Australian Defence Magazine Defence Industry Congress 2010

23 February 2010

SPEAKER: The HON. Greg Combet MP

Thank you Katherine [Katherine Ziesing, Editor, Australian Defence Magazine] for your kind introduction.

My work in the area of defence materiel is guided by a simple proposition - to provide the ADF the equipment it needs in a way which ensures value for money for the taxpayer.

To achieve this, the Government has been active in trying to improve performance and achieve real change and reform.

As you all know, change in this area is difficult, but it is occurring and we remain determined to continue our reform program.

The Government has implemented reforms to achieve the following goals:

• Assisting the Australian Defence Industry to be as competitive as possible;
• Providing Government leadership on key projects;
• Improving actual project performance and solving long term issues;
• Improving the defence procurement system;
• Providing greater accountability and transparency across the whole capability cycle; and
• Providing our industry partners with the information they need to help us achieve these outcomes.

I would know like to discuss each of these areas in turn.

Enabling a competitive Australian Defence Industry

First, I want to discuss our efforts to enable a more competitive and vibrant Australian Defence Industry.

As I have said previously, the greatest challenge with industry policy is not crafting fine words on paper - though that is difficult enough - but actually implementing it.

That is why, when we came into Government in late 2007, we examined the 2007 Defence and Industry policy statement very closely.

While we could see some improvements that could have been made to the policy, we decided the best initial approach was to focus on implementing its policy initiatives.

I am proud to announce today that of the thirty nine practical initiatives identified in the statement, the Government has successfully implemented thirty three of them.

Of the remaining six, the intent of three policy initiatives were satisfied through other means and the implementation of the remaining three is on schedule.

Some of the most notable initiatives implemented, which I am sure you are all well aware of, include:

• The Australian Industry Capability Plans;
• The Defence Export Unit;
• The ePortal; and
• Identification, dissemination and action in support of Priority Industry Capabilities.

Another initiative that did not form part of that statement was the Global Supply Chain or GSC program. This program grew out of the increasing consolidation of the defence industry that we have witnessed over the last few years.

This consolidation has led us to the point where, with the exception of ASC, there are no Australian owned defence industry primes. This is both a challenge and an opportunity.

It is a challenge, because we must now attempt to influence investment decisions being made in Europe and North America rather than Sydney or Melbourne.

It is also a great opportunity, since one of the best ways for Australian SMEs to grow their profitability through exports is to win work in the global supply chains of these large primes.

This is the objective of the GSC program, and to that end we have already signed Global Supply Chain deeds with Boeing, Raytheon and, most recently, Thales.

These are all practical initiatives that are helping our local industry compete with, and within, the global defence industry. They are initiatives that protect our key strategic capabilities while also ensuring that small and mid-sized Australian companies have the ability to market themselves to the world and get a 'fair go' with the big primes.

Further work is currently being undertaken in this area as part of the Government's refinement of the Industry Policy Statement, which we expect to deliver within the next few months.

To further aid Australian companies in their ability to become truly competitive at this level, the Government is also providing significant investment in improving industry's skills base.

There have been significant changes to the Skilling Australian Defence Industry (SADI) program over the last two years.

One of the most important has been a continual effort to reduce the amount of 'red tape' involved in applying for SADI. We have wanted to make it as easy as possible for companies to access SADI.

The result of this, I am happy to announce, has been a very strong increase in SADI applications and in the financial commitment of industry.

In addition to reducing the bureaucratic hurdles around SADI, we launched the $61 million Industry Skilling Program Enhancement (ISPE) which contains fourteen initiatives aimed at three goals:

• expanding the pool of skilled people from which the defence industry sector can recruit;
• enhancing work and career pathways in the sector; and
• addressing specific defence industry capability skills gaps.

One year on, implementation is progressing well.

For example, the School Pathways Programs in Advanced Technology and Marine studies in South and Western Australia have been established via a National Partnership Agreement. The Pilot Program for the Advanced Manufacturing Industry Schools Pathway Program in the Hunter Region of NSW has been launched and will be implemented in four Hunter High Schools throughout 2010.

The centrepiece of this policy package is the $21 million Defence Industry Innovation Centre. I had the honour of formally launching the Centre in September 2009 last year, less than a year after we announced our intention to create the centre.

The Defence Industry Innovation Centre works with SMEs in the defence sector to boost productivity, improve innovation and increase the competitiveness of those companies. I note that Tony Quick, the Centre CEO, is speaking tomorrow, and I urge you to pay close attention to what he has to say.

Providing Government Leadership on Key Projects

The second area I wish to discuss today is the importance of Government providing leadership on key projects.

The reality is that for major projects the political leadership of the Government needs to be pretty 'hands on' if Australian industry is to be confident that it has a fair chance.

