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Chapter 1

OVERVIEW

A review by our Chief Executives of our performance during 2005–06, the corporate governance and accountability structures defining the way that we do business, details of our financial performance, and achievements from key support areas.

Year in Review

Review by the Secretary and the Chief of Defence Force

Overview

This was another demanding year for Defence but one in which the organisation registered important achievements in many areas, including in our operational deployments, in some key acquisitions, and in further improvements in our financial and accounting management. In January 2006, we welcomed a new Ministerial team to the Defence Portfolio. Senator Hill, now Australia's Ambassador to the United Nations, was replaced by Dr Brendan Nelson as Minister for Defence, De-Anne Kelly was replaced by Bruce Billson as Minister Assisting the Minister for Defence, and Theresa Gambaro was replaced by Senator Sandy Macdonald as Parliamentary Secretary.

Defence is responsible for delivering seven outcomes to the Government. Defence's business is focused on the delivery of these outcomes, which are: Defence operations, Navy capability, Army capability, Air Force capability, strategic policy, intelligence, and superannuation and housing support services for current and retired defence personnel.

Defence's departmental income for the year ending 30 June 2006 was $17.249 billion, and administered expenses were $2.754 billion. Administered revenue for 2005–06 was $729.5 million. Defence's total assets at 30 June  2006 were $55.022 billion (departmental) and $1.149 billion (administered), and total liabilities at 30 June 2006 were $3.313 billion and $33.888 billion (administered). Defence's average staffing level for 2005–06 was 85,511, comprising 51,151 permanent members of the Australian Defence Force, 19,464 Reservists, 13,577 civilian staff, and 1,319 professional service providers.

The Hon Dr Brendan Nelson

The Hon Dr Brendan Nelson, Minister for Defence, talks with Able Seaman Jake Hall onboard HMAS Stuart on exercise in Pearl Harbor

Operations

Our operational tempo increased further in terms both of the numbers of personnel deployed overseas and of the numbers of operations in which they were involved. The year in review saw 11 new overseas operational deployments, including new deployments to Afghanistan, Pakistan and to Timor–Leste, and a significant redeployment to Solomon Islands. Our Special Forces and aviators undertook significant military operations in Afghanistan, while in Iraq our forces prepared for redeployment and refocusing in southern Iraq. There were increased demands on our deployments in our northern waters, designed to strengthen Australia's border protection and to protect our maritime Exclusive Economic Zones.

The range and scale of these deployments reflect the increasingly 'operationalised' nature of Defence. They show that Australia's strategic interests span the globe and underline the extent to which our Defence personnel – military and civilian – are at the forefront of promoting these interests.

As at the end of 2005–06, some 5,200 ADF personnel were deployed successfully on operations either overseas or operating on security tasks in Australia's maritime protection zone. Australia's commitment to rehabilitating Iraq continued with the Al Muthanna Task Group, maritime security in the northern Persian Gulf, the training of Iraqi land and naval forces, air surveillance and transport as well as support to coalition operations.

Bushmasters

Bushmasters leaving Camp Smitty in Al Muthanna province, Afghanistan.

A Special Forces Task Group of about 200 personnel deployed to Afghanistan for up to one year as part of Australia's increased commitment to the fight against terrorism. The Government also announced that a Reconstruction Task Force would be deployed later in 2006. This would support community rebuilding efforts to improve the quality of life of the Afghan people. Helicopter support comprising two Chinook helicopters was also provided to operations in Afghanistan. Before deployment, these helicopters were upgraded with a $25 million electronic warfare self protection equipment package to improve the safety and survivability of the aircraft.

Lieutenant Adam Ward and Corporal Pete Lonergan

Lieutenant Adam Ward and Corporal Pete Lonergan examine an infant boy while his mother waits in the ADF medical centre in the earthquake-devastated town of Dhanni, Pakistan

In October 2005, the ADF again responded rapidly to another terrorist bombing in Bali. Several Australians and other foreign nationals were evacuated to Darwin and Newcastle.

In April 2006, the ADF demonstrated its high levels of professionalism by being able to respond, within 24 hours, to a need to restore order after riots and destruction in Honiara in Solomon Islands. We continue to support the Australian Federal Police-led mission to restore law and order in Honiara.

