Infrastructure Partnerships

Australia leads the national

infrastructure debate by
bringing together both the
public and private sectors
to promote partnerships in
infrastructure provision.

Infrastructure Partnerships Australia

Submission to
Defence Procurement & Sustainment Review
June 2008

Contact
Joanne McCafferty
National Manager, Policy
Infrastructure Partnerships Australia
P | 02 9240 2053
E | joanne.mccafferty@infrastructure.org.au

EXECU TIVE SUMMA RY AND RECO MMEND ATION S

IPA welcomes the opportunity to submit its views to the Review of Defence Procurement
and Sustainment conducted by Mr David Mortimer AO (Review).
This submission addresses two issues:
1. Use of Public Private Partnership (PPP) procurement by Defence Materiels
Organisation (DMO).
2. Further DMO organisational reform opportunities.
1. Public Private Partnerships
IPA notes the evidence that PPP procurement, if applied to appropriate projects by
experienced project mangers, offers significant advantages and delivers better value for
money outcomes for Governments in Australia and overseas. UK evidence demonstrates
that Defence projects are no exception.
IPA is concerned there has been no use of PPP procurement by DMO since the
Commonwealth's PPP policy was established in 2001. In the same seven year period,
the UK Ministry of Defence has successfully used PPP procurement in respect of over
25 specialist military equipment Defence projects.
IPA notes that several Defence Capability Plan projects, and most immanently two pilot
training projects AIR5428 Fixed Wing Pilot Training and AIR9000 Ph7 Rotary Pilot
Training are potentially suitable PPP candidates.
Recommendations - Public Private Partnerships
IPA recommends that the Government:
Tenders the full scope of capabilities sought in project AIR5428 Fixed Wing
Pilot Training and project AIR9000 Ph7 Rotary Pilot Training as PPPs (i.e.
privately financed projects).
Appoints, as soon as possible, experienced PPP advisers to assist with the
tender processes.
Consults closely with industry, and importantly with those organisations that
are experienced in tendering and delivering PPPs projects in Australian, about
the design of the tender process and tender documentation.
IPA further suggests the Parliamentary Secretary Assisting the Minister for
Defence and the Defence Procurement Advisory Board initiate a Roundtable with
industry to identify specific Defence Capability Plan projects (or parts thereof,
such as training components) which are suitable for PPP procurement. IPA
recommends that annual meetings be held to track the progress of projects
identified as potential PPP candidates.

2.

DMO reform

While the specialist military equipment capabilities that the DMO is responsible for
procuring and maintaining are used towards a public policy objective, the core functions
and activities of DMO itself are overwhelmingly commercial in nature. DMOs functions
are properly categorised as that of a business. The enhanced separation of DMO from
Defence Capability Development Group following the Kinnaird Review has clarified this
reality.
DMOs vision, to become the leading program management and engineering services
organisation in Australia, will present a challenge unless DMO is placed on a more
commercial footing, particularly given unmet demand for quality project managers in the
private sector and the premium paid to attract them.
IPA commends the reforms recommendations of the Kinnaird Review, especially with
respect to training. However, IPA considers that better value for money for taxpayers
and better outcomes for DMOs client will result if a number of organisational issues
that are limiting major reform within DMO are addressed.
Recommendations DMO reform
IPA suggests consideration be given to establishing DMO as a Government
Business Enterprise. IPA recommends Government establish flexible workplace
arrangements within DMO to enable DMO management to:
be provided with flexibility to hire and fire;
pay and promote staff on merit without the constraints of designated public
service or military salary bands and ranks/levels;
pay performance bonuses;
develop career paths within DMO with opportunities and rewards
commensurate with the private sector;
develop exchanges programmes with the private sector (perhaps with
construction industry to minimise conflicts);
promote longer tenure from key project mangers;
reduce the layers of hierarchy of DMO;
engage leading private sector project managers;
increase the responsibility and accountability of staff; and
increase the productivity and performance of staff.
IPA further recommends that Government:
establish a team of industry project management experts, including from the
building construction sector, to review and audit the DMOs processes,
systems and culture with the aim of streamlining the process and achieving a
greater outcome focus;
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 embrace new developments in global best practice in project management

through consultation with leading management consulting firms and industry;
and
appoint a select team of industry experts to work with a hand-picked DMO
team to conduct a pilot procurement that follows a streamlined project
management process.

