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Annual Report 2013-14

Volume 1, Part 2 : Performance

Chapter 6: Defence Materiel Organisation: Outcome


Contributing to the preparedness of the Australian Defence organisation through acquisition and through-life support of military equipment and supplies.

Summary

The DMO has three programs:

Overview

Review by the Chief Executive Officer

In 2013–14, the Defence Materiel Organisation (DMO) expended around $9.5 billion to defence industry to acquire and sustain military equipment and support services. Most of this investment is tied up in long-term contracts of over five years duration. In addition, industry support programs managed by the DMO had an allocated budget of $40 million. The DMO continues, on average, to deliver the approved project scope within budget, with only a very small number of projects experiencing cost overruns. On average, projects are delivered 5 per cent under the approved project budget.

The DMO has improved cost and capability delivery performance in an increasingly complex environment. We operate under a purchaser–provider model, underpinned by agency service agreements, to deliver commercial, engineering, sustainment and project management services to the Defence capability managers. These funded agency agreements—materiel acquisition agreements for acquisition and materiel sustainment agreements for sustainment—contain key performance indicators to measure the DMO’s performance.

To better position the DMO to deliver customer requirements and meet government performance requirements, the DMO Strategic Framework for 2013–15 continued to be a central driver for the organisation. To best align the DMO’s activities to the framework, we have also implemented four change priorities. These priorities are used to focus DMO improvement activities on the means to sustainably deliver the outcomes agreed with capability managers without compromising safety and within available resourcing. The four change priorities are:

  1. Deliver acquisition and sustainment more efficiently

    Use DMO resources more efficiently to deliver approved acquisition and sustainment services to the Australian Defence organisation.

  2. Interact with reviews

    Proactively engage with and support the National Commission of Audit, the Defence First Principles Review (which incorporates a review of the DMO), the Defence White Paper and the Force Structure Review. Implement the accepted recommendations of reviews applicable to the DMO.

  3. Streamline internal processes

    Streamline internal policies and processes to empower greater delegation of decisions. Apply the minimum essential guidance required to execute DMO business activities.

  4. Reform the DMO

    Identify opportunities for reform across the DMO, plan early phases of potential implementation, and identify possible pilot activities. In parallel, enhance the skills and diversity of the DMO workforce and collaborate with defence industry to support the sustained delivery of services required by the Government and Defence.

There has been continuing work within the DMO to incorporate legally binding responsibilities from the Work Health and Safety Act 2011 into our policies and processes. The full suite of the DMOSAFE policy is now implemented. The continuous improvement of this framework means that we are updating our systems regularly in order to capture and share information on risks and hazards, together with lessons learned, and to support the implementation of benchmarked practices.

The DMO Work Health and Safety Assurance program has indicated that we have some exemplary performers across the organisation, and that general performance is trending up.

The DMO has also played a significant and leading role in the remediation of hazardous chemicals and joint special licence plant across all of Defence. This has facilitated the closure of the Comcare enforceable undertaking on hazardous chemical management, and the closure of the Comcare improvement notice on the management of joint special plant.

I am also pleased with the work within the DMO to enhance our diversity and inclusion. This is not just an argument about numbers, quotas or targets: it is about cultural reform and about building understanding and awareness of our workplace. Perhaps more importantly, it is also about creating a better, more productive DMO.

To that end, I have established the DMO Diversity Advisory Group. Diversity and inclusion contribute directly to ‘hard’ business outcomes and can provide a richer experience for managers and team leaders, as well as making the DMO a better place in which to work.

Given the current recruitment restrictions, the DMO is seeking to establish, where appropriate, an internal labour market, which will use staff with specific skill sets in flexible roles across several work areas. This approach aims to ensure that the key priority positions are filled, even on a more flexible, including part-time, basis—which is preferable to not filling a high-priority position. This approach should allow staff to construct more flexible working arrangements while enabling the DMO to achieve agreed outcomes.

Warren King
Chief Executive Officer
Defence Materiel Organisation

DMO role and functions

The DMO is responsible for the acquisition and sustainment of the materiel elements of operating capability for the ADF. The DMO has been a prescribed agency since 1 July 2005.

The Chief Executive Officer is directly accountable to the Minister for Defence under the Financial Management and Accountability Act 1997 for the performance of the DMO, while remaining accountable to the Secretary under the Public Service Act 1999.

