While the PM has heralded the 2016 Defence White Paper as visionary, its treatment of cyber policy is stuck in first gear. As noted by Tobias Feakin last week, DWP 2016 has provided more money and manpower for Australia’s cybersecurity efforts, but lacks a sophisticated policy position on cybersecurity posture, capability and resilience.

The DWP establishes two broad roles for Defence regarding cybersecurity. The first is to protect its own networks, and the second is to contribute to the broader whole of government cybersecurity effort, principally through the multi-agency Australian Cyber Security Centre (ACSC). The DWP proposes to achieve those two goals through investment in a larger workforce, enhanced cybersecurity capability, increased training and R&D. However this policy almost a carbon copy of the positions put forward in 2009 and again in 2013.

Casting back to the 2000 White Paper (yes, cyberspace existed back then), the central notions of Defence’s cyber policy were being formed. The 2000 White Paper noted that ‘information technology is transforming the way that armed forces operate’ and included ‘ensuring these systems are managed effectively, (and) secure against information warfare attack’ as a capability goal. By 2009, the White Paper noted that ‘the potential impacts of such (cyber) attacks have grown with Defence’s increasing reliance on networked operations’. In 2013, it was reworded to say ‘The potential impact of malicious cyber activity has grown with Defence’s increasing reliance on networked operations’. In 2016, that assessment remains: ‘Cyber attacks are a direct threat to the ADF’s warfighting ability given its reliance on information networks’.

Successive White Papers have also used similar language to reference Defence’s contribution to whole of government cyber security efforts. In 2009, the establishment of the Cyber Security Operations Centre was announced, with the caveat that ‘While this capability will reside within Defence…it will be purpose designed to serve broader national security goals’. In 2013, the creation of the ACSC, where Defence would play the ‘principal’ role, was highlighted as a major element of Defence’s cybersecurity posture. In 2016, Defence will continue to contribute to ‘the Government’s enhanced national cyber security efforts’—an area in which it makes a ‘critical contribution to (Australia’s) whole of government cyber security efforts’.

DWP 2016’s language on the treatment of cyber threats focuses on Defence and the Government’s work to ‘enhance’ and/or ‘strengthen’ cyber security capability. The DWP says that ‘The Government will strengthen Defence’s cyber capabilities to protect itself’. In 2013, Defence planned to ‘invest in technology and analytical capability to ensure our situational awareness and response capability remains ahead of the threat’. In 2009, the White Paper also stated that ‘The Government has decided to invest in a major enhancement of Defence’s cyber warfare capacity’.

A big part of the enhancement to Defence’s cyber capability is supposed to come from ‘increasing’ the R&D focus from the Defence Science and Technology Group (DTSG). In 2016, ‘Government will establish a research and development capability to help strengthen the defences of the ADF’s military information systems against attack’. DSTG’s Cyber and Electronic Warfare Division may be surprised to hear about this new cyber R&D capability since they have been responsible for Defence’s cyber related R&D work  for a number of  years now. In 2009, the then–DSTO planned to ‘increase its investigation and application of key enabling technologies…such as cyber warfare and computer security’. In 2013 also, DSTO was going to ‘bolster’ its cyber research in line with the 2013 National Security Strategy.

DWP 2016 has omitted the statement from 2013 on Australia’s position on international law and norms regarding cyberspace. That’s an important piece of the broader cyberspace conflict prevention and confidence building agenda in which Australia plays a leading role in our region. This agenda was important enough for the PM to mention in Washington, and its omission is surely a missed opportunity to promote it in Defence’s principal statement of policy.

Also missing is a strong concept of cyber resilience. Resilience is frequently mentioned in the DWP, but unfortunately, it’s only used once in the DWP in connection to cybersecurity. This is despite the concept of resilience’s emerging centrality to advanced cyber policy positions, such as the US Department of Defense’s Cyber Strategy. The DWP significantly fails to mention that a resilient military not only has the capability to protect itself in cyberspace, but also must be ready to operate effectively in a contested environment where access to cyberspace isn’t possible or trusted. The ability to operate without access to critical command and control networks now and in the future will mark the difference between advanced and less capable militaries and states. That’s a significant oversight, and a further marker of the lack of sophisticated thinking in DWP 2016 on cybersecurity policy.

