Ending the deadly stop-start in our defence industries Opinion Editorial

The Peever First Principles Review and RAND shipbuilding report released in recent weeks have the potential to radically simplify the structure of the Defence Department and improve the efficiency of the way it spends taxpayer dollars. Lifting the capital productivity of Defence is vital if Australia is to maintain an affordable and sustainable defence capability.

The points made by the RAND report are, on the whole, valid but not new. The 2014 Winter-White review of the Air Warfare Destroyer Program and the ongoing Senate inquiry into shipbuilding have both confirmed that Australian shipbuilding is less productive than it once was.

Likewise, the 2012 Senate report on Defence Procurement highlighted the problematic stop-start nature of Defence’s “block replacement” approach to acquisition. Even before entering politics, I was aware of the need for a coordinated and continuous build of naval vessels. As an Army pilot attending Navy Staff College in 2000, I was awarded the Australian Naval Institute prize for maritime strategy for a paper addressing this issue.

My argument then, as now, was not framed in the context of jobs. Rather, it was based on the long-term view of value-for-money and how Australia can afford to have the sovereign capability to be an informed buyer and capable manager of defence capital equipment.

Continuity of work associated with complex build programs such as the ANZAC class program enabled Australia to achieve world benchmark productivity, something evidence supports us being able to repeat given the opportunity. Importantly, this sovereign capacity is required not only to provide Defence with the industrial and engineering base to build ships but to keep them seaworthy and, where necessary, repair or modify them in response to unexpected events or threats.

While security circumstances can change overnight, the engineering and fabrication base required to respond takes much longer to generate.

Like RAND, the issues raised by Peever are not new. In his 2009 review, Rufus Black identified the dysfunction caused by the organisational boundaries between the 14 federated groups that make up the Defence Department. The 2012 Senate report on Defence Procurement also looked at the broader organisational structure of the Defence Department, and some of the recommendations appended to that report called for changes very similar in scope to those proposed by Peever.

If few of the recommendations in these reports are new, why should the public have any confidence that this time things might change?

For a start, the government has accepted the need for fundamental change and has already supported all but one of Peever’s recommendations. There is no formal response to RAND as yet but the case for change is compelling.

The coming months provide an opportunity for Australia to leverage off these two signature reviews to transform the way Defence does business; in particular, acquisition and sustainment. With focussed, informed leadership at both the political and departmental level, Australia has the opportunity to reshape decades of culture and practice that have sometimes led to very poor outcomes for the taxpayer.

Key among these has been the intentional separation of the Defence Industry Policy Statement from procurement plans. The RAND recommendation for a continuous build process is a clear repudiation of this approach. In practice, it signifies that defence industry is one of the fundamental inputs to defence capability and government should plan to use acquisition budgets to assist in maintaining sovereign competence and capacity in key areas. This will require a broader, longer term evaluation of what represents value-for-money to the nation and the outcomes will vary between aerospace, maritime and land procurement activities.

How we sustain major capital equipment also has scope for reform. For many years, default Defence practice required industry not only to compete to design and supply but to compete again on a regular basis to provide through-life support. Perversely, the competitive process intended to deliver value-for-money creates a stop-start environment that can actually drive up cost and risk while decreasing productivity and performance.

Experience in the United Kingdom demonstrates that some contract models can provide for ongoing extensions if the company meets the required operational outcomes while being required to drive down the cost of delivery with each contract renewal. The company is able to achieve this reduction in cost because the long-term nature of the partnership allows them to invest in the competence of their people and innovate to develop more effective and efficient processes.

Taking this one step further, whole-of-life contracting may be suitable in some instances – such as the future submarine – to better align the interests of the designer, builder and those providing through-life-support. Such an omnibus contract would enable the Commonwealth to agree to milestone payments to cover costs during the design and build phases but tie the contract profit to the supplier’s ability to consistently make the equipment available to the military over its operational life. The designer would then have a greater incentive to optimise the design to facilitate ease of maintenance, the builder to ensure ongoing availability of parts and design artefacts.

Whether in the land, maritime or air domains, Australia needs the reforms that should flow from Peever and RAND.

Senator David Fawcett is a former Australian Defence Force test pilot and deputy government whip in the Senate.

Ending the deadly stop-start in our defence industries, Australian Financvial Review