Defence

Audit strategy overview

Defence’s^[8] mission is to ‘defend Australia and its national interests’ and there are significant resources devoted to achieving this.^[9] The 2009–10 Federal Budget provides consolidated resources to Defence and the Defence Materiel Organisation (DMO) of more than $26 billion. The Defence White Paper 2009, Defending Australia in the Asia Pacific Century: Force 2030, released in May 2009, has set the strategic direction for Defence. The Government has also endorsed a Strategic Reform Program comprising a comprehensive set of reforms intended to overhaul the organisation, drive efficiency and create some $20 billion in gross savings over the period 2009–19, with over $3 billion of savings to be delivered across the 2009–10 Federal Budget and Forward Estimates.^[10]

Within the next 15 years the Government plans to upgrade or replace over 80 per cent of the Australian Defence Force (ADF) war fighting assets. To this end, the DMO is managing over 210 major capital equipment projects and 140 minor projects.^[11] It also provides sustainment management services for over 100 ‘fleets’ of military equipment. Until recently the ANAO had given significant priority to audits that cover the significant risks associated with delivering capability to the ADF through major capital equipment projects. The ANAO has also broadened its assurance relating to these risks by working with the DMO to provide a review report on an annual Major Projects Report developed by the DMO.^[12]

The introduction of the review report on DMO’s Major Projects has given the ANAO an opportunity to refocus some performance audit resources towards other Defence activities that are also critical to Defence delivering its outcomes. In the last two years, this has meant that, in addition to completing performance audits of major capital acquisition and sustainment activities in DMO^[13], the ANAO has also completed performance audits of the Army Reserve, the planning and approval of major capital equipment acquisitions, the tender process for the private public partnership to build and support the Joint Operational Command Headquarters, garrison support services, the Army Individual Readiness Notice, the procurement of Defence Force recruiting services and the management of Defence health services in Australia.

It will continue to be particularly important, in the context of Defence implementing the Defence White Paper 2009 and the Strategic Reform Program, for the audit program to include both audits of Defence’s major capital equipment procurements and audits of wider Defence activities. In 2010–11, in addition to continuing coverage of major capital equipment procurements and the generation of capability, potential audits include critical areas such as information technology, ADF mechanisms for capturing lessons learnt, warehousing and distribution of explosive ordnance and handling of explosive ordnance at the unit level, and management of support to ADF members and their families.

Audits in progress at 1 July 2010

Major Projects Report 2009–10

The 2009–10 Major Projects Report will be the third annual report to Parliament on the DMO’s major projects acquisitions (22 projects have been selected for 2009–10). The ANAO will complete the assurance review and report to Parliament on the technical progress, schedule and cost of each major project that is subject to review. The report will be based on the agreed scope of the review, rather than on in-depth reviews, such as those conducted for performance audits. The quality of DMO’s management reporting systems and controls, and its ability to provide the ANAO with relevant and timely access to information relating to each major project will be critical to the success of this review process.

The report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Operational Release of Navy Major Systems

Introduction of a new military capability through equipment acquisition and upgrade projects carries risks regarding timely operational release of the specified ADF capability. ANAO Audit Report No.30 2001-02, Test and Evaluation of Major Defence Equipment Acquisitions, found that Navy projects with well-planned and managed test and evaluation processes benefited from easier progress towards acceptance into naval service (that is, operational release of the relevant capability). The objective of the current audit is to report on Defence’s management of the processes to achieve operational release of Navy major systems, and to identify where better practice may be used by Capability Development Group (CDG), DMO and Navy to achieve improved outcomes. The audit is based predominantly on case studies of 23 projects progressing through their requirements compliance verification and validation phase under the management of DMO, and through to their regulatory review and operational release phase under the management of Navy.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Mechanisms for Capturing and Communicating Lessons from Operational Activities in the Australian Defence Force

In August 2008, the Senate Foreign Affairs and Trade Committee tabled its report on Australia’s involvement in peacekeeping operations. In its report the committee asked the Auditor-General to consider conducting a performance audit of mechanisms that the ADF has in place for capturing lessons learnt from current and recent peacekeeping operations. ADF’s lessons processes cover all operations and training exercises and do not differ according to types of missions such as peacekeeping. Accordingly, the ANAO is undertaking a performance audit of the ADF’s mechanisms for capturing and communicating lessons from operational activities.