Figure 6.1: Organisational structure as at 30 June 2014

Figure 6.1 is an organisational chart showing the reporting lines between the CEO and senior managers.

Performance against DMO strategic priorities

Australian Military Sales Office

During 2013–14, the Australian Military Sales Office enhanced its management of major asset disposals in Defence and further developed the government-to-government sales program. Engagement with Indonesia was a major focus and included the sale and transfer of C-130H aircraft, the facilitation of an associated commercial maintenance contract, and the sale of Bushmaster vehicles during the year. In addition, the office managed 43 disposals projects and 21 international sales projects.

Gate reviews

Since its inception in 2009, the program has conducted more than 500 formal reviews. All major projects are now in at least their third year of annual review. Metrics data for the past three years indicates improving project performance.

Sustainment gate reviews are currently being trialled for eight sustainment products. Full implementation in 2014–15 will involve around 30 reviews annually on a portfolio of about 66 significant products.

Negotiation Cell

The DMO has established a Negotiation Cell to improve its internal negotiation skills and general business acumen. The Negotiation Cell provides DMO project teams and line management with direct support in the preparation and conduct of negotiations. It is establishing and maintaining a standardised suite of negotiation training, and building internal DMO skills in negotiation and general business acumen.

Looking ahead

The DMO continues to drive reform across all elements of its business operations. Current priorities for reform are focused on:

  • identifying the core, minimum set of DMO roles required to deliver assigned outcomes while minimising overheads and costs through:
    • optimising the efficiency of retained DMO functions
    • prioritising DMO activities and resources to meet the ADF’s urgent operational demands, deliver government-approved projects, and sustain the force-in-being
    • revising contract and performance arrangements to better use industry capacity and capability
  • reducing the cost of equipment sustainment by around 10 per cent in real terms (against 2007–08 baseline levels) through increasing the use of productivity- and performance-based contracts, renegotiating or recompeting support contracts, improving processes, reforming supply chains, reducing targeted inventories, achieving internal efficiencies to reduce the APS workforce, and working with Defence to deliver shared services reforms
  • improving schedule performance through better schedule estimation and risk assessment methodologies
  • contributing to continuous tailoring of the two-pass process for major project approvals, as recommended in the 2008 Mortimer Review, to ensure the right balance in the preparatory work for project approvals, commensurate with their scope and complexity
  • providing specialist commercial and technical/engineering and through-life support advice earlier in the capability development process to ensure that technical and safety risks, costs and appropriate acquisition and sustainment strategies are considered in the development of capability options
  • enhancing the DMO’s advice to the Government on industry capacity to deliver required capabilities and on the accuracy of cost and schedule estimates for new equipment
  • embedding stronger controls to heighten personal accountability and provide lead indicators for management intervention
  • providing a range of assistance programs to improve the skills, productivity, innovation and competitiveness of Australian defence industry sectors, with a focus on those areas deemed critical to retaining Indigenous industry capacity to deliver approved Defence projects and through-life support for existing platforms.

DMO financial performance

The DMO receives around 90 per cent of its funding from Defence under agency agreements. The remaining 10 per cent of its funding is provided via a direct appropriation and own-source revenue. The DMO’s audited 2013–14 financial statements are included in Volume Two of this report.

2013–14 financial summary

The total net resourcing available to the DMO in 2013–14, as published in the Portfolio Budget Statements 2014–15, was $11,214 million. This comprised:

  • payment from Defence: $10,033.4 million
  • special account opening balance: $247.1 million
  • appropriation receipts: $872.4 million
  • non-appropriation receipts: $60.6 million.

During the course of a financial year, the DMO budget may vary for a number of reasons, such as changes in demand by Defence, foreign exchange fluctuations or reprogramming of cash flow to meet contractual obligations. Table 6.1 reflects the financial resource position taking all of these factors into consideration as at 30 June 2014. The 2013–14 total actual resourcing was higher than the estimate above largely due to a planned appropriation reduction of $35.4 million that was included in the 2014–15 PBS estimate that will not occur until Parliament repeals the relevant Appropriation Acts, which is expected to occur after 1 July 2016. Reported appropriation revenue in the financial statements remains at $907.8 million as reported in the Portfolio Budget Statements 2013–14. The remainder of the variation is due to an increase in non-appropriation receipts of $35.8 million offset by a decrease in appropriation receipts from other agencies (Defence) of –$44.8 million, resulting in total resourcing of $11,240 million.

