Commission of Audit proposes abolishing DMO

written by australianaviation.com.au | May 1, 2014
DMO is responsible for acquiring and sustaining defence equipment. (Department of Defence)
DMO is responsible for acquiring and sustaining defence equipment. (Department of Defence)

The federal government-commissioned Commission of Audit review into government programs and spending has recommended the Defence Materiel Organisation (DMO) be abolished.

Abolishing the DMO was one of a number of key recommendations for the Defence portfolio contained in the commission’s report, released on Thursday, which also included privatising shipbuilder ASC and Defence Housing, and streamlining Defence senior leadership numbers. But the review was particularly scathing of the performance of the DMO, which is tasked with acquiring and sustaining weapons and equipment.

“In the commission’s opinion the 2005 decision to create the DMO as a statutory independent organisation outside the Department of Defence, under a purchaser provider arrangement, has not worked. It has not been effective in enhancing accountability,” the commission’s report reads.

Advertisement
Advertisement

“The commission received a number of submissions that highlighted shortcomings of DMO and the Capability Development Group. These included: high turnover of military staff; project management and costing skills shortages; unnecessarily complex contracting arrangements; underestimation of initial project costs; a lack of independent scrutiny; inadequate identification of technical risks; and unreliable whole-of-life cost estimates.”

Instead, the commission advocates rolling DMO functions back into the Department of Defence.

“Ensuring all parts of the capability process reside within Defence — including a much smaller DMO focussed predominantly on contract management rather than detailed project management — will allow for a more integrated view of the capability process, better defined accountabilities and better sharing of information. It will serve as a basis to address the shared problems faced by DMO and Capability Development Group. A more professional Capability Development Group could be achieved by ensuring it was headed by a senior policy officer experienced in independent analysis of contending military equipment and with staff recruited from a new professional capability development career stream.”

Whether the federal government adopts the Commission of Audit’s recommendations for the DMO remains to be seen. Treasurer Joe Hockey and Finance Minister Mathias Cormann said in a joint statement the government won’t provide an “immediate response” to the Commission of Audit’s findings, instead “our response to the National Commission of Audit Report will be our first Budget on 13 May”.

PROMOTED CONTENT

23 Comments

  • Raymond

    says:

    Well, well, we could have had a 4th AWD and a 3rd LHD (for F-35B ops 🙂 ) after all, and for the same price!

    http://www.ncoa.gov.au/report/phase-one/part-b/7-8-defence.html (Defence procurement and the Defence Materiel Organisation):

    A major driver of defence costs is the preference for unique and Australian built equipment.
    In the case of the Air Warfare Destroyer and Landing Helicopter Dock ship projects the
    premiums in the prices tendered for an Australian build were considerable. The effective
    rate of assistance is estimated at about 30 per cent for the destroyers and over 100 per cent
    for some of the helicopter ship options. Choosing to support Australian industry cost billions
    of dollars. In effect, a foreign build could have provided an extra ship in each class for the
    same cost.

    I’m not proposing that we shouldn’t support Australian industry, but this is certainly interesting, if not tempting…

  • John N

    says:

    Raymond,

    Whilst I’m sure there are still savings and efficiencies to be made within Defence and the DMO (and all other Government departments), lets not also forget the blunders of successive Governments too.

    Not that it will ever happen (politics will always get in the way), but if we could have a truly bi-partisan approach to defence policy and defence industry policy, which clearly sets the direction for defence policy and procurement over, say a 10 year period and beyond (and update it on a regular basis too), maybe there would be some consistency and certainty for defence and defence industry too.

    Whilst the report talks of the ‘premium’ that is paid to build locally, there are many factors that contribute to that, not the least the ‘boom, bust’ cycle that has been happening for many decades due to Governments lack of consistency with orders.

    For example, Government orders a class of ship, the yard has to build up the workforce and train them too (this costs time and money!), production ends, no following orders, yard reduces workforce (workers find jobs in different industries or go on the dole!), some years down the track another class of ship is ordered (this time from a different yard in a different State!) and the cycle continues, everyone talks about the looming ‘valley of death’ in shipbuilding to come when the AWD’s are completed and before the Collins replacement start, but this has happened numerous times before too.

    Maybe if there was stability and certainty in relation to defence and defence industry, with a bi-partisan approach, those problems I mentioned for the ship building industry could be levelled out and the regular ‘valleys of death’ would be reduced making ship building more efficient and cost effective too, going back to the 2009 DWP approximately 50 ships were to be built for the RAN in the following decades, but since then, not one has been ordered (I’m excluding the AWD’s and LHD’s because they had already been ordered and were starting construction).