On Tuesday, the Defence Minister re-committed to releasing a White Paper in the first quarter of this year. That means it’ll be fewer than 51 sleeps before we see the document. More importantly, it means that the White Paper will be sent to the printer before the 2016 federal budget is locked down.

In times past, the resulting sequence of events wouldn’t be a problem. But the forthcoming White Paper comes with big expectations inherited from the Abbott government; specifically, the promises of a costed affordable plan and for defence spending to reach 2% of GDP within a decade. Committing to specific spending levels, let alone a timetable to reach 2% of GDP, is easier said than done with the overall budget still a work in progress.

And it’s not like Turnbull government is in honeymoon mode. The May budget will be the last opportunity for Scott Morrison to establish the government’s economic credibility prior to the election, and the political trainwreck following Joe Hockey’s 2014 budget shows how much is at stake. 

To complicate matters further, the economic and fiscal situation has moved into uncharted waters—not just for Australia but also internationally. Consider the graph above of successive estimates of global growth made by the International Monetary Fund from 2010 onwards. In each and every year, growth has fallen well a below expectation (which means that 2% of GDP ain’t what it used to be). Economists are flummoxed to explain the persistent stagnation. Central bankers continue to search for ways to promote growth with interest rates close to zero and, in some cases, negative. Faith in unconventional monetary policies such as ‘quantitative easing’ is evaporating. Commodity prices have collapsed and equity markets are worryingly volatile.

As a commodity exporting nation with a high dependence on company tax to balance the books, the government’s fiscal situation continues to deteriorate. Wayne Swan said we would be in surplus by 2012–13. Joe Hocky started out with a goal of 2015–16. In December, Scott Morrison pushed out the expected return to surplus to around 2020. But even that dismal projection presumes, somewhat optimistically, that measures currently stalled in the Senate will be passed. Worse still, it’s predicated on continuing unmitigated bracket creep.

Meanwhile, as deficits pile up, so too does Australia’s net debt. While net debt is only projected to grow to around 18% of GDP—a mere third of a trillion dollars—towards the end of the current decade, there’s no reason for complacency (as Treasury Secretary, John Fraser, made clear in a recent speech). Australia’s ability to manage economic risks depends upon maintaining a good credit rating so we can borrow money at favourable rates. Mounting debt works in opposition to this.

Readers of The Strategist don’t need to be reminded that the strategic environment is no more favourable than the economic. These are challenging times, wherever you look. How then will the Turnbull government balance its investments to mitigate economic verses strategic risks? Make no mistake; it’s a zero-sum game. Ignore the snake oil about defence innovation and spinoffs: every dollar spent on defence is a dollar that can’t be used to retire debt.

In the short to medium term, I suspect that the government has limited flexibility about defence spending. In contrast to the lead up to previous White Papers, acquisition approvals have continued apace over the past two years. In theory, some of the unnecessarily rushed shipbuilding activity planned for later this decade could be slowed down, but that would come at a political cost from the frenzied state of entitlement that calls itself South Australia.

Thus, the good news for Defence is that the forthcoming White Paper is likely to confirm extant expectations about the ongoing modernisation and expansion of the defence force. Just as importantly, they will likely provide adequate funding for the task at least until the end of the decade (unless we see a repeat of the regrettable period 2009 to 2013 when Defence was asked to square the circle of ambitious plans and parsimonious budgets).

One thing the government could do is jettison the 2% of GDP target. Setting aside the myriad of technical reasons why a GDP target is dumb (see here and Chapter 3 here), doing so would provide some flexibility in the years ahead to calibrate defence spending in light of evolving strategic and economic imperatives. In the good times of the resource boom, we could afford Defence’s planners the luxury of long-term funding certainty (and they returned the favour by handing money back unspent). Those days are over. Australia’s overall best interests are today served by a government that’s agile and adaptive in its allocation of resources.

The Government has a clear strategy for achieving a productive, cost-competitive and sustainable naval shipbuilding industry.

We also know that Australia cannot afford a naval shipbuilding industry at any price. A reshaping and reform of the naval shipbuilding industry will be needed if we are to deliver the future Navy we need, at a price we can afford.

