Speech by Minister for Defence Stephen Smith MP Defence and Industry Conference 2011 Opening Address Convention Centre, Adelaide
Wednesday 29 June 2011
Thank you Mark (Reynolds, Head of Defence Materiel Organisation Commercial and Industry Programs) for that introduction.
I thank the organisers of the 2011 Defence and Industry Conference for the invitation to open your Conference.
I acknowledge the Premier of South Australia, Mike Rann, my Ministerial colleagues Jason Clare, Minister for Defence Materiel, Kevin Foley, South Australian Minister for Defence Industries and Robert Knight, Northern Territory Minister for Defence Support, Industry representatives, Defence Officials, members of the Australian Defence Force, ladies and gentlemen.
This year’s Conference is the seventeenth Defence and Industry Conference. Over 2,000 delegates are expected to attend, with 75% of delegates from industry.
The Conference is an important forum for exchanging information and ideas, and you should make the most of this opportunity.
For Industry, this is an opportunity to discuss with Defence officials the acquisition and sustainment investment opportunities that Force 2030 will generate in coming years.
It is also an opportunity to present your ideas, concepts and innovations, with this year’s Trade Exhibition showcasing more than 200 exhibitors.
The Relationship Between Defence and Industry
The relationship between Defence and Industry is essential to support the work of our men and women in uniform.
In Afghanistan, I have seen this equipment in use, saving lives and underpinning the fight against the Taliban.
At the start of this year, in response to natural disasters across Australia, in New Zealand and in Japan, members of the Australian Defence Force conducted rescues, evacuations, recovery work, engineering and community support activities.
To succeed in these roles, the men and women of the Australian Defence Force are dependent on Defence and Industry working together to deliver and maintain the equipment they use and need.
It is essential that we get this relationship right, and deliver and support this equipment, now and into the future.
This is a critical element of our national security.
Procurement, maintenance and sustainment of capability, however, is not without very serious challenges.
I have spoken previously about some of these challenges.
That is why Defence Materiel Minister Clare and I have announced important reforms to improve Defence’s performance. It is why we will continue to announce and effect further reform.
Reforms to date apply to Defence’s budgeting process, to capability acquisition and development, and to the maintenance of equipment in service.
Reform – The Defence Budget
The need to reform Defence’s planning and budgeting processes was highlighted in this year’s Budget.
The Budget saw $1.6 billion in Defence funding handed back to the Government in 2010-11.
Of the $1.6 billion, $1.1 billion was related to capital funding that has been rephased to better align with updated forecasts of Defence and Industry’s ability to spend the funding Government has provided.
At the time of the Budget, this $1.1 billion was comprised of $815 million of Approved Major Capital Investment Program funding and $295 million of Major Capital Facilities Program funding.
When I was advised that a significant underspend was likely in 2010-11, I directed Defence to conduct a thorough reassessment of its budgetary forecasts and estimations across 2011-12 and the forward estimates. The Secretary and Chief Financial Officer will report to me on this before the end of the calendar year.
It is essential to improve Defence’s Budget estimation processes.
A $1.6 billion underspend is a significant failure in Defence’s planning and budgeting processes.
And this does not include the nearly $300 million of 2010-11 funds used to acquire the additional C‑17 aircraft and the amphibious ship Largs Bay.
Funding for Defence must be based on realistic and reliable forecasts.
In 2011-12, the Defence Departmental budget will total $27.5 billion. This equates to 7.6 per cent of Australian Government outlays and 1.9 per cent of Gross Domestic Product.
We have a responsibility to ensure that the Defence dollar is wisely spent and that it is seen to be spent wisely. For the first time in many years, perhaps for the first time in the modern era, real parameters have been imposed on the acquisition of capability: by the 2009 White Paper, by the Strategic Reform Program and, importantly, by a capped Budget.
More than ever, we need to ensure that we have the Budgeting discipline, the rigour and the accountability to meet our national security objectives.
We must continue to pursue the Strategic Reform Program to ensure Defence is efficient in delivering national security capability for Government.
The Strategic Reform program will deliver over $20 billion in savings to reinvest in the delivery of Force 2030.
