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Recommendation 1 |
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| To help ensure that project financial assurance statements continue to be robust and meaningful, the Committee recommends that, in consultation with the Australian National Audit Office, the Defence Materiel Organisation continue to seek independent financial assurance during the development of future Major Project Reports for an appropriately selected sample of projects. | |
3.13 The MPR disclosed that approximately $1.1 billion had been drawn upon from project contingency budgets in 2011–12 to retire project risks, equivalent to 2.3 per cent of the total approved project budget.[10]
3.14 As was noted in Chapter 2, the change in supplementation policy associated with out-turned budgets means that price indexation is now ‘a major risk or issue in some projects’, and for which contingency funds may need to be drawn upon.[11]
3.15 The ANAO noted in its overview of the 2011–12 MPR that:
… the emergence of any indexation risk has, to some extent,
changed the nature and use of the contingency budget from dealing with project
risk management to broader project management, and requires project staff to
have a greater understanding of the factors that influence indices and their
likely movement over the life of the project.[12]
3.16 In a written question to the DMO prior to the public hearing, the Committee asked which projects included in the MPR had utilised contingency funds in 2011–12. The Committee also asked whether there were any barriers to the projects that have used contingency funds, or the amount of funds that have been used, being documented in the Project Data Summary Sheets for future MPRs.
3.17 The DMO response listed fifteen major projects which had used contingency funds in 2011–12,[13] and indicated that:
Public release of details regarding project contingency
provisions could be prejudicial to taxpayers’ interests. DMO experience
indicates that knowledge of contingency provisions encourages some contractors
to find ways to gain access to the funds, which can have negative implications
for good project governance.[14]
3.18 At the public hearing, the DMO was asked to further explain the reasons for information on the use of contingency funds not being published. The DMO’s Chief Executive Officer confirmed that his main concern was that ‘disclosing the amount of money in each project provides an opportunity for people to go after that money’.[15]
3.19 The Committee asked the DMO to explore how the utilisation of contingency budgets could be better disclosed in the MPR, including the amount spent, why and when it was spent, and to whom the money went. In response, the DMO undertook to report back to the Committee with a proposal on how it could disclose the realisation of contingency into project expenditure.[16]
3.20 The Auditor-General was also asked to comment on how the use of contingency funds could be checked and publicly disclosed in a way that does not cause significant harm to the Commonwealth. The Auditor‑General expressed his understanding of the risks to taxpayer interests referred to by the DMO, but suggested that the DMO’s offer to look at the matter was ‘probably the best sign of progress that we have seen for quite some time in this area’.[17]
3.21 The Committee understands and appreciates the DMO’s concern that disclosing too much information about contingency funds could be prejudicial to taxpayers’ interests.
3.22 However, the Committee also recognises that the nature and use of contingency funds will be of increasing importance as the out-turned budgets of projects are tested over time. Ensuring an adequate level of transparency around when contingency budgets are being drawn upon is therefore a key area of interest for the Committee.
3.23 The Committee welcomes the DMO’s willingness to develop a proposal for how the expenditure of contingency funds could be better disclosed in the MPR, and looks forward to receiving this proposal.
3.24 The Committee’s initial opinion is that, while the DMO has legitimate concerns that the amount of contingency budget available is not disclosed to contractors, there would be less danger in disclosing information about funds that have already been spent.
3.25 The Committee notes that the MPR currently discloses the total contingency allocated across the 29 projects, but does not provide project-specific information. In response to a written question, however, the DMO was able to provide a list of projects for which contingency funds had been expended in 2011–12. The Committee considers that, at a minimum and in addition to any proposal for disclosing further information about actual contingency expenditure, this amount of information should be routinely included in future MPRs.
