Mark Bishop (WA, Australian Labor Party) Share this | Link to this | Hansard source

I seek leave to speak for up to 20 minutes.

Leave granted.

I thank the Senate. I have spoken on a number of occasions in recent years about reforms to the defence procurement system. I have also spoken about the system of accountability, particularly with respect to the essential role of the parliament. These are matters in which I retain a close interest, through my chairmanship of the Senate Foreign Affairs, Defence and Trade Legislation Committee, my membership of the Joint Parliamentary Committee on Public Accounts and Audit and my contact with industry and industry representatives.

I have also spoken about my learning in the United States last August from briefings by US officials and industry representatives. In general I think I can say with some confidence that in Australia we do seem to be on the right track. The Kinnaird and Mortimer reviews as they are being implemented are clearly having an effect, remembering that the nature of our defence bureaucracy is akin to a large dreadnought battleship—inefficient, costly to run, difficult to turn and in part obsolete.

By way of background for those listening, there are now only three bureaucracies involved in the procurement task, putting aside interested agencies such as Treasury, Finance and the Defence Science and Technology Organisation, which is often overlooked as an essential part of the process. The first is the Department of Defence itself, which is the principal client, including the three services—each of which approaches its procurement planning differently. Then there is the Defence Materiel Organisation, which as the contracting agency is the meat in the sandwich. Finally there is the defence industry—the providers. It is very clear to me that the implementation of this new order with the tough new disciplines needed is slow and painful. There is still a way to go on changing some very important behaviours and attitudes.

Essentially, however, there are only five ingredients to successful defence procurement: first, the client’s—Defence’s—specifications must be detailed, accurate and final before going out to tender; second, the contracting agency—DMO—must demand the highest standard of specificity from the client and then be able to represent that requirement to industry, which should not have any doubt about what is required; third, industry must demand accuracy and deliver to the contracting agency, DMO, exactly according to the specification, on price and on time; fourth, there should be no doubt about what DMO has procured on their behalf as meeting the client’s specifications, for dispute-free delivery to the client; and, fifth, agency and clients, as public instrumentalities, must be able to fully account for and report in detail on capability specifications met, cost and timeliness to the parliament.

That sounds extraordinarily simple, but of course it is not. The history of defence procurement has been one of constant failure against each of these principles. The reasons are partly historic but to some extent are endemic to the nature of the business. There are no excuses for past poor performance. It is true that defence materiel procurement around the world is based on obtaining leading-edge technology. That can be very complex and it is not an easy process for a small, remote nation such as Australia where our needs can sometimes be unique.

Unfortunately, sometimes this very complex technology is bleeding edge. We have been caught by undeliverable expectations leading to failure, project cancellation and failed capability planning. Some of that, however, is the result of unrealistic ambitions, false promises and what is called the ‘conspiracy of optimism’. There are far too many examples of such failure and few, I would suggest, are excusable. The recent examples of helicopters and landing barges could only be described as resulting from collective incompetence. However, where we tag onto new product developments—say, in the United States—whether for aircraft, weaponry or other systems, and the product is cancelled or amended, failure is to be expected. But a dilemma remains, and that concerns the level of confidence to be had in new developments which may have a capability horizon of, say, 30 years.

The purchase in the sixties of the F111 fighter-bomber, which turned out to be a brilliant plane, is illustrative of this experience. Its development was fraught with controversy over design, cost and late delivery, just as the JSF is now—hence the pragmatic decision to buy the Super Hornet in the interim as a guarantee of capability, albeit perhaps with compromised planned capability; hence also the argument for increased emphasis on off-the-shelf purchases for guaranteed cost and timeliness. I note, though, that committing to prototypes not proven operationally can be as risky as committing to a product still in development, especially where there is extensive customisation—or ‘Australianisation’, as it is termed.