Introduction to Infrastructure Partnerships Australia

Infrastructure Partnerships Australia (IPA) is the nations peak infrastructure body,
representing Australias leading infrastructure developers, financiers, consultants,
constructors, investors and operators, as well as transport service providers and
government departments and agencies.
IPA is dedicated to improving the provision of infrastructure in Australia, recognising the
well documented positive relationship between infrastructure capability and economic
productivity and performance.
Discussion
Australias security is a core business for Government. Defending Australias interests,
strengthening global peace and stability and developing structures to maintain relevant
and effective defence capabilities against emerging threats requires an outwardly
oriented defence organisation which invests in high-performing people and aims for
world best practice in leading and managing the business of defence.
As one of the biggest contracting organisations in Australia, Defence Materiel
Organisation (DMO) is responsible for acquiring and sustaining military equipment and
services in the order of $9.6 billion in 2007-08 alone and employs over 7,000 people in
more than 50 locations around Australia and overseas.
IPA recognizes DMOs unique challenge in balancing the need to function like a business
and be business-like, on the one hand, with the need to be accountable and respond to
compliances and controls as a defence organisation within a democratic public sector
framework. Much of DMOs work involves complex procurement of a commercially and
technically challenging nature.
Since the formation of DMO major inroads have been made in key areas such as training
and development. However, there still exist a range of organisational issues that are
limiting impeding high performance within DMO. IPA welcomes the Governments
support for ongoing enhancements to efficiency and effectiveness of DMO and the
Governments commitment to examining how DMO can continue to develop its
commercial orientation and become more business-like in its operations.
Defence Procurement and Sustainment in Australia and use of PPPs
Government procurement practices in Australia have evolved significantly over the years,
largely to address the changing requirements of a strong economy and growing
population and to remedy poor procurement and project management outcomes. Private
sector participation, in the form of Public Private Partnerships, has been a key
mechanism to enhance outcomes.
IPA believes that when properly scoped and executed, and applied to appropriate
projects, PPPs allow for the best share of resources, skills and risk between the public
and private sectors in the delivery of public assets.
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The size of DMOs infrastructure and equipment procurement task is enormous. As

arguably Australias largest program management and professional engineering
organization, it is important that DMO recognises that it does not have to face this
challenge alone.
It should seek the active involvement and participation of the private sector to help
shoulder a portion of the burden and also be part of the solution.
IPA is concerned there has been little use of public private partnerships (PPP)
procurement by DMO despite the fact that the Commonwealth's PPP policy was
announced in 2001 and has been in place for seven years. Over a similar period, the UK
has successfully used PPP procurement in respect of over 25 specialist military
equipment Defence projects.
Since 2001, only two Defence PPP projects have reached contractual close:
Headquarters Defence Joint Operations Command and Single LEAP Phase 1. A third
project, Single LEAP Phase 2, is currently being tendered. However, these projects sit
under the responsibility of the Defence Support Group and not DMO.
Despite
consistent and public Ministerial and Prime Ministerial policy support for PPPs, IPA
understands no other projects are announced as being considered as PPPs by Defence.
What are Public Private Partnerships (PPPs)?
PPPs involve the private sector being responsible for the design, construction, operation,
financing and long term ownership risks of capital assets for, or used by, the public
sector. It is the transfer of these respective risks (to the party best able to manage each
risk), combined with the discipline and analysis of private financing, which makes PPPs a
more effective model in appropriate circumstances.
The essence of a PPP is that the public sector makes payments commensurate to the
services provided by the private sector. If the service is not provided, or not provided to
the agreed quality at the agreed time, no payment is made or the payment is
reduced/abated. This contracting mechanism reduces optimism bias, which is the
propensity for traditionally procured projects to be over budget and overtime.
PPP procurement offers significant advantages to government, industry and importantly,
provided that the fundamentals of a stable partnership are achieved. These fundamentals
include: harnessing public sector expertise, extensive community consultation, focus on
long term outcomes, probity and transparency and a focus on a successful partnership.
PPPs impose upfront discipline that identifies, allocates, prices and manages risk. This
upfront and thorough scoping and the commercial imperative provides better outcomes
than traditionally procured government projects. PPPs require the private sector to
organize itself in the most efficient manner to deliver outcomes. The key incentive is that
the private sector doesnt get paid if it doesnt deliver, a powerful incentive.
Other benefits of PPPs:

