A Better Approach To Defence Procurement
A Better Approach to Defence Procurement
Royal United Services Institute for Defence and Security Studies (SA)
Thursday February 1, 6pm
Senator Rex Patrick
It’s a pleasure to be here with you this evening to speak on a topic that’s close to our hearts – A Better Approach to Defence Procurement.
Your organisation – the Royal United Services Institute for Defence and Security Studies (SA) - serves a very important role in defence-related community engagement.
By promoting informed debate to improve public awareness and understanding of defence and national security, your organisation helps to ensure that these vital issues have life beyond a 24-hour news cycle.
I’d like to start by thanking your president, Retired Wing Commander Mark Ryan, for the opportunity to share my thoughts on defence procurement.
As a relative newcomer to the Senate, some of you may not be familiar with my past and what authority I have to speak on the topic.
In brief, at the age of 16 I left Whyalla to join the Navy. During that time I completed my schooling, trained as an electronic technician and volunteered for submarine service.
I served on a number of Oberon Class submarines before being selected and posted to Osborne as a member of the trials crew for the first Collins Class submarine.
I left the Navy in 1994 and worked for the Australian sonar design and development company as a trainer, project manager, business development manager and head of research and development.
In 2007 I left the comfort and security of that full time employment to form my own company and built a successful domestic and international business in sonar and acoustics training and project management-related consulting.
Whilst running my own company I did some extracurricular activities such as writing on the topic of Future Submarines for a professional Defence magazine (some 50 articles over five years) and assisting the Shadow Defence Minister Senator Johnston exposing the very high annual cost of Collins sustainment vs the very low availability rates we were achieving for Collins (well over $500 million per annum and at one stage, unable to put a single submarine to sea).
What I wrote in my articles was not in line with government’s policy, or Navy’s thinking. That upset a few people. But I can assure you I was properly motivated. It is my view that without the pressure that Senator Johnston and I were putting on Defence, the political motivation to commission the Coles review and deal with the Collins problem would not have been there.
Sometimes doing unpopular things is necessary. I don’t apologise for speaking out.
In late 2015 I returned to SA to work as a senior advisor to Senator Nick Xenophon. Between my time with Senator Johnston and in the two years I worked for Nick I became extremely familiar with the inner workings of our Federal Parliament.
In 2016, after DCNS (now Naval Group) was selected as our international submarine partner, I revealed through the media that the company had had a massive security breach relating to their Indian Navy Scorpean submarine program (I had attempted to quietly report the leak back in 2013, but the Navy failed to act on my disclosure). Again, I was unpopular. Indeed, Minister Payne announced that I was to be subject to a security review.
After she announced the review I contacted Defence Security to make sure they knew where I could be found – I was really keen to be involved in a security review centred around me reporting a security breach and Defence’s earlier failure to deal with a disclosure relating to a massive data leak. Needless to say, they didn’t contact me again. I note there is now incredible security around the project and understand Naval Group have totally changed their data management in France.
My point in all of that is that taking a different view and speaking out, as I will tonight, can be a very good thing.
Comfort is the enemy of progress.
Tonight I am going to speak out on some real concerns I have with our current Defence procurement regime and take the opportunity to share a few thoughts on how we might improve the way it is done.
We definitely need to find win-win solutions because the current situation, in several notable instances, has produced lose-lose results.
To put it bluntly, Defence funds have been squandered in a way that has left us vulnerable.
Let me start with the problem.
You’re all likely aware of a couple of notable examples of poor procurement including the SEA 1411 Sea Sprite Helicopters which were $1.4 billion over budget and never used in service and the $44 million LCM 2000 Watercraft which proved too wide to be embarked on the amphibious ship they were intended for.
I note the replacement watercraft appears to not be buoyant enough to carry the Abrams tanks ashore, but that’s another story in development.
But that’s not where I want to go. I want to talk about an even bigger procurement disaster – a $21.5 billion disaster. Yes, that’s right, $21.5 billion.
Last month Defence supplied an answer to a question from Senator Leyonhjelm about Defence project procurement.
I refer you to a table from it – and I have handed out a few. It detailed, amongst other things, the total delays associated with a number of our major projects. The delays ranged from a couple of months to 151 months.
Being a former Project Manager I was taken aback. Project delay equals cost – that’s obvious. If a project is delayed you basically have to keep the entire project team on task until final sign off.
Noting there were decades of delays in the table, there had to be a massive blowout. Where was it being reported?
Fortunately a few days after the Leyonhjelm answer arrived, the latest ANAO Major Project Report came out. I examined that and at first glance, all seemed well. Almost all projects were within their approved budget. How can that be?
Well, it turns out that the key to Defence’s magic is indeed the words “approved budget”.
