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Chapter 8 - Asset Management, Purchasing and Capital Investment


Asset management

Defence manages $95.4 billion of total assets. This includes approximately:

  • $58.6 billion of specialist military equipment
  • $25.7 billion of plant, land, buildings and infrastructure
  • $6.8 billion of inventory
  • $0.6 billion of heritage and cultural assets
  • $3.8 billion of other items, including cash, receivables and prepayments.

Defence Groups and Services, are accountable for the underlying business transactions and records that substantiate the reported financial balances of assets under their control.

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.

During 2016–17, Defence worked to secure and advance the improvements in financial and asset management achieved in previous years. This has been achieved by:

  • an embedded 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

Defence undertakes procurement in accordance with the Commonwealth Procurement Rules and Defence policies. In 2016–17, Defence released a new Defence Procurement Policy Manual, which sets out in one place the 1 March 2017 edition of the Commonwealth Procurement Rules and additional Defence procurement policy directives, all of which must be complied with by Defence officials undertaking procurement.

In accordance with the Commonwealth Procurement Rules, the Defence annual procurement plan is published on the AusTender website (www.tenders.gov.au) to provide industry notice of proposed Defence procurements and enable industry to prepare for the competitive tendering phase. Defence also 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 participation statistics are available on the Department of Finance’s website at www.finance.gov.au/procurement/statistics-on-commonwealth-purchasing-contracts.

Defence also 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 at www.treasury.gov.au/publication/australian-government-pay-on-time-survey-performance-report.

To ensure non-corporate Commonwealth entities pay small and medium-sized enterprises on time, the Department of Finance released Resource Management Guide No. 417—Supplier Pay On-Time or Pay Interest Policy. To comply with the policy, Defence contracting templates include provisions that require the Commonwealth to make a self- generated interest payment for late payments that accrue interest of more than $100 (and without the need for any further invoice) for all contracts valued up to $1 million.

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. The method of payment for purchases at or above $10,000 is decided on a case-by-case basis. This policy reduces the administrative burden for payment and is of particular benefit to small business.

Australian industry involvement

Australian industry continued to play a vital role in the acquisition and sustainment of Defence capability in 2016–17. The criticality of the Defence–industry partnership was recognised in the Defence Industry Policy Statement released in February 2016. Defence continued to roll out the initiatives in the Defence Industry Policy Statement to support maximising Australian industry involvement. Specific activities include:

  • the launch of the Centre for Defence Industry Capability in December 2016
  • the launch of the Defence Innovation Hub in December 2016
  • the launch of the Next Generation Technologies Fund in March 2017
  • strengthening the Australian Industry Capability Program in late 2016.

The work will continue in 2017–18 with the development of:

  • the Sovereign Industrial Capability Assessment Framework and Defence Industrial Capability Plan, to be released in late 2017
  • the Defence Export Strategy for release in late 2017
  • a defence industry skilling and science, technology, engineering and mathematics strategy for release in mid-2018
  • the Defence Industry Participation Policy for release in the first half of 2018.

These initiatives focus on planning, guiding and supporting Australian defence industry to support Defence capability.

The 2016 Defence Industry Policy Statement set out a new approach to Defence industry and innovation, supported by almost $1.6 billion of funding over 10 years. The new approach is built around two high-profile programs: the Next Generation Technologies Fund ($730 million) and the Defence Innovation Hub ($640 million). These two programs focus on the research and development ends of the innovation spectrum respectively, and they form the complementary pillars of the enhanced Defence innovation pipeline.

Centre for Defence Industry Capability

Launched by the Hon Christopher Pyne MP, Minister for Defence Industry, in December 2016, the Centre for Defence Industry Capability is the ‘front door’ to the new innovation programs and provides a simplified access point to engage Defence on innovative ideas. Furthermore, the Centre for Defence Industry Capability provides a range of advisory services to assist small to medium-sized enterprises seeking to do business with Defence, as well as export facilitation services, including Team Defence Australia and the Global Supply Chain Program.

Next Generation Technologies Fund

The Next Generation Technologies Fund was launched by Mr Pyne in March 2017 and is investing $730 million over the coming decade in strategic research and innovation partnerships. Through these partnerships with academia, industry and publicly funded research agencies, Defence is building capability in the national innovation system to develop game-changing capabilities of the future.

Since the launch, several new research frameworks have been developed to grow cross-disciplinary collaboration, and new partnerships with the university sector and publicly funded research agencies have been established. Twenty-two universities across Australia are now conducting research in one or more of nine priority areas identified in the Integrated Investment Program (IIP). More information about the IIP is provided below.

Defence Innovation Hub

The Defence Innovation Hub was launched by Mr Pyne in December 2016, and received more than 200 innovation proposals up to 30 June 2017. The Defence Innovation Hub seeks proposals aligned with the six capability streams identified in the Integrated Investment Program. The investment priorities are reviewed on an annual basis.

The Centre for Defence Industry Capability and the Defence Innovation Hub were shortlisted for the 2017 Public Sector Innovation Awards, recognising their achievements in bringing new cultural and business approaches to Defence’s partnership with Australian industry.