    I agree it is tempting, on the surface, to just order from overseas, but again its more complex than that, for example, say a class of ships would cost $6 Billion to order from an overseas yard and to build locally was $10 Billion (40% premium), the big difference is that all the money sent overseas is lost to the economy forever, on the other hand building locally (and yes a percentage of the project cost will go directly overseas for equipment that can’t be produced here), but it means that all the people directly employed by that project are not collecting the dole, they are paying taxes, they are also spending money in their local communities and on it goes, every time one of those ‘dollars’ passes from hand to hand down the chain, the Government gets a tax return. The profits made by the shipbuilder and equipment manufacturers are also taxed, another return to the Government, the so called ‘premium’ paid by building here ends up being quiet different in the end.

    With the defence aviation industry we really don’t ‘manufacture’ here anymore, yes in recent times we ‘assembled’ 22 of the 33 Hawk 127’s, the majority of the Tiger ARH and MRH-90’s, 4 of the Wedgetails and the KC-30A’s, how much of those were assembly vs manufacture of components jobs, I wouldn’t really know.

    Let’s hope that Australian industry does get more than it’s fair share of work out of our multi Billion dollar commitment for the 72 F-35’s, but again there is no guarantee, as I understand it, all work gained has to be won against other competitors, lets hope industry can be competitive and that Government policy helps and not hinders!

    The other area of defence procurement that I find interesting is all the recent projects that are US FMS purchases, projects such as the Super Hornets, C-17’s, the soon to be delivered CH-47F’s, MH-60R’s, C-27J’s and in the near future P-8A’s and Triton, whilst all these equipment purchases will deliver what the RAAF, RAN and Army requires of those capabilities, usually on time and on budget, what is the return for Australian industry?

    As I understand it, unlike a number of other Countries, Australia does not demand a certain ‘percentage’, say 25-30%, of the value of the purchase to be spent locally supporting industry, maybe if it did, with the many many Billions of dollars that has been spend in recent years on FMS purchases, Australian defence industries would be more competitive due to consistency of work coming into them, who knows?

    Anyway, rant over!

    Getting back to the Commission of Audit report, if absorbing the DMO back into Defence is the right way to go, then do it! But lets not forget that sitting right at the top is the Government and Government policy too!

    Cheers,

    John N

  • paul davis

    says:

    Its about time this happened.Too many idiots in the DMO.The money that is wasted is abhorrent.It takes forever and ever for them to make a decision.Lets hope we can save more money and return those savings to real time training and operations.

    • australianaviation.com.au

      says:

      Paul, DMO doesn’t typically make decisions on projects, that is handled by CDG and the parent service. DMO is then handed the project with the preferred bidder to finalise the contract and deliver the capability.
      Cheers
      Andrew

  • Andy

    says:

    Interesting that on the one hand we advocate providing stability to industry in terms of a 10yr strategic plan but are quick to dissolve the DMO, which was established to provide a resident interface with an industry most seek to build. It takes time for a new govt organization to establish processes, develop resident knowledge and a constructive relationship with industry. I have observed the Contracting Interface agencies in the US and the DMO in Australia. I don’t think abolishing the DMO is a good idea. You still require an industry interface / contracting skill-set. The closer those people are to industry the better and the DMO organization fits that bill.

    Industry stability is made up of more that just orders. It’s contract policy, administration policy, communication structure and how to ask for help when industry doesn’t understand requirements, needs to offer trade-offs or simply can’t perform. I find it hard to believe that removing an organization chartered to do that and rolling that responsibility back into the greater Govt will help. Regardless, it does not appear that enough time has been invested in the DMO to know. While it takes a number of products to get industry production lean, it takes a number of similar contracts to get the DMO lean. It seems like the same approach should be applied across the defense enterprise, which includes the DMO.

  • paul davis

    says:

    Yes i understand that Andrew,but that is my argument.Way to long finalise the contract and then way way to long to deliever that capability.Have a look at the way Singapore do things.Very quickly and cleanly.

