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Chapter 8 - Asset management, purchasing and capital investment


Asset management

Defence manages $100.1 billion of total assets. This includes approximately:

  • $62.0 billion of specialist military equipment
  • $27.1 billion of plant, land, buildings, infrastructure
  • $6.9 billion of inventory
  • $0.5 billion of heritage and cultural assets
  • $3.6 billion of other items, including cash, receivables, prepayments and intangibles.

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

Defence undertakes accounting processes to enable the accurate and timely reporting of asset balances and ensure that they are consistent with the requirements for financial statement reporting defined in the Australian Accounting Standards. Defence conducts an annual fair value assessment of all assets.

Purchasing

Defence discharges its procurement function in accordance with the Commonwealth Procurement Rules and the attendant Procurement Connected Policies and Defence-specific procurement policies. These and other mandatory procurement requirements are expanded, explained and operationalised through the Defence Procurement Policy Manual. Defence officials undertaking procurements must comply with the Defence Procurement Policy Manual. To assist Defence officials to comply, Defence also provides procurement guidance, tools and templates that guide, inform and assure rigour and good governance in Defence procurements.

In accordance with the Commonwealth Procurement Rules, Defence publishes the Defence Annual Procurement Plan on AusTender (www.tenders.gov.au). The Defence Annual Procurement Plan gives notice of proposed Defence procurements and enables industry to prepare for the competitive tendering phase. Defence also publishes all 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.

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.

In 2017–18, Defence undertook an extensive Commercial Reform Program. The program aims to minimise the cost of tendering and contract administration by reducing the complexity of tender processes, balancing the allocation of commercial risks and enhancing industry engagement. Defence has also established the Defence Support Services Panel, which provides small and medium enterprises with easier and more streamlined access to Defence business opportunities. In addition, Defence is developing a Defence Industry Participation Policy to further facilitate Australian and local industry involvement for Defence procurements of $4 million and above.

The Centre for Defence Industry Capability and the Defence Innovation Hub advise small businesses and assist them to participate in Defence procurement and research activities.

To ensure that Defence understands the range of issues that small and medium enterprises face in supplying products and services and accessing procurement opportunities, Defence engages with industry through a range of forums, industry working groups and events. Defence will continue to pursue initiatives to engage with industry and assist small businesses to participate in Defence procurement activities.

Feature: Local industry

Australian industry involvement

In 2017–18 Australian industry continued to play a vital role in the acquisition and sustainment of Defence capability to support the Government’s $200 billion investment in renewing and strengthening Australia’s defence capabilities.

In 2017–18, Defence continued to roll out a number of initiatives that were announced in the 2016 Defence Industry Policy Statement. It also worked on a number of new policy initiatives to support the recognition of defence industry as a Fundamental Input to Capability as outlined the 2016 Defence White Paper.

The 2016 Defence Industry Policy Statement set out a new approach to defence industry and innovation. This approach is supported by two broad initiatives, funded at around $1.6 billion to 2025–26:

  • Centre for Defence Industry Capability: the Centre for Defence Industry Capability ($230 million over the decade) will be positioned as the front door to Defence for small to medium enterprises that are seeking to enter the defence market. The Centre for Defence Industry Capability has continued to provide advisory and facilitation services to businesses nationwide, including business improvement, skills development and supply chain facilitation services:
  • In 2017–18, the Centre for Defence Industry Capability approved 254 Advisory and Facilitation Services applications and approved 34 Capability Improvement Grants with a combined value of $1.16 million (GST exclusive) over the financial year.
    • A new approach to innovation: Defence will invest in a new approach to innovation that helps to ensure Defence remains resilient to emerging threats, including the possible use of disruptive technologies by adversaries. The Defence Innovation Hub ($640 million over the decade) has continued to seek to enhance Defence capability through innovation by investing in maturing and further developing technologies. To date it has:
    • awarded 46 innovation contracts, with a total investment of more than $67.15 million over the financial year
    • managed a portfolio of legacy innovation projects addressing a wide spectrum of innovation development worth approximately $49.3 million
    • launched its Special Notice service offering which calls for industry to submit proposals in response to specific capability challenges
    • awarded seven Special Notice contracts with a combined contract value of $4.3 million.

In 2017–18, the Next Generation Technologies Fund entered into more than 40 funding collaborations with 17 companies, 23 universities and two publicly funded research agencies. It has also committed more than $130 million to research programs in the coming years. This includes the first Grand Challenge and the first Defence Cooperative Research Centre.

