Senator MARK BISHOP (Western Australia) (21:19): Mr Acting Deputy President, I seek leave to speak for up to 20 minutes. Leave granted. Senator MARK BISHOP: Last year the Foreign Affairs, Defence and Trade References Committee tabled its interim report into defence procurement. Tonight I want to address the committee's report in more detail with my own perspectives. The committee's report, it should be noted, is scathing of the continuing nature of defence procurement in this country. This view is reflected in reports by the ANAO and those commissioned by Mr Rizzo, Dr Black and, more recently, Mr Coles. I will not repeat the committee's diagnosis. Suffice it to say that the problems remain the same—that is, failure to deal with whole-of-life capability; continuing inadequate or poor product specifications; poorly defined roles and responsibilities, leading to limited accountability; ongoing serious shortages in skills; limited strategic consideration of Australia's defence industry; and poor risk management. The common theme is a lack of transparency and accountability. All of this will be explored further by the committee during this year as each is a huge subject in its own right. Defence is now so huge and complex that it is totally constipated. It seems to have little internal ability to deal with the same ongoing set of problems. No amount of revision of processes, senior managers, editing manuals or more reviews will provide much benefit. What we have is a matrix model of many parts which must cooperate and be coordinated as a constant effort. Nevertheless, they are independent by tradition and intent, with separate and collective groupthink. We do need to accept specialisation, and the separateness of Army, Navy and Air Force has long proven practical, if nothing else. Equally, we need to acknowledge the need to coordinate their efforts into a strategic whole. This is done by white papers oversighted by the strategy division, the Capability Development Group and the joint operations crew. I do not have any difficulty whatsoever with that; however, when it comes to procurement, added to that complexity are the roles of the DMO and the DSTO. Each of these agencies is supposedly independent and provides special advice to temper and supplement the views developed internally by Defence. These are the key means by which the groupthink of the Defence leviathan is tested as security for government. We must not forget the Australian Submarine Corporation, which is an independent commercial entity owned by the Department of Finance and Deregulation. This model is managed by detailed procedure manuals which are often ignored and formal business agreements which are unenforceable. Across the top of this matrix, as guiding management principles we have the principles of outsourcing and centralisation. I would add that there is also inadequate emphasis on understanding commercial realities in the marketplace. There is a semblance of transparency and accountability one to the other within the matrix but, sadly, not much in combination. In fact, as I have said before, when the chips are down, no-one can be found responsible because it is the system that is at fault. That was also the finding of Mr Coles. He said in his first report that nowhere in all of Defence could he find any one person responsible for submarines. That mere fact is simply astounding. Now there is to be more shuffling at the top. Since the resignation of Dr Gumley, further control over the DMO will be exercised by a new associate secretary in Defence. His very difficult relationship with Defence in operating as Kinnaird and Mortimer intended is, I suggest, the elephant in the room. In its report, the Senate committee suggested that: … entrenched structural impediments to efficient and effective leadership within Defence could be at the source of Defence's procurement problems requiring reallocation and redefinition of roles, functions and responsibilities. Indeed, the current management matrix model may need overhauling or even dismantling. The matrix management monolith does indeed warrant very close attention. However, I am not convinced that any of the current changes will make the slightest difference at all. The key issue is not just about control but also streamlined and effective organisational structures. It is accepted that there are significant efficiencies in the centralisation of procurement and warehousing. The great bulk of the tens of thousands of Defence items procured, from paper clips to fuel and uniforms, are routine and trouble free. It is pleasing to note, as a shift from the past, that these days what troops in the field want they get—pronto. However, it is accepted that most problems occur with the smaller number of high-cost, high-tech, complex projects with many local inclusions. Unfortunately, many—indeed most—rest largely in Navy, where the record speaks for itself. I would suggest that the monolith of the matrix model, especially with respect to naval procurement, needs to be broken right down. In all reviews of this organisational monster, its continued existence has been a given, and the focus has been on making it work better. Kinnaird's and Mortimer's efforts were limited by this to some extent. Certainly this single paradigm has governed the Defence attitude in their appearances before the committee. In fact, Mortimer himself had serious misgivings on the model, as he observed: This artificial ‘market structure’ is not a contestable environment and the purchaser has little power to penalise and replace the provider. We therefore concluded that purchaser provider arrangements were unlikely to be particularly effective in these circumstances. The committee will in due course make its own judgements on the extent to which Mortimer's recommendations have been implemented. My own view is that the DMO is not the least bit independent. For example, the committee has not been able to get a separate submission from the DMO—the controlling response being that there is a corporate 'one Defence' position. I should note here that the committee sought a separate submission from DSTO and got one. In fact, at every appearance of the DMO before the committee, the chief of the Capability Development Group has been present and has ridden shotgun. There are two key, elementary prerequisites for true accountability. First, there must be a single line of authority; second, there must be organisational competence. I do not want to excuse Army or the RAAF, as their performance on some projects has been awful. But the bulk of the risk at present seems to rest with Navy, for a number of reasons. Navy has the largest construction and ongoing maintenance budget flowing from the white paper. Navy was found by Mr Rizzo to have been the worst affected by the move to outsourcing and centralisation of maintenance to DMO. The state of the fleet has probably never been so bad, noting the chaos of the amphibious fleet. According to a recent ANAO report, the Chief of Navy has been effectively disempowered. Navy has been stripped of technical skill to do anything other than simply run a ship and now it is still seriously short crewed. The debacle of the Collins submarines is evidenced chapter and verse by Mr Coles. There is continuing controversy about early failure with the keel of the first air warfare destroyer and hence little or no confidence about the grand plan to build 12 new submarines. We are now told Chief of Navy is rectifying all this, and good luck to him. The intention is honourable, but I