Wednesday, 14 March 2012
Matters of Public Interest
On this matter of public interest today I want to talk about the absolute necessity for more early industry consultation within the purview of the Department of Defence. In that context, the Senate Foreign Affairs Defence and Trade References Committee inquiry into defence procurement has identified, as we all now know, a number of matters absolutely critical to improved performance in the context of defence procurement.
The universal diagnosis has been that inadequate project prescription by Defence continues, after many years, to be a major problems. Coupled with over-optimism and over-promising by industry, this sort of inadequate project specification, without exception, leads to failure. However, this short-coming has its origins at the very beginning, when strategies for capability acquisition are formulated. The short-coming is seriously compounded at the first-pass stage and later, if the original strategic decision proves to be wrong.
Industry has expressed many complaints to the committee about the behaviour of Defence and relevant agencies. The important complaint in this context concerns the almost total lack of engagement and consultation at a very early stage—that is, the white-paper stage and the period thereafter, when broad strategy is converted to strategic capability options. Further, I suggest that if Defence paid greater attention to learning from industry what was truly possible, technically speaking, a lot of mistakes, schedule blowouts and cost blowouts could be avoided.
At worst, the criticism is that Defence, strategically speaking, is a closed environment or a closed shop—that is, strategic thinking is almost completely internal to Defence, its agencies and those client groups who are engaged on the inside of the defence debate in this country. Consultation and debate with outsiders, such as numerous think tanks and industry, is negligible or non-existent. One experienced observer has described Defence's capacity in this area to be an 'intellectual desert'.
The 'not invented here' syndrome predominates—that is, 'We know best and no-one else knows as well as or as much as we do.' The sheer tragedy is in the circumstance that Australian industry is, in large part, comprised of multinational companies based in the United States of America and Europe. That is where most of the R&D is done and where world leading-edge technology is carried out, formulated and improved. These companies therefore are part of the future capability in the world, especially in the United States where policy decisions by governments for over 100 years have resulted in procurement being outsourced to industry. Industry is also an intrinsic part of the strategic military thinking, policy development and capability planning. But not in Australia—or not to the same extent and not to a sufficient degree.
Nor are the multitude of Defence officers stationed abroad capable of monitoring, studying, or advising on that integrated relationship. Technology usually belongs to large, foreign owned primes who have domestic units in this country—companies which research, develop, produce and maintain military hardware valued at hundreds of billions of dollars every year. They are leading-edge in the most technologically advanced industry in the most advanced country in the world.
Our dependency on them is increasing for a number of interconnected reasons. Firstly, military equipment is becoming increasingly sophisticated. This applies especially to aircraft, weaponry, communications and protection technologies. Secondly, alliances dictate a higher degree of interoperability. The Australian government has made a policy call that Australia's armed services will engage to a high level of interoperability with those of the United States. Australia simply does not have the scale and depth of technological skill to conduct research and manufacture for, in world-class terms, the small market of this country.
Despite these circumstances it seems foolhardy to ignore the knowledge bank which these primes have to offer to this country. Yet according to those companies, we do just that. We do it on a regular and continuing basis, especially in the early stages of needs and gap assessment. The critical element of that is early process is now the white paper. It has become the key strategic doctrine for government. It effectively sets Defence policy in stone for five years—at least, that is the attitude of the Department of Defence.
Industry has said that consultation with them on technological capabilities has been minimal. Further, if they were consulted it would have led to better informed procurement options and strategies being placed in the white paper. Industry engagement in Australia seems to be limited to those stages after key strategic decisions are made. Proof of this can be seen in the submarine sideshow, whereby only now, after decisions have been made, are companies being engaged and options explored—options which should have been developed immediately after the white paper was agreed upon and published. Clearly, I suggest, this is part of an unhealthy and untrusting relationship, as I have mentioned previously—the Defence attitude is that industry is in general typified as rent-seeking to exploit generous budgets and, further, that industry's single ambition is to win a contract, with the detail to be sorted out later on. As we have seen, it is fair to say that Defence is often complicit—again, simply because of the failed prescription entered into without proper consultation at the beginning of the process.
