Commission of Audit

The impact of the Commission of Audit on the Department of Defence will be profound, if its recommendations are accepted.

9th May 2014


 Commission of Audit

 The end of the Defence Materiel Organisation?

Kym Bergmann / Canberra


The impact of the Commission of Audit on the Department of Defence will be profound, if its recommendations are accepted. In essence, it wants to take us back to the structures and numbers – especially at senior levels - that existed before the turn of the century. The Commission has decided that the idea of having the Defence Materiel Organisation (DMO) as a separate prescribed entity should end, with all of its functions returning to the Departmental mainstream. As many of us fondly recall, the functions of the DMO used to be performed by the Acquisition & Logistics division – or its various predecessors – and was usually run successfully by a single Deputy Secretary.

This previous structure will be remembered fondly by Commission Chairman Tony Shepherd, who was Transfield’s bid manager for the ANZAC frigate project in the period 1988-90. The bidding entity was known as AMECON – originally a consortium, which Transfield had acquired through a series of commercial decisions designed to place the company at the centre of Australian naval shipbuilding. Tony Shepherd was highly effective in that role, and was able to manage a very complex process, bringing together sometimes fractious subcontractors while at all times remaining focused on issues of offering a winning combination of acceptable price and high capability (the writer worked at that time for the ship designer Blohm+Voss Australia).

At the same time another current figure in the defence review landscape, Dr. John White, was running Williamstown Dockyard in Melbourne for Transfield. In the mid-1980s Williamstown – then one of several Government owned dockyards – was a union-dominated basket case of almost zero productivity. The yard was meant to build the RAN’s final two FFG frigates – but after years of effort only 25% of the first ship (the fifth in the series, with the first four coming from the US) had been completed and the final frigate was just a collection of rusting bits and pieces.

It was a decision of the then ALP Hawke Government to sell the yard – and with it the contract to build the two FFGs. After Transfield purchased Williamstown – the dockyard, not the suburb - they sent John White in to fix the problems and get things working again. Fix it he did, with assistance of others from Transfield – and even with the support of the previously militant Victorian Trades Hall council, who under the leadership of the late John Halfpenny realized that the union movement either had to accept change or perish. As a consequence the number of unions on site fell from the completely destructive and unsustainable level 23 down to three and the number of workers shrunk significantly. As Transfield was soon proudly able to point out, the new workforce of 450 people was three times more productive than the 1,600 previously employed under Defence ownership.

The relationship between Transfield’s chances of winning the ANZAC bid being run by Tony Shepherd – worth billions of dollars - and the improved performance at Williamstown, being run by John White, was very close. By showing that the final two FFGs could indeed be completed rapidly and to the highest quality under new management was clear proof that the ANZACs could be built in the same manner – and so it proved to be the case.

Running the ANZAC bid gave Tony Shepherd a great deal of exposure to the navy, the Department of Defence, industry, unions, lobby groups, the media and a range of Federal and State politicians – all of whom had a perspective on what was needed. This effort was replicated in New Zealand - possibly more so because that country had a very active peace movement that was firmly opposed to the project. In other words, he had two years of total immersion in the extremely demanding environment of defence tendering for a very high profile project that went beyond delivering a product but which was a follow-on from the Collins submarine as another nation building heavy engineering activity.

So when he makes reflections on Defence, he has a lot of relevant background – and probably shares the despair of many trying to understand current Departmental procedures compared with the relative simplicity and economy of how things functioned in the recent past. The report reflects this:

“In the absence of organisational and structural reform, the 2013 Defence White Paper and Defence’s planned timeframe for its capability and facilities requirements is unlikely to be afforded within the current budget and forward estimates and Defence funding guidance to 2022-23.”

And even more bluntly:

“It is not clear that Defence Headquarters in Canberra has the capacity to drive efficiency and better policy outcomes as the organisation has grown more complex and top-heavy over the years.
“Since 2000 the number of public service senior executives in Defence has grown by 63 per cent (from 103 to 168) and the number of serving star ranked officers by 58 per cent (from 120 to 190). Since 1996 the number of three-star officers (lieutenant general equivalent) has grown from four to seven, while the number of deputy secretaries in Defence has increased from four to 14.


“A simpler and leaner structure is a priority. The Department of Defence should be required to monitor and publish information on the number of personnel in the combat force, Defence headquarters and support roles. A particular focus should be the ratio of the combat force to other personnel (the so called ‘teeth to tail’ ratio). Defence should develop a programme to improve this over time.


“At the same time, staffing at Defence Headquarters, including the numbers of star-ranked and Senior Executive Service officers, should return to the 1998 level.”
While the significance of the 1998 date is not explained, it was at about that time that for highly political reasons major changes to the structure of the Department on the acquisition and support side of things started to occur. This was mainly because of perceived problems with the Collins Class – and a view held by John Moore, the Defence Minister at the time, that the system was fundamentally broken. The creation of the DMO was a consequence of this perception.


Another factor always used to justify an increase in personnel numbers – especially at senior level – are “current operations”. In 1999, Australia became involved in East Timor; in 2000 the 9/11 attacks took place and Australia deployed forces to Afghanistan; in 2003 we participated in the invasion of Iraq – and so on. However, now that all of these various commitments are drawing to a close it seems appropriate that the Defence personnel numbers reflect this new reality.