doubt that the matrix model will change to provide him the real control and authority he needs. To begin with, he has no control over DMO. As Mortimer said, he has no commercial remedy over failed agreements in a non-competitive environment. Despite the assertions of accountability set out in the defence procurement manual, the Capability Development Group, CDG, is in control, as it must be. As to competence, Rizzo found—and it was inferred by Coles—that Navy was stripped of technical competence more than a decade ago; in fact, it would take as many years to rebuild. As competence can only be measured by outcomes, it is simply not possible for Chief of Navy to be accountable. The committee identified the matrix model lacks role clarity and defined responsibilities despite Defence's assertions to the contrary. The traditional responsibilities for Navy are to have ships designed to agreed specifications for meeting Australia's needs. The ships then must be built and maintained, often for more than 30 years. At present Navy have limited responsibility for this. While they are heavily involved, design is ultimately a decision of government, as advised by the Capability Development Group. As for maintenance and refits, these are the responsibility of the DMO, although it should be said that failure to manage DMO as a supplier is, of course, a fault of Navy. The only absolute responsibility that Navy have for their ships is operations at sea. That too is dependent wholly on the support of DMO and the strength of the relationship. Perhaps the most telling weakness concerns the high-tech skills needed throughout the design, construction and maintenance phases. This is the whole-of-life responsibility referred to by the committee as a major ongoing matter of concern. These skills, especially in design and weaponry, are extraordinarily difficult to recruit. Defence as a whole, just like industry, has serious shortfalls. Yet, as we know, within the matrix model, the skills which exist are duplicated in several places. Sometimes they are shared by the services on a rotational basis of three years. So in the case of Navy, these skills reside in Navy, CDG, in larger numbers in DMO, in the ASC, and DSTO must be added as well. The RAND report tells us that in the critical areas of engineering, science and technical support across CDG, DMO, DSTO and Navy, DMO has a total of 478, DSTO 86 exclusively on submarines, and Navy—believe this figure or not—only 63, including none at all on submarines. Of the almost 2,000 staff in the ASC, it is not known how many fit this high-tech category—that is, five large Defence organisations all have a need for high-level naval design, construction and maintenance skills, and all are considerably understaffed. That precludes any consideration of industry whose contribution is indispensable. In a small naval nation such as Australia this is simply ridiculous, bordering on the absurd. Indeed, from the analysis of skill by RAND, the need for a new submarine project is quite blunt. While a seedbed of skill has been identified, all current government resources would be needed and still be deficient in a large number of specialty engineering categories, not to mention the decimation of the core skills still in short supply to manage the existing fleet construction and maintenance. The enormous skills gap between what is needed and what currently exists within Navy and the DMO makes it difficult to be optimistic. The RAND report is very sober reading on top of the initial findings of Mr Coles in his first report on the Collins class fiasco. Let me summarise Mr Coles's observations on the matrix model as it applies to the Collins class submarines. In my view, they cannot be separated from the whole naval ship building function. They are: due to failure to recognise fully what they were taking on, the various agencies involved did not make all the necessary investments post-delivery. The Navy was lukewarm on its role as owner of the fleet. The small number of submariners at a senior level in Canberra has led to difficulty influencing policy issues and the well-publicised difficulties the RAD has been having. The restructuring of the ASC as a government business enterprise within the Department of Finance and Deregulation, as a shareholder and owner, and DMO, as a customer, has created a structure which has proved challenging to operate efficiently in practice, and in which the exercise of ownership of elements of the design often presents practical or process difficulties. With these difficult relationships and the changes they engendered, without always having the clear leadership the program deserves, it has not been possible to take the steps to sustain submarines throughout their operational lives. Nobody was charged with taking full responsibility clearly and decisively for all aspects of sustainment of the program. For a strategic program to succeed, all elements must be brought together and delivered under an overarching program management structure. While Defence has put a program management structure in place, there are serious limitations in bringing together a number of different strands of activity as a result of organisational boundaries. Successive reorganisations over past decades have made Defence quite complex and lacking in focus. DMO's relationship with the ASC is intrusive, seeking to control and thereby discouraging ASC from taking responsibility. At the top level the relationship between the DMO and ASC was repeatedly described as having been damaging. Navy's contribution has been fragile in three regards: crewing, not playing its part in discharging its responsibilities and not supporting the supply chain properly. There are numerous instances where accountability, authority and responsibility are misaligned, fragmented and not understood. Another aspect is the degree of duplication of skills between DSTO and ASC. Elimination of duplication would of course minimise overall resource consumption by a matter of degree. The parallels with the broader defence ship design, building and maintenance responsibilities from this report by Mr Coles are stunning. I congratulate Minister Smith for his insight in commissioning the report. I have only one conclusion which flows from the committee's tentative view—that is, either all of these organisations staff up to become fully effective, which I presume will be difficult, if not impossible, or some rationalisation is undertaken whereby, for example, integrated centres of excellence might be developed in naval design, construction and maintenance and in tendering, contracting and project management within DMO, with both fully accountable to Chief of Navy. Certainly something needs to be done to reduce the number of organisations in the mix, competing for skilled staff and defending turf as a way of life. Roles and responsibilities must be carefully defined and lines of responsibility firmly nailed down. However, within such a new approach it is absolutely vital that the principle of contestability of advice within Defence is strengthened. It is absolutely fundamental that advice coming to government is fully understood and fully tested. In the history of government in recent decades, much more difficult things have been done. The current matrix model for naval construction at least cannot be sustained, and the record is there over the last 20 years to prove it. It is time to get serious and put an end to the years of procrastination and institutional inertia within Defence. Senate adjourned at 21:39