The audit involves an examination of: the effectiveness of the ADF’s mechanisms for capturing and communicating lessons; the adequacy of the ADF’s performance indicators for operational activities; and how lessons are shared within the ADF and with other relevant agencies.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Explosive Ordnance Services Contract

The Department of Defence, under the provisions of the Explosive Ordnance Services Contract, outsourced the storage, maintenance and distribution of explosive ordnance to Thales Australia (formerly ADI Limited). The contract commenced in July 2001 and has a term of
10 years.

The contract encompasses: managing the supply chain between explosive ordnance suppliers and the end user in forward bases and firing areas; delivering and collecting explosive ordnance to and from any Defence location in Australia; operating 18 Defence explosive ordnance storage, maintenance and distribution sites; managing four explosive ordnance disposal sites; managing, repairing and maintaining Defence’s non-guided explosive ordnance, equipment and facilities; ammunitioning and de-ammunitioning Navy ships; unloading commercial ammunition vessels; and providing technical services and training.

The objective of the audit is to examine the effectiveness of Defence’s management of the Explosive Ordnance Services Contract.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Accountability for Explosive Ordnance Held at Australian Defence Force Units

Control over explosive ordnance within the ADF has been the focus of significant internal and external scrutiny over the past several years. Wholesale distribution and warehousing of explosive ordnance is managed under the Explosive Ordnance Services Contract. On larger bases the main magazine is shared and run under a Garrison Support contract. Explosive ordnance storage and accounting arrangements extending further along the distribution chain to units and exercises are subject to differing arrangements.

The Computer System for Armaments (COMSARM) is the primary classified system used to account for explosive ordnance within the ADF. COMSARM is not normally available at the unit level and/or is not always used to manage all types of explosive ordnance held by a unit. A range of processes is used in place of COMSARM, including paper records, signals and the Standard Defence Supply System.

The objective of the audit is to evaluate the effectiveness of accountability and control arrangements for explosive ordnance in the ADF at the unit level.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Information and Communication Technology Strategic Planning

Defence’s ICT network is the third largest in Australia, consisting of over 8400 servers and 107 000 workstations for 106 000 users. Defence’s ICT infrastructure is supported by around 1400 people at a cost of approximately $1 billion per year.

In any organisation, appropriate strategic planning is fundamental to establishing, maintaining and developing an effective ICT infrastructure. Inadequate planning can result in an ICT infrastructure characterised by fragmentation, duplication, poor performance and the inability to meet business needs. The importance of strategic planning to meet ICT needs is heightened in a large, geographically dispersed organisation such as Defence.

The objective of this audit is to inform Parliament about the effectiveness of Defence’s ICT strategic planning activities.

The audit report is expected to be tabled in the Spring 2010 Parliamentary Sittings.

Potential audits

Major Projects Report 2010–11

The 2010–11 Major Projects Report will be the fourth annual report to Parliament on the DMO’s major projects acquisitions. Subject to the Joint Committee of Public Accounts and Audit (JCPAA) endorsement of selected projects, there is an expectation to increase the number of projects included to 30 projects by the 2011–12 report. In 2009–10, 22 projects were selected and endorsed by the JCPAA. The ANAO will complete the assurance review and report to Parliament on the technical progress, schedule and cost of each major project that is subject to review. The ANAO will continue to undertake analysis of each project’s performance and, over time, the emerging trends across all projects and the governance model in place within the DMO.

The report is based on the agreed scope of the review, rather than on in-depth reviews, such as those conducted for performance audits. The quality of DMO’s management reporting systems and controls, and its ability to provide the ANAO with relevant and timely access to information relating to each major project will be critical to the success of this review process.

SEA 4000 Air Warfare Destroyer—Phase 3, the Air Warfare Destroyer Build Project

Project SEA 4000 is being delivered under an alliance arrangement between ASC AWD Shipbuilder Pty Ltd (ASC), Raytheon Australia Pty Ltd and the Commonwealth. The participants have a shared commercial interest in the outcome of the project through cost and schedule performance incentives. In 2009 the program was in its acquisition phase, with the majority of combat and platform system equipment selected and most combat systems were under contract.  Preliminary design reviews of the ships’ systems were completed, and Critical Design Reviews were planned for December 2009.

