External reporting
Reintegrating DMO into Defence
2.1
The Committee notes the reintegration of the Defence Materiel Organisation (DMO) into the broader Department of Defence (Defence) has had positive cultural effects, and welcomes the evidence from Defence that the organisation was unified and that there was no delineation between Defence and the Capability, Acquisition and Sustainment Group (CASG).
2.2
There also appears to have been an increase in the accountability of Capability Managers (the service chiefs) in sustainment matters. Allocating responsibility for funding prioritisation and reallocation to service chiefs appears to have brought project management closer to the Capability Managers, rather than being kept at arm’s length by remaining the responsibility of DMO/CASG.
2.3
The Committee also notes the ANAO’s finding that there have been ‘positive trends’ in this area, but also agrees with the ANAO that consolidation of gains will be the ‘real challenge’ for Defence.
Clear read from budget papers to PBS, PAES, Annual Report
2.4
A ‘clear read’ is an important accountability measure. The term ‘clear read’ means that the objectives for each project should be clearly stated at the start of the year and achievements against those objectives reported at the end of the year. Finance describes the concept in official guidance:
The ‘clear read’ between corporate plans and Portfolio Budget Statements on the one hand, and annual reports and annual performance statements on the other, is an essential part of the accountability system that compares performance targets and figures against the outcomes actually achieved.
2.5
The Committee sees immediate benefits in improving the readability in Defence’s public financial and performance reporting documents, from the Corporate Plan and Budget Papers through to the Portfolio Budget Statements, Portfolio Additional Estimates Statements, and the Defence Annual Report.
2.6
The ANAO noted that predominantly financial reporting of Defence sustainment was adequate, however, there were variations in descriptive information, including no explanation of variations in full year outcomes, the use of different terminology across documents, and missing links between what was planned and what was actually achieved.
2.7
The Committee recommends that the Department of Defence improve its Corporate Plan, Portfolio Budget Statements, Portfolio Additional Estimates Statements, and Annual Report to ensure a clear read of both financial and descriptive performance information.
2.8
The Committee recommends that the Department of Defence consolidate information extracted from its Corporate Plan, Portfolio Budget Statements, Portfolio Additional Estimates Statements and Annual Report in one place online in a format that allows for clear and easy scrutiny of sustainment expenditure.
Improving transparent public reporting
2.9
The Committee notes the discussion that took place through submissions and via the public hearing process on ways to improve and enhance public reporting to the Parliament.
2.10
The Committee considered the current reporting model, the development of a Major Projects Report-style (MPR) document, and the suggestion from the Australian National Audit Office (ANAO) that the ANAO assist Defence in developing consistency across documents, with the ANAO then conducting periodic reviews to provide assurance.
2.11
While the Committee believes more work needs to be done in improving the transparency of sustainment reporting to the public and the Parliament, at this stage it agrees with the Auditor-General that the benefits that may be realised in developing an MPR-style document would not justify the funds and time spent in developing and refining such a document. The Committee noted the MPR has been developed through a constant state of refinement over the course of a decade.
2.12
Instead, the Committee supports the suggestion from the Auditor-General that Defence ensure that its existing external reporting is more consistent. Further, the Committee agrees that the ANAO should conduct periodic reviews to examine the macro framework every several years to provide assurance about Defence’s progression in improving its sustainment processes. This regime will be further supported by occasional performance audits on specific projects or sustainment activities.
2.13
The Committee noted differences in the information contained in hard copy or PDF versions of the Defence Annual Report on one hand, and the online/web versions of the Defence Annual Report, specifically around sustainment activities. The online version of the 2016-17 Defence Annual Report contains Web Table B.1, while the same table is not available in the PDF or hard copy version of the same document. Compounding this issue, there is no inline indication in the hard copy/PDF version that further financial information is available online – it is, instead, only to be found in an appendix.
2.14
Accordingly, the Committee recommends that Defence either include all information available in the online version of the Annual Report in the hard copy/PDF version, or appropriately signpost to the reader of the hard copy/PDF version of the Defence Annual Report that further information is available online, specifying what the online information entails. This signposting should occur within the document, as well as at the beginning of a chapter or in an appendix.
2.15
The Committee recommends that the Department of Defence appropriately signpost to readers of the hard copy/PDF version of the Defence Annual Report that further information is available online, specifying what online information is available.
Transparent public reporting and national security
2.16
The Committee notes Defence’s comments relating to national security and transparency of sustainment reporting. The Committee agrees that national security cannot be compromised in reporting on sustainment expenditure, however, this should not preclude adequate parliamentary scrutiny. The Committee also acknowledges Defence’s offer to provide private briefings to the Committee on sustainment matters that may be of a sensitive nature.
2.17
Throughout the course of this inquiry individual Defence assets or platforms have not been the concern of the Committee; instead, it has sought to focus on the framework surrounding sustainment reporting and to develop a robust overarching framework moving forward. The Committee does not envisage this focus shifting to individual assets or platforms in the immediate future.
Line between acquisition and sustainment
2.18
The Committee notes the discussion considering the distinction between the acquisition and sustainment phases of a project remains unresolved, and Defence and the ANAO have not reached clear agreement. Further, the Committee notes Defence and the ANAO’s view that Defence’s move to a whole-of-life costing model may provide a more comprehensive understanding of the total cost of an asset. The Committee will continue to monitor the progress of the whole-of-life costing model.
First Principles Review
Implementation of First Principles Review
2.19
The Committee notes Defence’s comments that there have been positive changes (which Defence is yet to clearly articulate) which have arisen from the First Principles Review, and acknowledges that some projects arising out of the review will take longer than the expected two year timeframe for implementation. The Committee notes that Defence has identified which issues will run beyond this two year timeframe and encourages Defence to continue to drive change in this area. The Committee will also continue to monitor developments in this area.
