Joel Fitzgibbon (Hunter, Australian Labor Party, Minister for Defence) Share this | Link to this | Hansard source

by leave—In May of this year the government fulfilled yet another key election commitment by commissioning an independent review of the Defence Materiel Organisation and the effectiveness of Australia’s defence procurement systems. We made this commitment when in opposition in response to broad industry and community concern over the poor performance of the previous government in delivering the capability that the men and women of the Australian Defence Force need to do their job effectively, efficiently and as safely as is possible while also delivering value for the investment of Australian taxpayers.

In recent years, public confidence in the ability of the Australian government to provide the Australian Defence Force with critical defence capability has been severely undermined. Projects like the Seasprite helicopter, Wedgetail and the Adelaide class frigates have combined to trigger significant widespread community concern about the waste and mismanagement that too often seem synonymous with expensive defence projects. We honoured our pre-election commitment by commissioning well-known businessman David Mortimer to undertake a review of the DMO and defence procurement more generally. Mr Mortimer was a good choice. He is well suited to this task, having been the chairman of the Defence Procurement Advisory Board since 2004. He is also the current chairman of Leighton Holdings and Australia Post. Mr Mortimer delivered his report to the Parliamentary Secretary for Defence Procurement, the Hon. Greg Combet MP and me last Friday. In all, he has made 46 recommendations, the contents of which the government will consider in the lead-up to the release of the defence white paper.

In opposition, I said that I wanted the DMO to run more like a business and less like a bureaucracy. The government’s response to Mr Mortimer’s report will be largely guided by the likelihood that the suggested changes will give effect to that aspiration. This is so critical, given the budget challenge we face. This year and in the coming years the government will spend more money on defence than at any other time in the history of the Federation. Indeed, in three years time we will be spending $6 billion more annually on defence than the Howard government spent in its last year in office. We will need this funding growth to deliver all the capability and people we need to secure the nation. But to achieve these goals we will also need to better prioritise defence spending to get better value for taxpayers’ dollars and to ensure the defence budget is sustainable into the future.

Making the challenge greater is the huge defence funding black hole we have inherited from the previous government—a black hole with a value of up to $15 billion. This is why I have directed Defence to undertake a savings drive which will deliver $10 billion of savings over the course of the next decade. That is $10 billion which will be reinvested into defence to bolster higher priorities. Not one cent of those savings will leak out of Defence; all of those savings will be reinvested in the broader defence project.

The deeper reforms delivered by the white paper and its associated companion reviews will further drive savings and efficiencies. The Mortimer review is an important precursor to these broad reform projects. It will be important to have procurement reforms in place to ensure we can deliver on the list of capabilities that the white paper will define.

With a cash budget of more than $9 billion each year, the Defence Materiel Organisation manages over 230 major capital equipment projects and over 180 minor projects. It also maintains thousands of vehicles and items of equipment in an inventory valued at more than $36 billion. Over the next decade, the DMO will manage $100 billion worth of acquisition in sustainment projects. Yet, despite this massive commitment of Australian taxpayers’ dollars, I was deeply concerned while in opposition that Defence faced serious challenges in its procurement of new equipment and its upgrading and sustainment of existing equipment. A significant number of defence projects faced serious delays in terms of their delivery. Each dollar wasted is a dollar of taxpayers’ money not available to be invested elsewhere. Just as concerning, each project delayed means that the men and women of the ADF go without much-needed equipment whilst trying to do the task the government expects of them. To this end, Labor committed that if elected we would conduct a formal evaluation of the effectiveness of reforms to the Defence Materiel Organisation that were implemented for the 2003 review of defence procurement by Mr Malcolm Kinnaird.

Despite the concerns I held while in opposition, I have to say that upon coming to government I was shocked at just how badly a number of projects had performed under the custodianship of the Howard government. While it is fair to say that a large number of projects in defence are executed as planned, the seriousness of the issues facing key projects that are central to the war-fighting capability of the ADF over the coming years was staggering. Many of these are now common knowledge to the broader Australian public and have combined seriously to damage the public’s confidence in the Australian government’s ability to provide the ADF with critical defence capability.