If we are to ensure that the ADF is a balanced force, with the highest levels of capability and protection we can afford, we must deliver capability that is value for money and internationally cost-competitive.

Substantial reform of the industry will be necessary and hard decisions will need to be made. The Government is willing to make that commitment. We will require industry to do the same.

We expect industry to work with us to reform the naval shipbuilding sector. We expect industry to make the necessary investments, provide the necessary skill base and build innovative new construction practices to deliver highly capable, cost-competitive naval vessels.

At the heart of this will be a commitment from industry for a productivity-based culture, which includes management, the Unions, the workers, with supportive government.

Industry will need to build complex project management skills in senior management and across the workforce. It will need to build experience in its workforce and sub-contractors, it will need to be focused on quality management and delivering the right product at the right price on time the first time.

As you’ll also be aware, submissions for the Competitive Evaluation Process to find an international partner for the Future Submarine Program are due to be received at the end of this month.

The Government understands the great significance of the decision-making process that will occur once these submissions are received and of the decision itself for Australia’s future.

We are determined to get the best capability and the best value for money through the Competitive Evaluation process for the Future Submarine.

There have been some criticisms of the Competitive Evaluation Process that have suggested that the timeframe for the process is not adequate to fully analyse the substantial range of issues that must be considered in proceeding with the submarine’s development.

I would note that all three participants, DCNS of France, TKMS of Germany and the Government of Japan have stated that they are satisfied with the timeframes that we have given them for the Competitive Evaluation Process. Some may say ‘of course they’d say that’ —perhaps they would—but we know that all three participants have invested in developing their responses to meet the schedule and that all three have done everything they can to demonstrate their suitability to be our partner.

When it comes to considering the proposals and making the decision, let me assure you that the Government does not intend to be rushed. This is too important a decision for that. We will take the time required to consider all options and to allow a comprehensive assessment against all of the Government’s criteria to be made.

There is a risk in moving too quickly, clearly, but there is also risk and potential cost, in adding more time to this process.

The Government has considered all the risks inherent in the development activities, and taken the best possible advice from the Department of Defence, and we have chosen this process as the most appropriate means to manage those risks given the nature of the process and the need for this critical capability.

This process provides a way for Australian industry to have the greatest possible involvement in the program, without any compromised cost, capability, schedule or risk.

In addition, the Expert Advisory Panel appointed by Government continues to oversee the conduct of the Competitive Evaluation Process to ensure the fairness and equity of that process.

The aim of the CEP is to inform Government’s decision on the international partner to work with Australia to develop and deliver the Future Submarine.

We have sought and are expecting proposals from all three participants to include proposals for onshore, offshore, and hybrid build options.

Through this process we will assess the ability of participants to work closely with us, including how each would approach our capability and sustainment needs, and how cost and schedule would be managed throughout the program.

For a program of this nature, we need to work closely with the selected international partner to fully develop the Future Submarine. This is going to be very resource-intensive for both Defence and the selected international partner.

Once the partner is selected, there will be about three years of further development work before we finalise the Future Submarine’s capability and cost.

Indeed, lessons from the Collins Class submarine program and other international submarine acquisition programs clearly indicate the need for such collaboration to arrive at the best understanding of capability, cost and schedule.

We need to commence this intensive work without further delay to avoid a submarine capability gap in the future.

As it stands, avoiding a capability gap will require us manage the life of the Collins Class submarines beyond their planned withdrawal. We’ll need to continue to invest in the current fleet for years to come. It’s important we don’t lose sight of this—the Collins Class submarine will continue to be a potent capability for the ADF for years to come.

I’m looking forward to the comprehensive consideration of the CEP, and being able to announce our decision on the international partner for Australia’s future submarine next year.

Regardless of that decision, we need the sovereign ability to maintain that future submarine over many decades. And this will generate significant opportunities and challenges for Australian industry and the science and technology community.

Two recent articles on Defence acquisition one here by my colleague Mark Thomson and another in the AFR here by John Kerin quoting Warren King caused me to reflect on the long journey Defence has already travelled in the pursuit of acquisition reform and the enormous challenge it still faces as it stands up the new Capability and Sustainment Group (CASG) and implements the ‘Smart Buyer’ initiative.