    • australianaviation.com.au

      says:

      I’m not sure we want to start comparing the various benefits and drawbacks of Australia’s and Singapore’s political and defence acquisition systems in this forum.
      Besides, I wouldn’t call Super Hornet, C-17, MH-60R as taking “way too long” to either decide upon or deliver. It’s possible you might be comparing apples with oranges.
      Cheers
      Andrew

  • Raymond

    says:

    I think the largest factor is whether the project is MOTS or not…

    • australianaviation.com.au

      says:

      As it would be with any capability being acquired by any nation.
      cheers
      Andrew

  • Raymond

    says:

    John N – Yes, wouldn’t it be great for everyone if the two major political parties could just ‘ring-fence’ defence as a core national security essential and agree on a policy that was bipartisan! A good place to start would be 2% of GDP, with a legislated minimum floor of 1.8%.

    And you are correct, good point; a lot of the extra cost for producing these acquisitions locally is offset by the sort of things you have mentioned, so the true additional cost once all is said and done would be a significant amount less.

    One more thing, as far as RAAF fighters are concerned, will the F-35 purchase be the first time (post-WW2 anyway) that there hasn’t been a FAL here in Australia?

  • John N

    says:

    Raymond,

    The only other ‘fighter’ that I can think of that hasn’t been assembled here since WW2 would be the Gloster Meteors that replaced the Mustangs in Korea, from memory, the majority of them were delivered to the RAAF in Korea direct from the UK.

    But those were different times too, technology was moving so fast that as soon as the production of a particular type was completed, it was just about obsolete and production of the next type started, which is completely different to today where front line fighters are now staying service for up to 30 years, so it would be very hard to sustain a fighter production line (or any military aviation production line) here now with the relatively small numbers purchased and the decades of gap between when the replacement would need to enter service.

    As far as buying ‘off the shelf’, especially US product via the FMS system, yes they do seem to deliver capabilities on time and on budget too, but you also need that capability to match the requirement, sometimes there is no choice but to go a different path, sometimes a bit painful too, to get the desired end result, two projects that come to mind are the KC-30A’s and Wedgetail.

    Cheers,

    John N

    • australianaviation.com.au

      says:

      Just something to think about – after the F/A-18 classics were assembled here the line was closed, the tooling was destroyed, and most or all of the workers moved across to the automotive, mining or other industries. Apart from Hawker de Havilland (now Boeing Aerostructures Aust) at Fisherman’s Bend, there was virtually no legacy gained from assembling the jets here, except for a bill which was a billion or two more dollars than it should’ve been.

      On the other hand, with the F-35 program Australian industry has positioned itself to not only build many of the high tech components for the 3,000-odd aircraft that will be built, but also to supply parts into the sustainment pipeline for the service life of the aircraft, many of which will be in service around the world after 2050, and some until 2060. That’s a pretty big legacy.

      Cheers

      Andrew

  • Raymond

    says:

    Thanks John, leading on from the topic of support for local industry, I was thinking along the lines that the majority of the RAAF’s 75 F/A-18’s were assembled here, and we’ll be purchasing at least a similar number (72) of F-35’s with the potential / likelihood of a total of 100…

  • Raymond

    says:

    Is it correct that the FAL for all F-35 customers, both US and export, will be LM’s Fort Worth plant?

    • australianaviation.com.au

      says:

      No, Italy has also set up a FAL and will assemble most of its jets and possibly those of other European customers such as Turkey, Netherlands, Norway etc as well.

      Cheers

      Andrew

  • Raymond

    says:

    Thanks again.

    But the UK’s will all be assembled in the US?

    • australianaviation.com.au

      says:

      There is no FAL in the UK – the RAF/RN jets will be assembled in the US. Don’t forget though that BAE, Rolls-Royce and other British companies build as much as a third of the jet.

      Cheers

      Andrew

  • John N

    says:

    Raymond,

    I think the points Andrew has made about the value of an Australian final assembly line vs ongoing high tech component manufacture is pretty close to the points that I was making. Assembly might be a quick ‘sugar hit’ for the economy (it’s not sustainable with the large gaps and low production run numbers too), but long term high tech component manufacturing has so many more long term benefits, including technology transfer that can flow onto other industries too. Let’s hope the F-35 program can deliver more than our fair share for many years to come.

    Where I think we are missing out on big time, is all the 10’s of Billions of Dollars of other US FMS product we have, and are going to purchase, US aerospace workers must say a little pray to Australia every night for all the jobs that we have created and sustained in the US by purchases we have made in recent years and will continue to make, in fact all of those purchase will probably total MORE than we are spending on the F-35’s!!

    With all that money flowing one way across the Pacific to our friends in the US, I still think we should be demanding, say, a 30% offset spend for component manufacturing in Australia by the various US aerospace giants.

    If that was the case, aviation component manufacturing in my opinion would be an even more valuable and efficient asset that creates jobs and wealth for Australia.