The project is to produce a Verification Cross Reference Matrix containing the contracted requirements and their respective verification procedures and verification results, in order to provide assurance that the contracted specifications, standards and requirements will be achieved.

An audit would provide advice to Parliament on the progress of the Air Warfare Destroyer Build project, and assess the adequacy of the project’s cost and schedule management system and requirements verification.

Implementation of the Military Integrated Logistic Information System

The Military Integrated Logistic Information System (MILIS) is intended to provide the next generation of defence combat support capabilities aimed at delivering superior logistic support. MILIS is being acquired under Joint Project 2077 and is scheduled to become operational in July 2010. The current high tempo of Defence deployments, along with earlier adverse ANAO findings, highlighted the significant challenges in providing logistic support and the difficulties of coordinating more than 100 different logistic information systems to support ADF operations.

MILIS is intended to be an integrated system, providing logistic information and support to ADF units and headquarters in barracks and in the field, including support to deployed locations with interrupted communications. Over the longer term, MILIS is intended to be the foundation for improved financial management, integrated supply, inventory management, maintenance, movements and distribution throughout Defence.

An audit would examine Defence’s planning for and implementation of MILIS, including the transitional and training arrangements.

New Air Combat Capability—AIR 6000 Phase 2A and 2B

AIR 6000 aims to introduce a new air combat capability with the air superiority and strike functions required to meet Australia’s strategic needs.^[14] In November 2009, the Australian government approved the acquisition of 14 F-35 Joint Strike Fighter(JSF) aircraft at an estimated cost of A$3.2 billion.

The JSF is being developed by an international collaborative program, led by the US. The program has entered the first lot of low-rate initial production, with system development and demonstrations running in parallel with production, sustainment and follow-on development. The key U.S. program risks include major cost increases and major delays. The Australian program’s highest risks relate to the effective management of the Air Combat Fleet workforce during the transition period, and to Australian defence industry outcomes identified in the agreed Industry Participation Plans.^[15]

The initial batch of the new aircraft is scheduled for delivery in the U.S. in 2014 for training and testing. The first squadron is intended to be ready for operations in 2018.^[16]  Approval of the acquisition of the next batch of aircraft, sufficient to establish three operational squadrons and a training squadron of JSFs, is planned to be considered by the Australian Government in 2012.^[17] This accords with the Defence Capability Plan 2009, which includes the acquisition of three operational squadrons comprising not fewer than 72 aircraft. Subsequent Defence Capability Plans may include Phase 2C, which covers the additional squadron that would take the total JSF acquisitions to 100 aircraft.^[18]

An audit would inform Parliament on the progress of the New Air Combat Capability project and would assess the adequacy of risk management arrangements put in place by the Defence Materiel Organisation for this project. The audit would include the project’s Phase 2A and Phase 2B capability definition and acquisition contract development.

Implementation of the recommendations of the 2008 Defence Procurement and Sustainment Review

Over the past several years the procurement practices in the Department of Defence associated with the acquisition and sustainment of equipment have been the subject of a number of reviews. These reviews included the 2003 Defence Procurement Review (the Kinnaird Review), which made a series of findings and recommendations broadly grouped around the four significant points in the Defence capability cycle, including: communication with government; defining and assessing capability; the management of capability; and the procurement and ongoing support of defence equipment.

Subsequently, in 2008 the Defence Procurement and Sustainment Review (the Mortimer Review) was undertaken.  That review identified five principal areas of concern, including: inadequate project management resources in the Capability Development Group; inefficiency in the process leading to government approvals for new projects; shortages in DMO personnel; delays due to inadequate industry capacity; and difficulties in the introduction of equipment into full service. The key themes of the Mortimer Review were focused on making the Defence Materiel Organisation more business-like and imposing commercial discipline on the defence procurement and sustainment processes. In 2009 the Defence Strategic Reform Plan was released. This document encompassed a range of areas within Defence and identified that reforms recommended by the Mortimer Review were a key element of the Strategic Reform Program.

The Government response to the Mortimer Review indicated that the ANAO will be invited to audit the progress of reform at nine and 18 months post-commencement and report its findings against the agreed plan to make defence procurement more business-like.