The RAND Study into the lessons learnt from submarine programs in the UK, US and Australia observed (and later reiterated by the Parliamentary Review into Defence Capital Projects), that ‘…technical risks must be identified early, and much thought must be given to deciding, with industry (emphasis added), the appropriate form of the contract and the incentive and risk sharing clauses built into the contract. Getting this wrong can almost guarantee problems with the conduct of the program and the relationships between the government and the contractor.’

These issues aren’t new. Paul Rizzo identified the need for technical skills in his review of naval engineering. John Coles highlighted (PDF) in his Review the need for knowledgeable buyers to ensure program success. The ‘Smart Buyer’ function recommended by the First Principles Review (FPR) is clearly in response to these warnings but again the gap between the recommendation and implementation is as wide as ever. The re-occurring problem has been the Commonwealth’s ability to work with industry to achieve a capability outcome with some degree of consistency and confidence.

A well-run parallel bidding process as planned for the future submarine project certainly offers part of the solution. It should result in a refined solution, improved value for money as all parties refine and reduce risk and, most importantly, an improved capability outcome. Collaboration and transparency will be the key attributes of success but these can only be empowered by knowledgeable buyers and sellers.

Regardless of how successful the parallel bidding process is, the next phase—parallel negotiation—presents a real challenge if the well-informed buyer is missing.

Acquisition folklore tells us that parallel negotiation is the only true path to acquisition salvation. A process in which continued competitive tension improves schedule, price and process. Good process is rewarded with a good outcome, which is defined in terms of schedule and price.

The alternative view is that parallel negotiations increases the cost of bidding for both the Commonwealth, which needs to buy-in an evaluation team, and the bidders because of the time taken and the size of the team necessary to respond several more times over the length of the  negotiations process. What’s not spoken of is that this approach also enables an ill-informed buyer to hide behind a process which is invariably run by a team of earnest but constrained individuals with no guarantee of a better outcome for taxpayers or for the capability users. It may be ‘safe’ because it has a ‘defensible’ audit trail, but there’s no level of assurance that the final outcome will deliver good capability in a timely or cost-effective manner.

In recent years the DMO has been the customer and the user’s representative; the FPR suggests nothing different. This has resulted in capability managers being excluded from the acquisition process. An example of this was in 2007 in the early stages of JP 2072—the battlefield communications project. Prior to the contract being terminated by the DMO, an Independent Review concluded that the initial schedule delay was in part the responsibility of the Commonwealth because of confusion around requirements and access to the end users. This was after 18 months of parallel negotiations and due diligence. Instead of the contract being a framework for the successful delivery of the capability it became a tool for contract termination. It took another 7 years for JP 2072 to be retendered and renegotiated at considerable cost to both industry and the Commonwealth.

The capability managers must be more than just sponsors of the capability life cycle as the FPR suggests. They must be accountable for and lead in the knowledge of their business and the capability outcomes required throughout the process, not just in the requirements phase. This is not a role for desk officers.

Once government approval has been given there is a critical role for the senior leadership team throughout the acquisition process. The leadership team needs to understand operational risk and the level of compromise they are willing to bear in capability outcomes. This is an important and explicit authority that has been missing in the acquisitions process.

While the FPR focused considerable effort on the revised two pass process and structural issues, at the end of the day a successful capability process has at its core three players: industry, the capability managers and CASG. If these players perform their roles correctly, capability should be delivered on time and on budget.

As CASG comes into being there are couple of points worth considering:

Firstly, CASG needs to put aside the fear that any imbalance in their relationship with industry leads inevitably to a price/profit advantage to industry.

Secondly, the role and authority of the capability managers remains unclear in the FPR and requires clarification. Red cards abound but this is focused on giving Government comfort during the approval process—it doesn’t recognise where budget and delivery fails.

Finally, CASG’s ability to ‘make strategic decisions regarding the most appropriate procurement and contracting methodologies’ can only be achieved with the continued involved and authority of knowledgeable and engaged capability managers. Without their involvement, one or more of the three legs of successful capability acquisition, capability outcome, schedule or price, will fail.