The examples of Defence project nightmares that we inherited from the previous government are all too well known to the members of this House and to Australian taxpayers. Probably the most infamous of all was the Sea Sprite helicopter project. When we were elected, the project was seven years late and $100 million over budget, and there seemed to be no prospect whatsoever that the capability would ever be delivered. Consequently, the new government was left with no choice but to cancel the project. The former government was trying to develop a 21st century helicopter out of a 1960s air frame—

Bob Baldwin (Paterson, Liberal Party, Shadow Minister for Defence Science and Personnel) Share this | Link to this | Hansard source

It was 1994!

Joel Fitzgibbon (Hunter, Australian Labor Party, Minister for Defence) Share this | Link to this | Hansard source

And the member opposite knows that was all the work of the previous government. It involved a contract not signed by the previous government—

Bob Baldwin (Paterson, Liberal Party, Shadow Minister for Defence Science and Personnel) Share this | Link to this | Hansard source

It was 1994!

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

The member for Paterson will have his opportunity later.

Joel Fitzgibbon (Hunter, Australian Labor Party, Minister for Defence) Share this | Link to this | Hansard source

It was signed by the government just preceding this government, which was led by Mr Howard. They are the facts, and the member opposite knows it. The result was that more than $1 billion worth of taxpayers money was flushed down the drain and, of course, a further $1 billion has to be found—or maybe more than $1 billion—to replace that capability with an alternative capability.

Another troubled project was the upgrade of six, now reduced to four, Adelaide class guided missile frigates. They are old platforms and, again, the former government underestimated the complexities involved in conducting a major systems and weapons upgrade on this platform. The result? Over $150 million cost variation, 4½ years late and only after significant effort and the attention of this government—in particular that of the Parliamentary Secretary for Defence Procurement, Mr Combet—are we now starting to feel confident we can recover that program which we inherited.

Another example is Project Wedgetail, the acquisition of six airborne early warning and control aircraft. Again, the complexities of the project were massively underestimated. It was assumed that brand-new, leading-edge capability could be delivered within the time and budget promised. Unfortunately, that is not going to be the case. The result? Currently 38 months behind schedule, hundreds of millions of dollars lost by Boeing alone, and it is still uncertain what capability we are going to get from the aircraft and in what time frame.

The litany continues: armed reconnaissance helicopters delivered two years late, a network of high-frequency radio stations 4½ years late and still not delivered, antisubmarine torpedoes three years late, upgraded armoured personnel carriers 12 months late and so on. The list is long indeed.

The Australian taxpayer expects and deserves better. The men and women of the Australian Defence Force expect and deserve better and this government is determined to meet their collective expectations. The Australian Defence Force, the Department of Defence and the Defence Materiel Organisation have a wealth of highly skilled, dedicated and experienced people. In the large, it is not the people letting us down but the systems government provides to facilitate their very important work.

That is what the Mortimer review is about—addressing the architecture of the Defence Materiel Organisation and the capabilities assessment and approval processes. The Parliamentary Secretary for Defence Procurement, Mr Combet, played a key role in tasking this review, selecting Mr Mortimer and in determining the review’s terms of reference. The report  of Mr Mortimer’s defence procurement and sustainment review, boldly entitled Going to the next level, constitutes a far-reaching and in-depth examination of the often complex and bewildering processes, practices and acronyms that comprise Defence’s procurement system. A key focus of Mr Mortimer’s review was examining the implementation and effectiveness of the ongoing reforms to the Defence Materiel Organisation following the 2003 Kinnaird review of defence procurement. The Kinnaird review investigated systemic failures that had caused delays and cost increases to a number of earlier Defence acquisition projects and made 10 major and 12 minor recommendations for potential reform across the whole procurement cycle.

Mr Mortimer was also asked to examine financial, staffing and governance arrangements for the Defence Materiel Organisation, potential for further utilisation of private sector expertise and involvement in Defence projects, the advantages and disadvantages of greater utilisation of off-the-shelf products, and options to optimise the involvement of Australian defence industry in Defence acquisition and sustainment.

A major review of our defence policy is also currently underway as part of this government’s defence white paper. This will focus on key examinations of our future strategic environment and the capabilities needed by the Australian Defence Force to best address the challenges of the future. As Mr Mortimer recognises, if Australia is to maintain or, indeed, improve its ‘strategic weight’, we must seek to ensure our procurement processes are as efficient and as effective as possible. This is essential if the Australian Defence Force is to achieve the capability when and where it is required and if we are to ensure the maximum return from the Defence budget.