Early progress has been good, but more can and must be done.
Reform – Shared Services
The Government has announced a second phase of Strategic Reform Program savings primarily related to shared services design and implementation.
The purpose of shared services reform is to rationalise Defence corporate overhead requirements in a way that does not reduce support of operations or capability development.
Reforms to shared services and other efficiency measures means that Defence can reduce the overall forecast public service workforce growth by 1000 over the next three years.
Savings from these reductions will also be returned to the Budget.
There will be no reductions to the Australian Defence Force military workforce as a result of these changes.
Given the priority accorded to maintaining support for operations, improving Navy sustainment and enhancing capability development, the Joint Operations Command, the Navy and the Capability Development Group will be exempt from these additional reductions to their forecast public service workforce. This reform is being undertaken as part of the Strategic Reform Program, using its governance and oversight processes, including oversight by the independent Defence Strategic Reform Advisory Board chaired by Mr George Pappas.
Reform – The Black Review
Further reforms to the Defence Budgeting process will be included in the coming period when I announce the Government’s response to the Review of the Defence Accountability Framework, known as the Black Review.
The Black Review is the first comprehensive review to examine personal and institutional accountability in Defence.
The Black Review and the Government’s response will outline how improved accountability can improve Defence performance by ensuring that the different parts of Defence work together much more effectively and with greater accountability at both personal and institutional level to produce better outcomes.
The Black Review will as well build on the procurement reforms that I and Minister Clare have already announced.
Reform – Accountability and Procurement
In early May, Minister Clare and I announced our initial accountability and procurement reforms for Defence.
As a consequence, as a matter of priority, Defence is accelerating the implementation of all of the Kinnaird and Mortimer recommendations previously agreed by Government.
This will provide greater confidence in the eventual success of projects.
Already we are seeing signs of improvement, with around 20% to 25% reduction in slippage of scheduling of those projects caught by the Kinnaird and Mortimer reforms as compared with earlier projects not subject to that rigour.
Reform – Minor Projects
The Government is also introducing new rigour into the management of so called ‘minor’ projects, implementing a two-pass approval system for minor capital equipment projects valued between $8 million and $20 million.
There are over 100 minor capital projects underway and in 2010-11 and the planned budget for minor capital projects is around $150 million.
$150 million is not ‘minor’ sum to you or to the general public.
This is an area of Defence expenditure long overlooked.
The taxpayer has a right to expect that these projects will be managed as efficiently and effectively as more costly projects. And so does industry.
The two-pass approval system has been successful in improving the budget, schedule and capability delivery of major projects.
This same rigour will now be applied to minor capital projects, including a formal business case for two-stage approval by the Minister for Defence.
Reform – Early Warning and Indicators
The Government is also implementing an Early Warning and Indicator system to prevent problems early in the life of a project.
Defence assesses that 80 per cent of problems with Defence capability projects occur in the first 20 per cent of the project’s life.
Therefore we need early warning in order to be able to take effective preventative action.
A set of triggers has been established to give early warning of projects which are or are at risk of running late, being over budget or not delivering the required capability.
The Minister for Defence, the Minister for Defence Materiel, the Secretary of Defence and the Chief of the Defence Force are advised when these triggers are activated.
When a trigger is activated Defence will conduct an internal review of the project and recommend whether a full diagnostic examination, known as a Gate Review, should be conducted.
Reform – Enhanced Gate Review Process
The Government is expanding the use of the Gate Review process for mature projects to ensure that the desired operational capability is being delivered.
Gate Reviews commenced in 2009 for selected high value and highly complex projects and have proven very effective in the early identification and resolution of problems.
We have also announced enhanced and more rigorous reporting to Government on such high priority projects.
Quarterly accountability reports to the Minister for Defence, the Minister for Defence Materiel, the Secretary of the Department of Defence and the Chief of the Defence Force will be provided for designated key projects. To ensure accountability, the reports are to be formally signed off by the Chief Financial Officer, the Chief Executive Officer of the Defence Materiel Organisation, the Chief of the Capability Development Group and the relevant capability manager, generally the relevant Service Chief.