The Government has taken a very strong interest in ensuring that projects such as Land 121, Phase 4 - the Protected Mobility Vehicle Light and JP 2048, Phase 3 - the Amphibious Watercraft Replacement are developed in such a way as to ensure Australian industry has a chance to compete.

This means a lot not only for Australian industry but also Australian workers. Our defence industry covers workers in Bendigo, Adelaide, Brisbane, Newcastle, Sydney, Perth and Melbourne to name just a few locations.

Those companies and their workers should be confident that this Government is committed to ensuring a fair competition between overseas and locally sourced options wherever possible.

Improving Project Performance

Most importantly though is the need for Government leadership to improve the delivery of capability to the ADF.

When the Government came to power there were a number of projects that for various reasons were well behind schedule and/or well over budget.

Some of them just appeared to drift on and on without any resolution while taxpayers' money continued to be spent for no result for the ADF.

That is why the Government implemented the Projects of Concern Unit for which I continue to have personal oversight.

We currently have around 10 Projects of Concern.

I am convinced that the extra attention and leadership focus that projects receive while they are listed as Projects of Concern improves the performance of all parties involved in the project in question.

Our approach to managing Projects of Concern offers opportunities to both Defence and Industry to break down the logjam of continued delay, contractual stand-offs, cost overruns and failure, and encourages the adoption of innovative implementation and management approaches.

Since the Government implemented the Projects of Concern process, we have seen hard decisions taken and good results achieved.

The Seasprite Helicopter received the level of scrutiny necessary under the 'Projects of Concern' and Government took the tough decision to cancel the project with all the facts to hand.

There was more positive news when I announced the removal of the Tiger Armed Reconnaissance Helicopter and the M113 Armoured Personnel Carrier Upgrade from the list in May 2008 as a result of successful risk reduction strategies.

The FFG Upgrade project was a project plagued by communication breakdowns and divergent goals. However, listing as a project of concern drove a very significant increase in cooperation between the various participants in the FFG upgrade.

This cooperation and dedication delivered results and in January this year, the project was removed from the Projects of Concern.

I have seen similar increases in cooperation and focus on other projects that have been listed. Examples of this include the Wedgetail acquisition and the Anzac Anti-Ship Missile Defence Upgrade.

Collins Class Submarine sustainment remains a challenge, and it is at the top of the list of Projects of Concern.

We are developing a new contractual approach with ASC and, despite the recent setback with HMAS Farncomb's generators, firm foundations are being laid for significant improvement, particularly in terms of submarines available for deployment.

As you may be aware, a senior DMO executive has been given the full time job of looking after the Collins Class. In addition, I have announced that a new Australian Submarine Program Office will be established in Adelaide next month.

The establishment of the joint Australian Submarine Program Office is a vital step towards achieving the submarine output Government expects.

Reforming Defence Procurement

This brings me to the Government's reform of the defence procurement system. It is far better to develop and implement a smart acquisition strategy to prevent a project getting into trouble than to embark on the enormous efforts that project remediation demands.There are five very important lessons we have learned from problem projects. They include:

• The importance of managing specification, identification and adaptation issues earlier and better across the project development and acquisition stages of a project;
• That first of type equipment projects experience a range of unique and interrelated issues around requirement management; systems development and integration; verification and validation; and the development of in-service support concepts;
• The importance of properly assessing the design maturity of modified Military off The Shelf acquisitions;
• The importance of a standardised contracting approach to the management of complex technical programs. This also involves linking contract payments to the supplier's meeting actual project milestones; and
• The importance of adequately resourcing the early ramp-up stages of projects.

These are lessons that Defence will apply to other projects and I am confident that this will result in better overall project management.

Apart from implementing these lessons learned, the Government is also driving procurement reform through its response to the Defence Procurement and Sustainment Review which was conducted by David Mortimer.

I intend to give a progress report on the implementation of the reforms in the coming months. Having said that, late last year I commented that I thought the reform process had been too slow.

I am pleased to say that this has improved, and that considerable progress has been made.

For example, I am pleased to say that the appointment of DMO General Manager Commercial is imminent.

The Commercial Manager will be vital to delivering on the two central themes of this reform process; making the DMO more business like in its behaviour and injecting industrial realities earlier in the capability development process.

Other achievements include direct appropriation of the DMO service fee; project charters within the DMO and the establishment of a Project Performance Office.

All of these are making for a more efficient defence procurement system - one that will deliver better results for both the ADF and the Australian taxpayer.

Improving Accountability and Transparency

The Government has also been determined to ensure that there is a continuing focus on improving accountability and transparency.

We have implemented a series of initiatives that are promoting a far greater level of accountability and transparency than has previously existed.

