Rex Patrick (SA, Nick Xenophon Team) Share this | Link to this | Hansard source

I rise tonight to speak on the topic of defence procurement. It is an important topic, noting the taxpayers' cost associated with it and the national security significance of it.

I have a real concern about defence procurement. Hundreds of millions, indeed billions, of dollars are being squandered and new capability is being brought on with significant delays—in some cases, of several years. Ridding ourselves of huge cost overruns in defence must be addressed as a matter of priority. On the strategic front, we need to pay attention to two distinguished strategists, Professor Paul Dibb and Richard Brabin-Smith of ANU's Strategic and Defence Study Centre, both former deputy secretaries of the Department of Defence, who made the following observations about management of our strategic risk:

Over recent decades, judgements in this area have relied heavily on the conclusion that the capabilities required for a serious assault on Australia simply didn’t exist in our region. In contrast, in the years ahead, the level of capability able to be brought to bear against Australia will increase, so judgements relating to contingencies and the associated warning time will need to rely less on evidence of capability and more on assessments of motive and intent.

Bottom line: we don't have the same warning time frames as we once did.

We won't necessarily have time to remediate problematic programs to ensure that they deliver the combat capability promised. Although everyone hopes that it will not be the case, Australia's changing strategic circumstances do mean there is a significantly greater risk that Australian forces may be called on to engage in conflicts of significantly greater intensity and to do so with much shorter warning than has been the case at any time since the Korean War of 1950, or indeed the Second World War. In these circumstances, we can no longer afford, if indeed we ever could, the sorts of defence procurement debacles that we have seen over the past 20 years.

You're all likely aware of notable examples of poor procurement, including the Seasprite helicopters which cost $1.5 billion and were never used in service, and the $44 million LCM2000 watercraft which proved too wide to be embarked on the amphibious ships they were intended for. I note the replacement watercraft appears to be not buoyant enough to carry the Abrams tank ashore, but that's another story in development. But that's not what I want to talk about. I want to talk about an even bigger procurement disaster, a $21.5 billion disaster—yes, that's right, $21.5 billion.

Last month the Department of Defence supplied an answer to a question from Senator Leyonhjelm about defence project procurement. The answer details, amongst other things, the total delays associated with a number of major defence projects. The delays range from a couple of months to 151 months. Being a former project manager, I was taken aback. Project delay equals cost. That's obvious. If a project is delayed you basically have to keep the entire project team on task until final sign-off. Noting there were decades of delay in the table, there had to be massive cost blowouts. Where was it being reported? Fortunately, a few days after the Leyonhjelm answer arrived, the latest ANAO major projects report came out. I examined it, and at first glance all seemed well—almost all projects were within their approved budgets. How can that be? Well, it turns out that the key to Defence's magic is the phrase 'approved budget'.

Let's go to a multirole helicopter. It's 60 months late but it's well within its approved budget. It has over $700 million remaining in the kitty. The answer to this quandary comes by looking at the project's second pass numbers. Let's recall how our defence capability process works. We start with a range of options to fill a capability need. At first pass we whittle down the options to one or two and then proceed to fully explore and fully cost those options. At the end of the detailed process the option or options are presented to government for what is called second pass. According to the Defence Capability Development Manual:

Second Pass approval is formal approval by Government of a specific capability solution to an identified capability development need. Second pass provides Government approval and acknowledgment of:

  …   …   …

e. budgetary provision for acquisition and operation of the capability solution, including all relevant FIC aspects and NPOC—

that is, fundamental inputs to capability aspects and net personnel and operating costs.

At second pass, where government commits to a solution, the total cost is presented. The second pass cost for the multirole helicopter was $953 million. Despite $2.9 billion being spent on the project to date, it's still within the approved budget of $3.7 billion. Defence will and does explain this by saying, 'Well, there's been a scope change,' or 'There have been currency variations,' et cetera. Those variations, and, indeed, all manner of sin, can be covered off by getting a budget change approved by government. As a result, a cost blowout is hidden.

The entire defence project budget is like this. I invite you to examine ANAO's major project review and find a project that hasn't had a variation made to its agreed budget. It's a difficult task. The ANAO, thankfully, provides one number in its report: the total budget variation since second pass approval. In 2011-12 it was $5.9 billion. In the years that followed it jumped to $6.5 billion, then to $16.8 billion and then to $18.5 billion. This year, across the 27 major defence acquisitions in the ANAO report, it's the number I just talked about: $21.5 billion. That's a $21.5 billion blowout compared to what the government approved when it committed to the projects. Just lock that figure in the mind: $21.5 billion. But according to Defence there is no problem.

With this approach the books always look balanced when in fact they are seriously out of whack. The reality is that no-one can use the public numbers to work out how well we are or are not doing in defence projects. The realities are camouflaged and concealed, and that has to change. One could be forgiven for thinking Defence is one of the last bastions of old Soviet economics—perverse state socialism in which, no matter what the delays and cost blowouts, projects are always declared to be a success, everyone gets a medal and no-one takes responsibility. Perhaps the spirit of Leonid Brezhnev still lives on.

I'll be taking this up at Senate estimates with both Defence and the Auditor-General. Defence run to a plan—the Defence Capability Plan—with what is a finite budget. How can you execute a plan like that when you are diverting money for planned capability to deal with blowouts in current projects? The approved budget for the 27 projects reviewed by the Auditor-General was just shy of $62 billion. Across those 27 projects the average project delay is measured in years, and they are in total almost 35 per cent over budget. And that doesn't include the cost of keeping an older capability running until the delayed capability arrives—although I note, in the case of the Multi-Role Helicopter, Defence slipped in an 'upgrade Black Hawk' line item as one of the approved budget changes. The Multi-Role Helicopter was supposed to replace the Black Hawk. Neither does it include the cost to the dedicated sailors, soldiers and airmen who have to fight on with obsolete capability. It's a situation that is neither sustainable nor fair, at a time when the federal government is seeking budget repair. On one hand the government is cutting health, education, welfare and other important programs, while slipping through the fingers on the other hand are billions of dollars of Defence overspend.

So the first thing we need to reform in Defence procurement is to start reporting projects against a second-pass baseline and provide absolute transparency of every dollar spent beyond that. That's a key element of any reform. Those responsible must take responsibility and do so when they are in the job. All too often, by the time delays and cost blowouts are belatedly revealed, senior managers have already moved on. All too often they have been promoted or have moved to a more highly paid job in industry. No-one takes responsibility. We can't have that continue when in the decades to come the men and women of the Defence Force face a significantly greater likelihood that Defence capabilities will be tested not in exercises, or even low-intensity hostilities, but in extremely demanding and potentially costly high-intensity conflicts. If we find our Defence capabilities to be deficient in those circumstances, it will be much, much too late. So there is a heavy burden of responsibility not only on Defence but also on the parliament, and particularly the Senate, in exercising our scrutiny function through estimates and other committee hearings to ensure that our Defence procurement is really on time and on budget. It hasn't been, but it must be in the future.

Senate adjourned at 19:17