The Hon Fran Bailey MP
Parliamentary Secretary to the Minister for Defence
KEYNOTE ADDRESS TO DEFENCE SUMMIT 2003 25 FEBRUARY 2003
The Road Map for the Defence Public Private Partnership
The history of Defence and industry in this country has largely been one of separate development, our recent past, and certainly our future, are linked.
This Government is acutely aware of the importance of allocating financial resources to meet Australia’s extensive defence requirements in a manner that maximises both effectiveness and efficiency.
We are also mindful of our commitment to give the public better value for its money, and the need for transparency in our procurement decisions.
A strong, healthy partnership between Defence and private industry is critical in delivering Defence capability, and in sustaining a powerful domestic industry base.
And a powerful domestic industry is one best placed to compete effectively in markets outside Australia.
A robust and vibrant partnership between Defence and industry, particularly one open to new ideas, has played a leading role in improving our national security and in helping Defence deliver greater capability.
As the Australian economy has matured, and Government has focused on its essential business, Industry’s role in support of Defence has been realised.
This evolution has taken us away from the post World War 2 environment where virtually all infrastructure, such as the dockyards, aircraft factories, explosives factories and maintenance workshops, were Government owned. In the 1970’s, the Government began looking more closely at the relative efficiency and innovation achieved through public and private sector production. By the end of that decade, the Fremantle class patrol boats were ordered from private shipbuilders. By the 1980’s, as the cost and overheads of Commonwealth facilities became apparent, we started divesting ourselves of factories and dockyards, and major vessels were ordered from private yards. The 1990’s saw Defence commence comprehensive market testing of its support services in response to the Government’s Public Sector Reform Agenda.
The result of these activities was a downsizing by about 20,000 military personnel and 22,000 public service employees since the mid-1980s,
without reducing the capability effectiveness of the ADF, or the Department.
Achieving this result was undoubtedly a major achievement of Government, and one that underpinned this Government’s willingness to substantially increase funding for Defence in the White Paper.
Defence is embracing the reform process, and has already examined a number of Private Financing principles, which may provide practical solutions for a number of future procurement decisions.
Defence’s understanding of the applicability of partnering with industry is evolving, and we have a wide range of activities we regard as suitable for some degree of joint public and private participation.
For the continued succuss of Defence Public Private Partnerships Defence faces a number of challenges. We must remain vigilant in ensuring: That industry agreements and contracts contain the correct specification and have appropriate key performance measures; That we focus on the services provided and desired outcomes rather than the traditional preoccupation with asset type; That we understand risk; That we identify from the outset realistic timeframes and budgets; and,
That we recognise that experience and learning from our experiences will assist in ensuring continued success.
I would now like to discuss some of the developments that have, and are, shaping the roadmap for the future of the defence/industry relationship in Australia. The Commercial Support Program in Defence – achievements and future directions Defence’s Commercial Support Program is a long-standing and successful partnering arrangement that has been in operation now for eleven years.
As at February 2003, the Commercial Support Program has market tested the work of 16,000 positions in 119 separate activities with a total value of commercial and in-house work of more than $5bn.
The efficient provision of non-combat related services by the private sector has underpinned, in part, the development of a more effective Defence Force we see in operation throughout the world today.
Currently, Defence has 17 activities identified for consideration under the Commercial Support Program, with recent announcements in the areas of Defence’s distribution system, the provision of health services in Victoria, and ADF recruitment services Australia wide.
Defence sees that further market testing, including the re-testing of contracts falling due for renewal, will achieve additional efficiencies,
though perhaps not of the same magnitude as that realised through the initial market testing process. Joint research and development – Defence Science and Technology Organisation partnering with industry
Over the past decade, the Defence Science and Technology Organisation has entered into 36 Industry Alliances in the fields of acoustics, data linking and communications, information security, microelectronics, minewarfare and weapons systems, modelling and simulation, combat systems, radar and sonar.
Industry Alliances are strategic, non-exclusive agreements designed to facilitate communication and the exchange and disclosure of information.
A number of these alliances lead to the identification of opportunities for further activities.
Industry Alliances have provided a valuable basis for collaborative Research & Development for current and future Defence capability with both Defence and non-Defence Industry.
The success of Industry Alliances is evident in the Australian Minesweeping System. The cooperation between Defence and Australian Defence Industry has supported the successful commercial exploitation of the system, which includes export sales of approximately $40 million. Defence’s involvement in the Co-operative Research Centre Program complements Partnering with Industry
The Co-operative Research Centre Program is conducted by the Department of Education Science and Training and allows Defence, through the involvement of the Defence Science and Technology Organisation, to engage industry and academia in research and development.