The DMO made payments of $10,910.8 million in 2013–14, resulting in a special account closing balance of $329.1 million as at 30 June 2014. The special account balance remains within the Official Public Account, providing the flexibility to meet cash flow requirements across financial years to align with capability delivery across DMO programs.

Resource summary

Table 6.1: DMO resource statement 2013–14

 

Actual available appropriations for 2013–14

$’000

Payments
made
2013–14

$’000

Balance
remaining
2013–14

$’000

 

(a)

(b)

(a-b)

Ordinary annual services[1,2]

Departmental appropriation

Departmental appropriation

907,791

832,432

75,359

Total departmental appropriation

A

907,791

832,432

75,359

Special account (departmental and administered)

Opening balance

247,136

   

Appropriation receipts[1,2]

907,791

   

Appropriation receipts

     

– other agencies[3]

10,033,372

   

– adjustment for other agencies[3,4]

–44,754

   

Non-appropriation receipts to special accounts

60,569

   

Adjustment for non-appropriation receipts to special accounts[5]

35,844

   

Interest[6]

   

Payments made[7]

 

10,910,842

 

Closing balance

   

329,116

Total special account

B

11,239,958

10,910,842

329,116

Less appropriations drawn from annual or special appropriations above and credited to special accounts

C

907,791

832,432

75,359

Total resourcing and payments (A+B-C)

11,239,958

10,910,842

329,116

Notes

  1. Appropriation Bill (No. 1) 2013–14 and Appropriation Bill (No. 3) 2013–14.
  2. Reported as $872,432,000 estimated actual in the Portfolio Budget Statements 2014–15. The variation is because the planned appropriation reduction will not occur until the relevant Appropriation Acts are repealed by Parliament.
  3. Appropriation receipts from Defence credited to DMO’s special accounts.
  4. Adjustment is variance between estimated actuals as at Portfolio Budget Statements 2014–15 and actual available appropriations for 2013–14 as at 30 June 2014.
  5. Adjustment is variance between estimated actuals as at Portfolio Budget Statements 2014–15 and actual receipts for 2013–14 as at 30 June 2014.
  6. Administered interest received from overseas bank accounts, which is remitted to the Official Public Account.
  7. Excludes GST.

Appropriations and other resources

The DMO workforce and operating expenses (along with industry programs) are directly appropriated by government through Appropriation Bill (No.1). The DMO has flexibility over the allocation of its workforce across the various programs it delivers. Variations for programs from the revised budget to the actual result may reflect changes to activity levels prescribed by Defence, budgeted cash flow adjustments for movements in foreign exchange rates or delivery of programs with fewer resources. Programs 1.1 and 1.2 were largely funded by payments from Defence for goods and services provided, as set out in the materiel acquisition agreements. Program 1.3 was funded largely through direct appropriation.

Table 6.2: Budgeted expenses and resources for DMO outcome

Outcome 1: Contributing to the preparedness of the Australian Defence organisation through acquisition and through-life support of military equipment and supplies

2013–14

revised
budget
$’000

2013–14

actual
result
$’000

Variation[1]

$’000

Program 1.1: Management of Capability Acquisition

Departmental expenses

Ordinary annual services (Appropriation Bill Nos 1 & 3)

267,393

218,645

–48,748

Special accounts

3,513,632

4,146,203

632,571

Expenses not requiring appropriation

8,877

5,906

–2,971

Subtotal for Program 1.1

3,789,902

4,370,754

580,852

Program 1.2: Management of Capability Sustainment

Departmental expenses

Ordinary annual services (Appropriation Bill Nos 1 & 3)

507,363

525,056

17,693

Special accounts

5,052,741

5,318,482

265,741

Expenses not requiring appropriation

18,835

13,914

–4,921

Program for Output 1.2

5,578,939

5,857,452

278,513

Program 1.3: Provision of Policy Advice and Management Services

Departmental expenses

Ordinary annual services (Appropriation Bill Nos 1 & 3)

97,622

93,581

–4,041

Special accounts

2,449

0

–2,449

Expenses not requiring appropriation

5,204

11,653

6,449

Subtotal for Program 1.3

105,275

105,234

–41

Total departmental expenses for Outcome 1

9,474,116

10,333,440

859,324

Note

The variation is between the actual result as disclosed in the DMO’s audited 2013–14 financial statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

Operating performance

The DMO budgeted for a break-even result in the Portfolio Additional Estimates Statements in 2013–14. This reflects the model under which the DMO is funded for the activity it performs.