Let’s go to the Multi-Role Helicopter. It’s 60 months late. But it’s well within its approved budget – it’s got over $700 million remaining in the kitty.
The answer to this quandary comes by looking back at the project’s ‘second pass’ number.
Recall the way our defence capability development works. We start with a range of options that can fill a capability need. At ‘first pass’ we whittle the options down to one or two and then proceed to fully explore and fully cost those options. At the end of that detailed process the option or options are presented to Government for what is called ‘second pass’.
According to the Defence Capability development manual:
Second Pass approval is formal approval by Government of a specific capability solution to an identified capability development need.
Second pass provides Government approval and acknowledgment of budgetary provision for acquisition and operation of the capability solution, including all relevant FIC aspects and NPOC;
At second pass, where Government commits to a solution, the total cost is presented.
The second pass cost for the Multi-Role Helicopter was $953 million. Despite $2.9 billion being spent on the project to date, it’s still within its approved budget of $3.733 billion.
Defence will and does explain that by saying, well, there’s been scope change, there’s been currency variations, etc. Those variations, and indeed all manner of sin, can be covered off by getting a budget change approved by Government.
As a result, any cost blowout is hidden. The entire Defence Project budget is like this – I invite you to examine the ANAO’s Major Project Review and find a project that hasn’t had a variation made to its agreed budget. The ANAO thankfully provide one number in its report – the “Total Budget Variation since Second Pass Approval”.
In 2011-12, it was $5.9 billion. In the years that followed it jumped to $6.5 billion, then to $16.8 billion, then to $18.5 billion. This year, across the 27 major Defence equipment acquisition projects, it’s the number I talked about just before - $21.5 billion.
A $21.5 billion blowout compared to what the Government approved going into the projects. Yet in a doctrine akin to “Stalinist Economics” – because no matter how bad everything is within the State, all is well – all is well in Defence.
With this approach the books always look balanced, when in fact they are seriously out of whack. The reality is, no-one can use the public numbers to work out how well we are or are not doing in Defence projects. It’s camouflaged, and that has to change.
I will be taking up this Stalinist approach at Senate Estimates with both Defence and the Auditor-General.
Defence run to a plan – the Defence Capability Plan – with what is a finite budget. How can you execute a plan like that when you are diverting money for planned capability to deal with blowouts in current projects?
The approved budget for the 27 major projects reviewed by the Auditor-General was just shy of $62 billion. With a total Budget variation since Second Pass Approval – what the media might like to call ‘a budget blowout’ – of $21.5 billion.
For those 27 projects there is an average project delay measured in years and they are almost 35 per cent over budget. And that doesn’t include the cost of keeping an older capability running until the delayed capability arrives. Although I note in the case of the Multi-Role Helicopter, Defence slipped in an “upgrade Blackhawk” line item as one of the approved budget changes. The Multi-Role Helicopter was intended to replace the Blackhawk.
Neither does it include the cost to the dedicated sailors, soldiers and airman that have to fight on with obsolete capability.
It’s a situation that is neither sustainable, nor fair at a time when the Federal Government is seeking Budget repair.
So, the first thing we need to reform in Defence procurement is to start reporting projects against a ‘second pass’ baseline – with the name of the signatory to that number indelibly marked on any report - and provide absolute transparency of every dollar spent beyond that.
The next remedy to the way Defence procurement is carried out is to reconsider how capability solutions are chosen.
I’ll start by saying what we should avoid.
We shouldn’t embark on unique capability solutions and particularly unique capability solutions that are orphaned.
Perhaps as I progress you might pick up on my apprehension about our $50 billion Future Submarine Program.
There is a litany of examples of developmental projects that have cost substantially more than was originally intended and have not met expectation. I don’t think I have to name any – you have all been in and around Defence long enough to know of the projects that I’m talking about.
Those that seek to go down that path are almost always well intended – and almost always not experienced at project management. They go down that pathway on account of the fact that we have special requirements.
Again, the Future Submarine Project provides us with a case in point. A number of arguments have been put forward as to why we need to do this – most have failed to stand up to scrutiny.
I remember a time ago when the unique submarine design advocates were arguing “we have unique environmental and sea conditions in and around our shores”. Their arguments fail when one look to South Africa and Chile, two countries surrounded by waters just as warm as ours and perhaps even more treacherous, and found that they both use off-the-shelf submarine designs.
Then there was the argument that the tempo and intensity of our operations meant we had to have something special. The arrogance of this claim was quickly quelled by contrasting Singapore’s submarine force and Australia’s. The Singaporeans sail their off-the-shelf submarines straight into the busy Singapore Straits and South China Sea – shared with submarine, warships and military aircraft from a range of different regional States or World powers transiting the Malacca Straits or South China Sea – even when only on training missions. Australian submarines typically sail out of HMAS Stirling into one of the quietest spots in the world. Sure, they deploy north from time to time – but they do so with a two week transit to the operational area.
