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Chapter 8 - Asset management, purchasing and capital investment


Asset management

Defence manages $94.1 billion of total assets. This includes:

  • approximately $56.2 billion of specialist military equipment
  • $25.4 billion of plant, land, buildings and infrastructure
  • $6.7 billion of inventory
  • $0.6 billion of heritage and cultural assets
  • $5.2 billion of other items, including cash, receivables and prepayments.

Defence Groups and the Services are accountable for the underlying business transactions and records that substantiate the reported financial balances of assets under their control. The Chief Finance Officer Group undertakes accounting processes to enable the accurate and timely reporting of asset balances and ensure that they are consistent with requirements for financial statement reporting defined in the Australian Accounting Standards.

Defence conducts an annual fair-value assessment of all assets. Previously, special military equipment had been exempt from this assessment. In 2015–16, this exemption was removed and special military equipment has been included in the fair-value assessment.

During 2015–16, Defence worked to secure and advance the improvements in financial and asset management achieved in previous years. This was achieved by:

  • embedding the shared service delivery model for asset accounting to further enhance financial reporting of assets and deliver standardised policies and processes to support the management of assets
  • a maturing data assurance framework and controls environment to swiftly identify and resolve asset management issues as they occur.

Purchasing

The Public Governance, Performance and Accountability Act 2013 (PGPA Act) requires high standards of governance, performance and public accountability.

Rather than prescribing detailed requirements, the PGPA Act creates a financial framework where entities have the flexibility to adopt appropriate systems and processes that help them to achieve diverse policy and statutory objectives efficiently and effectively.

The PGPA Act sets out the main principles and requirements of the Commonwealth Resource Management Framework. This includes the PGPA Act, the Public Governance, Performance and Accountability Rule 2014, the Commonwealth Procurement Rules and the Commonwealth Grants Rules and Guidelines. These documents give effect to the governance, performance and accountability measures covered by the PGPA Act. Defence implements the provisions of the Commonwealth Resource Management Framework through the accountable authority instructions issued by the Secretary and through associated departmental guidance.

In 2015–16, the Chief Finance Officer Group arranged for the updating and refinement of the departmental financial delegations, accountable authority instructions and associated financial guidance, giving effect to the requirements of the Commonwealth Resource Management Framework.

Defence undertakes procurement in accordance with the required purchasing policies and principles as articulated in the Commonwealth Procurement Rules and Defence policies.

The Commercial Division of the Capability Acquisition and Sustainment Group provides procurement advice and support to Defence staff exercising delegations under the PGPA Act for materiel and non-materiel procurement to ensure compliance with the Commonwealth Procurement Rules.

The Defence annual procurement plan is published on the AusTender website, www.tenders.gov.au. This provides industry notice of proposed Defence procurements to enable industry to prepare for the competitive tendering phase. Defence publishes open tenders on AusTender.

Procurement initiatives to support small business

Defence supports small business participation in the Commonwealth Government procurement market. Small and medium-sized enterprise and small enterprise participation statistics are available on the Department of Finance’s website.

Defence recognises the importance of ensuring that small businesses are paid on time. The results of the survey of Australian Government payments to small business are available on the Treasury’s website, www.treasury.gov.au.

The Defence Procurement Policy Manual and the Contract Template Selection and Tailoring Guide were updated to mandate the use of the Commonwealth Contracting Suite for suitable Defence procurements valued at under $200,000. This reduces administrative costs and maintains consistency of commercial approaches across government when doing business with small to medium-sized enterprises.

Defence has implemented a mandatory procurement policy on the use of the Defence Purchasing Card as the method of payment for purchases of less than $10,000 and for procurements at or above $10,000 on a case-by-case basis, further reducing the administrative burden for payment to small and medium-sized enterprises.

To ensure compliance with the Department of Finance Resource Management Guide No. 417—Supplier Pay on Time or Pay Interest Policy, Defence contracting templates include provisions that require the Commonwealth to make a self-generated interest payment for any late payment (and without the need for any further invoice) for all contracts valued up to $1 million.

Australian industry participation

Australian industry continued to play a vital role in the acquisition and sustainment of Defence capability in 2015–16. The criticality of the Defence–industry partnership was recognised in the 2016 Defence Industry Policy Statement released on 25 February 2016. An essential element of the new Defence capability lifecycle is the inclusion of Australian industry as a fundamental input to capability.