In Operation Pakistan Assist, the ADF provided medical and airlift assistance to the people of Pakistan affected by a devastating earthquake in October 2005. Some 140 personnel assisted the people in the village of Dhanni, 20 kilometres north east of Muzaffarabad in Pakistan. Defence provided 2,600 personnel to support Commonwealth and State security operations during the Commonwealth Games in Melbourne in March 2006. Following a request from the Queensland Government, disaster relief was provided to Innisfail and north Queensland following Cyclone Larry striking north Queensland.

When the Government commits ADF personnel overseas, it is not only the military parts of our organisation that are affected. Our intelligence agencies, logistic support areas, personnel and family support areas, information technology, medical and scientific specialists and headquarters staff working on policy development (to name just a few) are all heavily engaged in supporting the deployed forces. Moreover, the strategic and political complexity of recent operations requires the closest cooperation with other nations, international organisations and other Australian Government agencies.

People

The recruitment and retention of members of the ADF continued to be a key focus for Defence during the year. In late 2005, a ministerially-directed review was commissioned to take a fresh look at ways of meeting the challenges facing Defence in maintaining the ADF's highly skilled full-time and part-time military workforce and boosting recruitment. Significant reforms will flow from the review and work is under way to plan and implement a range of short, medium and longer-term initiatives to improve and sustain ADF recruitment and retention. Review outcomes will build on the retention and recruitment measures already under way. The measures being put in place will enable the ADF to achieve its current recruitment targets while conserving its workforce and meeting the particular requirement to grow Army personnel numbers over coming years. Other personnel initiatives introduced in the year included allowing suitably qualified women to be posted to infantry, armoured and artillery units. The first Australian Defence Medals were provided to former and currently serving Defence Force members. Better accommodation for single Defence Force members, in line with community standards, moved a step closer with the shortlisting of four potential strategic partners with Defence for a project to deliver 1,300 new rooms.

Corporal Bruce Bolger

Corporal Bruce Bolger discusses the finer points of an M1A1 Abrams tank with the Minister Assisting the Minister for Defence, the Hon Bruce Billson MP

Significant achievements have been made in reforming our military justice system to deliver impartial, rigorous and fair outcomes through enhanced oversight, greater transparency and improved timeliness. Sixteen of the 30 agreed recommendations from the Senate Committee's report into military justice have been acted on already, as well as significant elements of a further four recommendations. The positions of Inspector General of the ADF, Chief Judge Advocate, Director of Military Prosecutions and the Registrar of Military Justice all became statutory appointments during 2005–06, thus enhancing the independence of these positions from the military chain of command.

The Defence (Inquiry) Regulations have been amended to improve the fairness of all future administrative inquiries and amendments have been made to the Administrative Inquiries Manual with respect to the conduct of inquiries.

Three Boards of Inquiry – into the tragic deaths of Warrant Officer David Nary and Private Jake Kovco, and the loss of nine personnel in the Sea King crash on Nias Island, Indonesia – demonstrated the importance of this continuing reform agenda. Lessons learned from a review of the mishandling of Private Kovco's remains on return to Australia led to immediate changes in our approach to managing deaths overseas.

The backlog of redresses of grievance cases – which caused undue pressure on the complaints resolution system – has now been cleared. Our intention is to ensure that the new processes we have put in place deliver fair and timely outcomes. A critical step was to create the Defence Fairness and Resolution Branch – the central body outside of normal line management to handle all complaints and grievances. This step allows Defence to streamline the complaints and redress of grievance system in line with the recommendations of a 2004 joint Defence Force Ombudsman/CDF Redress of Grievance System Review.

Strategy

In response to our more complex and evolving strategic environment, we further enhanced our work in strategic policy development. This was reflected in the Defence Update and a classified Defence Planning Guidance paper. In December 2005, Prime Minister John Howard and the then Defence Minister released a review of Australia's national security, Australian's National Security: A Defence Update 2005. The Update examined the key features of Australia's contemporary strategic environment and outlined Defence's contribution to Australia's national security policy. It described how Defence is responding to the Government's requirement to shape the ADF as a highly capable and flexible military force able to meet a wide range of strategic tasks. The Update also informed Defence's capability decisions, corporate management and military strategy.