An audit would examine Defence’s and DMO’s planning for and management of the implementation of the recommendations of the Mortimer Review.

Management of the Defence Estate

Defence is the largest Commonwealth landowner and one of the largest landowners in Australia, with 3.4 million hectares of land. The Defence estate consists of 64 major bases and some 25 000 facilities valued at around $62 billion. Another 350 properties are leased, with an annual lease bill in the order of $120 million. The Defence Support Group manages and maintains the Defence estate, and works with its customer groups and services to identify, deliver and maintain estate projects.

An audit would provide assurance to Parliament on key aspects of Defence’s management of the Defence estate function.

Australian Defence Force Fuel Management

The ADF uses a variety of fuels and lubricants to maintain its military capability.

Sustaining the current high tempo of ADF operations requires the effective management and distribution of fuels and lubricants, a complex task involving many processes. DMO’s Maritime System Division manages the procurement and provision of fuels and lubricants for the ADF. Defence’s 2007–08 Annual Report states that DMO spent $422 million on fuels and lubricants in that financial year.

ANAO Audit Report No.44 2001–02, Australian Defence Force Fuel Management, found that the strategic management of the fuel supply chain was fragmented and insufficiently coordinated. It noted that Defence needed to do more to effectively identify, analyse and manage risk. The audit also identified a number of activities Defence was undertaking to improve management of its fuel and lubricants.

An audit would examine the effectiveness of Defence’s current management of its fuels and lubricants supply chain.

Management of the Australian Defence Force Rehabilitation Program

The ADF Rehabilitation Program commenced in 2006 to ensure that ADF members receive fast rehabilitation assessments and coordinated management of injury or illness sustained on deployment. The intention is to help maximise Defence’s capability by returning ADF members as quickly as possible to military duty or, or if this is not possible, to alternative duty in the ADF if available or to transition out of the ADF.

The Directorate of ADF Rehabilitation Services is responsible to the Commander Joint Health and the Service Chiefs for overseeing the effective and efficient coordination and delivery of Defence’s rehabilitation services. In October 2008, Defence reported over 8000 program referrals (an average of 400 per month) since the commencement of the program, with a marginally lower rate of referral in 2008–09.

An audit would assess the effectiveness of Defence’s management of the ADF Rehabilitation Program, aimed at returning injured or ill ADF members to duty as quickly as possible.

Remediation of the Lightweight Torpedo Replacement Project

The Lightweight Torpedo Replacement Project (JP 2070), as currently approved by the government, is divided into three phases. The total budget for all three approved phases of JP 2070 is $665.48 million. Phase 1, which focused on selection capability analysis and costing, has been completed. Phase 2 involves the acquisition of an initial tranche of torpedoes and integration of the torpedo onto the Adelaide and ANZAC Class Ships. Phase 3 primarily involves the acquisition of a larger quantity of torpedoes referred to as war stock. Both Phases 2 and 3 are ongoing. In May 2010, the ANAO tabled Report No.37 2009–10, Lightweight Torpedo Replacement Project. That audit concluded that the acquisition of the replacement lightweight torpedo has not been managed effectively by DMO, as the project will not deliver the capability originally sought by the ADF; did not achieve schedule; and remained within budget but that this had been achieved through the removal of all air platforms from the scope of Phase 2.

At the conclusion of the audit there was ongoing uncertainty surrounding cost, schedule and capability outcomes for the Project. In response to the audit report, Defence and DMO acknowledged that planning for, and implementation of, the test and evaluation program for the torpedo had not been as proactive as it should have been but advised that senior management intervention had recently occurred to ensure that these problems were being resolved quickly. Defence advised that it aimed to achieve an initial operational capability in mid‐2011, with the torpedo to be fully in service with all equipment delivered in late 2013. In this context, in May 2010, the Minister for Defence requested that the Auditor-General undertake a follow-up audit of JP 2070 to provide independent assurance of the project’s progress and that the project is able to get back on track along the lines Defence was then anticipating.

An audit would assess the effectiveness of remediation arrangements put in place by Defence and DMO to resolve issues impacting on the completion of the Lightweight Torpedo Replacement Project and achievement, including in-service support, of the desired capability.