In 2017–18, Defence also launched a range of policy and program initiatives to enhance Australia’s defence industry to better support Defence capability:

  • The release of the Defence Export Strategy to support a strong, resilient and internationally competitive Australian defence industry in January 2018. Key achievements from the strategy included:
    • the release of the 2018 Australian Military Sales Catalogue in March 2018
    • the opening of the Australian Defence Export Office and appointment of the first Australian Defence Export Advocate in April 2018
    • the inaugural meeting of the Defence Export Forum in May 2018.
  • The release of the Defence Industrial Capability Plan in April 2018. The plan outlines the Government’s vision for Australia’s defence industry over the next decade:
    • the plan identified 10 initial Sovereign Industrial Capability Priorities
    • a Sovereign Industrial Capability Assessment Framework was developed to provide a top-down, strategy-led framework which provides a repeatable methodology to identify Sovereign Industrial Capability Priorities.
  • The strengthening of the Australian Industry Capability Program, which maximises the involvement of Australian industry in meeting Defence’s capability goals, in late 2016:
    • in 2017–18, 21 Australian Industry Capability Public Plans were published on the Defence Australian Industry Capability Program website. They set out the plans and forecast opportunities for Australian industry involvement in major Defence capability projects and sustainment activities.
  • The running of the National Defence Industry Skills and Jobs Information Campaign from November 2017 to June 2018 nationwide to promote opportunities for Australian business involvement and employment in Australia’s defence industry.

Further information on Defence’s industry and innovation programs can be found in the annual Defence Industry and Innovation Programs Update Report detailed in Appendix B.

Indigenous procurement policy

Defence remains committed to stimulating Indigenous economic development and growing the Indigenous business sector.

Since the introduction of the Commonwealth Indigenous Procurement Policy, Defence has consistently exceeded the Department of the Prime Minister and Cabinet annual portfolio targets. In 2017–18 the Defence target remained at 3 per cent of eligible domestic contracts, equalling 420 contracts for the Defence portfolio.

Defence’s performance against the portfolio’s annual targets is published annually on the Department of Prime Minister and Cabinet Indigenous Procurement website listed in Appendix B.

Defence is currently developing an Indigenous Procurement Strategy as a further pathway to delivering Indigenous procurement outcomes. Through strong leadership, an inclusive culture and proactive communication, Defence is well positioned to maximise supplier diversity and specific Indigenous engagement outcomes across our procurement activities.

Capital investment

Defence has continued to deliver the ambitious $200 billion recapitalisation of the ADF outlined in the 2016 Defence White Paper and associated Integrated Investment Program.

The 2016 Defence White Paper sets out the Government’s vision to enhance Australia’s defence capability, deepen our international security partnerships and collaborate with defence industry and science and technology research partners in support of our nation’s security. The Integrated Investment Program, published along with the white paper, sets out all elements of the Government’s defence investment, including new weapons, platforms, systems, and the enabling equipment, facilities, workforce, information and communications technology, and science and technology.

Since the launch of the 2016 Defence White Paper, the Government has approved a number of capability investments across the major equipment, facilities and infrastructure, information and communications technology and science technology to deliver the Government’s capability requirements.

During 2017–18, the Government approved 111 capability-related submissions. It gave 21 ‘First Pass’ approvals, 35 ‘Second Pass’ approvals and 55 ‘Other Pass’ approvals. Of the 55 ‘Other Pass’ approvals, 14 were granted for submissions that provided advice to Government on current and future capability, and 35 projects were approved for early access to Integrated Investment Program funding. This early funding is used to complete critical capability development work to ensure that Defence can present comprehensive First and Second Pass proposals to the Government as scheduled.

Significant government announcements in 2017–18 include the following:

