|Paul Dibb and Geoffrey Barker
From: The Australian February 27, 2010 12:00AM
With tens of billions of dollars at stake, Greg Combet is caught between the demands of civilian bureaucrats for competition at any price and military demands for US equipment regardless of cost or adequate alternatives
FREE-MARKET competition for defence contracts has seemed the holy grail of defence industry policy as the federal government has moved to undertake a $100 billion-plus rearmament program over the next 30 years.
"Competition is the nature of it," the chief executive of the Defence Materiel Organisation, Stephen Gumley said at last year's Defence and Industry Conference. "The competitive environment is very important to everybody in the system."
But the Labor government, which is working on yet another defence industry policy statement, no longer seems to accept fully Gumley's view that free-market competition delivers the best outcomes in terms of value for money, risk minimisation, on-time delivery and technological innovation.
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Addressing the recent Seapower Conference in Sydney, the Minister for Defence Personnel, Materiel and Science, Greg Combet, publicly rejected DMO's practice of opening to competition every major naval ship repair and maintenance job. "In my opinion this was not a good policy solution . . . by imposing competition at this level the commonwealth did not receive value for money and companies were not able to invest in their workforces, infrastructure and capital equipment," he said.
Combet went on to announce that the government now planned to establish long-term, performance-based contracts for repair and maintenance in lieu of the present arrangements.
It was of course ironic that under a Labor government DMO had embraced uncritically the virtues of free-market competition and rejected virtually any role for government-industry partnerships, especially since the defence industry policy released by the conservative Howard government in 2007 had declared: "Competition cannot and should not be employed at each and every opportunity . . . Sometimes it will be simply impractical to secure effective competition."
Yet it would be misguided to attribute all defence procurement shortcomings to the rigidity of the DMO's pro-competition ideology.
Some astute observers look instead towards the Defence Capability Development Group as also contributing towards procurement problems.
The CDG, which advises the DMO, is run by uniformed personnel. Where Gumley appears wedded to a competitive approach, the so-called "iron colonels" within the CDG tend to default reflexively to a preference for foreign military sales (FMS) from the US, arguing that these ensure "interoperability".
Moreover, the loyalty of uniformed officers in the CDG is to their service commanders who control their careers and promotions and who expect the officers to deliver the equipment that they want sometimes regardless of competition, cost and wider strategic and economic considerations.
The CDG is resistant to allowing Australian producers to compete with US suppliers, even when there are lower Australian prices and entirely comparable local capabilities available. As the lead agency in procurement until the so-called second-pass stage of a
final cabinet decision, the CDG has powerful influence on decisions and tends to support its decisions by asserting that they are "the military requirement", not to be questioned by the civilians in the DMO or even ministers.
Some observers, while not questioning Gumley's commitment to competitive processes,
believe he sometimes raises the virtues of competition to help the DMO break through the anti-competitive prejudices of the CDG's iron colonels and to appeal to other government agencies, such as the Department of Finance, which have input into procurement decisions.
In efforts to check the iron colonels, the 2008 review of defence procurement and sustainment led by businessman David Mortimer proposed measures to get the DMO involved in procurement decisions at earlier stages of the process.
Now the Rudd government is letting it be known that it believes the CDG should be headed by a suitably qualified civilian.
But finding a suitable civilian is difficult, and outgoing CDG chief Vice-Admiral Matt Tripovich is being replaced by ir Vice-Marshal John Harvey.
The trouble with DMO's competition-at-any-cost policy is that it is an ideological belief laden with theory imported from neoclassical economics. Reflecting its 18th-century laissez-faire origins, the theory asserts that optimum defence industry outcomes can be achieved only through the invisible hand of competitive market activity.
But is that always and inevitably true for defence procurement? Is competition necessarily the best way to ensure optimum value for the $10 billion-plus at present bei