Recommendation 2 |
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| The Committee recommends that, by 20 June 2013, the Defence Materiel Organisation submit a proposal, for incorporation into the 2013‑14 Major Projects Report Guidelines, on how project-level contingency fund data could be disclosed in future Major Projects Reports without being significantly prejudicial to taxpayers’ interests. At a minimum, projects that have utilised contingency funds during the previous financial year or are anticipated to use contingency funds in the forthcoming financial year, and the amount of such funds, should be identified in the reports. | |
3.26 In its overview of the 2011–12 MPR, the ANAO identified a range of pressures that can contribute to schedule slippage, including actions by contractors; economic conditions impacting on workforce supply and demand; and procurement decisions by other nations which may impact on downstream purchases in terms of time to delivery.[18]
3.27 The DMO provided a summary in this year’s MPR of actions being taken to address slippage.[19] The JCPAA recommended inclusion of this information in last year’s review, having regarded schedule slippage as a ‘major concern’ and DMO’s explanations as being ‘unhelpful’.[20]
3.28 In the 2011–12 MPR, the DMO claimed that ‘since 2000, the average level of slippage has decreased from over 50% to around 30% and … DMO project schedules are now comparable with the private sector’.[21]
3.29 At the public hearing, the DMO was asked about the range of pressures contributing to schedule slippage, and the role that project scope and complexity play in this.
3.30 The DMO gave the Committee an overview of a review by a private sector consultant, Independent Project Analysis (IPA), benchmarking the DMO’s performance in managing major projects against a sample of projects from the IPA’s database of over 14 000 private sector capital projects across more than 200 companies, primarily in the processing and extractive industries. The IPA report found that the DMO performed better than the private sector on budget and capability performance.[22]
3.31 The DMO also discussed the IPA report’s findings on schedule performance. The IPA found that DMO projects suffered from schedule slippage of around 30 per cent, which was similar to the private sector. While there had been statistically significant improvements since the 2003 Defence Procurement Review (the Kinnaird Review), the DMO conceded that this was an area in which further improvement was needed.[23]
3.32 In regard to the reasons for schedule slippage, the DMO identified the following issues and examples:[24]
3.33 The Committee notes that schedule slippage remains the DMO’s biggest project management challenge.[26] There are currently few signs of immediate improvement across the range of MPR projects, with overall slippage for MPR projects having increased slightly, in percentage terms, between 2010–11 and 2011–12.
3.34 However, it is encouraging that there appears to have been some progress to reduce slippage over recent years, stemming from reforms associated with the Kinnaird and Mortimer reviews and the demerger of the DMO from Defence in 2005. The ANAO’s analysis has shown that the largest schedule delays continue to be associated with more developmental projects that were approved prior to 2005, and the DMO’s overall schedule performance appears to be being let down by a relatively small number of older projects that have experienced excessively long schedule delays.[27] This observation is further evidenced by the IPA’s finding that while median DMO schedule slippage was the same or better than industry benchmarks, mean slippage was worse.[28] The Committee hopes that overall schedule results will start to improve over the coming years as these older developmental projects eventually reach Final Operational Capability and exit the MPR.
3.35 The Committee welcomes the new section in the MPR outlining what DMO is doing to minimise schedule slippage, as was recommended by the Committee in its review of the 2010–11 report. Given the historical correlation between acquisition types and final schedule outcomes, the Committee is pleased to note that, in future MPRs, the consideration of Military Off-the-Shelf (MOTS) or Commercial Off-the-Shelf (COTS) options prior to acquisition will be reported on for all new developmental and ‘Australianised MOTS’ (AMOTS) projects.
3.36 The Committee appreciates that the DMO’s difficulty in accessing platforms to perform upgrades has had an impact on schedules for some projects. However, the Committee was not convinced that these challenges are entirely unpredictable, and considers that the potentially limited availability of operational platforms could be better planned for during the establishment of the original project schedules.
3.37 The ANAO’s assessment of the reasons for schedule slippage was that ‘underestimation of both the scope and complexity of work’ was the primary factor.[29] The DMO’s public hearing comments about the MRH90 helicopters were that incorrect assumptions about project maturity had been made at the time of approval, leading to lengthy schedule slippage. Given the seriousness of these matters, the Committee has recently written to the Auditor-General to inform him that a performance audit of Defence’s test and evaluation processes, including those that take place prior to acquisition, is an ‘audit priority of the parliament’.
3.38 The Committee notes that the Government has recently agreed to recommendations by the Senate Foreign Affairs, Defence and Trade References Committee to require greater engagement of test and evaluation practitioners in the early stages of acquisitions.[30] It is hoped that, over time, these changes will reduce the chance of MRH90-type problems occurring for future procurements.