This will improve accountability and alert senior Defence officials and Government to problems in projects so that an appropriate remediation plan can be developed early and acted on.
These reforms have a single central focus – prevention not post mortems. It is most important to get projects right at the outset and early on.
Early intervention is always better than an exhaustive assessment well after the seeds of project difficulty have been sown. We need to prevent problems before they emerge and solve them as they emerge – prevention not post mortems.
Reform – The Rizzo Review
In the near future, further reform will also include the Government’s response to the Rizzo Review into the Maintenance of Naval Ships.
In February, I announced the appointment of an independent team of experts to develop a plan to address problems in the repair and management of the amphibious and support ship fleet led by Mr Paul Rizzo.
Early advice from Mr Rizzo points to a systematic breakdown over a long period of time, including under resourced naval engineering capabilities, inefficient industry contracts and inadequate risk management.
The recent Australian National Audit Office audit report on the Acceptance into Service of Navy Capability also highlighted that the capability development system has not consistently identified and responded in a timely way to issues affecting Navy capability acquisition and support.
Many of the seeds of the problems we now face were sown long ago, and over time insufficient resources have been allocated to address materiel and personnel shortfalls since the ships were brought into service many years ago.
Mr Rizzo is developing a plan to address these problems, to reform past practices, and oversee early stage implementation of the reforms.
This work is additional to the new comprehensive transition plan I have asked Defence to prepare to ensure a smooth transition to the introduction of the Landing Helicopter Dock ships in the middle of the decade.
Reform – Projects of Concern Announcement
Today I am announcing further reforms: additional procurement reforms in the Projects of Concern process.
I make the central point at the outset: the public policy objective is a successful project. The objective is not for projects to end up on the Projects of Concern list, the objective is to prevent and remediate.
The Project of Concern process was established by the Government in 2008 to focus the attention of Defence and industry on remediating projects with significant schedule, cost, capability or project management challenges.
The Minister for Defence Materiel has been working closely with Defence, the Defence Materiel Organisation and Industry to reform management of Projects of Concern.
The reforms I am announcing today are the result of this work.
They include incentives for Industry to focus on resolving projects of concern, and enhancing accountability for projects on the list.
When a company has a project on the list, Government and Defence will weight its performance in remediating the project when evaluating that companies tenders for other projects.
In extreme circumstances this could result in companies being excluded from further tenders until the project is remediated.
We will also introduce a formal process for adding and removing projects to the projects of concern list.
This formal process builds on the Enhanced Early Warning and Gate Review process Minister Clare and I announced in May this year.
Defence and the Defence Materiel Organisation will also develop formal remediation plans for all designated projects.
In the case of projects confirmed as Projects of Concern, these remediation plans will:
• identify project remediation objectives;
• identify key milestones and the timeline for their achievement; and
• detail the basis on which a project will be removed from the Project of Concern list.
Where DMO and Industry cannot agree a satisfactory remediation strategy, DMO will provide formal advice to Government on whether the project should be cancelled.
For all existing Projects of Concern, formal remediation plans will be developed and agreed with Industry. These will include the basis on which these projects will be removed from the current list. Projects will only be taken off the list if the project is remediated in line with the plan or the project is cancelled.
Ministerial involvement has been and will continue to be a cornerstone in driving improved outcomes for Project of Concern projects.
Accordingly, as part of this enhanced process, the Minister for Defence Materiel will hold biannual meetings with Defence and Industry representatives responsible for projects of concern to ensure individuals are being held to account for the progress of remediation of the projects.
These reforms have been developed in close consultation with Industry by Minister Clare. I am also announcing today an update to the projects of concern list.
Two projects on the Projects of Concern list have been successfully introduced into service and have been removed from the list.
Firstly, Project Vigilare is an air defence command and control system to give the Australian Defence Force improved surveillance and communications capabilities.
It was added to the Project of Concern list in 2008 due to schedule delays.
The prime contractor, Boeing, has worked closely with Defence to address the issues and get the project back on track and is to be congratulated for its efforts.
