Projects Review to study annual Top 30

10 March 2008

Australia’s Minister for Defence, Joel Fitzgibbon, has commissioned Parliamentary Secretary for Defence procurement, Greg Combet, to oversee an ongoing, annual review of Defence’s Top 30 acquisition projects by the Australian National Audit Office.

In the 2007-08 financial year Australia’s defence budget is $22 billion, of which some $9.6 billion will be spent on acquiring, upgrading and sustaining defence equipment. Before it was elected, the incoming Labor government pledged an immediate audit of the Department of Defence, its budget and management processes as well as instituting annual reviews of major defence procurement projects.

Australia’s defence acquisition processes were overhauled in 2003 following a review of the government’s Canberra-based defence procurement agency, the Defence Materiel Organisation (DMO), headed by Adelaide industrialist Malcolm Kinnaird.

The Kinnaird Review recommended wide-ranging improvements to the processes the department should follow in specifying and procuring defence equipment. Before winning office Fitzgibbon was highly critical of the previous Howard government for its failure to follow these new processes and charged it with accepting defence project delays and budget blow-outs as the norm rather than the exception.

Since taking office he has singled out repeatedly in media interviews several major procurement programs which have encountered serious difficulties and delays: among them, the $1.4 billion upgrade of four RAN FFG-7 frigates by prime contractor Thales Australia, which is running four years late; the 3.5 billion Australian dollar program to acquire six Wedgetail Airborne Early Warning & Control (AEW&C) aircraft from Boeing, which is now over two years behind schedule; and the $950 million purchase of 11 SH-2G(A) Super Seasprite helicopters for the RAN, which Fitzgibbon finally terminated on March 5.

“The former government was obviously aware of these issues and attempted to hide them from the broader community,” he told Rumour Control. “Worse still is the fact the former government had no coherent plan for dealing with any of these issues.”

Also, Fitzgibbon has criticised heavily the Howard government’s decision in 2007 to order 24 F/A-18F Super Hornets at very short notice under a U.S. Foreign Military Sales (FMS) arrangement, at a cost of some $6.5 billion – this price is the estimated whole of life, whole of capability cost of the aircraft, incuding fuel, weapons and training.

This election-year decision ignored the Kinnaird processes, said Fitzgibbon, and was taken “without justifying the need or undertaking any comparative analysis or consideration of other aircraft”.

Fitzgibbon said he would discuss these and other so-called “high-risk” defence projects with senior officials from the Australian Defence Force, the DMO and the department before presenting a recommended course of action to his cabinet colleagues.

The planned review would implement an election pledge by Fitzgibbon to carry out a full audit of Australia’s defence budget “as a matter of priority” to determine its true position. He also will audit the effectiveness of the DMO and implement greater Parliamentary oversight of major defence acquisition projects.

The oversight role will be filled by Parliamentary Secretary for Defence Procurement Greg Combet. According to sources close to Combet his long term goal will be to improve management and administration within the DMO over the long term, rather than a crash program to re-build the 2008 DCP. Part of the oversight process will be an annual, independent review of Australia’s 30 biggest defence procurement projects by the ANAO.

At the time of writing no formal announcements had been made and DMO chief, Dr Steve Gumley, was understood to be still deep in discussion with the ANAO over how the projects will be selected and examined by the auditors.

Notwithstanding Fitzgibbon and Combat’s oft-stated concern to prevent a significant hiatus in defence contracting as a result of these reviews, industry is worried the review process could result in the delay or cancellation of projects to which Australian companies, especially small to medium enterprises (SMEs), have already made a significant financial commitment.

“Until you know what it is he [Fitzgibbon] is targeting, it’s hard to know what the implications are for Australian industry,” according to Paul Fisher, Canberra-based director of the Defence Industry Unit of Australian Business Ltd, one of Australia’s major industry associations.