  • Maritime and anti-submarine warfare:
    • Future Submarine design and construction: A $700 million contract with Lockheed Martin Australia for the Future Submarine Combat System Design, Build and Integration has been approved. This work will include the design of the combat system and procurement activities to select subsystem and component suppliers.
    • Second Pass approval for the Future Frigates program: The Government will invest approximately $35 billion into the Future Frigates, named the Hunter class, to replace the eight Anzac Frigates. This work will commence in the late 2020s.
    • Second Pass approval for the Multi-mission Unmanned Aircraft System: The Government will invest approximately $1.4 billion to acquire the first six MQ-4C Triton remotely piloted aircraft through a cooperative program with the United States Navy to complement the surveillance role of the P-8A Poseidon aircraft.
  • Intelligence, surveillance, reconnaissance and electronic warfare, and space and cyber:
    • Second Pass approval for the Airborne Early Warning and Control Interoperability Compliance Upgrade: The Government will invest approximately $580 million to upgrade the E-7A Wedgetail airborne early warning and control aircraft. The aircraft will be upgraded with new and more advanced combat identification sensors, tactical data links and communication and encryption systems.
    • Other Pass approval for the Civil Military Air Traffic Management System: The Government will investment approximately $1.2 billion in the OneSKY project. OneSKY will transform Australia’s air traffic management system and national infrastructure in the sky, ensuring that the travelling public arrive at their destination safely. This project will replace the ageing military air traffic management systems, which will ensure the ADF can continue to operate safely in Australia’s airspace.
  • Land combat and amphibious warfare:
    • Second Pass approval of the Battlefield Command Systems: This project will enhance the ADF’s land force digital, command, control and communications systems and support hundreds of local jobs. Land combat and amphibious warfare capabilities will be improved by providing fast, accurate information over secure and reliable digital communications.
    • Second Pass approval for the Chemical, Biological, Radiological and Nuclear Defence: The Government will invest approximately $300 million to protect ADF personnel from chemical, biological, radiological and nuclear hazards. Defence will acquire detectors, protective suits, masks, protective shelters, decontamination systems, containers for contaminated equipment, warning and reporting software and simulation systems.
    • Second Pass approval of Future Artillery Ammunition: The Government will invest approximately $100 million to supply 155-millimetre ammunition for the Lightweight Towed Howitzer. This ammunition will replace ageing ammunition stock and will increased range and lethality and a greater range of effects, such as infrared illumination, to enhance the Army’s advanced night fighting capability.
  • Air and sea lift:
    • The Government has not made any new public announcements on approvals for this stream in 2017–18. However, the Government is continuing to deliver on the commitments made as a part of the 2016 Defence White Paper.
  • Strike and air combat:
    • The Government has not made any new public announcements on approvals for this stream in 2017–18. However, the Government is continuing to deliver on the commitments made as a part of the 2016 Defence White Paper.
  • Key enablers:
    • First Pass approval of the Royal Malaysian Air Force Base Butterworth: The Government will invest approximately $22 million to upgrade facilities at the Royal Malaysian Air Force Base Butterworth. The ADF uses the air force base as part of our longstanding commitment to regional security.
    • Second Pass approval for Remotely Piloted Unmanned Aircraft Systems MQ-4C Triton: As part of this program, Defence will invest around $110 million to upgrade facilities at Royal Australian Air Force Base Tindal.
    • Second Pass approval for Larrakeyah Barracks Redevelopment, Darwin (including Norforce): Defence will invest approximately $223 million in base redevelopment. This redevelopment will address the upgrade of critical in-ground infrastructure, support on-base growth over the next 25 years, and improve the working environment for Defence personnel.
    • Second Pass for facilities to Support Naval Operations in the North: Defence will invest approximately $272 million in the Facilities to Support Naval Operations in the North project. This will deliver a new outer wharf to support the Royal Australian Navy’s major surface combatant ships and submarines.

In 2017–18, 10 major capital facilities and infrastructure projects, valued at a total of $1.5 billion, were referred to the Parliamentary Standing Committee on Public Works. The committee held public hearings for 11 major capital facilities and infrastructure projects, valued at over $2 billion. Five medium work projects, valued at $31.4 million, were notified to the committee. Further information on the Parliamentary Standing Committee on Public Works is in Chapter 6.

Projects of Concern

The Projects of Concern regime is a proven process for managing underperforming capability projects at a senior level. Once a project is listed as a Project of Concern, the primary objective of the regime is to remediate the project 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 regularly to the government.

Table 8.1 provides a list of Projects of Concern as at 30 June 2018. Significant changes in the 2017–18 reporting period were the addition of Civil Military Air Traffic Management System (AIR05431PH3) and Deployable Defence Air Traffic Management and Control System (AIR05431PH1) to the list. Subsequently, Civil Military Air Traffic Management System (AIR05431PH3) was removed from the list after the acquisition and support contracts were signed with the prime contractor. After the successful remediation of the Collins Class Submarines Sustainment (CN10) and Air Warfare Destroyer (SEA04000PH3), the projects were removed from the list.

Table 8.1: Projects of Concern, as at 30 June 2018

Project name Project number
and phase
Date added
Multi-Role Helicopter (MRH-90) AIR09000PH2, 4 and 6 November 2011
Australian Defence Satellite Communications Capability Terrestrial Enhancement JNT02008H3F September 2014
Deployable Defence Air Traffic Management and Control System AIR05431PH1 August 2017

Defence will continue to actively manage the remaining Projects of Concern in 2018–19, as agreed with the government.