2.20
The Committee notes Defence’s declaration of a five year moratorium on reviews to enable the delivery of long term changes arising out of the First Principles Review process. Examination of the ANAO’s audit into Defence’s Management of Materiel Sustainment suggests a plethora of reviews and engagements of consultants with little consistent action or Key Performance Indicators coming from these reviews.
2.21
The Committee also notes the issues around the selection of Bechtel to provide services to support implementation of the First Principles Review. While the Committee acknowledges that Bechtel had expertise in this area through its work with the United Kingdom’s Defence Equipment and Support, and was on a Defence procurement panel, evidence provided to the Committee around the procurement panel lacked detail. Further, the lack of competitive process and a contract that was not performance-based were cause for some concern for the Committee. The Committee notes that Defence is undertaking a competitive process to find a suitable candidate to run the major projects office, rather than continuing to use a secondee from Bechtel. The Committee recommends that Defence provide a progress report on finding an alternative to Bechtel within six months of the tabling of this report.
Realising Savings and Cultural Change
2.22
The Committee notes the process Defence is undertaking to pursue and realise savings. Securing better value for money on contracts is one important way to do this, as is properly outsourcing through competitive processes. The Committee notes the importance of performance-based contracting and urges Defence to use this mechanism as much as possible to lower costs and drive efficiency. Further, the Committee notes the commitment of Defence to drive cultural change in this area.
2.23
The Committee acknowledges that while Defence has found savings by seeking efficiencies, re-evaluating contracts and pursuing performance based contracts, the outcome of this process has been inconsistent and unclear. Continuing to address cultural issues within Defence, and a thorough examination of contracts that do not provide value for money should be given a high priority.
Systems Program Offices
2.24
The Committee welcomes the continuing reform process of Systems Program Offices (SPOs), and commends Defence on identifying areas of expertise as well as areas that require further improvement. Defence’s recognition that a one size fits all approach to reform of SPOs may not provide the necessary flexibility and appropriate reporting structures. The Committee welcomes Defence’s commitment to a regular review cycle for SPOs to assess their performance structures and contractual models. The Committee will continue to monitor developments in this area.
2.25
The Committee recommends that within six months of the tabling of this report the Department of Defence provide to the Committee:
a report on progress in driving First Principles Review reforms
detail of the positive changes that have been realised to date with the implementation of the First Principles Review
an update on the progress of the Systems Program Offices review
a report on progress of the whole-of-life costing model
a report on progress to selecting a candidate to run the Major Projects Office.
Staffing
2.26
The Committee notes that Defence has begun to have a more proactive approach to staffing, with a focus on altering staff responsibilities and enhancing skill levels. This is intended to enable staff to undertake more of a supervisory, governance role, rather than working on more transactional issues. As a result, Defence has observed the development of increased expertise and centralisation of program management and governance, which in turn has led to Defence deploying staff more flexibly. This is a positive development for Defence.
2.27
The Committee notes that Defence had historically not included the cost of staffing expenses in SPO reporting, instead treating staff salaries as a ‘free good’. The First Principles Review found some SPOs were spending more on staffing than what was actually being purchased. The Committee shares the ANAO’s view that it is ‘heartening’ to hear that Defence is now moving to being able to report on a full cost basis what is being purchased at the decision-making stage.
Smart Sustainment and project classifications
2.28
In early 2010, Defence began its Smart Sustainment Reforms, expecting to yield $5.5 billion in savings to be reallocated within Defence over the following decade – this was the largest single source of savings under the broader Strategic Reform Program. To facilitate these reforms, Defence made $360m of ‘investment funds’ available for projects that would yield net savings.
2.29
The Committee notes that a Defence review found that most SPOs did not have the capacity to undertake Smart Sustainment initiatives, and that Defence pushed ahead with the reforms anyway.
2.30
Of concern to the Committee was that the ANAO found Defence was unable to properly account for the expenditure or benefits arising from the use of $360m in ‘investment funds’ to drive Smart Sustainment initiatives. In the audit report, the ANAO outlined reasons for doubting some of the savings for Smart Sustainment. Defence had also undertaken in March 2017 to follow up on the matter.
2.31
In response to questions on notice from the Committee at the public hearing, Defence provided a breakdown of how the Smart Sustainment funds were allocated. Further information on this expenditure is available at paragraph 3.55.
2.32
Considering the classification of projects as Commercial off the Shelf, Military off the Shelf, or Developmental, the Committee notes the agreement of Defence and the ANAO that project classification can be somewhat ‘philosophical’ in nature, and also notes that Defence’s adoption of the Smart Buyer approach may lead to ‘steering away’ from Developmental projects. Regardless of a project’s classification, Defence should better consider and report potential project risks.
Internal reporting
From Quarterly Performance Reports to Monthly Reporting
2.33
The Committee notes the ANAO’s finding and Defence’s broad agreement that internal reporting via the Quarterly Performance Report required improvement.
2.34
The Committee hopes Defence’s recent IT improvements will lead to a better reporting system, but notes that technology should not be Defence’s sole focus. Defence’s internal reporting regime should be open to the Minister and the Secretary, and report using plain language. Terms like ‘overachievement’ should not be used to describe overspending. More broadly, the culture in the Department of Defence will need to continue to change to reinforce reform across this area.
2.35
The Committee recommends that the Auditor-General consider reviewing the Department of Defence’s new Monthly Reporting system and documentation including advising whether there have been improvements in reporting to the Minister and Secretary, and that the information provided via reporting is timely and accurate.
2.36
The Committee recommends that the Department of Defence provide a detailed progress report on behavioural changes that have accompanied improvements in internal performance reporting within six months of the tabling of this report.