3.39 Project maturity scores are allocated by DMO to each project to quantify their maturity at defined milestones. The ANAO has noted that maturity scores at Second Pass Approval for projects in the 2011–12 MPR ‘vary and are generally inconsistent with the presentation in the DCP [Defence Capability Plan]’.[31]
3.40 The ANAO Overview section of the MPR included graphs produced by comparing, in percentage terms, project maturity scores to the budget expended and time elapsed for each MPR project.[32] For some projects, the maturity scores were vastly higher than the proportion of budget expended and time elapsed.[33]
3.41 In a written question, the Committee asked the DMO if where project maturity far exceeds time elapsed and budget expended, this should be viewed as an indication of an overly optimistic assessment of project maturity.
3.42 The DMO response suggested that the question would be more appropriately addressed to the ANAO, who performed the analysis. The DMO indicated that it would not analyse project maturity scores in this way, as it would imply a direct linear relationship between the time elapsed and the maturity score:
While it is expected that during a project's life the
maturity score indicator will increase, the indicator can also deteriorate. For
example, the commercial score could decrease in the event of a major dispute or
if the contractor runs into financial difficulties.[34]
3.43 The DMO indicated that it had informed the ANAO of its concerns about the analysis during the preparation of the MPR.
3.44 In a separate written question, the Committee asked the DMO why the benchmark maturity scores used for projects in the MPR did not take into account the inherent differences in project maturity between Developmental projects and Military Off-the-Shelf (MOTS) projects. The Committee also asked how the DMO ensured that maturity scores were applied consistently for all projects, noting that some Developmental projects (such as the Joint Strike Fighter) were given higher maturity scores at Second Pass Approval than some MOTS projects (such as the Additional Chinook project).
3.45 The DMO advised that it had promulgated an agency-wide instruction on the use and application of maturity scores in September 2010. It added that:
Maturity scores are a helpful tool, but they are ultimately
indicative and advisory. At key points in the project lifecycle they may help
with consideration of relative risk. Where scores are lower than nominal
benchmarks [they] indicate a higher relative risk exposure—but would not
necessarily lead to a decision not to proceed with a project.[35]
3.46 The response also indicated that the application of maturity scores can ‘vary from project to project depending on the assumptions made by the project manager that underpin the assessment’. It suggested that the Joint Strike Fighter project’s maturity score at approval reflected ‘a very optimistic assessment of the project at the time’—but noted that this was done prior to the DMO’s current maturity score procedures being promulgated.
3.47 While MOTS systems would ‘typically’ have higher scores against the key maturity attributes due to a greater level of data being available from test and evaluation, the DMO indicated that:
… until we have confirmation that Operational Test and
Evaluation (OT&E) data is available to Australia the score may be lower
than expected for some MOTS items.[36]
3.48 The Committee notes DMO’s comments in response to a written question that maturity scores should not be directly compared to time elapsed or budget expended, and understands that there is not a direct linear relationship between each of these aspects. However, the Committee argues that there is value in such analysis in order to help identify projects that may be maturing slower than expected, or where overly optimistic assessments of project maturity may have been made. The Committee supports the ANAO’s ongoing use of these graphs in future MPRs.
3.49 The Committee stands by its decision to ask the DMO about comparative information which was compiled and presented by the ANAO using DMO data. The question gave the DMO the opportunity to both respond to the ANAO’s analysis and to explain its reasons for disagreeing with the comparisons being made. The DMO’s brief response to the Committee’s question did not provide any specific reasons for project maturity scores being disproportionally high in some cases.
3.50 The Committee notes the DMO’s comments that maturity scores are ‘ultimately indicative and advisory’; will ‘vary from project to project depending on the assumptions made by the project manager’;[37] and ‘are not precise and are not intended to enable exact comparisons across projects’.[38]
3.51 While accepting that some level of variation will be unavoidable, it is crucial that the DMO improve its consistency in this area. The 2012 Defence Capability Plan indicates that maturity scores are used to assist the Government to compare the maturity of different project options ‘as a measure of the relative confidence associated with them at the time they are being considered’, and that projects with higher maturity scores are considered to carry lower risk. Off-the-Shelf projects are expected to have considerably higher maturity scores at the time of decision-making than Developmental projects.[39] Imprecise and inconsistent maturity scores could therefore make a difference in determining which projects receive approval—decisions which can have significant long-term consequences for both budgets and defence capability.