Following successful testing, the system is now in operational use by the Air Force.
Secondly, the High Frequency Modernisation project which is providing Defence with a modernised high frequency communications system.
It was added to the Project of Concern list in 2008 because of the failure of the fixed network to meet project milestones.
A revised schedule was negotiated with the company and these milestones have now been achieved, over 12 months ahead of the revised schedule.
They are examples of what can be achieved when Defence and Industry work closely together to address project challenges.
Nine projects remain on the projects of concern list. The Government, Defence and Industry will continue to work to resolve the challenges these projects are facing.
Update to the Defence Capability Plan
As well, today I am releasing, on-line, a supplement to the on-line electronic version of the Defence Capability Plan 2009. This will be the third update of the Defence Capability Plan since the 2009 Defence Capability Plan was released by my predecessor Minister Faulkner.
The supplement outlines the adjustments since I released the second Defence Capability Plan update in December 2010.
The adjustments include removal of projects approved by Government, such as the acquisition of 24 new naval combat helicopters.
They also include the cancellation of the project to acquire additional C‑130J aircraft following the Government’s acquisition of an additional C‑17 heavy lift aircraft.
Further adjustments reflect the ongoing refinement of the information in the Defence Capability Plan, in particular variations to schedule and cost.
In the coming weeks Defence will incorporate these changes into the on-line Defence Capability Plan.
This fulfils the Government’s commitment to continue to update the Defence Capability Plan.
While the Defence Capability Plan has been enhanced following the Government’s response to advice from the independent Australian Strategic Policy Institute on ways to make it a more useful and more transparent document, I continue to believe that it needs to be improved to be more useful to industry.
I have previously discussed with Industry representatives the need to improve the quality of pre-first pass information provided to Industry.
I will continue to pursue this.
Reform – Overprogramming of the Defence Capability Plan
One ambition is to reduce the level of over programming in the Defence Capability Plan.
The overall Defence Capability Plan program is developed taking into account the available funding, the delivery schedules for projects and the capacity of industry to develop and deliver the projects.
The principle behind over-programming is to provide flexibility and to aid in ensuring that best use is made of available funding in the event of delays to the development of individual projects.
It is a deliberate strategy to manage the risk of projects being delayed, so that funding can be diverted to other high priority Defence capability projects.
However, what over programming really means is that more projects are included in the Defence Capability Plan than can actually be realised.
This creates false expectations.
It means promising more than we can deliver.
It also means, in effect, planning for failure.
All versions of the Defence Capability Plan since it was first published in 2001 have been over programmed.
I do not believe that this is the best basis for Defence capability.
We can do better.
This process will be undertaken in conjunction with the next Defence Planning Guidance process.
Linking the Defence Capability Plan to the Defence Planning Guidance
As outlined in the White Paper, the Defence Planning Guidance is the Government’s premier Defence planning document between White Papers.
The Defence Planning Guidance process aligns strategic guidance, capability decisions and resource planning on an annual basis.
Future iterations of the Defence Capability Plan will be more closely linked to this process.
Linking updates to the Defence Capability Plan with the Defence Planning Guidance will ensure that information provided to Industry is based on the latest national security tasks set by Government.
This also underlines the fact that the Defence Capability Plan is primarily a national security document. It is not of itself an industry policy document, but guidance to industry.
A Defence Capability Plan based on the Government’s updated Defence Planning Guidance will provide more meaningful, more reliable information for industry.
As well, a focus on projects which have been developed for Government consideration in accordance with the Kinnaird and Mortimer processes will ensure Industry has the best information available for projects which are approaching the acquisition stage.
A focus on getting complex and costly Defence projects right at the beginning will reduce or avoid major problems later in the life of a project.
If we fail in our obligation to get these projects right, it reflects badly.
It reflects badly not just on Government, but on Defence itself and on the Defence Industry.
Most importantly, if we fail to deliver enhanced capability to the Australian Defence Force, it is a bad outcome for our national security interests.
There is no shortage of determination for Defence and Industry to do better.
Individual and collectively we can all do better in this task.
And through our ongoing reform program we will.
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