Co-operative Research Centres are a Government initiative aimed at encouraging long-term collaborative research between academia, industry and research organisations.
They promote self-sustaining, commercial outcomes that contribute to national objectives and improve Australia’s productivity and international competitiveness.
Defence has been a member of 17 Co-operative Research Centres, and was a member of three successful bids in the 2002 selection round, recently announced by the Government.
Defence involvement in the Co-operative Research Centres is in the areas of structures, photonics, asset management and diagnostics. Project Alliancing - The Djimindi1 and ANZAC Ship Alliances
Project Alliancing is an innovative project delivery strategy that uses a non-traditional contractual arrangement.
Phonetic pronunciation: Ger – mindi. (‘Ger’ as pronounced in ‘Germany’, ‘mindi’ as in ‘Mork and Mindy’
The arrangement aims to modify the traditional environment that often fosters adversarial relationships between parties. In a project alliance, alliance participants work together to achieve project outcomes.
There is an equitable sharing of risks and rewards, and an emphasis is placed on aligning the interests of the participants and ensuring all transactions are transparent and conducted on an 'open book' basis.
The underlying premise is that a team can produce faster, higher quality results and that more effective capability outcomes will be achieved, while reducing the cost of doing business for all participants.
The ANZAC Ship Alliance is a pilot project in which Defence is trialing Project Alliancing concepts to determine whether they represent a better way of doing business.
This Alliance is concerned with the management of changes to the ANZAC ships operated by the Royal Australian Navy and it continues a long standing relationship between the Commonwealth and industry participants Tenix Defence and Saab Systems.
This project is a good example of where we are building on an existing Defence/Industry relationship while at the same time exploring ways that we can achieve better outcomes.
While it is still early days, we have already seen some promising results from this arrangement in terms of timeliness and flexibility.
It is also interesting to note that much of the work directed to the ANZAC Ship Alliance is still competed.
So although the Government maintains its relationship with Tenix and Saab, two thirds of the work is sourced outside these two companies providing many opportunities for wider industry involvement and in particular Australian SME’s.
Nonetheless, despite indications that Project Alliancing may have a future in Defence, its trial status will be reviewed this year.
The review will be strategic in nature and will examine both policy and operational aspects to determine the suitability of continuing with Project Alliancing within Defence. Strategic Sector Plans – a pragmatic approach to competition
Defence relies increasingly on the development and sustainment of key capabilities within Industries that are of strategic importance to Australia.
We are now adopting a more strategic approach to acquisition in relation to the development and sustainment of the key strategic industries.
In 2001, the Government approved an approach to Defence procurement that aims to foster long-term partnerships with industry.
This approach envisages the bundling of projects into significant packages that maximise effective competition and provide long term certainty of work.
This is particularly important for those capabilities that are unique to the defence sector.
The clearest example is in the Naval Shipbuilding and Repair Sector, where Defence is the only customer.
Consequently, Defence's demand for ships has an immediate effect on the structure of this industry. Where this demand is lumpy, the industry experiences a boom and bust cycle.
By taking a strategic approach to naval ship procurement, Defence seeks to create a more certain and even work flow environment that will facilitate the shaping and sustainment of key capabilities, within this industry.
The new approach will be contained in a series of sector plans, which are currently being developed by Defence in conjunction with other government bodies, associations and industry.
These sector plans will cover the four major Defence industry sectors, namely: aerospace, naval shipbuilding and repair, electronics and land and weapons.
Through developing and improving the sustainability of Defence industry sectors, Australia can further develop its in-country capability to support ADF assets through life as well as improving the competitiveness of Australian industry. Non-Traditional Involvement and Unsolicited Proposals Further opportunities for private public partnerships will come in a number of what have been considered non-traditional areas of private sector delivery. An example of this was seen in support provided by
Eurest where the company was engaged in what has been termed ‘Contractor on Deployed Operations’ (CONDO’s). Eurest provided catering and associated support services to United States Defence personnel for seven camps surrounding Kuwait in the Gulf. This service was provided following 10 days notice under a standard contractual basis.
Involvement of this type, previously considered taboo by a private company, has demonstrated that in certain circumstances, a number of benefits to that of in-house delivery, benefits in terms of quality, time and value for money.
The flexibility and particular skills of private industry are not always known or completely understood by the public sector. Education of the comparative benefits and possible opportunities for the private sector will be assisted by approaches to consider ‘Unsolicited Proposals’ as recently foreshadowed by Minister Hill.
We will soon be assessing a departmental proposal for guiding the consideration of Unsolicited Proposals from industry.
This policy will set out a process for managing proposals, which hold new technology, innovation or which offer an improved way of doing business.
