–Defence Reform

The new government brought with it a renewed focus on defence reform. With the dust only just settled on the 2009 Strategic Reform Program (SRP), it must seem a bit like groundhog day at Defence. But until the government and public have confidence that Defence is efficient, the cycle of reviews, reports and reform will continue.

Central to the emerging reform agenda is the government’s commitment to an independent ‘first principles’ review of how Defence is structured and operates. At the same time, the National Commission of Audit has made substantial recommendations in a number of areas.

This chapter sets the scene for what’s likely to come. There are five sections. The first surveys defence reform over the past 35 years. The second summarises the SRP. The third explores post-SRP reform in Defence. The fourth examines the National Commission of Audit. The fifth opines on the challenges and opportunities for the future.

Much of the material in this chapter is taken from (1) a presentation by the author to an Atlantic Council workshop on comparative defence reform held in Ottawa in June 2013 and (2) the ASPI submission to the National Commission of Audit from November 2013. Both documents can be accessed in full at the ASPI website. For even more detail, see previous editions of the Budget Brief and Ergas (Agenda, Volume 19, #1, 2012) and Ergas and Thomson (Agenda, Volume 18, #3, 2011).

Consistent with the financial focus of the Budget Brief, the emphasis in what follows is on efficiency rather than on behavioural or cultural reforms.

Background

The Australian Department of Defence was created in 1976 by the amalgamation of the previously separate three services and civilian department. As with similar consolidations in the United States and United Kingdom, the goal was to achieve greater inter-service

cooperation and, to an extent, impose closer civilian oversight. The resulting organisation was largely a federated structure with central execution of policy development, financial management, force structure planning, science and technology, and capital acquisition.

Then, as now, a diarchy of the Secretary and Chief of the Defence Force (CDF) lead Defence with separate and overlapping responsibilities.

In the late 1980s, Defence commenced a long-term program of systematically market testing non-core functions. Under the auspices of the Commercial Support Program (see Figure 4.1) civilian and military activities were compared with private sector alternatives. By the end of the turn of the century around 16,000 positions had been market-tested with around 66% of activities examined transferred to the private sector. Activities included printing, repair and maintenance of equipment and facilities, medical services, technical training, corporate

Key Points

Although the savings targets for the Strategic Reform Program have been abandoned, reform

continues.

The incoming Abbott government has committed to a ‘first principles’

audit of Defence.

The National Commission of Audit had some difficult news for Defence.

The government should kick-start the next round of defence reform.

144

services, catering and information technology. Around the same time, the government divested itself of its shipyards, munitions plants and aircraft factories. By 2000 the civilian workforce had fallen from 40,000 to 16,300 positions and the military 70,000 to 50,300.

These reductions were largely the result of outsourcing of non-core activities previously performed by uniformed personnel and privatisation, notwithstanding that several thousand military positions were also lost as a result of the 1991 Force Structure Review.

Figure 4.1 Defence reform: 1985 to 2014

In 1996, the newly elected Liberal–National government undertook a comprehensive Defence Efficiency Review involving a high-level private/public sector advisory team. The Review led to the Defence Reform Program (DRP), which ran between 1997 and 2001. The DRP:

• adopted a shared services model for a wide range of activities including personnel administration, materiel sustainment, training and education, base/facilities support and information technology

1990 Rizzo and Black Reviews Cultural Reviews

145

• geographically consolidated some activities and disposed of the resulting surplus property

• accelerated the outsourcing of activities, including many that had been recently consolidated.

The promised savings from the DRP were around $1 billion from a then budget of $10 billion.

Although the DRP fundamentally restructured the organisation by embracing a shared services model, the long-term financial impact of the changes is difficult to discern. Most of the savings were used to ‘buy-back’ 7,000 military positions. But because there were no additional ships, planes or battalions raised as a consequence, the ‘buy-back’ was as much a

‘roll-back’ of reform.

In 1999, the Australian-led mission to East Timor heralded a decade of high operational tempo and rising defence funding. With money flowing and attention focused on

operational matters, efficiency reforms were put on the back burner and the shared services model eroded by the migration (and in some cases the duplication) of many activities back into the individual services.

In one area, however, reform continued during the 2000s. Beginning in 2000, materiel sustainment and acquisitions were consolidated by the creation of the Defence Materiel Organisation. There followed a series of reforms to capability planning and acquisition precipitated by several embarrassing multi-billion dollar acquisition debacles. Key developments included:

• re-establishment of DMO as a quasi-independent ‘prescribed agency’ with separate financial accounts from Defence

• the introduction of a two-pass process of project approval that saw the National Security Committee of Cabinet directly involved in the approval of large defence acquisitions

• revamped project governance and professionalisation of the DMO workforce.

The merits of the reformed DMO are difficult to judge given the extended duration of major defence projects, but preliminary data shows some improvement in the delivery of projects on schedule and within budget. On the other side of the ledger, it now takes much longer to conceive and approve projects, and alignment between strategic policy and capability development remains elusive.

Towards the end of the last decade, there emerged two (almost contradictory) propositions about Defence funding. First, there wasn’t enough money in projected Defence funding to afford all that was planned in terms of new equipment and attendant personnel and operating costs. Second, Defence wasn’t as efficient as it could be, having grown less than optimally efficient after close to a decade of escalating funding. Faced with this situation, in early 2008 the then government directed Defence to find $10 billion of savings over the next decade.

146

Then in May 2008, the government appointed George Pappas to audit the Defence budget.

His report was delivered to the Minister in April 2009. The Budget Audit identified prospective savings of $1.3 billion to $1.8 billion a year based on 2007-08 spending, plus one-off savings of between $218 million and $398 million. On an out-turned basis (taking anticipated inflation into account), the prospective recurrent savings over the decade commencing 2009-10 were between $15 billion and $20.7 billion.

To the work of the Budget Audit were added: (1) the initial work done by Defence to save

$10 billion; (2) the results of the 2008 Defence Procurement and Sustainment Review; and (3) the results of a series of internal ‘companion reviews’ conducted in parallel to the development of the 2009 Defence White Paper. The result was the SRP; a package of

reforms and efficiency initiatives to improve Defence’s performance and deliver $20.6 billion of savings over the following decade.