Outside that broader context, however, it is clear that the reforms to get compliance with the principles I have mentioned are starting to fall into place. But it is proving difficult. We are all aware of the difficulties in the relationship between the DMO and each of the three services on the one hand, and industry on the other. The purchasing disciplines set out in the principles I listed were too loose. Specifications were inadequate. Contracts were therefore imprecise and industry had great scope to negotiate low and ratchet right up. Cost overruns were normal, as was late delivery. This is still common overseas, as I was told recently in the US, but subject to new disciplines as defence budgets start to shrink.

Having made these observations and outlined the background to reform, my question now is: what progress have we made in Australia post Kinnaird and Mortimer? As mentioned previously, the front end specification and approval discipline has been dramatically tightened up. But the bulk of these recommendations for reform applied to Defence and the three services rather than DMO. I will return to that subject shortly. That being the case, any analysis of success against Mortimer must extend necessarily to those elements beyond the current narrow focus on DMO. The means by which this assessment is made is through the parliamentary committee system, with the assistance of the Australian National Audit Office. That work has been usefully supplemented by evidence to the Senate Foreign Affairs, Defence and Trade Legislation Committee, which meets three times a year.

I am pleased to be able to say that, with the help of the ANAO, useful progress has been made on transparency of process—but not outcomes. The ANAO report of November last year titled 2009-10 Major Projects Report marks the spot. A number of important consequences flow from that. This report contains an assessment of 22 major Defence projects currently underway. This review is not just measuring progress on each but analysing the systemic strengths and weaknesses. The most pleasing matter to note is that ANAO has found that for all projects there have been no cost overruns. Importantly, it should be noted that for off-the-shelf purchases there have not been any delays whatsoever—a very salutary and instructive conclusion. As identified by ANAO, the more customisation for Australian needs and the more development to be undertaken, the greater the slippage.

The bad news, however, is that timeliness has deteriorated by 31 per cent. The effect of this simply is that, while the taxpayer has stopped bleeding, the capability plan is failing in delivery. This is a very serious weakness in our defence effort. To quote the report:

The reasons for schedule slippage vary, but primarily reflect the underestimation of both the scope and complexity of work by industry and the DMO.

As we know, much of this can be attributed to system design and integration planning and implementation. This is the biggest single bugbear across the board in this age of technical complexity. Unfortunately, I fear that experience is such that we cannot be too optimistic about finding silver bullets to fix the problem. However, in complimenting ANAO and DMO for their efforts in producing this excellent report, there are some important matters requiring resolution. These were the subject of some discussion at a meeting of the JCPAA on 28 February. I mention them here to stress their importance.

First, and perhaps most important of all, is the capacity of the accountability and reporting system to accurately measure and report progress in a standard format, based on standard information. It is clear from the DMO project data summary sheets in the ANAO report that much historic information on some projects simply is not available. I have raised this issue many times, because I have found it impossible to measure costs across projects through the years. The classic for me was the old FFG upgrade project. At estimates hearings, my questions were met with cover-up and confusion about the differences between costs in original dollars, out-turn prices, indexation, foreign exchange fluctuations and changes to scope. It is salutary to know, at least from this report, that ANAO and DMO cannot establish that either. Certainly at JCPAA it is agreed that a standard benchmark for reporting is needed, the suggestion being that second pass approval price, which is to be the starting point, should be expressed in out-turn dollars. Despite the risks of slippage and variable exchange rates, at least this might give us a more accurate track on real costs. It is also clear that in filling the gaps in the information it simply may not be fruitful to chase some data. I suspect we might have to write it off to experience and get on with establishing strict formats and reporting standards for all projects henceforth.

Another important matter of process referred to in the ANAO report concerns the point at which responsibility for product delivery can be passed from DMO to the capability manager—that is, the service chief responsible for the original specification as client. The answer to this question is determined by the degree to which my principles on procurement have been met. Clearly, avoidance of disputes depends on compliance with client specifications. The communication along the way needs to involve not just the client and DMO but the industry contractor as well. There is a suggestion that the judgment on handover from DMO to Defence should be at what is termed ‘final operational capability’. But, as this entails many other elements such as training and the provision of associated facilities which are not the responsibility of DMO, I am not too sure. This is an important matter to be resolved in due course.