Mr Mortimer’s review has made a total of 46 recommendations covering five principal areas of concern:

• the strategy and needs analysis of capability planning;
• defining the requirements of capability;
• the capability acquisition process;
• sustaining and disposing of capability; and
• driving cultural change in the Defence Materiel Organisation.

An important component of the Mortimer review was the public consultation process. The review received 59 written submissions and held consultations with over 40 stakeholders. The views and input received from these contributors and stakeholders have helped to shape Mr Mortimer’s report and its recommendations—and I thank those people. There are several key recommendations made by Mr Mortimer. The review sensibly suggests Defence should increase the rigour with which projects are assessed for entry to the Defence Capability Plan. Central to this is achieving a more disciplined understanding of the cost, schedule and risk information for a project to allow government to make an informed decision on a project’s suitability for entering the Defence Capability Plan. Commercial acquisition strategies for projects should begin to be developed from the outset, and Defence should continue to monitor projects closely following their entry into the Defence Capability Plan and advise government of any changes to a project’s justification, scope, cost, schedule or risk that might warrant a review of the sustainability of the project.

This would assist in ensuring projects like the air warfare destroyer project, for example, are delivered on time and on budget with all the capability that was promised. Under the previous government, problems on the AWD project were already evident with a $3 billion cost gap between first and second pass. This increase was caused not by massive scope changes but by poor cost assessments. Capability procurement involves trade-offs between capability, risk and opportunity costs. Government cannot make informed decisions without accurate cost assessments.

Mr Mortimer also suggests that a more tailored application of the two-pass process introduced under the Kinnaird reforms should be considered. While an in-depth, multilayered approval process by the National Security Committee of Cabinet might be appropriate for particularly complex projects such as the air warfare destroyer project, more simple projects, such as those focusing purely on off-the-shelf technology, or ‘repeat’ purchases of previously acquired equipment could potentially be more efficiently examined and approved by government. This could include a single-pass approval, particularly where a more rigorous approach is taken for entry to the Defence Capability Plan. Another option could include establishing a subcommittee of the National Security Committee. This would have the effect of potentially speeding up the less complicated acquisition decisions, whilst allowing the NSC to better focus on the more complex projects. All of these options will need to be closely examined by the government ahead of our response.

Another key recommendation from the review is a greater focus on the provision to government of off-the-shelf capability solutions. This is aimed at strengthening the requirements introduced by the Kinnaird review, in particular by introducing a clear definition of what constitutes ‘off the shelf’, to avoid repetitions of the post-Kinnaird project failures such as the trucks offered under LAND 121 or the Tactical Unmanned Aerial Vehicle in JP 129, where off-the-shelf solutions turned out to be anything but off-the-shelf solutions.

The review also recommends that alternative contracting methods, in particular public-private partnerships, should be applied to defence procurement projects where appropriate.

Undoubtedly, one of the more contentious aspects of the review is the recommendation that the Defence Materiel Organisation become an executive agency, while also retaining its current prescribed agency status. This was a recommendation of the Kinnaird review that the previous government chose not to implement. It is a concept which appealed to me when I was the opposition spokesman of defence matters and one which should be further canvassed and considered. I said both in opposition and since the election, that I want the DMO to run more like a business and less like a bureaucracy. This imperative will apply whichever approach the government takes.

I have touched on a number of Mr Mortimer’s key findings and recommendations but the review makes a number of additional helpful observations which, along with the key recommendations, will be considered by the government ahead of the white paper process to ensure the correct procurement architecture is in place to drive our other defence reform projects.

I would like to take this opportunity to express my sincere gratitude to Mr Mortimer for the time and effort he has invested in developing this thorough and comprehensive review into what is undoubtedly one of the most complex and important areas facing Defence, underpinning as it does our national security. Of course, I would also like to thank my Parliamentary Secretary for Defence Procurement, the Hon. Greg Combet, for his ongoing effort, dedication and commitment to reforming Defence’s acquisition and sustainment processes. I would like to thank the review team from within Defence who supported Mr Mortimer throughout the project. That Defence team was headed by Major General Tony Fraser.