For example, the ANAO is now conducting annual reviews of DMO's Major Capital Projects. This allows interested parties to track the performance of these projects. It is also the most information that has ever been publicly released on these projects.

The idea is simple - the greater transparency the Government can provide, the greater the accountability, which eventually leads to better performance.

As you are aware, at the Defence+Industry Conference in July last year, the Minister for Defence, Senator Faulkner and I released the Public Defence Capability Plan 2009.

We foreshadowed that the online version of the Public Defence Capability Plan 2009 would be updated every six months to reflect decisions made by the Government, and that the next formal re-issue of the Plan would not occur until 2011.

Again this feature takes transparency and accountability to a new level, with such regular updates never before being made public by any Government.

Therefore I am pleased to announce today that the Public Defence Capability Plan 2009 will be updated on Defence websites by the end of the week.

Changes made to the Public Defence Capability Plan 2009 are the result of decisions taken by Government since July 2009.

In summary:

• seven projects have received Second Pass Approval;
• one project has received First Pass Approval;
• five projects have been accelerated;
• five projects have been deferred; and
• two projects were deleted.

It is important to be up front with industry about the deferment of a number of projects. It is regrettable but is a consequence of the Defence budget planning and capability analysis that has been underway in recent months, designed to ensure that Force 2030 is delivered.

The DCP will continue to be adjusted over time due to various factors that emerge as the capability development process progresses, including: changing strategic priorities and economic circumstances, the maturity of projects and the evolution of technology in the options under consideration, and operational experience.

In addition to the changes listed above, some projects have moved within the timing bands set out in the 2009 DCP as our strategic and budgetary priorities have changed. These changes are normal. Government identifies timing bands rather than exact years so that industry is not faced with 'false precision' when it comes to project schedules.

The changes also reflect the Government's decision to approve a first tranche of 14 Joint Strike Fighter aircraft under project AIR 6000.

A key addition to this DCP update is the project summary page that shows all the project changes that have been made since the original publication of the DCP in July 2009.

The updated Public DCP 2009 contains many opportunities for Australian industry.

Last financial year we expended around $6 billion on acquisition and sustainment in the domestic economy. Between 2009/10 and 2013/14, the DMO predict that approximately $30 billion will be spent in the domestic economy.

In an era of the global financial crisis when other nations are cutting their defence budget, the Government is committed to increasing our defence budget by 3 per cent on average in real terms to 2017-18, followed by 2.2 per cent average real growth to 2029-30.

These are factors that, a year and a half ago, led Jane's Defence to label Australia a 'Golden Market'. The countries on this list are characterised by significant opportunities for the defence industry, with a focus on real spending growth.

Providing Industry with the Information they need

Finally it is important that we also continue to get our partners in industry the information they need to support us.

The DCP will continue to be adjusted over time due to various factors that emerge as the capability development process progresses. While Government will attempt to keep adjustments to the public DCP to a minimum, they are unfortunately inevitable.

That is why we are keen to ensure that information is provided to industry on any changes to the DCP as quickly as possible - which explains our commitment to six monthly updates.

In addition, in mid 2009 the Minister for Defence announced that a review of the DCP would be undertaken as a matter of priority.

This report was recently completed, and the Defence leadership is now examining its recommendations.

I would like to congratulate and thank Mark Thompson and Leigh Purnell, along with the Australian Strategic Policy Institute, for their collaborative efforts in providing Defence with a strategic document identifying options to enhance value to industry associated with public Defence Capability Planning.

The Government is carefully considering a range of improvements to the Public DCP to increase the amount of capability planning information provided to the public, and to improve the usefulness of that information for Defence industry in particular. Part of this process will be a careful examination of the ASPI report. We would expect to release the report and the Government's response in the next few months.

In the meantime, I can tell you that the centrepiece of the Government's response will be a return to a longer planning horizon, with the level of information provided on each project to be appropriate with its state of development. The changes we are considering include:

• Returning to a ten year time frame, which would better assist industry's strategic planning, noting that the level of certainty for each unapproved proposal would be consistent with its level of maturity;
• Increasing the level of detail of project descriptions;
• Describing any Priority Industry Capability (PIC) aspects of projects;
• Outlining applicable Australian Industry Capability (AIC) guidelines particularly for projects which are approaching Second Pass Approval;
• Including improved information on timings for market solicitation activities; and
• Reinvigorating existing forums such as the Environmental Working Groups.

The intent of these changes is to provide greater clarity and an appropriate degree of planning certainty for the DCP's target audience, while preserving the planning flexibility that Defence and the Government need to cope with changing circumstances.

I will conclude today by reaffirming the Government's determination to provide more effective opportunities for industry to contribute to Defence Capability Planning.

Thank you for the opportunity to address you on the Government's programs and efforts in Defence materiel.