Table W6.1: Statement of comprehensive income for the period ended 30 June 2014

    Revised budget Actual result Variation[1]
    2013–14 2013–14 2013–14
    $'000 $'000 $'000
EXPENSES        
Employee benefits 551,707 558,919 7,212
Suppliers 8,900,143 9,738,994 838,851
Grants 19,676 13,000 -6,676
Depreciation and amortisation 2,590 989 -1,601
Write-down and impairment of assets - 3,461 3,461
Foreign exchange losses - 18,057 18,057
Other expenses - 20 20
Total expenses A 9,474,116 10,333,440 859,324
LESS:
OWN-SOURCE INCOME
Revenue
Sale of goods and rendering of services 8,568,822 9,464,685 895,863
Interest - 1,251 1,251
Other revenue 31,816 32,142 326
Total revenue 8,600,638 9,498,078 897,440
Gains
Other gains 1,100 4 -1,096
Total gains 1,100 4 -1,096
Total own-source income B 8,601,738 9,498,082 896,344
Net Cost of (contribution by) services C=(A-B) 872,378 835,358 -37,020
         
Revenue from Government D 872,378 907,791 35,413
Items not subject to subsequent reclassification to profit or loss
Changes in asset revaluation reserves - 38 38
Total other comprehensive income E - 38 38
Surplus (Deficit) F=(D+E-C) - 72,471 72,471

Notes

  1. The variation is between the actual result as disclosed in the DMO's audited 2013–14 Financial.
  2. Statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

Explanations for major variations - Income Statement

The DMO achieved an operating surplus of $72.5 million. This is less than one percent of total budgeted expenses. The main reasons for this surplus were that the planned appropriation reduction of $35.4 million cannot occur until the relevant appropriation acts are repealed and achievement of further efficiencies resulting in lower operating expenses.

Financial Position

Table W6.2: Balance sheet as at 30 June 2014

  Revised budget Actual result Variation[1]
  2013–14 2013–14 2013–14
  $'000 $'000 $'000
ASSETS      
Financial assets
Cash and cash equivalents 130,000 122,628 -7,372
Trade and other receivables 731,375 733,299 1,924
Total financial assets 861,375 855,927 -5,448
Non-financial assets
Property, plant and equipment 5,896 5,061 -835
Intangibles 113 13 -100
Other non-financial assets 1,434,647 1,383,350 -51,297
Total non-financial assets 1,440,656 1,388,424 -52,232
Total assets 2,302,031 2,244,351 -57,680
LIABILITIES      
Payables
Suppliers 1,192,519 1,341,482 148,963
Grants 5,111 5,733 622
Other payables 519,821 238,554 -281,267
Total payables 1,717,451 1,585,769 -131,682
Provisions
Employees 176,025 180,415 4,390
Other provisions 5,881 3,024 -2,857
Total provisions 181,906 183,439 1,533
Total liabilities 1,899,357 1,769,208 -130,149
Net assets 402,674 475,143 72,469
EQUITY      
Parent entity interest
Contributed equity 155,368 155,368  
Asset revaluation reserves 252 290 38
Retained surpluses (accumulated deficit) 247,054 319,485 72,431
Total parent entity interest 402,674 475,143 72,469
Total equity 402,674 475,143 72,469

Notes

  1. The variation is between the actual result as disclosed in the DMO's audited 2013–14 Financial.
  2. Statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

Explanation for major variations – Balance Sheet

The variations between the revised budget and the actual result for 2013–14 in the balance sheet mainly reflect:
  • a decrease in assets of $57.7 million mainly representing a decrease in other non-financial assets and cash
  • a decrease in liabilities of $130.1 million mainly representing a decrease in other payables offset by an increase in supplier payables
  • an increase in equity representing the operating surplus.