In regard to ADF operations in Australia, the Government strengthened Defence legislation by amending Part IIIAAA of the Defence Act 1903. These changes did not fundamentally alter the principle of the primary responsibility of State and Territory authorities to respond to a terrorist incident, but were intended to enable the ADF to respond more quickly and effectively in the event of a domestic terrorist incident.

In 2005–06, we continued to focus on counter-terrorism cooperation with most Association of South East Asian Nations' members, including the resumption of counter-terrorism training with Indonesia through Exercise Dawn Kookaburra, which was held in February 2006. Through the Defence Cooperation Program, Australia provided assistance to regional countries, with expenditure in 2005–06 of $82.8 million. Defence also contributed four ADF members into line positions within the Papua New Guinea Defence Force. Some 1,000 personnel participated in the Five Power Defence Arrangements multilateral exercise Bersama Lima.

The Prime Minister, the Hon John Howard MP

The Prime Minister, the Hon John Howard MP, tests the weight of the Army's new lightweight enhanced combat body armour, as soldiers show him their new webbing and personal field equipment, at the launch of the Defence Update and the Hardened and Networked Army Initiative

Defence continued to play a key role in the Government's expanding efforts to prevent the transhipment of weapons of mass destruction. In April 2006, Australia hosted Exercise Pacific Protector 06, which was the first Proliferation Security Initiative air interdiction exercise to be held in the Asia Pacific region, with representatives from 32 countries attending.

Financial Management and Support

I am pleased to say that I was able to sign this year's financial statements on an 'except for' basis. After two years of being unable to form an opinion, it is pleasing to see the significant effort and focus on financial management delivering a tangible result. Improving Defence's financial management has been a high priority for the organisation and we have made significant progress during the year.

The 2005-06 financial year represented a complex and extremely challenging year for Defence. Not only has there been extensive remediation work but the additional activity of the DMO demerger, and the introduction of the Australian equivalents to International Financial Reporting Standards (AIFRS) has seen Defence experience the most complex financial year in its history. I am pleased to say that Defence was able to step up to each of these challenges.

The DMO 2005-06 Financial Statements were signed as true and fair indicating that the demerger has been judged as financially successful. This has been a significant business activity and I extend my appreciation to all those involved.

With regard to Defence's accounts, the remediation work has delivered significant improvements in four key areas. Improvements have been made in the reporting of military and civilian leave liabilities, the valuation and reporting of explosive ordnance, the introduction of a more rigorous asset capitalisation approach and the completion of asset valuation work in information and communications technology.

The introduction of AIFRS was also a significant challenge. In dealing with the extensive changes involved, our approach was comprehensive and thorough. We produced 29 'position papers' setting out Defence's approach to critical accounting issues ranging from inventory classification for accounting purposes to the intangible asset capitalisation threshold. These technical papers proved to be invaluable in dealing with the complex, conceptual and practical issues of AIFRS implementation.

This significant achievement with the financial statements has involved a large number of people from across the organisation, and I extend my appreciation to them for their contribution.

With the achievement to date and a comprehensive plan for continuing remediation, I am confident that Defence's financial statements will see full rectification in the near future.

Parliamentary Secretary to the Minister for Defence, Senator Sandy Macdonald

Parliamentary Secretary to the Minister for Defence, Senator Sandy Macdonald, chats to the Officer Commanding Alpha Company 3rd Battalion, Royal Australian Regiment, Major Terry Cook, on Operation Anode in Solomon Islands

In the May 2006 Budget, the Minister for Defence announced that the Government had decided to continue to increase Defence spending by three per cent real growth a year until 2015–16. This will mean an additional $10.7 billion for Defence over the period 2011–12 to 2015–16. The Defence budget will increase to $17.9 billion (excluding administered funds) in 2006–07, up from $10.6 billion in 1995–96. This $17.9 billion commitment to Defence in 2006–07 represents 9.1 per cent of Australian Government outlays and about 1.9 per cent of GDP. In addition to the three per cent real growth commitment and other newly announced budget measures, the 2006–07 Budget provided an additional $1.9 billion to acquire a new heavy airlift capability (C-17s), and an extra $1.5 billion over ten years for the Hardened and Networked Army.

Our end of financial year outcome reflected well on the detailed work done by the Chief Financial Officer Group over the budget cycle. Continuing our record of competent cash management, the end of the financial year saw us manage to within $7 million of our estimate. While overall funding keeps Defence on track to meet Government requirements, pressures on military personnel numbers – and thus on civilian staff – continue.