3.52 The Committee welcomes the 2010 promulgation of DMO-wide instructions on the use of maturity scores, and hopes this has gone some way to improving consistency in the way that maturity scores are assessed. Noting the issues that continue to be raised by the ANAO, the Committee suggests that the DMO follow up these instructions with further action to improve consistency in the way that maturity scores are applied, and work towards alignment with the presentation of maturity scores as outlined in the Defence Capability Plan.
Recommendation 3 |
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| The Committee recommends that the Defence Materiel Organisation review its current approach to assigning maturity scores to projects to improve the consistency of their application and their consistency with the Defence Capability Plan. | |
3.53 The Committee noted in its review of the 2010–11 MPR that it expected to see in the next MPR ‘concrete evidence of results and progress’ having been made to achieve consistency of information across projects. [40]
3.54 In its overview of the 2011–12 MPR, the ANAO noted that inconsistency of information across projects continued to be an issue. Issues with business systems were again noted by the ANAO, particularly differences between information technology systems in terms of risk management, financial management and document management. Furthermore, inconsistently recorded information has created issues for project management and decision-making.[41]
3.55 The ANAO provided an update in the 2011–12 MPR on DMO’s efforts to improve its systems, noting that ‘the DMO has advised that limited progress has been made overall towards rationalisation, and that further ownership and guidance would be required within the organisation in order to achieve the desired outcome’.[42]
3.56 The Committee asked the DMO what was being done to achieve the level of ownership and guidance required to drive further progress towards rationalisation. The DMO informed the Committee of its recent rationalisation of risk management systems, and provided an update on its progress in migrating staff to a single records management system.
3.57 In relation to financial management systems, the DMO responded that:
… the financial data kept by each project is tailored to the
individual project. Differences will occur on factors such as the number of
contracts being managed, the currencies used in each of those contracts, the
labour and material indices, and the use of Foreign Military Sales versus
commercial contracts. All major projects record their project approval values,
the expenditure to date, and remaining budget (which includes planned
expenditure and remaining contingency) in Capital Equipment Program Financial
Planning System (CEPPlan). CEPPlan is planned for redevelopment to modernise it
and better link it to the Defence Budget and Output Reporting Information
System (BORIS) system. This redevelopment is scheduled for roll out in August
2013, subject to CFO Defence approval.[43]
3.58 The response further indicated that due to large variations between projects ‘it will not be possible to standardise the information held and management by all projects at all levels’.[44] Addressing the ANAO’s concerns about the consistency of presentation of information, the DMO advised that:
… information is maintained by each project in accordance
with the relevant project plans approved for each project. These plans provide
the basis for tailoring the DMO processes to match the requirements of each
project.[45]
3.59 The Committee was concerned by advice provided in the MPR that ‘limited progress’ has been made in improving the consistency of information across projects.
3.60 The DMO’s response to the Committee’s question indicated that some rationalisation of risk management and record management systems was underway, but that due to large variations in the nature of projects full standardisation of information may not be possible. However, the Committee feels that the management systems used should be able to be consistent across projects, despite the individual nature of the projects themselves.
3.61
Recognising these complexities and acknowledging resource constraints,
the Committee suggests that the DMO, potentially in consultation with the ANAO,
develop a business systems improvement plan which prioritises projects, assigns
completion dates and allocates senior level ownership for implementation. The
plan should identify priority areas for rectification where the most
substantial improvement is needed and is achievable.
Recommendation 4 |
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| The Committee recommends that the Defence Materiel Organisation develop a business systems improvement plan which prioritises projects, assigns completion dates and allocates senior level ownership for implementation. A progress update on achievements against the plan should be included in the 2012–13 Major Projects Report. | |
3.62 Accountability for the delivery of major projects is an area of ongoing interest to the Committee.
3.63 In a written question, the Committee requested from the DMO a list of all major projects approved by the Government after 1 March 2010, with details of the assignment of overall responsibility, authority and accountability for realisation of the capability system to an in-service stage. In response, the DMO provided a table of 99 projects listing the Capability Realisation Authority for each.[46]
3.64 In another question, the Committee asked the DMO whether the ‘project line management’ section of each PDSS in the MPR should be taken to provide a clear answer to the question ‘Where does the buck stop?’ The DMO advised that:
For projects assigned to the DMO, accountability and
reporting flows from the Project Director or Project Manager through line
management to the Chief Executive Officer Defence Materiel Organisation where,
ultimately, ‘the buck stops’.[47]
3.65 The DMO also provided information on the ‘typical allocation of responsibilities and accountabilities’ of line management, including the General Manager, the Division Head, the Branch Head and the Project Director or Manager.[48]
3.66 In a final written question on accountability assignment, the Committee asked the DMO for an example of a project that had exited the MPR, with details of accountability as allocated at each state post exit.
