Mal Brough (Fisher, Liberal Party, Special Minister of State) Share this | Link to this | Hansard source

by leave—I move:

That this bill be now read a third time.

Pat Conroy (Charlton, Australian Labor Party) Share this | Link to this | Hansard source

I rise to speak on the Defence Legislation Amendment (First Principles) Bill 2015. This very important bill, which has been the subject of some debate today, arises out of the 35th significant review that has been conducted into Defence since 1973. The management of the Defence portfolio and, in particular, Defence capability development, acquisition and sustainment, is fraught both within Australia and around the world, so it is no surprise that we have had almost as many reviews as we have had years since 1973. What is interesting about this particular review is that its recommendations reverse and contradict recommendations that very significant reviews over the last 15 years have put forward in this area. This does not make it wrong, but it does represent a significant change in approach to Defence capability development, definition, acquisition and sustainment.

What was the general problem that the first principles review made recommendations about? The review stated:

The current organisational model and processes are complicated, slow and inefficient in an environment which requires simplicity, greater agility and timely delivery. Waste, inefficiency and rework are palpable. Defence is suffering from a proliferation of structures, processes and systems with unclear accountabilities. These in turn cause institutionalised waste, delayed decisions, flawed execution, duplication, a change-resistant bureaucracy, over-escalation of issues for decision and low engagement levels amongst employees.

This is a pretty damning indictment of the state of the Department of Defence and its processes. While I fear it is an accurate assessment, it is not a reflection on any particular government of the day. Defence is the single most complex part of governing and delivery for this country and, if you look at the Western world, any country around the globe. While that quote is quite damning, it needs to be put it in a broader context of the great challenges in capability definition, development and acquisition.

While that is the general problem, I want to highlight a couple of the other problems that the review traversed—that is, the Capability Development Group and the Defence Materiel Organisation. The first principles review stated:

The Defence Materiel Organisation has also been beset with problems that have impacted its ability to achieve the required outcomes. It is clear that the organisation has become top heavy, complex and unnecessarily deep. This significantly contributes to Defence not getting the capability it needs at a reasonable cost or in reasonable time.

I disagree slightly with the assessment around cost. But it is well and truly self-evident that the performance of DMO has been controversial and suboptimal for some time and that change was needed. I would submit, though, that there was a possible further reform to what the first principles review recommended.

I will turn first to the Capability Development Group. Review after review has identified problems with this organisation. Training is a classic example. In 2013-14 the ANAO did a report around capability development. It conducted a survey of CDG staff, particularly ADF personnel, so it was the CDG personnel themselves making statements about their own capabilities. The findings were quite stark. The survey found that 79 per cent of staff at CDG had worked in CDG for less than five years, and 20 per cent of project managers stated that they had no skills or experience as project managers before they had their first project to manage. Le me repeat that: 20 per cent of CDG project managers had zero skills or experience before they managed their first project. The survey also found that 62 per cent had no or below average skills or experience before starting their first project management role, and 70 per cent of CDG staff said they had no or below average skills and experience in managing a project of the size that they were currently tasked with. This pointed to an organisation that had project managers with very poor training and experience before they were given their particular tasks.

The survey also revealed that there was a total focus on getting projects approved by government but very little focus on running a project on time or budget. This accords with evidence from within the defence sector and from the experience of people I talk to regularly in the defence industry and bureaucracy, who were very frank in saying that CDG provided no real internal contestability. It certainly was not at arm's length. It was very weak because of the fundamental problem that the promotion prospects of ADF personnel within CDG ultimately were dependent on the service heads of their organisations, whether Army, Air Force or Navy, rather than arising from providing strong internal contestability to projects being argued for by the services.

The main problem with the Defence Materiel Organisation was that it was in no-man's-land. It was not completely outside the Defence organisation, so it did not have independence and accountability in the budget, but it was not completely within the Defence organisation either, which meant it was exposed to conflict. This was because governments of both persuasions were unable to implement very strong recommendations from two landmark reviews of Defence—the Kinnaird review of 2003 and the Mortimer review of 2008. Both of them, in very strong language, recommended that the DMO should become an executive agency. The Kinnaird review said:

It is essential for the DMO to establish its own identity, separate from Defence, to ensure it is able to rapidly transform its culture and develop the commercial focus it needs. A cultural shift in the DMO can underpin and help drive a new focus on performance and outcomes, and lead to improved procurement and support practices and better results for government.

This is why Kinnaird recommended that it become an executive agency. The review also highlighted that because of this lack of structural separation:

… there have been occasions where the capabilities being acquired in projects managed by the DMO have been altered as a result of decisions made elsewhere in Defence. This has included changes made after contracts have been signed and without government approval, resulting in rises in the real cost of projects or significant delivery delays …

This is an unacceptable event to occur: projects were changed post contract signing without the project manager being told or even consulted about it. That is why Kinnaird recommended an executive agency.