For the benefit of the House, I table the report for the information of members and senators and indeed the broader Australian community.

I have advised the opposition that I will take a few moments to update the House on the welfare of the nine Australian special forces soldiers who were injured in Afghanistan on 2 September. I am very pleased to advise that the soldier most critically injured—that was the soldier who you will recall was evacuated to Germany—has arrived back home in Australia. He is under the very best of care. I can also report that he is in good spirits and we are hopeful of a full recovery. Two other wounded Australian soldiers also returned home earlier. Again, I take the opportunity while reflecting on their courage to pay tribute to all those putting their life on the line in Afghanistan in the interest of not only Australia’s security but, indeed, global security and, of course, in the interest of the Afghan people. I also take this opportunity, as the Prime Minister has done directly to President Karzai and I have done to the defence minister through the Afghan ambassador to Australia, to again express regret over the incident that occurred in Afghanistan last week which involved the death of some Afghan police and a well-known and respected district chief, Rozi Khan. I again commit the government to fully participating in the various investigations being undertaken into that incident so that we can fully understand its cause, and to best ensure that if mistakes have been made that those mistakes are not repeated in the future.

I ask leave of the House to move a motion to enable the member for Paterson to speak for no longer than 20 minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Mr Baldwin speaking for a period not exceeding twenty minutes.

Question agreed to.

Bob Baldwin (Paterson, Liberal Party, Shadow Minister for Defence Science and Personnel) Share this | Link to this | Hansard source

I rise to respond to the ministerial statement of the Minister for Defence and the tabling of Going to the next level, the report of the Defence Procurement and Sustainment Review. Let me start by stating that this report is evolutionary, not revolutionary—it is evolving from Kinnaird, not getting rid of Kinnaird; it is building on the foundations of Kinnaird. It is obvious that, after five years, you would need to review how the implementation of the 2003 Kinnaird review commissioned by the former Howard government was progressing. The Kinnaird review was critical in establishing a new methodology in procurement of the assets important for our Defence Force in providing security for our nation. The Defence Materiel Organisation has over $100 billion of military equipment under sustainment, in the process of acquisition or being planned over the next 10 years. This includes the management of some 230 major projects worth over $20 million each and the sustainment of over 100 Australian Defence Force fleets, platforms and weapons systems. The size of this task has seen DMO grow to an organisation with over 7,000 employees and an annual budget of nearly $10 billion.

On behalf of the coalition I take this opportunity to congratulate Mr David Mortimer AO on the review. Mr Mortimer is highly credentialed. He is currently chair of Leighton Holdings and Australia Post—and, after all, it was the Howard government that appointed Mr Mortimer as the Chairman of the Defence Procurement Advisory Board in 2004. I also extend those congratulations to Major General Tony Fraser, currently head of helicopter systems division in the DMO, who headed the review team secretariat.

This report is the evolution of review of practices and principles that have evolved since the process of the management refinement of acquisition in ironing out the difficulties. But, in listening to the Minister for Defence today, what we continue to hear from the minister is a crisis in confidence and the continual condemnation and undermining of the professionalism and ability of those in Defence and DMO. Since becoming minister he has set out to play the blame game, even blaming the previous Howard government for projects initiated by the former Hawke-Keating Labor governments. It is very clear that it is the Parliamentary Secretary for Defence Procurement, the Hon. Greg Combet, with the interest and administrative ability with respect to the very important issue of capability acquisition for the ADF. It is the Minister for Defence, through his words and actions, who has sought to introduce a crisis in confidence in those we entrust to supply the necessary systems and platforms for the defence of our nation.

In playing the blame game on acquisitions, costs and delays, the Minister for Defence has overlooked a statement by Dr Stephen Gumley, CEO of the DMO, on 10 July 2008 at the hearings of the Defence Subcommittee of the Joint Standing Committee on Foreign Affairs, Defence and Trade into the 2005-06 Defence annual report. Dr Gumley said:

The biggest problem we are facing in Defence equipment acquisition is schedule. As we have benchmarked ourselves against other countries and as we have looked at our own performance, we find that, once you make corrections for foreign exchange, inflation, changes of quantity and transfers to other parts of the Defence organisation, that post second pass or post contract formation we are bringing in most of the projects at/or around the budget. In other words, cost is not the thing that gives us deep concern. The statistics we have are that in 239 major projects—and we define a major project as over $20 million—closed over the last 10 years with an accumulated value of $27 billion, when you make those corrections for foreign exchange, inflation, quantities and transfers they came in on average at 98 per cent of the budget.

