Reform - The Defence Budget

Mark (Thomson) has recently noted: “…there’s an urgent need to remediate Defence’s financial and management information systems. Recent events have revealed that Defence has an

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unacceptably poor understanding of its costs…”.

The need to improve and reform Defence’s planning and budgeting processes was particularly highlighted in this year’s Budget.

At the time of the Budget it was determined that there would be a $1.6 billion underspend for the 2010-11 financial year, and $1.3 billion of capital funding to be reprogrammed.

Regrettably, while this was a good outcome for the Budget bottom line, it represented a significant failure in Defence’s planning and budgeting processes.

The reprogramming was necessary to better reflect more realistic project delivery schedules for capability and infrastructure projects which importantly did have to accommodate anticipated delays in project delivery from and by industry.

But, as the 2011-12 ASPI Defence Budget Brief points out, the underspend and reprogramming were symptoms of serious difficulties with Defence’s financial estimation processes and capability development planning.

Funding for Defence must be based on realistic and reliable forecasts. As a consequence it is essential to improve Defence’s Budget estimation processes.

In 2011-12, the Defence Departmental budget will total $27.5 billion.

This is 7.6 per cent of Australian Government outlays and 1.9 per cent of Gross Domestic Product.

When I was advised that a significant underspend was likely in 2010-11, I asked Defence to conduct a thorough reassessment of its budgetary forecasts and estimations across 2011-12 and the

forward estimate years.

The Secretary and Chief Financial Officer will report to me on this well in time for the 2012-13 budget process, indeed by the end of this calendar year.

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This will not be a simple update of the 2011-12 Budget costings.

It will be a comprehensive stocktake and health check of the Defence budgeting system. It will consider all budget processes, estimation methods and underlying budget assumptions. It will challenge budgeting processes and methods that have been part of Defence’s budgeting system for years.

I propose to act on this advice upon receipt, and not simply wait for the 2012-13 Budget process. Just as in this year’s Budget, this could entail a return, in whole or in part, at that time, of the

estimated underspend to the Budget, or the bring forward of the acquisition of necessary capability.

The return of Defence underspend to the Budget reinforces the message that we must get the estimates and the estimation process right.

I have asked the Secretary and Chief Financial Officer to consider Defence’s budgeting system in light of the experience of other large organisations’ systems of budgeting, for example Rio Tinto and BHP, both capital intensive and logistics intensive businesses.

Given the history of underspends in Defence, I have asked that particular focus be applied to the way in which the Capital budgets are formulated and managed, including the ongoing utility of contingency, slippage and most importantly over-programming.

Consistent with APSI’s Defence Budget Brief 2011-12, I have also asked Defence to consider ways in which more reliable information on Defence costs, savings and performance can be made public to enable enhanced transparency, scrutiny and analysis.

Reform - the Strategic Reform Program

The need for deep reform of the Defence Organisation was outlined in the 2009 Defence White Paper and is the genesis of the Strategic Reform Program.

We must continue to pursue the Strategic Reform Program to ensure Defence can efficiently deliver national security capability for Government.

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The Strategic Reform Program must deliver $20 billion of savings for reinvestment in Defence capability.

The Strategic Reform Program comprises over 300 separate reform initiatives and is managed across 15 individual 'reform streams'.

To seek to ensure reform is sustainable and genuine, Defence has built a Strategic Reform Program governance and assurance framework.

This includes regular reporting to Government and the Defence Strategic Reform Advisory Board, Chaired by Mr George Pappas, which includes senior private sector leaders with experience in large-scale organisational reform.

Defence has achieved its $1 billion in planned Strategic Reform Program savings in 2010-11.

However, a $400 million operating underspend in 2010-11 was an indication to me that more could be done.

On 6 May I announced a second phase of Strategic Reform Program initiatives that will result in $1.2 billion in savings across the Forward Estimates.

This will be achieved through additional shared services and other efficiency measures leading to a reduction in the overall forecast public service workforce growth by 1000 over the next three years.

The purpose of shared services reform is to rationalise Defence corporate overheads in a way that does not reduce support of operations or capability development.

Savings from these reductions will be returned to the Budget.

But I must be frank. Early Strategic Reform Program savings have been, in effect, ‘low hanging fruit’. The easy cost cuttings and the easy savings.

Achieving Strategic Reform Program savings targets into the future becomes tougher as we pursue real and sustained reform across Defence.

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From 2012-13 onwards, Defence will need to find annual savings of $2 billion and above.

These savings have to be genuine and long lasting.

As a consequence, there must be a greater focus on the implementation of long lasting reform as opposed to one off cost cutting. Some examples are:

• working with industry to introduce smart sustainment improvements; • the consolidation of 24 major wholesale warehouses to 7 and the reduction 200 smaller warehouses to less than 100; and • the rationalisation of information data centres from 200 to

less than 10.

