AECOM AUSTRALIA PTY LTD Cost assurance for the 2015 Defence White Paper 304,067 DELOITTE TOUCHE TOHMATSU Cost assurance for the 2015 Defence White Paper 404,910 DELOITTE TOUCHE TOHMATSU Cost assurance for the 2015 Defence White Paper 707,298 ERNST & YOUNG Cost assurance for the 2015 Defence White Paper 1,001,638 ERNST & YOUNG Cost assurance for the 2015 Defence White Paper 1,089,500 KPMG AUSTRALIA Cost assurance for the 2015 Defence White Paper 397,289 KPMG AUSTRALIA Cost assurance for the 2015 Defence White Paper 1,344,502 PRICEWATERHOUSE COOPERS LEGAL Cost assurance for the 2015 Defence White Paper 438,955 PRICEWATERHOUSE COOPERS LEGAL Cost assurance for the 2015 Defence White Paper 646,290 PRICEWATERHOUSE COOPERS LEGAL Cost assurance for the 2015 Defence White Paper 1,087,336 QINETIQ PTY LTD Cost assurance for the 2015 Defence White Paper 251,890 QINETIQ PTY LTD Cost assurance for the 2015 Defence White Paper 837,760 QINETIQ PTY LTD Cost assurance for the 2015 Defence White Paper 1,968,627 RAND CORPORATION Cost assurance for the 2015 Defence White Paper 876,296 RAND CORPORATION Cost assurance for the 2015 Defence White Paper 1,965,073 WILDE AND WOOLLARD Cost assurance for the 2015 Defence White Paper 192,322
KPMG AUSTRALIA Cost estimation for SEA1000 440,400
KPMG AUSTRALIA Cost estimation for SEA1000 645,750
Total 14,599,903 Source: Department of Defence – Senate Order 192 contracts listing
In addition, the government has sought advice from the six-person White Paper expert panel (at contracted rate of around $150,000 each) and Defence/DMO has sought expert advice on defence industry policy as shown in Table 3.10.
Table 3.10: Expert advice on Defence Industry Policy
Contractor Subject matter Amount of
consideration DELOITTE TOUCHE TOHMATSU Study of Australian Defence Industry Issues 601,165 DELOITTE TOUCHE TOHMATSU Prepare Industry Policy discussion paper 398,148 Total 999,313 Source: Department of Defence – Senate Order 192 contracts listing
Hopefully, the substantial investment in external advice will be repaid through the greater efficiency available through a properly funded and planned White Paper.
Show us the money
The adjectives applied by the government to describe the forthcoming Defence White Paper and its accompanying plan for the ADF include ‘fully costed’, ‘externally assured’,
‘achievable’, ‘affordable’, ‘credible’, ‘realistic’, ‘properly funded’ and ‘enduring’. This is all well and good. But if—as the Minister says—the new White Paper is to ‘restore the compact that should rightly exist between the Government and its Defence Force’, there’ll need to be
140
another adjective put on the list; transparent. If the government wants to be taken seriously when it claims that its plan is ‘credible, affordable and properly funded’, it’ll have to show us the money.
To varying extents, past White Papers has tried to do so. Without doubt, the Howard government’s 2000 effort set the gold standard. It provided a decade’s worth of overall funding guidance in the document, and backed it up with a detailed breakdown of new funding over the decade in the subsequent budget. The 2009 White Paper provided far less information and the 2013 document did even less. All we got was a single figure in the budget for the six years of funding following the four-year forward estimates period. The difference between the 2000 White Paper and its successors is easy to understand. The 2000 document had a great story to tell, whereas its successors had a lot to hide.
The argument within official circles (that I’ve been regaled many times with over the years) will be that funding transparency is undesirable because it limits the government’s flexibility.
Flexibility, in this context, is the ability to claim to be doing something while not actually doing it. But if the Abbott government is serious about having an ‘affordable and long-term plan that aligns strategy, capability, and resources’, it’s time to put the money on the table.
There are two reasons why the government should be eager to disclose its defence funding plans. First, it would allow then to put the 2% of GDP issue back in the box once and for all.
Disclose a funding envelope today that hits 2% of GDP in 2023-24 and be done with it.
Otherwise, as we’ve seen, they could find themselves chasing their tail trying to adjust to the vagaries of the movable feast that’s nominal GDP. Second, it would provide political
momentum to defence funding that a future non-Coalition government would find more difficult than otherwise to overcome.
So when the government releases its ‘vision for Australia’s defence strategy over the next two decades in the new Defence White Paper’, here’s what it needs to do to justify the growing list of adjectives being applied to the document:
• The White Paper should include a two-decade long funding envelope (see page 122 of the 2000 White Paper to see a decade-long version), divided between personnel, capital and operating costs. The division between the three costs will allow a back of the envelope assessment of the internal feasibility of the plan.
• Update the funding envelope each year in the Budget for changes to foreign exchange, inflation, new budget measures and funding shifts between years.
• Provide a decade-long Defence Capability Plan (DCP) with dates for first- and second-pass approval and funding bands for each project. And I don’t mean the ridiculously fuzzy information we’ve been served up in recent times, but something more like crisp transparency that the Howard government delivered back in its 2001 DCP.
Nothing I’ve suggested would compromise national security or the Commonwealth’s commercial position, but it would allow the government to be held to account for its promises. The Howard government wasn’t afraid of being held to account, let’s hope the Abbot government isn’t either.
141
Chapter 4 –Defence Reform
On the 1 April 2015, the government released the report of the independent First Principles Review of Defence. As a result, Defence is about to undergo a second major reform program only three years after the last one—the Strategic Reform Program (SRP)—was abandoned.
This chapter sets the scene for what’s likely to come.
There are four sections. The first surveys defence reform over the past 35 years. The second summarises the SRP. The third examines the First Principles Review.
The fourth opines on the challenges and opportunities for the future.
Some material in the third part of this chapter is taken
from the recent ASPI Special Report One Defence—one direction? available from the ASPI website. While the emphasis here will be largely explanatory, the aforementioned publication provides a critical analysis of the forthcoming reform program. For further background on Defence reform, 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, Defence’s cultural change program Pathways to Change is not examined.
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, the 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 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 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 and privatisation,
notwithstanding that several thousand military positions were also lost as a result of the 1991 Force Structure Review.
Key Points
The First Principle Review of Defence has been released and a new wave of reform is about to hit Russell Hill.
The Defence Materiel Organisation will be reabsorbed back into Defence.
Capability Development Group is being disbanded and a new capability development process is on the way.
Risks and opportunities lay ahead.
142 Figure 4.1 Defence reform: 1985 to 2015
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
• geographically consolidated some activities and disposed of the resulting surplus property
• accelerated the outsourcing of activities, including many that had been recently consolidated. Rizzo and Black Reviews Cultural Reviews
143
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. As for the two-pass process, it now takes much longer to conceive and approve projects than in the past, 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, that there was not enough money in projected Defence funding to afford all that was planned in terms of new equipment and attendant personnel and operating costs. Second, that Defence was not as efficient as it could be, having grown fat and complacent 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.
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.
144
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 for reinvestment in capability.