    Cheers,

    John N

  • Martin

    says:

    Did the commission really say that “…the 2005 decision to create the DMO as a statutory independent organisation outside the Department of Defence, under a purchaser provider arrangement, has not worked. It has not been effective in enhancing accountability…”

    Well hang on, last time I looked, the DMO was part of the Department of Defence as what was called a “prescribed agency”, so not completely independent. That said, not sure why the decision makers thought it would be a good idea in 2005 for the DMO to have greater financial independence from the rest of Defence. I think this just created more accounting and paperwork for the different parts of the same organisation to try to work with one another!

    Some of the submissions to the Commission appear to cover similar ground to recommendations in reviews of the Defence acquisition process in the recent past. I want to be assigned the task of undertaking a review into some aspect of the Department of Defence. It would be easy money. I would just have to photocopy a previous investigation report and re-submit it to the Department or Government. Every decade or so, I could then undertake the review again (photocopy report again) and I would have a secure income for life.

  • Raymond

    says:

    I was more wondering why we couldn’t have a FAL for 70+ airframes as well as the component manufacturing, not versus.

    Yes, I think Australia has a good case to argue that we need increased offsets and investment, considering all the money we are spending across various projects and acquisitions. As you say, there is a huge amount of money flowing their way and we could and should be getting more out of it.

    Don’t get me wrong; I think the F-35 work we are getting is great, just that we need more of this included in the purchases we make as it seems that we often aren’t getting the best that we could be.

    • australianaviation.com.au

      says:

      If we were to build a FAL here, the jets would probably cost close to double what we’re paying for them from the Ft Worth line, not to mention the cost of setting up the FAL itself.
      Cheers
      Andrew

  • Darren

    says:

    John N makes a valid argument I support in that any that any defense contract require 30% (or so) off sets. The F-35 model is perhaps the most interesting idea yet. The volume driver for a local company to supply parts for 2000+ jets is fantastic. It is a longer production run, hopefully more sustainable, with an ability to leverage off the set up to compete for other projects here and overseas with a major project track record as a pointer towards cost competitive quality. I really think FMS from our US friends should include work on the global project just as for the F-35, or work to the value of that ‘30%’ in their company (ie Boeing Superhornets for us, Widgets for the 787 for them.) The driver here is to build and sustain niche suppliers, and in turn jobs.

    As for DMO and the ADF in general. I’m one of those that believes in the wise investment to defend our nation (not to mention the ready workforce and equipment in times of disaster.) But it frustrates me when something like the Sea Sprites gives nay sayers a flashing light to attack the ADF. The ADF, the government, need to drive the best deal for this country, delivering on time, on budget. Maybe DMO is not the answer, but there had better be a good one as we can not afford to waste a cent.

  • random

    says:

    We (Government and society in Australia) need to re-think the priorities of procurement other than FMS.

    All of the well run (fit for purpose, deliverable on time, and within budget – ie delivering capability) programs like Super-Hornet, C17 & MH-60R have been delivered under FMS. All of the programs that have floundered recently have not. Surely that speaks volumes for better of the two options.

    “Fit for purpose, deliverable on time, and within budget” is given no more importance or decision weighting than local production potential, marginal electorate employment, or foreign diplomatic considerations. Apparently there are 9 procurement criteria to consider. These are frequently not DMO decisions, nor decisions of Defence – they are frequently political decisions that “consider” the advice of DMO and Defence.

    This means that most procurement decisions are often settled on political considerations rather than capability considerations.

    The extant non-FMS procurement system is broken entirely because no individual assessment criteria has primacy, and the polity want to keep it that way. Perversely, even local over-runs in cost and time are considered productive in a fiscal sense because the money keeps going around the economy! Unfortunately it does not consider monies wasted in other areas such as retention of staff, extra training costs, costs due to delayed delivery, etc.

    Further to that, non-FMS frequently allows bracket creep with respect to bespoke changes or additions to the production variant. Often these involve commercial contract negotiations with a local OEM subsidiary or manufacturer (because GAF no longer exists in this space for aviation production), and frequently Industry resourcing of “contracts” far exceeds Government resourcing. In the end, you get what you ask for, and you get what you pay for. If you ask the wrong questions or design a contract badly, you are saddled long term with the results.

Leave a Comment

Your email address will not be published. Required fields are marked *

Each day, our subscribers are more informed with the right information.

SIGN UP to the Australian Aviation magazine for high-quality news and features for just $99.95 per year