Defence Force Recruitment (DFR)

At 30 June 2009 Defence employed 55 081 permanent and 20 277 Reserve ADF personnel. To maintain this level of personnel, and grow the number of personnel in accordance with Defence plans, Defence has a requirement to recruit approximately 10 000 new personnel each year. The recruitment process is undertaken jointly by a contracted service provider and Defence personnel.

In 2009–10 the ANAO undertook an audit examining the tender process for the New DFR contract (contract signed in July 2008), the transition-in of the successful tenderer (August 2008 to January 2009) and the termination of that contract (Termination Deed signed in October 2009 and services ceased on 31 January 2010).

An audit would examine Defence’s management of the process to obtain an interim recruiting services contractor (late 2009), Defence’s management of this contract, the model that is being used to deliver recruitment services and planning for the future delivery of services.

Management of Commercial Prepayments

The face value of Defence’s prepayments for 2008–09 was reported to be in excess of $1 billion, including commercial prepayments and prepayments for foreign military sales. For capital acquisitions, Defence’s usual practice is to advance start-up or mobilisation payments to contractors in order to secure long lead-time items, including those requiring significant initial development. Defence generally seeks to balance the need for such payments against the risks, including the opportunity cost to the Commonwealth, indicated by the public debt interest foregone. Current government policy requires the benefits of this approach to be weighed against the risks and the costs, to ensure that the Commonwealth achieves value for money.

An audit would examine Defence’s arrangements for entering into and managing its prepayments, including arrangements for assessing value for money.

Management of the Reserve Employer Support Payment (ESP) Scheme

The Reserve Employer Support Payment (ESP) Scheme provides financial assistance to eligible employers to help offset the costs of releasing employees for most categories of ADF service. Defence has identified the skills, qualifications and expertise of ADF Reservists as important to strengthening current and future military capability.

The aim of ESP is to support skills development and, to this end, annual ESP payments of approximately $20 million per annum are made to thousands of Australian employers. ESP is administered by Defence under section 58B of the Defence Act 1903 and is paid at a flat weekly rate (currently over $1000 per week) per eligible employee. There are no restrictions on the uses to which the employer may put ESP payments.

An audit would assess Defence’s management, control and reporting of ESP payments to employers.

LAND 121 (Phase 3)—Project Overlander

LAND 121 (Project Overlander) is a multi-phased project to provide the ADF with field vehicles and trailers beyond the life of the current fleet. The project includes small four-wheel drive vehicles, medium and heavy trucks and large semi-trailer style vehicles, and will replace an ageing fleet acquired between 1959 and 1994.

Phase 3 involves: three separate contracts for light and lightweight vehicles and modules; medium weight, medium and heavy vehicles and modules; and trailers. The total cost of this phase of the project is $3.1 billion.

In August 2008 the Minister for Defence announced that the medium and heavyweight component of this phase would need to be retendered. In October 2008 contracts were signed with Thales Australia for 293 Bushmaster vehicles, and a $350 million contract with Mercedes-Benz to supply 1200 ‘G-Wagon’ trucks to the ADF.

An audit would assess Defence and DMO’s progress in undertaking this acquisition.

Management of the Defence Community Organisation

The Defence Community Organisation (DCO) was established in 1996 to support ADF personnel and their families to balance the demands of military service with personal and family commitments. DCO services are delivered by Area Teams located on or near major ADF establishments around Australia. DCO administers grants to support organisations and provides childcare services. Area Teams include social workers, military support officers, regional education liaison officers and family liaison officers. Area Team staff provide a range of support services, including to the relatives of serving personnel who may be injured or killed.

DCO was subject to review by Defence in 1997–98 and, in May 2007, the government announced a DCO review to guide the development and provision of enhanced family support programs and services.

An audit would provide assurance to Parliament on the management and effective delivery of community support services to the ADF community via the DCO.

Gate Reviews for Capital Equipment Acquisition Projects

Gate reviews are an assurance process intended to ensure that DMO is able to provide high- quality information and advice to decision-makers. The 2008 Defence Procurement and Sustainment Review (the Mortimer Review) outlined that the DMO had used a range of review mechanisms with varying success. Among these were ‘gate reviews’ entailing a formal review by senior managers and project personnel at key project milestones. The goal of these reviews is to consider the project in sufficient detail before selected key project milestones to provide adequate assurance, and if necessary support, without overly disrupting the project office.

