Annual Report 2004-05

Prescription Achieved

The DMO became a prescribed agency under the Financial Management and Accountability Act 1997 on 1 July 2005. This was a major milestone in the implementation of the recommendations from the Defence Procurement Review led by Mr Malcolm Kinnaird, as agreed by the Government in September 2003.

The review recommended that the DMO have a clear and separate identity from Defence so that it could develop its own individual culture, but retain its inextricable link to the defence function. The desired outcomes included the following:

• the DMO should become a more performance and outcomes driven, business-like organisation, leading to improved procurement and support practices;
• a more transparent relationship should be established between the DMO and Defence that ensures alignment of accountabilities, responsibilities and authority;
• the DMO should have the flexibility to adjust financial and staffing resources to meet workload, within the Government's regulatory framework; and
• the DMO should introduce self-discipline that would obviate the need for externally imposed controls.

Upon prescription, the DMO became a financially autonomous organisation within the Defence Portfolio. The DMO remains part of Defence, with the Chief Executive Officer of the Defence Materiel Organisation (CEO DMO) remaining accountable to the Secretary of Defence under the Public Service Act 1999 and to the Secretary and the Chief of the Defence Force under the Defence Act 1903. The CEO DMO continues to serve on appropriate Defence senior committees, including the Defence Committee, to which he will continue to report and provide advice.

The Minister for Defence issued a Directive to the CEO DMO, Dr Stephen Gumley, on 30 May 2005. Under this Directive, the CEO DMO became directly accountable to the Minister from 1 July for the DMO's performance in the efficient and effective delivery of acquisition and through-life support of materiel for Defence capabilities.

Comprehensive agency agreements have been developed to form the basis of the relationship between the DMO and Defence. These agreements cover both the acquisition of Defence equipment and their sustainment in-service, as well as activities normally expected of Defence in support of the organisation. They identify the respective accountabilities, responsibilities and authorities of the DMO and the rest of Defence and aim to provide better visibility of the costs of procuring and sustaining Defence assets. The agreements will be refined and improved over several annual cycles. Workforce agreements have been established to ensure that the DMO has an appropriately skilled workforce.

The CEO DMO has control of the resources necessary to deliver the DMO's products and services and sets the organisation's financial management policy. The CEO DMO has also been delegated the necessary powers to manage and allocate staff resources under the Public Service Act 1999.

The formal establishment of the DMO as a prescribed agency was the culmination of considerable work by Defence and central Government agencies over 2004-05 to put in place necessary legislative measures, accounting and procedural arrangements.

These included:

• modification of Defence's corporate information management systems (ROMAN, PMKeyS and SDSS) to identify the DMO as a separate entity;
• separation of the budget for the DMO from that of the rest of Defence in the Portfolio Budget Statements 2005-06;
• establishment of Special Accounts to provide the mechanism to fund DMO's activities and the opening of separate bank accounts for the DMO's financial transactions;
• preparation and ratification of Agency Agreements between Defence and the DMO defining accountabilities, responsibilities and performance measures;
• delegation of personnel management powers to the CEO DMO, subject to consultation with the Secretary of Defence;
• establishment of internal DMO governance arrangements including the Materiel Audit Committee, the Chief Executive Instructions and appropriate delegations for officials within the DMO;
• development of protocols for the employment of ADF staff in the DMO; and
• tabling of regulations in both Houses of Parliament to establish the DMO as a prescribed agency.

This work was aided by advice from the Defence Procurement Advisory Board, chaired by Mr David Mortimer. Membership of the Board remained stable since it first met in March 2004. Along with Mr Mortimer, other private sector members are Mr Malcolm Kinnaird, Mr Kevin McCann and Dr John White. The public sector members have been General Peter Cosgrove (the then Chief of the Defence Force), Mr Richard Smith (Secretary of the Department of Defence), Dr Ian Watt (Secretary of the Department of Finance and Administration) and Dr Ken Henry (Secretary of the Department of the Treasury).

The Board met regularly in 2004 and 2005, providing advice to the CEO DMO and the Secretary of Defence on strategic issues and reporting to the Ministers for Defence and Finance and Administration on progress on implementation of the Defence Procurement Review recommendations.

The arrangements established for the DMO provide it with clarity of purpose, appropriate powers and financial autonomy.