Cash Flow

Table W6.3: Cash flow statement for the period ended 30 June 2014

  Revised Budget Actual result Variation[1]
  2013–14 2013–14 2013–14
  $'000 $'000 $'000
OPERATING ACTIVITIES      
Cash received
Goods and services 9,457,041 9,997,310 540,269
Appropriations 869,311 905,499 36,188
Net GST received 657,165 627,756 -29,409
Other cash received 60,569 4,818 -55,751
Total cash received 11,044,086 11,535,383 491,297
Cash used
Employees 548,219 551,862 3,643
Suppliers 9,368,404 9,820,589 452,185
GST paid 657,165 630,009 -27,156
Funds returned to Defence 491,662 491,662
Grants 19,676 12,378 -7,298
Other cash used 453,416 1 -453,415
Total cash used 11,046,880 11,506,501 459,621
Net cash from or (used by) operating activities -2,794 28,882 31,676
INVESTING ACTIVITIES      
Cash Received
Proceeds from sales of property plant and equipment 528 528
Total cash received 528 528
Cash used
Purchase of property, plant and
equipment and intangibles 3,011 1,124 -1,887
Total cash used 3,011 1,124 -1,887
Net cash from or (used by) investing      
activities -3,011 -596 2,415
Net increase or (decrease) in cash held -5,805 28,286 34,091
Cash at the beginning of the reporting period 135,805 94,342 -41,463
Cash at the end of the reporting period 130,000 122,628 -7,372

Notes

  1. The variation is between the actual result as disclosed in the DMO's audited 2013–14 Financial.
  2. Statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

The variations in the cash flow statement are consistent with the variations in the income statement and balance sheet. As at 30 June 2014, the DMO had a cash at bank balance of $122.6 million.

Administered Schedules

Table W6.4: Income and expenses administered on behalf of the Government for the period ended 30 June 2014

  Revised budget Actual result Variation[1]
  2013–14 2013–14 2013–14
  $'000 $'000 $'000
Expenses administered on behalf of Government
Foreign exchange losses 38 38
Total expenses - 38 38
Income administered on behalf of Government
Interest 250 67 -183
Other 1,961 1,961
Foreign exchange gains - -
Total income 250 2,028 1,778

Notes

  1. The variation is between the actual result as disclosed in the DMO's audited 2013–14 Financial.
  2. Statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

Table W6.5: Administered cash flows  for the period ended 30 June 2014

  Revised budget Actual result Variation[1]
  2013–14 2013–14 2013–14
  $'000 $'000 $'000
OPERATING ACTIVITIES      
Cash received
Interest 250 73 -177
Levies 2,474 2,474
Other 1,539 1,539
Total cash received 250 4,086 3,836
Net increase or (decrease) in cash held 250 4,086 3,836
Cash at the beginning of the reporting period - - -
Cash from the official public account for return of administrative receipts 191 191
Cash to the official public account for interest 250 4,277 4,027
Cash at the end of the reporting period - - -

Notes

  1. The variation is between the actual result as disclosed in the DMO's audited 2013–14 Financial.
  2. Statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

Table W6.6: Assets administered on behalf of Government as at 30 June 2014

  Revised budget Actual result Variation[1]
  2013–14 2013–14 2013–14
  $'000 $'000 $'000
ASSETS      
Financial assets
Receivables 2,059 1,502 -557
Total financial assets 2,059 1,502 -557
Total assets administered      
on behalf of Government 2,059 1,502 -557
LIABILITIES      
Payables
Other payables 1,539 1,539
Total Payables - 1,539 1,539
Total liabilities administered      
on behalf of Government - 1,539 1,539
Net assets/(liabilities) 2,059 -37 -2,096

Notes

  1. The variation is between the actual result as disclosed in the DMO's audited 2013–14 Financial.
  2. Statements and the revised budget published in the Portfolio Additional Estimates Statements 2013–14.

Special Accounts

The Defence Materiel Special Account is the main operating account from which most business activities are conducted.

All sources os revenue, including direct appropriation, related party appropriation (revenue from Defence) and other non-appropriation sources of revenue are recorded in the special account. These amounts remain in the special account even if not fully used in the budget year. They are held as an appropriation receivable in the Official Public Account and are available to meet future expenditure requirements and liabilities when they fall due.

Table W6.7: Actual special accounts cash flows and balances

  Outcome Opening Receipts Payments Adjustments Closing
    balance       balance
    2013–14 2013–14 2013–14 2013–14 2013–14
    $'000 $'000 $'000 $'000 $'000
Defence Materiel
Special Account [D and A] 1 247,136 10,992,822 -10,910,842 - 329,116
Total special accounts    247,136 10,992,822 -10,910,842 - 329,116
             
Comment            
D and A means departmental and administered.