So that starts to belie the statements made by the Minister for Defence. Importantly, Dr Gumley went on to say:

When you look at the data it shows that about 20 per cent of the projects go over in cost, about 20 per cent of the projects come in or around the budget, and about 60 per cent actually come in under.

He continued:

The cost problem is primarily up to second pass. I am not saying we do not have a few costly projects afterwards, but primarily the pattern is estimating up to second pass.

Further, in his statement to the committee, he said:

That leads us to what I think is the major problem with Defence acquisitions, and that is schedule—in other words, delivering the projects on time. Typically the more complex the weapons system, the greater the project delays. Most of our major projects run two or three years late. We have been doing quite a bit of analysis on the causes of those schedule delays.

One of the greatest challenges facing defence procurement is in the continual changing of performance specifications, known as ‘scope creep’. A clear example of this was the major time and cost blow-out in the Bushmaster program. But who amongst us would want to compromise the safety of those who serve our nation on the battlefield and who use these assets? Again, in phase 3 of the LAND 121 project scope creep was the thing that made the project go back to re-tender. But I cannot see us ever faltering in continuing to develop programs and look for further and better ways of providing protection to our men and women.

However, where the two-pass system from the Kinnaird review has been applied it has actually supplied some discipline in the procurement process. There is a danger in what appears to be a suggestion that this system should be partially dismantled for so-called less complicated acquisition decisions. The devil is in the detail here and also in the definition of ‘less complicated’. Further, who will make the decision that an acquisition will be less complicated? It appears that the Mortimer report is suggesting that there be two approaches to acquisition—a ‘two-and-a-half pass’ system for complex procurement and a ‘one-and-a-half pass’ system for less complex procurement. Further evaluation of that by the DMO, Defence and industry needs to be explored.

Further, I note that in chapter 5 of the report, ‘Driving Cultural Change in DMO’, Mortimer reiterates recommendation 6 of the 2003 Kinnaird review that the DMO should become an executive agency. He states, and I agree, that to ‘drive further reform there must be a clear separation in the financial and non-financial resources allocated to and used by each agency’.

Even though the formation of DMO as an executive agency reporting directly to the minister was originally recommended by Kinnaird, the evolution of the process of acquisition management reflects that now is the time to put forward the legislative framework for DMO to become an executive agency with a separate budget allocation and clear lines of separation in management of acquisition and responsibility for the through-life sustainable costs of projects. The coalition agrees that DMO should become an executive agency and that Defence should become a customer of DMO. Again, to quote an extract of the Mortimer report:

Prescription of DMO has not delivered the necessary accountability, authority, independence and control over inputs for it to be fully results driven and commercially orientated.

However, to my concern, after an initial, very brief read of the report, it would appear that recommendation 5.1 suggests that DMO should be both an executive and a prescribed agency. This itself appears to be fraught with danger. How does one agency separate itself cleanly? I would urge the government to do some further research into whether this has been done before and whether it is even possible. The danger in treating sustainment differently to acquisition is that you would endanger the integration of acquisitions and through-life support. While in 2006 Dr Gumley thought that being totally separated was the wrong answer, in June this year he said:

It’s the greatest frustration that as a prescribed agency I’ve got accountability for outputs, but my inputs are controlled and that leaves you in a very difficult position.

In particular, I’d like to make the DMO workforce more commercial and more professional.

In relation to major acquisitions, what we have seen from the minister is a continual dithering and a lack of faith in our experts. This was most evident in the issue of the acquisition of the 24 Super Hornets as a replacement for the F111 and continues on with the lack of a solid commitment to the Joint Strike Fighter. One minute, the minister was creating a crisis in confidence among those we entrust to make informed decisions in Defence, DMO and DSTO about acquisitions by publicly denouncing the acquisition of the Super Hornet, and then, shortly after, he was proclaiming it the best aircraft of its type currently available.

