Australia — Defence and Industry Conference 2011

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. 

Press release
Min­is­te­r­i­al Sup­port and Pub­lic Affairs,
Depart­ment of Defence,
Can­ber­ra, Australia 

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