We take very seriously our high levels of interaction with parliamentary committees. In 2005–06, Defence:

  • provided 50 written submissions to parliamentary inquiries;
  • appeared at 39 committee hearings/ private briefings;
  • gave 237 hours of evidence at committee hearings; and
  • responded to 211 committee questions on notice.

In addition, Defence published 214 responses to parliamentary questions on notice.

Many questions to Defence, particularly the parliamentary questions on notice, were very complex, and consisted of multiple parts. We maintained our good record of timely responses to such questions.

In the area of corporate support, the augmented estate maintenance program continued and progress was made in reforming business transaction processes. A number of important contracts were signed or tenders progressed. Program funding for estate maintenance (covering items from airport runway repairs to asbestos remediation) was increased by some $100 million per year from 2004–05 and, for the second successive year, this was almost fully achieved (98 per cent in 2005–06). This was a commendable result given the strong non-Defence demand for construction and maintenance contractors. The establishment of the Defence Business Improvement Board (in August 2006) will increase the reform momentum.

HMAS Ararat

HMAS Ararat in Darwin Harbour

Capability

The major capital equipment program continued to grow in 2005–06. The Defence Capability Plan, which lists major investments in capabilities for the next ten years, was overhauled and a new public version released in June 2006. Overall capital equipment funding was up 12 per cent on the previous year. This followed an estimated 22 per cent increase in 2003–04; the budget figures for 2006–07 point to a further 20 per cent increase.

Government acquisition decisions in 2005–06 included those on:

  • acquiring up to four C-17 Heavy Airlift aircraft and associated support equipment;
  • acquiring an additional 34 MRH-90 helicopters to replace the current Black Hawk and Sea King helicopter fleets;
  • upgrading the Anzac-class frigate anti-ship missile defence system;
  • acquiring the AEGIS weapon systems for the Air Warfare Destroyer;
  • acquiring the Joint Air to Surface Stand-off Missile for the F/A-18; and
  • first pass approval for the Amphibious Ships project, and the provision of funding to conduct further design, technical and through-life support studies.

In May 2006, the Headquarters Joint Operations Command project, a fully integrated command and control headquarters to be constructed near Bungendore NSW, reached a critical milestone, the selection of the preferred tenderer. The project is on course for staff to occupy the facility towards the end of 2008.

Bushmaster Infantry Mobility Vehicles

Mobile muscle: A pack of Bushmaster Infantry Mobility Vehicles move off from their field base during training at Puckapunyal

One year after becoming a prescribed agency, the Defence Materiel Organisation (DMO) continued to ensure that Defence capabilities are supported through efficient and effective acquisition and through-life support of materiel. The DMO Annual Report forms Volume 2 of the Defence Annual Report. The total expenses for the DMO in 2005–06 were $7,592 million, including $60 million to provide policy advice and management services to the Government. During 2005–06, the DMO's average staffing level was 6,536, comprising 4,502 civilian staff, 1,641 military members and 393 professional service providers, in approximately 50 locations throughout Australia and overseas.

The DMO is Australia's largest project management and engineering services organisation. The organisation currently manages in excess of 210 major projects and a significant number of acquisition and sustainment contracts worth approximately $60 billion.

In addition to its acquisition and sustainment roles, the DMO has supported the Minister Assisting the Minister for Defence, Bruce Billson, in leading an industry policy review proposed by Minister Nelson. A discussion paper was released at the Defence and Industry Conference in June 2006.

Conclusion

This summary barely touches on the outstanding achievements of people in all parts of Defence, and their contribution towards achieving our mission of defending Australia and its national interests.

All Australians have reason to be deeply appreciative of the job our servicemen and women do, and the way in which they are supported before, during and after deployment by our ADF and APS people.

Our reputation as a world-class fighting force is due not only to our performance as a defence force overseas, but also to our performance as a defence department here at home. Our people in all parts of the Defence organisation continue to do a magnificent job.

Sadly, Australians were too often reminded this year that military operations can extract a heavy price. We salute the service of our people who have lost their lives, whether on operations overseas or at home. Their memory sustains us in our task.

R.C. SMITH, AO, PSM
Secretary
Department of Defence

A.G. HOUSTON, AO, AFC
Air Chief Marshal
Chief of the Defence Force

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