Delivering these reforms on time and within budget will be vital to the success of the Strategic Reform Program. Defence has anticipated the inherent challenges, and is working hard to address them.

Reform - Accountability and Procurement

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

The Government agreed to 42 of them in full and three in part. Some of the key recommendations have not yet been fully implemented. These include:

• 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; and • benchmarking all acquisition proposals against off-the-shelf

options where available.

In early May, Minister Clare and I announced our initial accountability and procurement reforms for Defence.

As a consequence, as a matter of priority, Defence is accelerating the full implementation of all of the Kinnaird and Mortimer recommendations previously agreed by Government.

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This will provide greater confidence in the eventual success of projects.

Already we are seeing signs of improvement, with around 20% to 25% reduction in slippage of scheduling of those projects caught by the Kinnaird and Mortimer reforms as compared with earlier projects not subject to that rigour.

Reform - Minor Projects

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

There are some 160 minor capital equipment projects in Defence to be delivered over the next 10 years at a cost of over $1 billion. This is an area of Defence expenditure long overlooked.

The taxpayer has a right to expect that these projects will be managed as efficiently and effectively as more costly projects.

The two-pass approval system has been successful in improving the budget, schedule and capability delivery of major projects. This same rigour will now be applied to minor capital projects, including a formal business case for two-stage approval by the Minister for Defence.

Reform - Early Warning and Indicators

The Department is also implementing an Early Warning and Indicator system to prevent problems early in the life of a project.

Defence assesses that 80 per cent of problems with Defence capability projects emerge in the first 20 per cent of the project’s life.

This points to the need to address the early stages of capability planning, to get projects right at the outset.

We also need early warning in order to be able to take effective preventative action.

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A set of triggers has been established to give early warning of projects which are or are at risk of running late, being over budget or not delivering the required capability.

The Minister for Defence, the Minister for Defence Materiel, the Secretary of Defence and the Chief of the Defence Force are advised when these triggers are activated.

When a trigger is activated Defence will conduct an internal review of the project and recommend whether a full diagnostic examination, known as a Gate Review, should be conducted.

Reform - Enhanced Gate Review Process

In this context, the Government is expanding the use of the Gate Review process for mature projects to ensure that the desired operational capability is being delivered.

Gate Reviews commenced in 2009 for selected high value and highly complex projects and have proven very effective in the early identification and resolution of problems.

Gate reviews have now been expanded to apply to all major capability projects.

We have also announced enhanced and more rigorous reporting to Government on such high priority projects.

Quarterly accountability reports to the Minister for Defence, the Minister for Defence Materiel, the Secretary of the Department of Defence and the Chief of the Defence Force will be provided for designated key projects.

This will improve accountability and alert senior Defence officials and Government to problems in projects so that an appropriate remediation plan can be developed early and acted on.

These reforms have a single central focus and I return to our guiding principal: prevention not post mortems.

It is most important to get projects right at the outset and early on.

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Early intervention is always better than an exhaustive assessment well after the seeds of project difficulty have been sown.

Reform - Projects of Concern

The Project of Concern process was established by the Government in 2008 to focus the attention of Defence and Industry on remediating projects with significant schedule, cost, capability or project management challenges.

I make this point at the outset: the public policy objective is not a Project of Concern, the public policy objective is a successful project.

The Minister for Defence Materiel has been working closely with Defence, the Defence Materiel Organisation and Industry to reform management of Projects of Concern.

Recently, Minister Clare and I announced additional reforms including incentives for Industry to focus on resolving projects of concern, and enhancing accountability for projects on the list.

When a company has a project on the list, Government and Defence will weight its performance in remediating the project when evaluating that companies tenders for other projects.

In extreme circumstances this could result in companies being excluded from further tenders until the project is remediated.

We will also introduce a formal process for adding and removing projects to the projects of concern list.

Defence and the Defence Materiel Organisation will also develop formal remediation plans for all designated projects.

Where DMO and Industry cannot agree a satisfactory remediation strategy, DMO will provide formal advice to Government on whether the project should be cancelled.

For all existing Projects of Concern, formal remediation plans will be developed and agreed with Industry. These will include the basis on which these projects will be removed from the current list.

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Projects will only be taken off the list if the project is remediated in line with the plan or the project is cancelled.

Ministerial involvement has been and will continue to be a cornerstone in driving improved outcomes for Project of Concern projects.

Accordingly, as part of this enhanced process, the Minister for Defence Materiel will hold biannual meetings with Defence and Industry representatives responsible for projects of concern to

ensure individuals are being held to account for the progress of remediation of the projects.