Such proposals are a common way for industry to bring forward solutions to capability needs outside of formal requests by the Commonwealth.
The successful implementation of such policy holds tremendous potential for industry and defence and should further open our procurement and capability processes.
Combined acquisition and maintenance
In considering the Commonwealth and Industry, as partners, develop an on-going relationship in the long-term service provision of vital assets.
The private operator assumes owner-like responsibilities for the service provision whilst contributing private sector expertise to public sector asset management strategies.
The asset and service is developed with a whole of life view from the outset and payment is based on availability.
The benefit for the public sector is that it provides for the appropriate transfer of risk and a greater degree of contractual surety.
The move to performance-oriented maintenance strategy encourages proactive maintenance from industry and ensures best value for the public dollar.
Defence and industry partnership is most clearly illustrated in the Comprehensive Maintenance Contracts (CMC’s) within the Corporate Services Infrastructure Group (CSIG). Here industry assumes a strategic role in infrastructure maintenance and asset management.
The benefits of this experience will soon be incorporated into revised internal processes and amended capital works contracts, where industry
expertise will provide further assistance in refining cost estimates and in the provision of innovative design solutions. This involvement will provide significant cost reductions for Defence throughout the life of the asset and ensure greater functionality in design.
The acquisition of the Hawk Lead-In fighter aircraft marked the first Defence aerospace procurement in Australia that integrated acquisition and through-life-support into a single long-term contract.
The Commonwealth and British Aerospace Systems agreed to the concept of delivering interim levels of capability with the customer, 78 Wing, advising the minimum level of capability required in a series of staged deliveries.
The in-service support contract requires British Aerospace Systems Australia to provide deeper maintenance support throughout the 25 year life of type span.
Private Financing Initiatives (PFI)
The Government is committed to ensuring that private financing becomes an established procurement option that can be used when it delivers better value for money. The Commonwealth’s leasing arrangements for its new Special Purpose Aircraft approximate many of the most desirable aspects of private financing.
For Defence, PFI is all about leveraging, new ways of doing business with private industry. Whilst opponents of PFI point to unchecked future
liability and the potential for long term non-discretionary budgetary restrictions.
The potential benefit of PFI models to provide innovation, appropriate levels of risk transfer, reduction in through life costs, accelerated project delivery….counter I believe such criticism.
The benefits of greater visibility of through life costs cannot be understated. This and previous Governments are all too familiar with budgetary pressures incurred as a consequence of additional project costs neither identified nor conceived at the commencement of a new project. Appropriate PFI models have in many instances avoided such cost blow-outs incurred in traditional methods of procurement and delivery.
Public Sector agencies are required to achieve best Value for Money in all procurement decisions, the identification of all project costs is critical in making this decision. Given the distinct benefits of PFI, delivery of certain projects through PFI methods will assist Government in procuring the best value for money solution.
As the private sector manages the process of service provision, under Private Financing it is appropriate that it manage the related risk.
The greater the risk carried by Defence, the less likely that Value for Money will be provided by the use of Private Finance as opposed to direct procurement.
Following the decision to acquire the Replacement Patrol Boats using traditional procurement methods, it became apparent that issues related
to Value for Money, lease classification, and accounting treatment needed to be resolved.
The Department of Finance and Administration, in consultation with Defence and other agencies, is currently developing further guidance on these aspects as well as on the selection of suitable Private Finance candidates.
The Government is seriously committed to exploring private finance opportunities and we are confident it will be a preferred model for some types of assets and services.
PFI delivery strategies have the potential to assist in infrastructure modernisation and relocation, and to provide benefits in containing facilities operating costs through improved design and innovative management.
In conclusion, I see us heading towards more cost effective procurement outcomes through closer dealings with the private sector and tailoring our procurement process to better fit the nature of the particular acquisitions.
I am keen to explore the benefits that can accrue from assessing the risks in each proposed procurement by looking at the appropriate allocation of these risks between industry and ourselves and then matching the method of procurement to best suit.
As our understanding of risk improves, and we better understand the strengths of the different procurement approaches, we will be better able to achieve more effective and efficient procurement outcomes.
Clear, complete and comprehensible contracts are essential for both the public and private sector for effective public private partnerships. These contracts must define objectives and requirements of projects, provide the necessary preliminary information and define deliverables. Contract development and administration with defence has come a long way in recent times and this Government is committed to further improvement.
I would like to conclude by revisiting my introductory remarks.
We see the increasing co-operation between the public and private sector as a positive step in helping Defence make best use of the budget allocated by Government.
The benefits of doing so, while important to Defence, are equally important to industry.
I wish you an informative few days discussing the business of Defence, and how to engage in a commercial relationship with it successfully.