3.67 The DMO’s response noted that only two projects had exited the MPR since its inception in 2007: the AIR 5376 Phase 3.2 – Hornet Refurbishment and the AIR 8000 Phase 3 – C-17 Globemaster III - Heavy Airlift. The DMO then provided general information about the responsibilities of the Capability Manager, who is ‘directly accountable to the Secretary of Defence and the Chief of the Defence Force for the successful realisation of an approved new capability’.[49] The roles and responsibilities of Capability Managers were also illustrated in a diagram attached to the response.[50]
3.68 At the public hearing, the Committee asked the DMO to provide a simple diagram that tracks how the responsibility for a project changes from the Chief Executive Officer of DMO to the Capability Manager over time.
3.69 The DMO indicated that it has now become more formalised within Defence that the Capability Manager is ‘overall responsible for the capability’, while the DMO is responsible for ‘the materiel elements to Final Materiel Release’.[51] A diagram was provided on notice illustrating this arrangement.[52]
3.70 The allocation of responsibility across the life of a project has been an area of ongoing interest to committee members. The Committee understands there has been significant variability in accountability across projects, and was pleased to hear that the allocation of responsibilities between the DMO and Capability Managers has now become more formalised inside Defence.
3.71 Diagrams provided by the DMO to explain the accountability arrangements were not as simple as they could have been, and as a result, were not especially helpful. However, it is clear from the evidence as a whole that the Capability Manager is the ‘key figurehead accountable for Whole of Capability’ after the Second Pass approval of a project. The Capability Manager’s responsibilities include coordinating the inputs to a project, including the materiel delivery that is managed and financed by the DMO.
3.72 The Committee notes that a recent report of the Senate Foreign Affairs, Defence and Trade References Committee made recommendations to expand the responsibility of Capability Managers, including by attributing budgetary control to them for procurement and sustainment rather than the DMO.[53] While the Government’s response did not accept key aspects of these recommendations, it did commit to taking steps to ‘ensure the primacy of the Capability Manager’s role is maintained’.[54]
3.73 The Committee welcomes any actions that have been or will be taken in light of this response to improve the clarity and outward transparency of the relationship between the DMO and the Capability Managers in regards to overall accountability for project outcomes.
3.74 The DMO’s overview of the MPR reported that approximately 53 per cent, of DMO’s 2011–12 budget, or around $5.4 billion, was for its sustainment program. This comprised around 115 sustainment products.[55]
3.75 Given the importance of sustainment and the proportion of the DMO’s budget attributed to it, the Committee was interested in learning whether there were any reasons why an annual consolidated report could not be produced to bring together the information on sustainment.
3.76 The DMO replied that it reports on the top 20 sustainment products through the Defence Annual Report, Portfolio Budget Statements and Portfolio Additional Estimates Statements. These products accounted for an average of around 70 per cent of the DMO sustainment budget.[56]
3.77 The Committee followed up this response at the public hearing, asking the DMO why it was not able to provide an overview of 100 per cent of the DMO’s sustainment activities.