Reform - Defence Capability Plan

In July 2009, the Government announced that it would re-examine the way we provide planning information to the public and to industry, including the nature and the content of the Public Defence Capability Plan, and how it could be enhanced.

To help in this task, Defence commissioned ASPI to look at how we might improve the content, quality, presentation, transparency and utility of the information made available publicly relating to current and forward capability planning.

While the Defence Capability Plan has been enhanced following the Government’s response to advice from ASPI, I continue to believe that it needs to be improved to be more useful to industry.

One ambition is to reduce the level of over programming in the Defence Capability Plan.

The overall Defence Capability Plan program is developed taking into account the available funding, the delivery schedules for projects and the capacity of industry to develop and deliver the projects.

The principle behind over-programming is to provide flexibility and to aid in ensuring that best use is made of available funding in the event of delays to the development of individual projects.

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It is a deliberate strategy to manage the risk of projects being delayed, so that funding can be diverted to other high priority Defence capability projects.

However, what over programming really means is that more projects are included in the Defence Capability Plan than can actually be realised.

This means promising more than we can deliver and, in effect, planning for failure.

Overprogramming is a long standing practice. All versions of the Defence Capability Plan since it was first published in 2001 have been over programmed.

I do not believe that this is the best basis for planning Defence capability.

Reducing the level of overprogramming in the Defence Capability Plan will be undertaken in conjunction with the next Defence Planning Guidance process.

Linking the Defence Capability Plan to the Defence Planning Guidance

As outlined in the White Paper, the Defence Planning Guidance is the Government’s premier classified Defence planning document between White Papers.

The Defence Planning Guidance process aligns strategic guidance, capability decisions and resource planning on an annual basis.

The 2011 Defence Planning Guidance process is well underway.

Future iterations of the Defence Capability Plan will be more closely linked to this process.

Linking updates to the Defence Capability Plan with the Defence Planning Guidance will ensure that information provided to Industry is based on the latest national security tasks set by

Government.

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This also underlines the fact that the Defence Capability Plan is primarily a national security document. It is not of itself an industry policy document, but guidance to industry.

Getting these projects right and delivering them to the Australian Defence Force on time is an essential element of the Australian Defence Force being able to meet future challenges.

Reform - The Rizzo Report

In February, the Minister for Defence Materiel and I announced the appointment of an independent team of experts to develop a plan to address problems in the repair and management of the amphibious and support ship fleet led by Mr Paul Rizzo. Yesterday the Minister for Defence Materiel and I announced additional reforms as part of the Government’s response to the Rizzo Report into the Amphibious Fleet.

Mr Rizzo has identified a systematic breakdown over a long period of time, including under resourced naval engineering capabilities, inefficient industry contracts and inadequate risk management.

Many of the seeds of the problems we now face were sown long ago, and over time insufficient resources have been allocated to address materiel and personnel shortfalls since the ships were brought into service many years ago.

Mr Rizzo’s report includes a plan to address these problems, to reform past practices, and oversee implementation of the reforms.

The Government and Defence have accepted all of Mr Rizzo’s recommendations and will fully implement the outcomes of Mr Rizzo’s review.

This includes the remediation of naval engineering capability, to be overseen by the appointment of a new two star naval engineering officer, and an increase by over 20 new positions to the Amphibious and Afloat Support Systems Program Office of the Defence Material Organisation.

The Government has asked Mr Rizzo to chair an Implementation Committee so that he can personally ensure that the agreed recommendations are being effectively implemented in a timely way.

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Future Reform - The Coles Review

Our amphibious capability is not alone in facing significant maintenance and sustainment challenges.

I have previously spoken about the considerable challenge to resolve the lack of Collins Class Submarine availability.

The Collins Class is a vital part of Australia’s maritime national security capability.

But problems with the availability of the Collins Class are of long standing, deeply entrenched and well known to the public.

These problems are significant and highly technically complex.

At times we have seen as few as one Collins Class submarine available for operations.

This situation is unacceptable but will not be addressed simply by continuation of the status quo.

This is a significant challenge for Government. It is a challenge for Defence. It is a challenge for Navy and it is a challenge for the ASC.

As a consequence, the Government will conduct a review into the optimal commercial framework for the conduct of Collins Class Submarine sustainment.

The review will be conducted by Mr John Coles, a United Kingdom-based private sector expert in major Defence programs.

Mr Coles will provide his interim report by December 2011 with a final report by March 2012.

My ambition is that the Coles Review will do for the Collins Class Submarine what the Rizzo Report has done for our amphibious fleet capability: a clear sighted path to improve the sustainment and availability of the Collins Class Submarines.

