Mark Bishop (WA, Australian Labor Party) Share this | Hansard source

Earlier this week I tabled report No. 429 from the Joint Committee on Public Accounts and Audit on the 2011 Major projects report by the Australian National Audit Office. Included within that report was a dissent by me on one reporting matter I did not agree with. That matter is the committee's recommendation on price indexation reporting.

By way of background, the parliament has long been concerned with the accountability and acquittal of taxpayers' money by defence in its procurement budget. The defence budget for procurement, as managed by the Defence Materiel Organisation, is currently $9.1 billion per annum. This comprises $3.4 billion for new equipment and $4.7 billion for sustainment—that is, new purchases, running costs and maintenance. This is 40 per cent of the total defence budget and includes 268 projects, 188 of which are very large, averaging $400 million apiece. In fact, DMO spends $38 million every day of every week of every year. So the nature and scale of this task and the scrutiny of it by the parliament should not be underestimated. By general government standards, this massive amount of money on capital projects has no equal.

Projects in other portfolios, of much lesser value, attract much more scrutiny. As an example, there is the Refresh program in Centrelink where $200 million was spent on new computer infrastructure. Here a steering committee, chaired by a departmental head with other high powered outsiders, rode shotgun. The reason was the then government had little faith in the ability of Centrelink to deliver. With the number of projects averaging $400 million in defence, nothing like this level of scrutiny exists. Perhaps it should.

There are encouraging signs with newly instituted gate reviews that a semblance of similar rigour is emerging. However, the record over the years has been appalling, the waste being counted in recurrent billions of dollars. That is notwithstanding many reviews and reports urging reform and new organisational arrangements. One of those was a report by the Senate Foreign Affairs, Defence and Trade References Committee in 2003, of which I am a longstanding member, noting that the committee is currently finalising another inquiry into defence procurement.

In its 2003 report the committee recommended that defence issue an annual report on the progress of major projects against the criteria of cost, timeliness and technical performance. As a result, in 2006, the public accounts committee recommended that the Howard government provide funding to ANAO so this could occur. The ANAO reports directly to the parliament and the public accounts committee is the forum in which those reports are considered. Funding was provided and this report on the 2010-11 ANAO audit of major projects in defence is the fourth to date.

I will not reiterate the recommendations of the ANAO or the JCPAA's report, except to say progress is being made by defence and the Defence Materiel Organisation, albeit slowly. The ANAO report covered 28 major projects with a total lifetime value of $46 billion in current figures. The most damning finding was that time slippage had increased by 31 per cent, which is simply unacceptable. Firstly, planned capability falls way short. Secondly, additional costs of $295 million in price indexation are paid by the taxpayer. That is the price of delayed production. To be fair to defence, I know they are trying very hard to make a new road in this area, as demonstrated by recent public evidence. In its own defence, it claims that almost 90 per cent of this time lost is on pre-2005 projects. I can only say that the challenge to defence is that the proof of the pudding will be in the eating. That excuse will slowly disappear over time. I sincerely hope all the current expressions of hope and determination to do better will in fact be realised. The ANAO reports to the public accounts committee will tell us in time, and this brings me to the point of my dissenting report. In reporting to the parliament on these top 28 projects, ANAO uses a number of devices. These include standard project data summary sheets where standard technical and performance details of the progress of each project is recorded and updated annually. Originally, these were poorly done but have gradually improved to provide increasingly useful insights.

ANAO has also reported financially against standard criteria. These include original project budgets, indexation increases, real increases for subsequent project alterations as approved by government and foreign exchange variations. As an example of the significance of these reporting lines, in 2010-11 the approved budget increase for the 28 projects totalled $7.8 billion—an enormous amount of money; in fact, more than the total annual budget for many government agencies. That $7.8 billion was comprised of increases approved for changed project specifications of $3.6 billion; a foreign exchange decrease of $3.4 billion; and price increases—that is, indexation—of $7.6 billion. With neutral foreign exchange, that is no windfall. The extra funding would have been $11.2 billion—a huge amount. These are amazing figures but all legitimate as things stand and go to explain budgetary increases year on year.

The reporting format enables the parliament to understand those increases. As I mentioned, the only aberration in this format is that, while delays are tolerated and funds are indirectly indexed throughout that delay, unnecessary costs are of course incurred. I should note, however, a new discipline has been imposed whereby indexation will no longer be provided for time slippage for post-2010 projects; henceforth Defence will have to absorb the costs of its poor time performance.

The obvious question is: given the enormity of the time delay in the past, how will that cost be absorbed in the future, especially by DMO, remembering we are discussing billions in indexation costs annually? In considering these matters in the last two years, the public accounts committee has spent some time on financial reporting criteria as well as the very vexed question of meaningful handover dates from the supplier, DMO, to clients—that is, the service chiefs.

The committee has agreed to some changes in financial reporting following discussions between the Auditor-General and DMO. One of these is to move away from historic cash reporting with separate indexation to what are called out-turn prices. That reflects current prices in real terms. Increases for changed project specifications as approved and for foreign exchange will remain. Pre-2010 projects will also continue to have price indexation identified.

Together these reporting criteria enable the parliament to quickly establish poor project management and financial shortcomings. My problem is this: the public accounts committee, as advised by the Auditor-General, has agreed price indexation should no longer be included as a separate measure for post-2010 projects, the argument being that out-turn prices are sufficient. The argument is that to identify separate indexation elements for each project is too onerous and time consuming. I simply do not accept that as I believe this is a significant dilution of accountability in this process. Furthermore, if it can be done for pre-2010 projects, why stop? The claim it is too onerous does not wash simply because in contractual terms indexation is provided for—that is, indexation is contained in the project contracts. It must be calculated separately to pay accounts as well as derive the out-turn price.

In some contracts it is understood there may be a wide range of indices used. This is especially the case for overseas projects such as shipbuilding where there can be and are many variables. They could include windfall gains and losses—and that makes sense in these turbulent economic times. My concerns go to the natural tendency of the bureaucracy to obtain funding and acquit in global terms only—that is, they say, 'Trust us, stop micromanaging and judge us by our outcomes, not our outputs. In other words, let the managers manage and don't worry about the money.' In an environment like Defence, with an annual budget of $25 billion, I understand the attraction of such an attitude. Likewise, for the Department of Finance and Administration, I do not envy them their task of getting full acquittal of money spent. I understand that is why provision for indexation and contingency funding are simply capped as line items.

The task in knowing where all the money goes in Defence is frightening. However, that does not mean that we slacken off in our demands for full accountability; hence my fear about the agreement to abandon reporting on indexation in the major projects report. I accept that many Defence procurement projects are complex. I accept in many cases where there is leading technology there are risks, some unknowns and that specifications will change. But none of this is an excuse to slacken the reins and thereby return to the past.

There is already generous provision for some of this in contingency funding—it is simply built into the initial approved price. I understand that is a very large sum of money; however, having had indexation separately identified for so long, for it now to be removed I can only see as a serious diminution of accountability. After all, last year indexation amounted to additional costs of $1.16 billion—now lost to parliamentary scrutiny for post-2010 projects.

Funding of Defence procurement projects is already very liberal and has escaped detailed scrutiny for a long time. The record is clear evidence of the need for the disciplinary task the parliament has embarked upon both through ANAO and Senate estimates and inquiry. In my view, the public accounts committee has been too liberal and hence my dissent.