The single issue here is that the process for product specification, especially at the earliest stage, to be charitable, is vague. The fact is that the real expertise around the world on military development and manufacture is with industry, driven by the United States military in particular, which, overwhelmingly, spends three or four times more than that of the rest of the world. We seem to have realised that, acknowledging that local development is often a recipe for failure. We have moved to off-the-shelf purchasing, which, where genuine, has proven its worth in some, but not all, of the processes described. We have also moved to outsourcing, which remains valid for procurement but of course has a significant downside for both sustainment and maintenance because we lose, we do not retain, the corporate knowledge in this country. This flies in the face of the mantra for local development, which has often proven unable to match genuine off-the-shelf purchases in both cost and timeliness—certainly not without cost-plus arrangements or subsidies essential because of poor product specification. I suspect that there is still a strong school in Defence arguing for local development using Australia's unique geographical circumstances in support. Of course, that is relevant sometimes but not as much as some would have us believe.
Overall coordination and responsibility for developing the Defence Capability Plan is tightly controlled by the Capability Development Group, the CTG, following policy formulation from the strategic policy areas. Unfortunately and increasingly, the government is almost totally reliant on this single channel of advice—often expressed in committees as the 'one defence family' view of the world. ASPI and others have frequently criticised in this context that there is no viable form of contestability. Industry, which has the richest source of advice for the reach-back reasons I have mentioned, is excluded. As for the independence of both DMO and DSTO, their involvement appears to be too late for strategic consideration, although I suspect that the value of their independence has in recent years become seriously diluted—assuming that such independence ever worked properly, given the raft of failed projects and the projects likely to be about to be added to the list of projects of concern.
The more recent ANAO report shows quite clearly that some of that advice, particularly with respect to off-the-shelf purchases, was obviously misleading—it was just incorrect and should never have been given. Most were simply developmental—not in production or in service anywhere around the world. Will we ever know what the independent views of DMO and DSTO were, let alone those of industry? It seems unlikely, simply because the system is still totally opaque.
The defence of the Department of Defence to the matters and criticisms I raise is that there is a very high need for probity—that is, Defence is rightly terrified of becoming embroiled in controversies of favouritism, bias and improper relationships, which have dogged it so frequently in the past. Industry is certainly no slouch in trying to gain that commercial advantage, and too many in Defence and DMO in the past have been seriously compromised. This is equally important at the tendering stage and the pre first-pass, where technologies are being assessed. Yet I struggle to understand the probity issue at the strategic stage, where capability options are still being explored in strategic form. To my mind, it can be nothing other than part of the anti-industry mentality I have been outlining in this speech or just a convenient smokescreen—in fact, much like the commercial-in-confidence argument we regularly encounter in Senate estimates. On many occasions this defence has been used to deny the parliament necessary information. And so it is with the assertion of probity, which is used without any discretion to maintain this dreadful veil of secrecy.
This is a fundamentally important issue as we begin the revision of the current white paper, which, some would suggest, is already out of date. If we ignore the intellectual capability of our industry and its overseas principals, as we have in the past, we will continue on this march of procurement folly. Government needs the best advice it can get, as of course does the taxpayer. Defence needs to open up and take advantage of all the knowledge and information available; otherwise we will continue to pursue, and receive in response, second-best options.
What is the critical message here? The critical message is this: there is no good reason for not having early and regular consultation with industry. The optimal time for such consultation is pre first-phase decision making. Why is that? It is pre scoping, pre guidelines drafting, pre capability decision making. You consult with industry at the pre first-phase period, but you consult at a different level. You consult on strategic purpose, you consult on conceptual options and you consult on capability options that might still be in the pipeline or still being thought about or that might be put into place in a different way. Probity, commerciality and confidentiality, I suggest, are major league straw-man arguments that do not hold up when put to the serious test.
At a basic level, at the pre first-phase consideration time, we are talking strategically. We are talking conceptually only. The field of competition, the field of competitive behaviour, the field of pricing and the field of options in terms of particular strategic capability come post second-pass decision making. Probity is of course relevant then— (Time expired)