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The Coles Review and subsequent reforms in Collins Class sustainment are an essential part of tackling the significant challenge of submarine availability.

Without having confidence in our capacity to sustain our current fleet of submarines, it is very difficult to fully commence, other than through initial planning, the acquisition program for our Future Submarine.

This is consistent with the absolute necessity to work very hard in the early days to get projects right and thereby avoid, reduce, and minimise project difficulties down the track.

So for what will be largest defence capability project that the Commonwealth of Australia has seen, very careful attention in its early stages is demanded, and that’s what we’re doing, including sustainment.

Future Reform - The Black Review

Problems in Defence procurement, in sustainment, in budgeting all point to problems in institutional accountability.

To effectively reform Defence, to improve Defence outcomes, we must address the administration of Defence.

Reform to Defence administration will be detailed in the coming weeks when I announce the Government’s response to the Review of the Defence Accountability Framework, known as the Black Review.

The Black Review is the first comprehensive review of personal and institutional accountability in Defence.

The Black Review and the Government’s response will outline how improved accountability can enhance Defence performance by ensuring that the different parts of Defence work together much more effectively and with greater accountability at both personal and institutional level to produce better outcomes.

The Black Review will build on the procurement reforms that I and Minister Clare have announced.

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Central to these reforms will be to re-establish and strengthen internal contestability within Defence. As stated in ASPI’s report on the Control and Administration of the Department of Defence, “No plan or proposal should go to Government without having been robustly contested and red-teamed within Defence".

All of these reforms will ingrain rigour and individual and institutional accountability in the day to day work of the Defence organisation.

This will see the Defence organisation more effectively and efficiently support Australian Defence Force operations now and into the future.

Force Posture Review

It is also essential that the Australian Defence Force is correctly geographically positioned to meet future security and strategic challenges.

That is why I recently announced the Force Posture Review.

The need for the Force Posture Review is driven by our strategic circumstances.

Australia’s strategic interests are overwhelmingly positioned to our north, north west and north east.

A ‘Brisbane Line’ disposition of Navy, Army or Air Force assets does not reflect the reality of where the Australian Defence Force must operate, whether for military operations or humanitarian assistance and disaster relief, or other contingencies.

It is appropriate to consider whether the Australian Defence Force is appropriately geographically positioned to respond in a timely way to Australia’s strategic and security demands.

I am advised that this is the first stand-alone dedicated Force Posture Review that we’ve had for a considerable period of time.

The Review will examine strategic and security considerations including the rise of the Asia Pacific, the rise of the Indian Ocean rim as an area of strategic importance, the ongoing need for

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Australia to be in a position to respond to a range of contingencies including, humanitarian assistance and disaster relief in the Asia Pacific and the Indian Ocean and also new and modern security and strategic challenges, in particular energy security.

The Force Posture Review will assess the impact on the ADF’s Force Posture of these considerations and will make recommendations in relation to the basing options across Australia.

Two of our leading national security experts, Allan Hawke, a former Secretary of the Department of Defence, and Ric Smith, also a former Secretary of the Department of Defence, will oversee Defence’s work on the Force Posture Review.

The Defence Force Posture Review will report during the first quarter of 2012 and will form part of the security and strategic considerations for the 2014 White Paper.

This work will complement the joint work we are undertaking with the United States on the US Global Force Posture review.

In November last year, Secretary Gates and I agreed that a bilateral Australia-United States Force Posture Review Working Group would develop options to align Australian and United States force postures in ways that are of benefit to both our countries' national security.

The strategic focus of our discussions with the United States is to the north of Australia, and to the strategically important arc running from the Indian Ocean through to the Asia Pacific region.

Australia and the United States will work together to, for example:

• develop options for increased US access to Australian training, exercise and test ranges; • consider the prepositioning of US equipment in Australia; and • develop options for greater use by the United States of

Australian facilities and ports.

The discussions include making sure that we are postured to be able to respond in a timely and effective way to a range of

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contingencies that may arise in our region, including humanitarian assistance and disaster relief.

That means pre-positioning supplies, equipment and Navy platforms to be as close as practicable to where natural disasters may occur and to avoid the unnecessary travel time in moving ships ported far to the south.

I look forward to continuing this work with Defense Secretary Leon Panetta.

Conclusion

The reforms we have delivered and those which will follow in the months ahead will position Defence and the Australian Defence Force to face range of challenges, now and into the future.

Reforms to Defence accountability will address challenges in Defence procurement and the control and administration of Defence and its finances.

The Force Posture Reviews will mean that our forces are correctly geographically positioned to meet future challenges. Meeting and overcoming challenges is what the ongoing reform program is about.

We will succeed in this because we are determined to do so.

We will succeed in this because we have a national security obligation to do so.