Minister for Defence - Speech - Australian Defence Magazine Congress 2014

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Senator the Hon David Johnston

Minister for Defence

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24 February 2014

Defence and Industry - a new deal is forged

Thanks Mike, to Katherine Ziesing and her team at ADM, thank you for the congress and I look forward to the good news next week I think about the arrival of number two.

To your sponsors thank you too for the support you have given to defence industry and more broadly to Australia.

Distinguished guests, industry leaders, thank you for this opportunity, of course ADM plays a role in informing public debate on issues and encouraging discussion on national security and defence matters within Australia.

This year is potentially quite an exciting one for Defence; the agenda is a demanding one in an increasingly dynamic strategic environment.

The challenges that present as to how Defence – and more significantly to industry – can continue to deliver constructively within this agenda are enormous given the fiscal parameters we are confronting and I will talk about those a little more.

These are very challenging times for Government.

The Treasurer announced on the 17th of December that we had inherited accumulated deficits of $123 billion, the next four years the trajectory was to a budgetary position of some $666 billion owing over the next decade. Why is that important? Because this country is utterly dependant on our terms of trade.

If we have a down turn in our terms of trade in agriculture, mining, oil and gas, or in our exports generally we are in a lot of trouble.

The Treasurer also said that one thing is for sure – no country has ever taxed its way to prosperity.

I am convinced, as is the Government, that freer trade and smaller government is the way forward for us. We understand how important it is for you to know that we are working with you to make our economy stronger and prosperous. I see Australian industry therefore as our capability partner in the great endeavour to maintain a safe and secure Australia. That is to fund the insurance policy that we all know we must have.

This Government intends to grow Defence so that the total Defence budget is 2 per cent of our GDP within the coming 10 years.

We will start growing the Defence budget once the broader economic circumstances permit. By delaying of course we make the step up steeper, we are aware of that, but let me tell you the current issues we are confronting in terms of getting the money right are just horrendous.

The Government is committed to the reform of Defence from a ‘first principles’ perspective. In other words making decisions faster, more cost effective and trying to avoid some of the threshold issues that you all know confront you when seeking Defence work.

This externally-led review will help ensure that we are spending every dollar of tax payer’s money on Defence thoughtfully and effectively. We will – and the Government and the Prime Minister have committed to – reinvest any savings we can find in that process back into capability.

The Government remains committed to no further cuts to overall Defence spending, that is the important first step on our road back.

We have lost $18 billion dollars in the last four years, our capital account is in disarray.

For those of you that understand long term spending you will know that to maintain a proper, structured, planned capital investment programme in Defence over 10, 15, 20 years we have got to have some stability of resourcing.

The first step in this is no further cuts.

We will develop a White Paper within the first 18 months from the last election to set out the strategic challenges and what capability we can afford to meet those, we must match out capacity and our capability and our aspirations to our resources.

It will focus on aligning aspirations with budget, matching a review of our force structure with a long-term budget plan.

I want our plan to be realistic and achievable and, may I say, have bipartisan support. I am acutely aware of ‘over promising’ as that is what we have had to live with for the last five years – over promise and completely under deliver.

The White Paper will set out what we want the ADF to be able to do and how it can be achieved with the resources available – this is what our strategy will be.

The White Paper will provide an achievable result and some much needed stability to the defence organisation, particularly on its capital side.

The White Paper will be released in the first part of 2015 supported by a force structure analysis.

The attending Defence Capability Plan will provide industry with certainty and the clarity it needs, such as you would expect from a bankable document – that is a document you, as an SME, can take to your shareholders and your board and say ‘here is where the Government is going and they have got the funding to do that over the long term’.

May I say that you saw last week that we announced the P8. They were in the budget as far back as 2006 – that is the sort of stability we must have if we are going to go forward with big platforms.

The Australian Government is committed to supporting local defence industry, consistent with providing best value for the tax payer and effective and affordable equipment for the Australian Defence Force.

The Government intends that the ADF should use Australian-made equipment where ever possible – and often it is very difficult.

So when I am buying on behalf of the Government and signing off at NSC on large acquisitions the questions I am asking – particularly in the aerospace area - are ‘how much of this money is coming back to Australia in terms of the supply chain? In terms of sustainment? In terms of Australian input into this acquisition?’