The Mortimer review was equally strong. It argued that the DMO should become an executive agency, because of the benefits such as:

This is where we are now. Neither the Howard government nor the Rudd government were able to get broad enough support within and outside Defence for DMO to become an executive agency. Instead, it became a prescribed agency, where it was separated from Defence but not given the independence, the budget and the authority to act properly as a full commercial project manager. That is why we have seen these controversies. That is why we have seen the delays and the schedule overrun. But reform has occurred and DMO has improved its performance since the Kinnaird and Mortimer reviews. In particular, we have seen a more businesslike relationship between the three services and DMO. We have seen very strong efficiencies and we have seen a stronger negotiating party with the private sector.

We have seen negatives. We have seen the tensions with Defence over financial control and budgeting, which are self-evident. We have seen the DMO fail, in most cases, to attract commercial talent. We have seen unnecessary layers of management develop, particularly at the deputy secretary level. This reflects the fact that there was a real sense that they could not poach from Russell 1, from the mainstream Defence organisation, but they were not able to attract the commercial talent. So in the end we saw another layer of deputy secretaries develop, which really did not add too much. The ultimate sin was that the DMO was unable to consistently provide real contestability around acquisition strategies or industrial realities. That led to suboptimal acquisition strategies.

But performance did improve. For example, of the 30 top projects currently in the acquisition stage, 87 per cent of the schedule slippage of these projects occurred in projects approved before 2007. This cumulatively represented 81 years of deferred capability, which is a problem, but, as I said, 87 per cent of this schedule slippage occurred in projects approved before 2007 and before the reforms of DMO were fully in place. There has been improvement in cost control, but schedule is still an issue. These are the problems that the first principles review sought to solve, and that is why, ultimately, they recommended that DMO be brought within the organisation completely and why CDG should be dissolved, with its role split between the policy and intelligence group and CASG, as it is known.

So I think that it was unsustainable for DMO to be structured as it was before this review. It had to be either fully out of Defence or fully within Defence. But there are risks of this particular reform approach. First the risks are around contestability. I have concerns about whether the policy and intelligence group will be able to provide the genuine contestability to challenge the capability definitions process being driven by the service chiefs—whether they have the resources and the attitude to generate that. It is not just about rigorously defining military capabilities. It is about providing true independent advice on the financial, technical, industrial and economic implications of certain capability options being developed.

There is also a risk in replacing CDG and DMO while we are undertaking acquisitions of the submarines, future frigates and LAND 400—three very significant acquisition projects. To effectively abolish the Capability Development Group and the Defence Materiel Organisation while acquiring projects that cumulatively will cost more than $80 billion is a high risk indeed. There is also a risk that capability managers will specify very narrow needs and timelines at gate 0 to game the system. This is something which, unfortunately, does happen with the Defence organisation—a service or a particular group within a service will set their heart on a particular capability. They might do it for the best of reasons. They might do it because they see it as the best platform in the world and they want their troops to have the best piece of equipment, and I understand that. But it means that we do not get real contestability, we do not reduce risk and we do not look at Australian options.

I saw an example firsthand, which was around LAND 121 Phase 4—protected mobility vehicles, light—effectively to replace the Army's Land Rovers with something with suitable protection to survive in the modern battlefield. Parts of the Army and the CDG had their hearts set on the Joint Light Tactical Vehicle, a US option being developed right now, and they specified timelines, processes and requirements that effectively ruled out almost every other option. It was only because of real leadership within the Labor government at the time, driven by the defence materiel minister and the defence minister, Senator Faulkner, that we saw an Australian option kept on the table. It was only through the actions of Minister Combet and Minister Faulkner that we saw an Australian option, championed by Thales, given a real chance to compete against the US option. It has come through. As predicted by some, the US option is delayed as they deal with their defence cycle and as they deal with trying to get requirements merged between the marines and the army. The Thales option of the Hawkei looks like it is going to be a really good platform that will not only provide the best protection for our troops in the field but also save hundreds of jobs in Bendigo. This is an example of the risks of giving too much power to one part of Defence without having true contestability. There are also issues around staffing in CASG to do post gate 0 acquisition, strategy and implementation.

Defence is a complex beast, to state the obvious. Australia, quite frankly, does it better than most countries in the world. That is because governments of both persuasions have been undertaking reforms of this area since 1973. The first principles review makes a sound contribution to this. I think that moving DMO back into Defence has merit but is not without risks. I, for one, will be keeping a very close eye on it, because ultimately it is about providing the best capabilities for the Defence forces at the lowest cost and on time and on budget, while maximising the number of jobs in Australia. So I commend the bill to the House, but it is not without risk.

Question agreed to.

Bill read a third time.