The Mortimer Review suggested that gate reviews be expanded and recommended the establishment of a Project Program Office to review projects and assist projects in solving problems where necessary. The government’s response to the Mortimer Review indicated its agreement. The first reviews undertaken under this new process occurred in September 2009.

An audit would examine and report on the development and effectiveness of the enhanced gateway review processes and associated administrative arrangements.

Defence’s Involvement in Australian Civilian Activities

Defence support to the Australian community and civilian authorities is a key and ongoing element of Defence activities. The government can, and does, regularly call upon the ADF to provide emergency and non-emergency assistance to the government and the Australian community in non-combat roles, including search and rescue, emergency assistance, surveillance, security, non-emergency law enforcement and support for significant international events held in Australia, such as major sporting events. The support varies in nature, can include short or long periods of time, and often involves a high level of visibility to local, national or international communities.

An audit would assess the effectiveness with which the ADF carries out its requested involvement in Australian civilian activities, including the efficacy of inter-agency arrangements, operational planning, and achievements against stated outcomes and performance parameters.

Australian Defence Force (ADF) Clothing and Personal Equipment

The Land Systems Division within DMO is responsible for delivering clothing and personal equipment to the ADF for operational and non-operational roles. ADF clothing includes combat and non-combat clothing and accoutrements for general duties and non-operational roles. The 5th edition of the ADF Clothing and Personal Equipment Procurement Plan 2010–14 was released on 1 July 2009. It outlines the significant tendering activities to meet the ADF’s clothing requirements, along with the six-monthly clothing industry forums to foster relationships with the textile, clothing and footwear industry.

The most recent clothing and equipment plan was developed in the light of the May 2006 ADF Clothing Review that identified the need to improve governance and business practices between Army and Land Systems Division for the procurement of clothing. Matters requiring attention included: the management of the interfaces between Army Headquarters and Clothing Group; higher level management of overall clothing business processes; management of rapid acquisitions; relationships with industry and budget management.

An audit would examine and report on the effectiveness of Defence’s management of the acquisition of clothing and personal equipment for the ADF.

Sustainment of Navy’s Afloat Support Capability

The afloat support force provides operational support for the Royal Australian Navy’s fleet at sea. Afloat support involves providing fuel, food, stores and ammunition at sea, significantly extending the reach and endurance of operations. The ships HMAS Success and HMAS Sirius provide the Royal Australian Navy’s afloat support capability. The 2007–08 Defence Annual Report stated that the HMAS Sirius had transitioned into service and that HMAS Success had had a major refit.

An audit would provide assurance to Parliament regarding the effectiveness of Defence’s management of the sustainment of Navy’s afloat support capability.

Management of the Skilling Australia’s Defence Industry (SADI) Program

The Skilling Australia’s Defence Industry (SADI) Program—approximately $215 million over 10 years—is administered by DMO. The SADI program’s stated outcomes are the generation of additional skilled positions, up-skilling of existing employees, and improving the quality and quantity of skills training in Defence industry. SADI is structured as a reimbursement program where companies commit to a program of skilling activities with outcomes and costs agreed in advance.

A range of companies, working on Defence acquisition and sustainment contracts, are eligible to apply for SADI funding. Third parties, such as education institutions and industry representative bodies, can also request SADI funding. Requests and proposals are assessed in a non-competitive environment on their merits against published guidelines.

An audit would provide assurance to Parliament regarding the effectiveness of DMO’s management of the SADI program.

AIR 5439—Acquisition of F/A–18F Block II Super Hornet Capability

Acquisition of the F/A–18F Block II Super Hornet represents an investment of around $6.6 billion for 24 aircraft, weapons, facilities upgrades and aircrew training. The project is to provide the ADF with a bridging air combat capability during transition from the current F–111 strike bombers and F/A–18 fighters to the JSF capability to be acquired under Project Air 6000. Phase 1 of the project manages the aircraft and related support system. Phase 2 manages weapons and related support systems. The first four aircraft are scheduled for delivery in the second quarter of 2010 with final operational capability to be achieved in December 2012.

An audit would assess Defence and DMO’s progress in undertaking this acquisition.