The Australian Department of Defence is supposed to publish the latest update of its 10-year Defence capability Plan (DCP) in mid-2008; this rolling, $50 billion procurement blueprint is updated every two years and the 2008 edition is scheduled to contain additional industry policy implementation data derived from the March 2007 Defence Industry Policy Statement.

However, the development of a new Defence White Paper, which is due to be published at the end of this year, is likely to impact on the scope and timing of the new DCP. This, in turn, may not now be published until early in 2009.

Combet himself provided no clues on the timing of the next DCP in his keynote speech to the ADM 2008 Congress in Canberra on 26 February. But he did provide an important insight into his priorities, his methods and his style.

He said: “As the Parliamentary Secretary in this area I am formally responsible to the Minister for Defence for the following areas:

• The Defence Materiel Organisation;
• The efficiency and effectiveness of major capital equipment acquisition;
• Detailed analysis of and advice to the Minister on acquisition and sustainment issues generally;
• Contracting matters;
• Defence industry policy and maximising Australian industry involvement;
• Defence exports, and
• A number of programs run through DMO including the Skilling Australia Defence Industry (SADI) Program.

“All of this fits within the wider strategic objective to deliver to the ADF the capability it needs, while at the same time delivering value for money for taxpayers. In order to fulfil my roles I have developed a work program in my office comprising five keys categories:

• Significant projects which are over budget and/or schedule
• Current projects
• Future procurement and sustainment projects
• Ongoing reform of DMO
• Enhancement of Australian industry capability

“The first of these is the monitoring of projects that are suffering from slippages in schedule and/or cost. I am sure many of you here today will be aware of some projects that would fall into this category.

“I am conducting, in conjunction with the DMO, a review of these projects and providing advice to the Minister for Defence on the best way forward. Top of my list for this review process are the Seasprite Helicopters. These helicopters are already six years late and there are still a number of issues that need to be worked through.

“There are also a number of other projects suffering from similar problems. Basically my job here, and it is an early priority of my work, is to get across the detail of the projects so that I can provide advice to the Minister for Defence, who is the ultimate decision maker in these areas.

“I have seen some fairly radical reporting of some of these projects within the media and today I just wanted to inject a bit of realism into the public debate surrounding them.

“Firstly, it is important to note that these are generally what we call legacy projects. By this I mean that are projects that predate important Kinnaird reforms that have been made within the procurement process. For example, after the commencement of many of these projects we have seen the implementation of improved cost and schedule estimation, a reduction in ‘scope creep’ and the introduction of the two-pass system of Government approvals. These reforms have clearly made enormous progress in the efficiency and professionalism of procurement decisions and management.

“Secondly, a lot of the projects where there are problems are also developmental and involve some leading edge technology. Military forces and many corporations worldwide have been challenged by the high technical risk and cost/schedule uncertainty associated with such projects.

“This of course is not to say that I believe the performance of some of these projects should be excused. They should not be. I am however keen to inject some reality into the some of the media reporting on these projects and some perspective to the DMO’s performance.

“The fact is that DMO delivers the vast majority of its programs on budget and on time. I think sometimes DMO receives a lot of negative media attention when something happens that is not to plan, but little attention for projects it has successfully pursued and implemented.

“In many of these problematic acquisitions the Government is faced with complex legal and commercial arrangements that bind the Commonwealth and limit our options, but we are considering the issues.

“We also are dealing with many projects that remain critical to the ADF’s future war-fighting ability.

“Therefore I want to moderate some of the more fevered media speculation that the Government will be cutting a large number of projects. I noted with some interest a report in the Sun Herald in NSW just last Sunday, the 24 February, in which it was speculated that the following projects would be cut:

• Super Hornets
• Abrams Tanks
• Air Warfare Destroyers
• Amphibious Ships
• Seasprite
• FFG Adelaide Class Frigates
• JSF

“And a host of others were all subject to speculation that the Government was going to chop the lot. And I want to state clearly to you this is not the case. And please take that message. We will be reviewing these things where there are issues of concerns, but in many of the projects I have just identified there are no immediate issues of concern.