3.78 The DMO informed the Committee that the ‘first and foremost’ challenge relating to reporting on sustainment activities was that performance information on sustainment was tightly linked to sensitive information about Defence’s operational capability commitments.[57] The DMO elaborated that:
Where we run into highly sensitive matters in the sustainment
area is that most of the performance metrics that we have for sustainment are
against the [Chief of the Defence Force’s} preparedness directive, which is
classified. If we were to do something similar in sustainment in terms of
assessing performance against measures in a public fashion, it would be
classified. We would have the same issue in sustainment metrics as we do in the
measures of effectiveness issue so the value of that would be less so in terms
of a public document. If we were to put a consolidated report together of how
we are performing against all the sustainment activities, that would give you a
public indication of preparedness, which is something we cannot do because it
is classified.[58]
3.79 Other complexities identified by the DMO relating to reporting on sustainment included the moving of funds between one capability manager’s line of activity and another’s, and that the nature of sustainment activities is that they are an ongoing piece of work without a clear beginning and end.[59]
3.80 Despite these challenges, the DMO indicated that it would be able to report on some data, such as the amount of money being spent on each of its sustainment activities. The DMO undertook to look at ways to provide more detailed information on sustainment in order to improve its transparency.[60]
3.81 On 13 May 2013, the DMO wrote to the Committee in response to this undertaking. The response indicated that a ‘major review along the same lines as the Major Projects Report would prove difficult’ due to the nature of sustainment work and the classification of information. However, the DMO committed to expand its reporting in Portfolio Budget Statements and the Defence Annual Report to cover the top 30 sustainment products, rather than the top 20. This would represent reporting on around 77 per cent of current spending on sustainment.[61]
3.82 The Committee understands the sensitivity of some sustainment-related information, and the inherent difficulty of reporting on this. However, given the increasingly large amount of public money devoted to sustainment, the Committee considers that transparency of information is needed to the greatest extent possible without compromising national security interests.
3.83 The Committee welcomes the DMO’s commitment to expand the number of sustainment products reported on in the Defence Annual Report and Portfolio Budget Statements. However, the Committee believes that more needs be done to increase the depth, not just the breadth, of information provided in these reports. Current reporting provides only a high-level overview of each product, its expenditure and its performance for the relevant financial year. The Committee would like to see a proposal from the Department of Defence, in consultation with the ANAO and taking into account disclosure in other jurisdictions, on how the level of detail can be enhanced to make sustainment information more transparent to public scrutiny.
Recommendation 5 |
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| The Committee recommends that, by 20 June 2013, the Department of Defence reports to the Committee on how it intends to achieve greater transparency in relation to its spending on sustainment activities. | |
3.84 In its review of the 2010–11 MPR, the Committee recommended that the DMO include in the 2011–12 MPR a discussion on the use by, and value of, the report for external stakeholders such as private companies or industry associations.[62]
3.85 In response to this recommendation, the DMO contracted the independent firm Ernst & Young to conduct a survey of external MPR stakeholders. A summary of the findings were published in the 2011–12 MPR.[63]
3.86 In response to a written question, the DMO also provided the Committee with a detailed copy of the survey results.[64]
3.87 The survey had been sent to 226 external stakeholders, of which 86 responded. Of the respondents, 76 per cent were from industry (including those linked to projects mentioned in the MPR) and 23 per cent were from outside the Defence Community (such as media). Only 41 respondents completed the survey in its entirety after indicating they were aware of the MPR, with the remainder either not being aware of the MPR or not fully completing the survey.[65] Ernst & Young advised the DMO that the response rate was below the level usually received for their industry based consultations.[66]
3.88 Amongst those who responded, the survey provided the following key findings:[67]
3.89 Some suggestions for improvement were included in the supporting comments of respondents to the survey. The comments varied greatly and were at times conflicting—for example, some comments called for more detail to be included in the report while others called for less.[68] A small number of comments raised concerns about the accuracy of MPR information, including financial figures.[69] There were also suggestions that information on the source selection process for projects should be included in the MPR.[70]
3.90 In its response to the Committee’s question, the DMO said that the survey ‘did not highlight any clear areas for change’, and that no changes to the MPR were intended as a result of the feedback other than any made in consultation with the ANAO and with the approval of the Committee.[71]
3.91 The Committee welcomes DMO’s commissioning of an external stakeholder survey to fulfil the Committee’s previous recommendation to include a discussion on the use and value of the MPR.
3.92 Although the overall response rate to the survey was disappointing, the Committee was pleased to hear that the MPR was generally valued by the majority of those who did respond, and that the report has an appropriate focus.
3.93 It was unsurprising, given the primarily industry demographic, that survey respondents had the most interest in project specific information provided in the PDSSs and in overall information provided by the DMO.
3.94 The DMO has indicated that the survey did not highlight any clear areas for change in the MPR. However, the Committee suggests that the comments of respondents and the relatively low ratings given on the transparency, clarity and accuracy of information in the report indicate that there remains room for improvement. The Committee will continue to explore potential enhancements to the format and content of the MPR during its future reviews of the report and its Guidelines, and expects both the DMO and the ANAO to actively consider and suggest improvements wherever possible.