AIR 9000—Acquisition of the MRH 90 Helicopter Capability

The MRH 90 Troop Lift Helicopters project has an approved budget of $3.56 billion. The project will provide the ADF with 46 multi-role helicopters to replace the existing Blackhawk and Sea King helicopters in a range of land and maritime operations. The project also aims to establish the associated simulation, training and support systems the helicopters require to function at an optimal level. The current contractor is scheduled to supply an initial Navy operational capability of one aircraft in mid-2010 and an initial Army operational capability of four aircraft in late 2011. The DMO, in the 2007–08 Defence Annual Report, assessed the Engineering Certification task as the highest risk to the program.

An audit would examine DMO’s management of the acquisition project, including adherence to the relevant procurement and financial guidelines.

Sea 4000 Air Warfare Destroyer—Vendor Selection, Post Second-Pass Project Approval

Project SEA 4000 is a four-phase proposal to acquire maritime air warfare capability. The project to acquire three air defence-capable ships, at a total cost of around $8 billion, is the largest naval shipbuilding project ever undertaken in Australia. Following definition, design and requests for tender for the build phases, contracts with the successful tenderers to build the ships and support systems were signed in October 2007. The first ship is expected to be delivered in 2013.

The project involves an alliance contract between ASC AWD Shipbuilder Pty Ltd, Raytheon Australia Pty Ltd and the Commonwealth represented by the DMO (the Alliance). The DMO also has a contract with Navantia SA as the platform system designer and a Foreign Military Sale Arrangement with the United States Government for supply of the core Aegis System.

An audit would review the tender selection and management of vendors selected to provide assurance to Parliament that these processes are delivering value for money and risks are being appropriately managed within the context of the project.

Sea 4000 Air Warfare Destroyer—Management of Technical Risk Associated with Air Warfare Destroyer

Project SEA 4000 involves the successful specification, design and delivery of vessels and integrated weapons systems. As such, SEA 4000 is technically the most complex and challenging Naval acquisition since the Collins Class submarines.

An audit would examine how the lessons learnt from managing technical problems during other complex projects, such as the Collins Class project, are applied to SEA 4000, and the arrangements and processes Defence has put in place to identify, manage and remediate technical risks over the life of the project.

Defence Science and Technology Organisation’s Management of Scientific and Technical Research

Defence’s scientific and technical research program supports procurement, capability and whole-of-government security needs. With 2300 employees (over 900 with doctorates) at eight research facilities and an annual budget of $430 million, it is one of the Commonwealth’s largest research endeavours. The Defence Science and Technology Organisation, headed by the Chief Defence Scientist, manages the program.

An audit would examine the Defence Science and Technology Organisation’s arrangements for managing research undertaken in-house, through collaborative partnerships with academic and commercial organisations, and through contracts with external researchers.

Retention of Military Personnel

Defence’s ability to defend Australia and its interests depends to a significant degree on its ability to retain trained personnel in support of continued growth for the ADF. The ADF’s current personnel target is to reach 57 000 members by 2016. Defence intends to achieve the target by recruiting and by reducing the ADF’s separation rate to below 10 per cent per year. The government allocated approximately $3.1 billion to Defence in 2006–07 to support its recruitment and retention initiative over the next 11 years; this includes implementation of further reforms to improve personnel retention within the ADF.

ANAO Audit Reports No.31 2002–03 Retention of Military Personnel Follow-up and No.35 1999–2000 Retention of Military Personnel have previously examined the ADF’s personnel management practices aimed at retaining ADF members. Those audits assessed the measures the ADF had taken to improve personnel numbers against the cost of recruiting and training new personnel, and whether more cost-effective steps could be taken to reduce the separation rates of desirable personnel.

An audit would complement the existing audit work by examining Defence’s current management of retention of ADF personnel, including recent reforms.

Australian Defence Force Gap Year Program

In 2008, as one of a number of Australian Defence Force (ADF) recruitment and retention measures, Defence introduced an ADF Gap Year Program targeted at students or recent school leavers. The program is administered individually by the three Services—Navy, Army and Air Force—at an estimated cost of approximately $306 million over 10 years. Gap Year participants undertake the same initial training as full-time ADF personnel, but without the longer-term commitment.