The final argument, one advocated behind a security firewall, was the need for long range. Our submarines need to be able to get from HMAS Stirling to the South China Sea and back in order to fulfil some hypothetical operational scenario too classified for regular Australians to see. Australia has never done this in the past and, quite frankly, it’s hard to imagine a conflict scenario where we wouldn’t be operating out of some sort of forward base.
In my view, we don’t properly consider operational requirements in the context of the solutions risks.
We go down the developmental path with little reservation and end up with a range of ill effects when the risk materialises, namely:
- The capability is delivered late
- The project costs more – and sucks up money intended for other projects
- The project gets delivered with less capability than originally intended (and often worse than the off-the-shelf capability it was chosen against)
- The delivered capability is unreliable.
There were a couple of events that took place in 2007 that drove the last point home for me. It was a year when our submarine availability was not as it should be.
I spent some part of that year doing sea trials on a brand new South Korean Type 214 submarine, dived somewhere off the coast. The crew had transferred from one of their highly reliable Type 209 submarines and were just Cracker Jack. I was operating one of the sonars when something very interesting happened – I’m not at liberty to say what it was, other than it was ‘operational’ – you’ll just have to go with me on this. The crew were too polite to kick me out of the control room and so I stay and observed how, switching from trials mode to operational mode, the crew performed. I was impressed – they were well-trained and well-practiced.
A few weeks later I was in Perth training prospective submarine warfare officers on sonar operations and was quickly going over some of the basic theory of towed array operations. A towed array is a long ‘garden hose’ looking device that trails between 500 and 1500 metres behind a submarine. They are fitted to most submarines, are extremely useful for detecting long range contacts and submarines, and most submarines have them as standard and use them as a matter of course. One of the candidate warfare officers piped up and told me to slow down – “please don’t presume any of us have operated a towed array”. I was gob-smacked.
It was on that day I came to appreciate the benefit of having a reliable off-the-shelf submarine where crews practised their craft of a daily basis over a submarine that on paper did a lot more than the other submarine, but no-one ever got to go to sea on them.
Do we really need to chase that extra capability?
In his 2008 Defence Procurement and Sustainment Review, David Mortimer wrote that:
Experience shows that setting requirements beyond that of off-the-shelf equipment generates disproportionately large increases to the cost, schedule and risk of projects.
Similarly, Norman Augustine, former Under Secretary of the US Army and former president and CEO of Lockheed Martin Corporation, wrote a book in 1997 called “Augustine’s Laws”.
In this primer for project management, Augustine’s 15th law states that:
The last ten per cent of performance generates one-third of the cost and two-thirds of the problems.
Let me repeat that.
The last ten per cent of performance generates one-third of the cost and two-thirds of the problems.
It’s a startling observation from someone who I imagine knows more about this topic than most in this country.
Again – we shouldn’t embark on unique capability solutions and particularly unique capability solutions that are orphaned – even, and especially, when they have a pump jet – although now I find myself straying into Pauline Hanson’s area of expertise.
It’s my belief that we need to adopt a hard line approach of acquiring off-the-shelf defence purchases. The approach involves:
1. Buying a relatively low risk design
- The process to get to a cabsub can be streamlined and with proposals developed by a Capability and Sustainment Group that is much smaller than the current organisations.
- We immediately reduce the risk of financial cost blow-outs.
2. Building it here in Australia
- We recognise the sustainment benefit gained from the build experience
- We enjoy the economic benefit of local jobs and investment
- We enjoy the benefits of technology transfer
- We work to get into global supply chain
3. Spending money doing niche capability enhancements here
- Money otherwise wasted on blowouts gets directed at Australian industry to develop niche capability advantages that we can export to our allies and friends.
- The risk of development gets shared across multiple smaller projects
4. Doing the sustainment here.
- Because we don’t have an orphaned designed capability, we can pick up the phone to friends who might be able to help us with problems we encounter – and vice versa.
With guidelines such as these it is far more likely that we will get procurement right.
If there needs to be a unique and orphaned solution, the Department can present a case for it which can then be promptly and almost properly rejected.
I will add one final point, noting my recent criticism of the constitution of the Future Submarine Project leadership team. We need to inject qualified, career project managers who have demonstrated success in taking projects from conception to completion in a commercial environment.
The days of giving defence project oversight to former admirals based on their perceived seniority must end – unless of course, they have recognised qualifications and demonstrated experience in project management as just described.