“With projects of the size and importance that we are talking about the Rudd Government is keen to make sure we are engaged and provide the necessary direction and support.

“That is why the Prime Minister and the Minister for Defence felt it was wise to have, for the first time, a Parliamentary Secretary who was tasked with the issue of Defence Procurement. I certainly know that the Minister for Defence is very committed to ensuring this area is handled professionally and I am keen to provide him the necessary advice and support he needs for this task.

“I believe it is also important that we not only work towards a resolution of some of the problem projects but also learn from some of the mistakes of the past. From my examination of these projects so far I can say that much of the delays and cost pressures are due to the following factors:

• The technically challenging nature of the capability being sought;
• Incorrect or inadequate cost/schedule forecasts;
• Failure to deliver against agreed schedules by both domestic and foreign contractors;
• Increases in the cost of labour and materials;
• Delays in project approval or contract formation;
• Variations to scope, or
• Delay in platform upgrades due to the heightened ADF operational tempo.

“Therefore it is part of my role to devise reforms to the procurement process to ensure, where possible, that we avoid making the same errors in the future and much of that work has been done due to the reforms already enacted.

“Another lesson that I have learnt, and which now seems obvious, is that it is incredibly difficult to integrate very modern military systems into old and dated platforms. This is something that the Government will be considering when we approach our future procurement projects.”

“My fourth task… is to continue the reform process within the DMO. One of the key elements I see in any future reform program is the current CEO of DMO, Dr Stephen Gumley. In my short time as Parliamentary Secretary I have already grown to greatly admire his talent, capacity and the contribution he has made. Therefore I will be keen for him to play a central role in a future program of reforms.

ENDS

BREAKOUT BOX:
Labor’s Defence Policy: what has Fitzgibbon promised?

The spate of reviews set up by new defence minister Joel Fitzgibbon appear to be a determined implementation of Labor’s 2007 election promises. Pundits trying to predict Fitzgibbon’s next course of action, and the drivers behind it, would be well-advised to re-read Labour’s 2007 Defence Policy, especially the section relating to defence acquisition.

It states: “A Rudd Labor Government will ensure its new Defence White Paper returns discipline and strategic coherence to the Defence Capability Plan (DCP).

“The Howard Government has politicised and compromised the integrity of the DCP by consistently ignoring its strategic basis. The Howard Government’s failure to have in place the operational priorities, framework and discipline that an up-to-date Defence White Paper brings to long-term capability development and planning has led to an unaffordable and incoherent DCP.

“The ADF is also suffering because of the Howard Government’s failure to effectively manage the DCP. The Howard Government’s mismanagement of equipment projects worth hundreds of millions of dollars has resulted in important capabilities being delayed or abandoned.

“Efficiency in defence is not just a matter of fiscal prudence and good housekeeping – it is a matter of strategic necessity.

“The Howard Government has failed to plan for the ongoing personnel and operating costs generated by new equipment to such an extent that the predicted shortfall calls into question the sustainability of the Defence budget.

“A Rudd Labor Government will conduct a full audit of the Defence budget to determine the true position as a matter of priority. Labor is committed to maintaining defence spending, including a minimum annual 3 per cent real growth until 2016, and is committed to ensuring that Defence dollars are spent more effectively and efficiently.

“Labor will implement a number of initiatives, and act upon their findings to address shortcomings in the Defence organisation. These will include:

• A comprehensive audit of Defence financial management to ensure that the corporate performance of the organisation fully complies with the Financial Management and Accountability Act 1997 and meets best practice standards;
• A formal evaluation of the effectiveness of the reforms to the Defence Materiel Organisation (DMO) that were implemented following the 2003 Review of Defence Procurement;
• Greater and more effective Parliamentary oversight of the major defence acquisition program.

“Labor will also task and resource the Australian National Audit Office to undertake independent evaluations of the top 30 major defence equipment projects on an annual basis.”

© Rumour Control 2008

ENDS