Defence expects to spend $5.4 billion on equipment and acquisition support in Australia in 2013/14. This equates to 60% of DMO’s military equipment acquisition and support expenditure, so the other 40% is going somewhere else.

This year’s budget for the Defence Material Organisation’s programmes to improve industry efficiency – this is money injected into suppliers and industry to support skills and commercial opportunity – is $40 million.

I am currently receiving advice and working closely with the DMO and Australia’s ship building sector to deal with the current problems they are confronting.

I will be announcing how we will be pulling together a new White Paper in the very near future, but developing a White Paper does not of course take place in a vacuum.

Our strategic environment shapes our options and what we want the ADF to do, and that is a very fluid circumstance.

Providing for the nation’s security is a fundamental responsibility of Government.

The new White Paper will need to reassess our strategic environment, the changes underway in our region and around the globe.

We will need to challenge our thinking of what the key tasks of Defence are.

As part of the White Paper, Defence will develop a force structure review. Such a review will be shaped by the tasks the Government expects the ADF to undertake and to be able to undertake.

This work needs to be dispassionate, analytical and capable of challenging established beliefs.

Importantly it needs to be able to balance cost and capability, not assessing elements individually, but at a whole of capability level.

Also, the White Paper needs to be able to recognise the critical place industry takes in generating and sustaining capability, and may I say from an inaugurated point of view, that is from the very early stage so we can reap the benefits of the corporate knowledge that has been acquired by industry over a very long time, something I think we don’t do well.

And as I have previously stated there will be a new Defence Capability Plan published to align with the Defence White Paper, an unclassified, public, 10-year plan that will provide further guidance, fidelity and clarity to industry.

It will be a full and proper ten-year plan, not the obfuscations we have been used to in the past six years.

Ensuring a rigorous and inclusive outcome will take time and effort. We are currently working assiduously with Defence to meet the requirements of that White Paper such that we will meet our deadline of the early part of 2015.

The Government is committed to gaining the best value for tax-payer dollars that are spent on Defence.

The review will begin in earnest once the key findings of the National Commission of Audit are delivered, so our ‘first principles’ review is following the National Commission of Audit which is going to charter the course for an administrative prospective on what reforms can be done in Defence.

The findings of the first principle review will then be wrapped in to the White Paper.

The focus will be on improved decision making and accountability, in other words, timely decisions, as time is money and we need to acknowledge that time is what has been hurting, not just Defence’s capacity to meet the challenges, but industry’s capacity to get going.

So the focus will be on expedient administration so that the ADF can meet the challenges of the next 15 or so years.

Included in the ‘first principles’ review will be a review of the Defence Materiel Organisation. This will attack the task of reducing the cost to industry of doing business with defence and seeking to implement simpler, faster and more cost effective tendering. DMO must become a more commercially astute organisation. In other words commercial discipline must start to be a front of mind focus for the DMO.

We must adopt a more commercial approach to contracting, as well as to risk management and risk transfer. The first principles review will look at establishing a DMO that is itself much more commercially skilled. The review will examine the option of a more independent agency – an agency that can have a great capacity to hire and fire and attract people with commercial skills.

I am mindful that the recent experience of GoCo in the UK did not work, although I think there has been substantial improvement in the capability acquisition principles and funding functioning of the UK Government.

I will be looking to the ‘first principles’ review for advice on the way forward as well as anything the National Commission of Audit might say.

We have met Bernard Gray, we have spent some time with him and we have discussed the way he has reduced the British Defence public service from about 29 000 down to about 18 000. The way he has done that has been an interesting way forward, I am not suggesting that is the way forward, but he has achieved a shake-up in that area that has been much to his credit.

Let’s talk about some facts for defence industry.

There are currently around 180 approved major acquisition programs on the go at an average of $427 million and more than 50 minor projects at an average of $10 million under management, along with the wide-range procurements associated with supporting services and infrastructure.

The DMO also sustains and maintains over 110 platforms and fleet systems as operated by the ADF.

In 2013/14 the DMO will pay around $8.5 billion to defence industry to acquire and sustain military equipment and support military services.

The DMO’s expenditure in Australia involves an estimated 3 000 firms in the Australian defence industry.