Prior to the election, Labor was committed to the Joint Strike Fighter and the Super Hornet projects. On 30 October 2007, the member for Hunter, Joel Fitzgibbon, said:

The Howard government has committed us to both the JSF and the Super Hornet and we accept that they will be part of our air capability mix.

Then, on coming to government, the story changed. Labor was now backing away from this commitment, putting at risk millions of taxpayers’ dollars and industry investment in Australia and threatening our air combat capability. Then, after his little charade, in March the Minister for Defence said the Labor government would go ahead with the plan to buy 24 Super Hornet fighter planes from the US Navy for over $6 billion. His tune has changed so much that he was quoted as saying:

… based on the advice of the air capability review, the new Government is satisfied that the Super Hornet is an aircraft with significant capability and more than capable of meeting all of Australia’s defence needs …

Labor were all over the place on whether they supported these vital acquisitions and were not even aware of the obligations surrounding these contracts should they be terminated. Termination liability for the Super Hornet contract would have been, to cite Dr Gumley, around $400 million, escalating at between $80 million and $100 million per month. The minister is creating a crisis in confidence in the defence industry, not a refined procurement regime. Perhaps, with his lack of judgement, he should step aside and let the parliamentary secretary step up to the plate.

There is no doubt that the Howard government got on with the job. Some of the major acquisitions during the term of the Howard government that allowed the Australian Defence Force to grow in size, flexibility and firepower with significant investment in new and expanded capability included, for our Army, 59 new Abrams tanks, 40 new multirole MRH90 helicopters and the Bushmaster vehicle, which now is proving so effective that it is being exported—to name but a few projects. Our Enhanced Land Force means that Australia will have eight regular Army battalions by 2010, up from five in 1996, each with greater strength, better equipment, mobility, combat weight and networked capabilities.

For our Navy it included 14 Armidale class patrol boats, the commencement of three new air warfare destroyers, the commencement of two new large amphibious ships, a new replenishment ship and an upgrading of our frigates and Collins class submarines to be an effective part of our systems platforms.

For our Air Force it included four new C17 heavy lift aircraft—the C17 was one of the best executed off-the-shelf procurements and was instigated by the Howard government—and the 24 off-the-shelf Super Hornet multirole aircraft and six Wedgetail airborne early warning and control aircraft. As the minister would know, it will always be a problem when you acquire leading edge technology such as this project, as Labor would have known from their experience with the JORN project and the Collins class submarine, to name but two.

I now refer to the Seasprite helicopter, a project commenced in 1994 under the former Labor government. The minister has made only one decision of note since taking his position, and that was to terminate the Seasprite at a cost to the taxpayer of $1.1 billion. There was no haggle, no resistance; he just threw up the white flag. There was not even a serious contemplation of litigation, which was quoted to the Senate to cost about $20 million. This minister’s first act of significance was to surrender and then to sign a release and discharge in favour of the contractor, disposing of the taxpayers’ capacity to recover anything like the money spent. That was the first thing the minister did: wave the white handkerchief.

Back to the report: the Mortimer recommendation on the early adoption of commercial acquisition strategies is commended. These strategies set the plan for the department and for the industry to allow government to exercise an appropriate level of control over both the capability being acquired and the method of acquisition. As I have said, on an initial speed read, it appears that this Mortimer report is evolutionary, not revolutionary. It is evolving from Kinnaird, not getting rid of Kinnaird. It is building on the foundations of Kinnaird.

The minister raised the issue relating to the incidents last week on 18 September in the southern region of Tarin Kowt. This unfortunately led to the death and wounding of a number of Afghanis, including the Chora District Governor and tribal leader, Rozi Khan. My understanding from the information provided to me is that the Special Operations Task Group were fired upon from a number of locations, and, in self-defence, they returned fire. I understand from the information provided to me that at all times our Australian troops acted within their rules of engagement.

We should never underestimate the seriousness of the situation that our brave Australians find themselves in in such areas. In fact, on the injured soldiers, I am glad that we have seen a return of some of the injured nine back to Australia. I am also thankful for the treatment provided by both US and other forces to our injured nine in Afghanistan. I know that all of us in this House and, indeed, all Australians extend our prayers and thoughts to those who have been injured and pray for the safety of those who go to defend the freedom and democracy of people other than Australians.