Australian Industry Capability Program

During 2016–17, the Australian Industry Capability Program retained its focus on Australian industry involvement in Defence acquisition and sustainment activities. The Australian Industry Capability Plan template has been strengthened in line with the Government’s policy of maximising Australian industry involvement in meeting Australia’s defence capability goals. Under the strengthened program, tenderers are now required to provide more detail in their Australian industry capability plans for projects at or above a threshold of $20 million, or where a sovereign industrial capability requirement is applicable (sovereign industrial capabilities will be released at the end of 2017).

Changes to the Australian Industry Capability Plan template have been made to explicitly address:

  • the tenderer’s strategy for maximising Australian industry involvement in the project and enduring Australian industry capability benefit beyond the work period
  • maximising the inclusion of competitive Australian small to medium-sized enterprises and Indigenous business enterprises
  • details on the proposed investment in innovation, and collaborative research and development efforts in Australia
  • establishing, transitioning or enhancing skills, knowledge, systems, technology and infrastructure within Australian industry
  • identification and promotion of Australian defence export opportunities and contributions to the global supply chain.

Defence closely monitors the implementation of the plans, which are a contracted deliverable for the successful tenderer. This improved approach to Australian industry involvement is fully aligned with the 2016 Defence White Paper, the Integrated Investment Program and the Defence Industry Policy Statement, and highlights Defence’s commitment to supporting Australian industry.

Indigenous procurement policy

Defence is committed to procuring from Indigenous businesses through the application of the Indigenous Procurement Policy, which commenced in July 2015. Portfolio targets are established annually by the Department of the Prime Minister and Cabinet. Defence exceeded its initial 2015–16 target of 70 contracts, with 285 contracts valued at $142 million being placed with Indigenous businesses. Defence has subsequently had its target of eligible domestic contracts for 2016–17 increased from 210 to 420 contracts, bringing forward the 3 per cent target initially set for 2019–20.

Defence was recognised as the Government Member of the Year at the 2017 Supply Nation Connect Awards for its commitment and contribution to increasing opportunities for Indigenous Australians to participate in the economy.

Defence is implementing a number of initiatives to ensure:

  • stakeholder engagement to promote a coordinated approach to ongoing implementation of the Indigenous Procurement Policy
  • continuous review and updating of policy and guidance
  • improved system reporting
  • internal outreach, including establishment of a Defence Indigenous Procurement Policy working group
  • Indigenous business outreach activity to achieve maximum exposure to available resources and opportunities for Indigenous businesses to provide goods and services to Defence
  • the development of an Indigenous Procurement Policy strategic plan, with expected completion in August 2017.

Capital investment

The Integrated Investment Program now combines the previously separate programs of major capital equipment (formerly known as the Defence Capability Plan), information and communications technology, and estate and infrastructure investment.

The Integrated Investment Program includes investments that have been approved by Government, in addition to the unapproved proposals for which Defence will be seeking Government approval over the decade to 2025–26. The Integrated Investment Program is reviewed biannually by Government.

During 2016–17, 74 capability-related submissions were approved by Government against an initial plan of 62 (as given in the 2016 Defence White Paper). Fifteen of those submissions received first pass approvals, 31 received second pass approvals, 15 received other types of Integrated Investment Program project approvals, and 13 approvals were granted for submissions that provided advice to Government on current and future capability.

Significant approvals were granted for:

  • maritime and anti-submarine warfare
    • release of the Naval Shipbuilding Plan
    • approval to commence design of the 12 future submarines, to be built in Australia
  • intelligence, surveillance, reconnaissance and electronic warfare, and space and cyber
    • second pass approval to enhance Defence access to commercial satellites to support ADF operations around the world and at home to secure Australia’s borders
    • second pass approval for electronic warfare infrastructure to counter emerging electronic warfare threats
  • land combat and amphibious warfare
    • second pass approval for the replacement of night fighting equipment
  • air and sea lift
    • second pass approval for small unmanned aerial surveillance and reconnaissance capability
    • second pass approval for a new fleet of petrol tankers and aviation refuelling vehicles
  • strike and air combat
    • first pass approval for a short-range ground-based air defence system.
  • key enablers
    • second pass approval for an upgrade to the Navy’s Garden Island facility in Sydney.

Eleven of these approvals, totalling $1.2 billion, required referral to the Parliamentary Standing Committee on Public Works. Of the 11 projects referred, the committee held public hearings for eight major capital facilities and infrastructure projects, valued at over $494 million. It is anticipated that the other three projects referred to the committee in 2016–17 will be the subject of public hearings in early 2017–18. In addition, 19 medium work projects, valued at $138.1 million, were notified to the Parliamentary Standing Committee on Public Works, indicating a strong project pipeline for the next two years.

Additional performance information about major capital projects and the Defence estate is available on the Defence website at www.defence.gov.au/annualreports/16-17. A list of the additional information is provided at Appendix B—Supplementary online material.

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.

Table 8.1 provides a list of projects of concern as at 30 June 2017. A significant change since the end of the previous reporting period is the successful remediation of the Mulwala Redevelopment Project (JP 2086, Phase 1) and the subsequent removal of the project from the list.

Table 8.1: Projects of concern, as at 30 June 2017

Project name Project number and phase Date added
Collins Class Submarines Sustainment CN 10 November 2008
Multi-Role Helicopter (MRH-90) AIR 9000, Phases 2, 4 and 6 November 2011
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 2017–18, as agreed with Government.