Put simply, if the pace of current operations has been reduced to levels last seen in 1998 then there would seem to be no reason why the Department and the services should not reorganise themselves accordingly.


On the role of defence industry, the Commission takes a fairly hard line:
“A major driver of defence costs is the preference for unique and Australian built equipment. In the case of the Air Warfare Destroyer and Landing Helicopter Dock ship projects the premiums in the prices tendered for an Australian build were considerable. The effective rate of assistance is estimated at about 30 per cent for the destroyers and over 100 per cent for some of the helicopter ship options. Choosing to support Australian industry cost billions of dollars. In effect, a foreign build could have provided an extra ship in each class for the same cost.
“Using Defence for industry policy support comes at a price and the Commission considers that governments must be clear and transparent on these issues.”


However, some interpretation is required. The Commission does not argue against doing work in Australia – it is saying that the cost (if any) needs to be identified so that Governments can make clear and rational decisions about what they are doing.


Again, Tony Shepherd’s role in and knowledge of the ANZAC frigate project might be a factor. At the time it was assumed that the ships would be more expensive to build in Australia rather than to purchase them directly from the competing designers located in Germany and the Netherlands. This is for a range of reasons connected with new construction activity: facilities need to be built; staff hired; subcontracts negotiated – but most importantly of all, manufacturing economies of scale need a certain volume to kick in. For the ANZACs, the rough rule of thumb was that if building the ships in Australia cost more than 10% above the European price, then the deal was off.


Transfield / AMECON / B+V were well aware of the political sensitivity of the Australian build premium – and responded accordingly. As a footnote, the 10 ships built here were about 5% more expensive than if they had been purchased from Europe and had more than 70% Australian and New Zealand Industry Involvement. In other words this was a massively good deal for the country – and for the RAN as well, because the ships have been effectively supported ever since by local industry.

To get back to a situation of “more ANZAC, less AWD”, the Commission recommends:
“The Commission considers that the DMO should be fully integrated into the Department of Defence.”


The background is explained earlier: “Ensuring all parts of the capability process reside within Defence — including a much smaller DMO focussed predominantly on contract management rather than detailed project management — will allow for a more integrated view of the capability process, better defined accountabilities and better sharing of information. It will serve as a basis to address the shared problems faced by DMO and Capability Development Group. A more professional Capability Development Group could be achieved by ensuring it was headed by a senior policy officer experienced in independent analysis of contending military equipment and with staff recruited from a new professional capability development career stream.”


This notion of returning the Department to an era of being able to more simply and coherently articulate what they want in terms of capability also resonates with the ANZAC frigate experience. To minimise the curse of requirements creep and the ongoing uncertainty that entails, Defence and the RAN classified the ship early in the process as a Tier 2 combatant – and to keep acquisition costs as low as possible instructed bidders to follow a fit-for-but-not-with philosophy for certain weapons and sensors.


While not ideal, this proved to a reasonably effective approach to keeping cost and schedule under control.
Another important recommendation of the Commission is to privatise ASC. In fact, this would be a re-privatisation because the Government only acquired it in the year 2000. This will be the topic of much further analysis, because it is likely that the separate Winter-White report will recommend something similar. There is a growing acceptance that the performance of ASC both in maintaining submarines and building Air Warfare Destroyers will be considerably improved if the organisation is once run on a fully commercial basis. This would certainly reflect Tony Shepherd’s very relevant previous experience with Defence contracting.


The notion of re-absorbing DMO into the Department and concentrating its functions on contract management also seems sound. Defence needs to be an informed buyer, not a micro-manager of industry. The idea that the DMO would become Australia’s premier project management organisation always seemed at odds with expecting industry to take responsibility for project outcomes. You cannot have it both ways. If Defence wants to be a genuine program manager, then it can hire subcontractors for everything and do the very large amount of work itself of organising the construction of a platform or integration of a system – or both. Indeed, this is the way that some other entities occasionally do things – such as the United States Navy on certain projects. But you need to have very deep pockets to go down that path.


It will be interesting to see how many of these recommended changes to Defence are accepted by the Government. There should not be too much political pain involved, because no extra money is required and essentially it is a Canberra-based bureaucratic shakeup. No one will shed tears if a relatively small number of very senior and very well superannuated public servants and military figures are required to take early retirement. The downsizing and re-absorption of DMO into the Department will be more difficult and time consuming, but can be managed.
After all, a template already exists. In hindsight, the Departmental structure of circa 1998 worked reasonably well. Some fine tuning needs to be made because of changing circumstances in the last 15 years, such as the importance of cyber security, but otherwise clearer lines of communication, a simpler committee structure and – especially – more openness and transparency – is what the Commission of Audit seems to be about.


The privatisation of ASC will be complex – but no more so than the sale of Telecom or the Commonwealth Bank. It will lead to a further delay in the Air Warfare Destroyer build – but that looks inevitable in any case. The real beneficiary will be the Australian taxpayer and Defence itself, with the construction and support of future platforms being done in a much more cost effective manner than is currently the case. From an ideological perspective, this should be a perfect policy decision for a reformist Coalition Government.


 

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