In 2013/14 they are expected to employ around 26 000 people in support of Australian Defence capacity.

I for one, having been the Shadow Defence spokesman the current Government in opposition, understand the pain that many of you have been through in waiting for the work in rustling up finance, to put the documents in, to compete, to hope the programme is going to be approved or to go through the process quickly.

Through its base services contracts across Australia Defence spends approximately $1 billion per annum.

In 2013/14 Defence has allocated $1.2 billion for capital facility projects alone along with $511 million for estate maintenance.

We are currently grappling with the rationalisation of the estate – the estate is vast and it is costing us an absolute fortune to maintain and it needs to be rationalised. This is a very sensitive and political area that we must attack right now.

Defence ICT conducts business of around about $1.3 billion annually in support of Defence operations right around the world.

The scope of Defence ICT environment ranges from 130 000 work stations to access 8 satellite installations, making it one of the most complex environments to manage we have.

Defence ICT is currently going through several change initiatives that will introduce many benefits across the Defence ICT environment such as greater scalability, flexibility and adaptability, improved information speed and reliability, continued technology capability edge, enhanced interoperability and improved business support.

If any of our major allies change the way they do encryption the flow-on is absolute for us – we have to fall into step right behind them at considerable expense.

For industry we expect significant opportunities to flow from a new White Paper and a ‘first principles’ review of the Defence portfolio.

We want industries that can compete on the world stage. We are committed to ensuring that they have such opportunity and I will talk about what we are doing in Defence with our own version of US Foreign Military Sales or FMS.

I have been on the case for Defence Export Control Office, DECO – there is not much point in having industry develop really good, internationally competitive systems if we can’t sell them, if we don’t have a tamper proof capacity to get them out into the market.

We are interested in Australian industry across the whole life cycle of a programme and project, that includes supporting innovation through the Capability and Demonstrator programme as well as the Defence Innovation and Realisation fund, and as I have mentioned earlier, reforms will support project delivery coupled with the significant area of sustainment.

But the flip side of this situation is industry must deliver productivity.

We must be cost effective, so our earned value figures must be right up around a dollar for dollar.

Now, we have delivered some great success stories in recent times, success stories that I want to mention because I don’t think we spend enough time understanding the positives when we focus so much on the negative.

CEA’s phased array radar technology is world class at an extremely cost-effective price – this is the future for us, particularly with the SEA 5000 programme.

Using SAAB’s command and control 9LV system out of South Australia, the ANZAC ship upgrades of Perth, Arunta, etc. have been fantastic.

Can I tell you, having spent time in Iraq and Afghanistan, Thales’s Bushmaster has been worth every single cent we have spent on it, to the point where the SAS and the British are using it as the vehicle of choice.

The Joint Strike Fighter is on the way. The fact is that we have a number of manufacturers who are specialising in the high tech machining of those parts.

Marand are doing the TAR planning for BAE systems, Rosebank, Lovitt and a whole host of other industry performers are doing other amazing things in the aerospace area in terms of producing high quality, high fidelity parts for this cutting edge piece of technology.

There are also a number of SMEs supporting the on-board electronic systems that we have on ships and planes and we want those SMEs to be successful, we want them to make a profit, we want them to be something that the larger corporations want to acquire.

Recent success stories for us in a small way have been RM Williams in South Australia.

As you all know we had a problem with parade boots – soldiers on ANZAC Day in Cairns and Darwin would march off leaving the soles of their boots on the parade ground because of a particular inadequate glue – the contract is now with RM Williams in South Australia and the change and the feedback I am getting from soldiers is fantastic.

LAND 121 trailers are manufactured by Hallmark up in Queensland, a very big contract going very well.

From base support it is not only the larger companies that deliver Defence’s essential garrison and infrastructure services, but a range of SMEs including facilities contractors.

The health of our people is one of the most important issues I confront on a daily basis.

Aspen Medical are providing phenomenal services in places where getting professionals is extremely difficult.

Coming from Western Australia as I do I know that getting medical services in the North West of my state is virtually impossible – particularly the allied health services.

Aspen is fighting a huge battle to try and encourage and service our major bases, particularly in Darwin and Townsville, and I want to take my hat off to them.