The initiatives outlined in the Defence Industry Policy Statement include the Centre for Defence Industry Capability to be established in the second half of 2016 and the Sovereign Industrial Capability Assessment Framework and Defence Industrial Capability Plan to be in place in the second quarter of 2017. These initiatives will focus on matching Defence capability needs with a strengthened Australian industry to deliver them. Defence will also establish the Defence Innovation Hub and Next Generation Technologies Fund in 2016–17 to connect Defence capability needs with the innovation expertise of the Australian industry and academic base.

The Australian Industry Capability Program retained its focus on maximising Australian industry involvement in Defence acquisition and sustainment activities. Under the program, tenderers are required to develop Australian industry capability plans for projects at or above a threshold of $20 million, detailing how Australian industry will be involved in project delivery. Defence closely monitors the implementation of the plans.

A number of major capability decisions in 2015–16 entailed significant long-term Australian industry involvement. This included the commitment to the construction of future submarines and the continuous build of surface vessels in Australia; the acquisition of 1,100 Australian-designed and manufactured Hawkei protected mobility vehicles; the Wedgetail airborne early warning and control system upgrades and sustainment contracts; and the strategic munitions interim contract utilising Mulwala and Benalla facilities.

Indigenous procurement policy

The Australian Government’s Indigenous Procurement Policy commenced on 1 July 2015 and Defence was set a target of 70 contracts with Indigenous enterprises in 2015–16. Defence exceeded this target for 2015–16, with more than 100 contracts valued at more than $100 million being placed with Indigenous enterprises (this number includes subcontracts let by Defence prime contractors). By 2020, Defence aims to increase its procurement activities with Indigenous businesses to 3 per cent.

In 2015–16, Defence developed a resource to assist Indigenous enterprises to develop and update capability statements to better market the services available to Defence. Defence participated in ‘Meet the Supplier’ forums conducted by the Department of Finance and Supply Nation, and in October 2015 Defence conducted its own ‘Meet the Indigenous Supplier’ forum. Defence was also a finalist in the 2016 Supply Nation Connect Awards in the government sector for its commitment to Indigenous enterprise.

Facilities and Infrastructure Program

The Facilities and Infrastructure Program of the Integrated Investment Program, previously known as the Major Capital Facilities Program, comprises approved and yet-to-be-approved major and medium projects.

The Facilities and Infrastructure Program typically consists of capital expenditure for major capital facilities and infrastructure projects, environmental remediation program projects, property disposals, acquisitions and fit-outs. It prioritises facilities such as airfields, wharves, training areas, explosive ordnance storage, fuel installations, and test and experimentation assets, as they are critical to the sustainment and generation of Defence capability. The Facilities and Infrastructure Program also funds investment in infrastructure such as living-in accommodation and underground utility infrastructure including sewage, stormwater, water, gas and power.

The planning and delivery of the Facilities and Infrastructure Program is a significant and important contributor to ensuring the estate is aligned with current and future force requirements. The program aims to meet the needs of the capability managers and the enabling workforce through:

  • planning and delivery of new capability facilities projects
  • aligning sustainment projects with new capability projects so delivery is more efficient and affordable
  • acquiring and disposing of property in accordance with strategic requirements
  • delivery of major redevelopment, sustainment and environmental remediation projects to ensure the estate is safe and available for use.

In 2015–16, 12 major capital facilities and infrastructure projects, valued at just under $3 billion, were approved by Parliament. This was a record number of approvals, indicating a strong project pipeline for the next two years.

Expenditure was lower than estimated in the Portfolio Additional Estimates Statements. The end-of-financial-year expenditure was $993 million, compared to an allocation of $1.1 billion.

The following information about major capital projects and the Defence estate is available:

Projects of concern

The projects of concern regime is a proven process for managing seriously underperforming projects at a senior level. Once listed, the primary objective of the regime is to remediate these projects by implementing an agreed plan to resolve any significant commercial, technical, cost and/or schedule difficulties. Projects of concern receive targeted senior management attention and must be reported on more regularly to the Government.

A significant change to the projects of concern list at the end of 2015–16 (Table 8.1) includes the successful remediation of the Direct Fire Support Weapons project (LAND 40, Phase 2) and subsequent removal of the project from the list.

Table 8.1: Projects of concern as at 30 June 2016

Project name

Project number and phase

Date added

Collins Class Submarines Sustainment

CN10

November 2008

Multi-Role Helicopter (MRH-90)

AIR 9000, Phases 2, 4 and 6

November 2011

Mulwala Redevelopment Project

JP 2086, Phase 1

December 2012

Air Warfare Destroyer

SEA 4000, Phase 3

June 2014

Australian Defence Satellite Communications Capability Terrestrial Enhancement

JP 2008, Phase 3F

September 2014

Defence will continue to actively manage the remaining projects of concern in 2016–17, in accordance with Government expectations.