Defence anticipates that a significant number of participants would opt to remain in the ADF. The program has approximately 700 places per annum and in 2008–09, a total of 626 people (396 men and 230 women) were enlisted in the program.

An audit would assess the implementation and management of the ADF Gap Year Program.

Fraud Control

In 2009–10, the Department of Defence and the Defence Materiel Organisation (DMO) have budgeted to spend in excess of $26 billion from departmental appropriations. These expenditures cover a broad range of matters from salaries and allowances to large capital equipment and facilities expenditures. These expenditures also include significant payments to external providers for a broad range of services and consultancies.

An audit would examine the systems and processes within Defence and the DMO to manage their responsibilities related to the prevention, detection and investigation of fraud within these two organisations, including arrangements related to services provided by external providers. The audit would also examine Defence’s fraud risk assessment processes and its related fraud control plan.

Management of Defence’s Obligations to Pay for Australian Government Taxes, Fees and Charges

Australian Government agencies are subject to special arrangements that apply to Goods and Services Tax, Fuel Excise, Aviation Fuel Excise, Customs Duty and Fringe Benefits Tax, and other taxes, fees and charges. Among Australian Government agencies, Defence has some of the largest volumes across the broadest range of Commonwealth imposts.

An audit would examine Defence’s administration of the special arrangements that apply to Australian Government agencies in respect of Commonwealth taxes, fees and charges.

Implementation of Revised Governance Arrangements within the Defence Science and Technology Organisation

Over recent years, the Defence Science and Technology Organisation has put in place, through Chief Defence Scientist Instructions and other policies, performance reporting, accountability and compliance frameworks. The governance arrangements are intended to provide the Chief Defence Scientist and his advisory committee with a regular and comprehensive ‘health check’ of the organisation.

An audit would examine the Defence Science and Technology Organisation’s implementation of governance arrangements since 2006.

Cost, Schedule and Capability Executive Reporting (Defence Materiel Organisation)

The ANAO Major Projects Review report team undertakes a series of assurance reviews of elements of the Defence Materiel Organisation’s (DMO) major projects. It has identified that the numerous corporate and project management IT applications being employed by different project offices results in inconsistency between the information produced by each projects’ IT systems, and efficiencies in DMO cannot be gained by adopting a consistent approach to developing and subsequently reviewing the major projects while disparate IT systems are retained.

An audit would examine DMO major project reporting processes and associated supporting systems, to assess the effectiveness of project management reporting in DMO.

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[8]    Three legally distinct bodies working closely together carry out Defence’s role. These bodies are the Department of Defence (Defence), the Australian Defence Force (ADF) and the Defence Materiel Organisation (DMO).

[9]    Defence’s total workforce in 2007–08 comprised 93 500 permanent and Reserve ADF and APS staff. Defence operates from 450 locations around Australia and has assets of around $60 billion, which includes $34 billion in specialist military equipment.

[10]  The stated aims of the Strategic Reform Program are to provide a vehicle for deep and enduring reform within Defence; enhance management performance within Defence; ensure that productivity within Defence is increased and able to be sustained, so that the maximum possible level of resources are directed to front-end capability; improve the way Defence does business, in terms of efficiency and effectiveness; and help ensure the goals set out in the White Paper are delivered.

[11]  The top 30 projects alone have an approved cost of $42.5 billion.

[12]  The pilot report for 2007–08 was tabled in November 2008 and reported on a sample of nine of the DMO’s top 30 projects. The 2008–09 report will cover a sample of 15 major projects. Over time, the intention is to increase the coverage to up to 30 major projects.

[13]  These have included audits of the Super Seasprite Project, the M113 upgrade project and the   sustainment of the Collins Class submarines.

[14] Portfolio Budget Statements 2008–09 Budget Related Papers NO. 1.4A AND 1.4C Defence Portfolio, Part 2 Defence Materiel Organisation, pp.184–185.

[15] Ibid.

[16] Bloomberg, Australia Approves Purchase of 14 F-35 Jet Fighters (Update1), 25 November, 2009.

[17] The Australian, ‘Kevin Rudd signs off on purchase of 14 F-35 joint strike fighters’, 25 November, 2009.

[18] Department of Defence, Defence Capability Plan 2009, p.44.

 

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