I would expect in return from this greater clarity and focus that there will be clear expectations placed on industry.

You cannot simply expect the Government to keep funding industries that do not perform so that in a whole host of areas there is under-performance.

We have got to get mean and lean in terms of productivity in those larger areas if we are going to have enterprises that are going to service well into the future, but I also want to hold Defence organisation accountable too.

If we are asking you to be productive the quid pro quo is that we must be timely.

Taking two years to adjudicate a tender is simply unacceptable.

Delivery on time and on budget is what we want, every dollar will be important.

Policy makers need to understand that every dollar they spend comes from someone. Every dollar must be well spent. There will be no room for mismanagement or waste.

Now what you need to know about government is firstly that it is on your side. You must know that when you make a decision, when you speak to your financiers or your equity partners, that we understand the sort of risks and analytical evaluations that you are going through.

No-one has been listening for the last six years, no one has been interested, can I tell you that this Government really is.

As a starting point I can announce today that Professor Don Winter, former Secretary of the US Navy, and Dr John White, a former head of the ANZAC Shipbuilding project, will lead an independent review into the Air Warfare Destroyer programme.

Both Professor Winter and Dr White are pre-eminent persons in understanding the ship building processes and both have wide experience in ship construction.

They have been tasked to examine all aspects of performance on the AWD program, including cost, schedule and quality factors.

They will identify the factors that have been limiting performance and the reason we are doing that is because if this programme is successful – as it must be for us – we have got to surveil it, we have got to make sure that it delivers.

The Government is not about to fund a long-term enterprise that is not productive and on the cutting edge of the earned value matrix.

The review will recommend remediation and mitigations to improve the cost and schedule performance of the AWD programme and to realise the national security benefits of the programme and the long-term benefits for the Australian shipbuilding industry.

The review will also identify the risks to the future completion of the AWD programme and provide recommendations on how these factors may be remediated or mitigated.

I met with both Professor Winter and Dr White yesterday and reiterated to them the importance of the task they were about to undertake and the requirement that their review should be completed within three months of the commencement of their undertaking.

In addition to this specific shipbuilding issue, this Government has inherited a significant problem from the former Government – the ‘Valley of Death’.

That people ask me what I am doing about the ‘Valley of Death’ is evidence of the fact that nothing has been done in the last six years.

Indeed most of those people asking the question are union members, they have been let down very badly and we have no money.

School halls and school bonuses have been where the cash has gone, and now I have got people saying ‘what about our jobs?’.

I am grappling with that and we have a plan, it is not going to be easy but you will see it in due course, but the challenge here is very significant.

We are working on this programme, it requires a whole-of-government approach and you will see what comes out of it.

I want to briefly address the topic of submarines.

The new submarine program is very complex and a difficult undertaking.

The former Government did very little, but I am working hard with Defence to catch up and under the umbrella of having no money that is very hard.

We need to extend the life of the Collins. We have a plan for that and it is starting to unfold.

Once we have scoped out and planned in detail the Submarine Life Extension Programme you will see how that impacts on, and runs across, into the new programme.

We are going to continue to manage these problems in a very methodical, determined way.

We are being strategic and we are being rigorous – the money must be well spent and give us a better bang for buck than ever before.

Industry is the critical fourth arm of Defence and a strategic enabler of the wealth and security of Australia.

Without industry taking and maintaining its rightful place the nation is poorer, the defence of Australia is weaker, and the Navy, Army and Air Force and the Department of Defence are diminished.

I come back to the problems we are confronting. These challenges are very many in this current fiscal environment.

We have no money but can I say I am blessed with very good people, as I have said to you before.

The service chiefs have done and amazingly professional job in dealing with the loss of $18 billion dollars over the decade in the last four years. They don’t complain and they just get on and they deal with the problems.

We have maintained our training regime and we have maintained our exercises.

We have also had the benefit of good allies who have been to collegiately talk about the technical issues we are confronting.

My simple task is to provide – with their support – a straight forward, credible, costed, funded plan into the future for Defence, a plan that the whole of government can support.

It is not going to be a huge splash, it is not going to be over promised, it is going to be conservative, but it will be credible.

That is the task we are confronting and the most important part of that task is industry.

I thank you for listening so attentively, I will take some questions.

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