My view at this time is that final materiel release, FMR, the point at which DMO consider they have complied fully with the tender specifications, is the appropriate handover point. In that way some discipline remains with the client to get it right at the beginning and throughout the project.

The next matter flowing from the ANAO report I want to mention concerns the listing of both the major projects under review and the projects of concern. I note that some of the major projects also appear on the list of projects of concern. This latter is a management device where, if it is clear that a project is failing or at risk, it is targeted for extra attention—noting, too, that part of that attention is the introduction of ‘gate’ reviews. These reviews comprise independent experts convened to bring fresh eyes to the management of a project. This is a technique now employed widely and usefully in government and industry, provided it is in time.

Nomination as a project of concern is also a process used to determine whether in fact a project might fail in full or in part. The recent cancellation of the landing barge fiasco came from this process, as did the contract renegotiation with Boeing on the non-delivered capability on the AWAC aircraft. What is also clear from the evidence given at recent Senate estimates is that many of the projects considered to be failing by this means are being rescued. The outstanding matters to be resolved within JCPAA, however, concern the criteria by which projects should be included in such lists and also when they might be removed, having been rescued, and what the thresholds should be. These discussions will be had with both DMO and the ANAO in due course, but I would like to briefly mention the cost thresholds.

From the simple principle of Pareto, perhaps, examination of the detail of projects is restricted to those above a set value. Here I note that a cabinet threshold also exists, recently increased to $100 million for second pass approval. I have some reservations about such high thresholds. While no doubt it is a work volume issue and one of risk management, the numerical bulk of projects are below that threshold. Perhaps one day soon when the reporting date, format and datasets have been standardised we might get to a report which is far more inclusive.

We are making good progress on transparency in this area, and I issue some compliments to the Department of Defence, DMO and ANAO. But that is not to forget that the 31 per cent slippage in delivery time is simply not acceptable. Of course, new strict disciplines in any complex process have to flow through to all the players. That includes industry, because improved transparency leads to better discipline, tighter contracts and better compliance. In that context, I am sure DMO is helped enormously by strong direction from both the government and the parliament in its relationship with the Defence client and the industry supplier. So the authority of parliamentary committees should not be underestimated. Ask any public servant and they will tell you that being interrogated for hours on end can be pretty torturous. That accountability flows down into organisations, including industry. In this context, the taxpayer can be assured that the determination of the JCPAA in improving reporting and accountability will continue.

However, we are about to embark on more intensive parliamentary scrutiny by way of the forthcoming inquiry of the Senate Standing Committee on Foreign Affairs, Defence and Trade. Through this inquiry, the parliament will probe beyond the operations of DMO. The terms of reference are quite specific in that, from the white paper down, the committee will be looking at, among other things, the inner workings of the Defence capability group, its maze of committees, which to date have operated in splendid isolation from the parliament, and the reform achievement of the Strategic Reform Program. In that context, I recently obtained a useful brief from the Parliamentary Library. The brief sought to map out these internal processes within each service but also collectively at the strategic level. I am absolutely horrified at the complexity. Clearly, we have much to learn about the reform program and the reasons for the catastrophic blow-out in delivery times.

While government initiated reviews such as Kinnaird, Mortimer and the Strategic Reform Program have been important, so too has the scrutiny of parliament. In fact, as experience has shown on many occasions—for example, with the report on military justice—parliamentary committees have a very real role to play, not just in pursuing accountability but in getting, ensuring and guaranteeing substantial policy reform by government. That is certainly the approach I will bring to this work. I look forward to the work of the Senate committee, the continuing focus of JCPAA and the ANAO, and to an acceleration of change and improved outcomes from the Defence procurement process.