Following the recommendations of the First Principles Review, the government has agreed to move the quasi-independent Defence Materiel Organisation (DMO) back into Defence. In its place will rise the new Capability Acquisition and Sustainment (CAS) group—effectively a pared down version of DMO with its top layer of management removed, but with substantial extra responsibilities in logistics and capability development.

The report’s language is interesting; the DMO is to be ‘disbanded’, which sounds like what you’d do with an outlaw motorcycle gang. That might not be accidental—DMO has made more than a few enemies over the years.

In 2003, the Kinnaird Review of defence procurement then recommended the establishment of a fully independent ‘executive agency’ to undertake acquisition and sustainment. The goals of the proposed separation from Defence were four-fold:

• a more business-like relationship between DMO and Defence to support ‘clearer lines of authority, accountability and rewards for performance’
• ‘more flexible remuneration arrangements’ to ‘attract and retain high quality project managers’
• a separate identity so that DMO could ‘rapidly transform its culture and develop the commercial focus it needs’
• give the head of DMO ‘sufficient power to be able to recommend against project proposals that do not have adequate risk analysis or are not fully costed’

Executive agency status was judged to be a step too far and, following push-back from Defence, the DMO was established as a financially-independent ‘prescribed agency’ in 2005. As a result, DMO was neither fully independent of Defence nor fully part of it. Nonetheless, the four goals were retained.

A decade later, here’s what the First Principles Review had to say about DMO:

‘The Defence Materiel Organisation has also been beset with problems that have impacted its ability to achieve the required outcomes. It is clear that the organisation has become top heavy, complex and unnecessarily deep. This significantly contributes to Defence not getting the capability it needs at a reasonable cost or in reasonable time.’

So what went wrong? One way to try to answer the question is to examine the progress towards the four goals from 2003.

There’s no doubt that the creation of DMO catalysed a more business-like relationship between the three Services and DMO. What’s more, DMO has been able to work with the Services and defence industry to drive efficiencies. However, at the same time, tensions emerged between DMO and Defence over finance. The issues are arcane, but because DMO and Defence each have their own financial accounts what’s best for one is not always best for the other.

Progress towards more flexible remuneration has been limited. Although the first Chief Executive Officer was employed on a salary exceeding that of either the Secretary or CDF, things slowed down pretty quickly after that. The problem was not that the Public Service Act provided insufficient flexibility, but rather that Defence wasn’t about to let DMO poach its staff and drive up its salaries. Frustrated, DMO did the only thing it could to get around the roadblock; a new layer of deputy secretary managers was born. Even then, the ability to attract the best talent from the private sector remained incomplete.

In terms of building a greater commercial focus, we’re confronted with conflicting data. There’s no denying that DMO has done a lot to professionalise and upskill its workforce. In addition, progress was made in establishing performance-based contracts, especially after the introduction of ‘smart sustainment’ in 2009. On the acquisition side, DMO was certainly a more formidable counterpart when it came to dealing with industry than its predecessors. And notwithstanding claims to the contrary, DMO has been very effective in delivering project within budget (though schedule remains a work in progress). Nonetheless, the First Principles Review believes that much more can be done via a ‘smart buyer’ approach with the private sector playing a greater role in managing both acquisition and sustainment.

Finally, if there was tension between DMO and Defence over financial matters, it was nothing compared with the rancour over whether DMO should provide independent risk assessments to cabinet submissions dealing with major projects. And there were other turf wars, such as the tussle over whether DMO’s financial workforce should be absorbed into Defence ‘shared service’ regime.

Would things have turned out better if DMO had become a fully independent executive agency as recommended by Kinnaird in 2003 and again by the Mortimer Review in 2008? Who’s to know? Greater separation may have prevented the squabbles over finance, staffing and advice to government, but it may have also introduced a different set of problems.

In the end, DMO had few friends. Sooner or later, something was going be done to reduce its power and independence. We can only hope that the pendulum has not swung too far back.

No doubt champagne corks are popping in the executive suites of defence industry as they look forward to dealing with a weakened contractual counterparty. But it must be a bittersweet victory for the folks over at Defence who will now have to take responsibility for the things that used to be blamed on DMO. Sometimes you’ve got be careful what you wish for.