Fixed time and price: Capability development and delivery and O&M risks are
passed to the private sector (fixed price contracts mean cost overruns are avoided).

Financing & pricing reflect the projects risk: Financial risks are passed to the
private sector.

Financing due diligence reduces risks: The public sector has lower risk through the
use of rigorous project finance due diligence processes. Equity and debt financiers
undertake thorough due diligence to ensure risks are optimally identified, allocated
and priced.

Maintenance obligations rest with private sector: Private financing ensures secure
long term funding streams for maintenance/repair, minimising lifecycle costs and
maximising benefits.

Certainty of service quality: The service is provided to the agreed standard through
the life of the project and thus consistency of quality assured. For example, if the
Seasprite had been procured through PPP, the Commonwealth would not have paid
out one cent to the contractor as the contracted outcome was never achieved.

Better value for money: Generated through benchmarking, whole of life costing,
due diligence, risk analysis, competitive processes and third party revenues.

Harnessing private sector skills: Ability of private sector to deliver the asset more
cheaply and efficiently more than offsets higher financing costs.

Public sector doesnt pay if private sector doesnt deliver: PPPs = performance
based.

PPPs allow public sector to focus on core functions: Private sector specialises in
asset and infrastructure financing, delivery, ownership and maintenance.

PPPs drive innovation: Projects are specified in terms of outputs, driving design,
construction and operational efficiencies.

PPPs more accountable and transparent: The recent study commissioned by

Infrastructure Partnerships Australia confirms PPPs are more transparent and more
accountable.

Evidence of better value for money from PPPs

Research studies show that PPP projects show better outcomes than projects
undertaken through traditional procurement. In the United Kingdom, which has been at
the forefront of development of the PPP procurement framework, there has been a large
body of research on PPPs.
A study undertaken by Mott McDonald (Mott McDonald, 2002) focused on measuring
the relative degree of optimism bias 1 associated with traditional procurement. The study
concluded that while UKs PPP projects were found to exhibit relatively neutral optimism
bias, the bias found in traditional procurement was sometimes significant (50% or more).

Optimism bias was defined as the percentage differential between the estimated works duration or
capex cost at the Strategic Outline Case (SOC) or Outline Business Case (OBC) and Works
Completion (WC).

Table 1: Key measures from the Mott MacDonald Study

Recorded Optimism Bias
Type

Traditional Projects

PFI/PPP Projects

Works Duration

17%

Capital Expenditure

47%

1%

Operating Expenditure

41%

5%

Benefits Shortfall

2%

2%

Source: Review of Large Public Procurement in the UK (Mott MacDonald 2002)

The UK National Audit Office (2003) found that 73% of traditionally procured projects
were over budget, and 70% were delivered late. By comparison, just 20% of PPP
projects were over budget and a mere 24% over time.
IPA Research on PPP procurement
In December 2007, IPA launched a landmark report titled Performance of PPPs and
Traditional Procurement in Australia, commissioned by IPA and undertaken by The Allen
Consulting Group and Melbourne University. The study undertook comprehensive
analysis of 21 PPP projects and 33 traditional projects around the nation, allowing for the
first rigorous and comprehensive comparison between traditional government-delivered
and privately financed and delivered projects. Its key findings were:
PPPs demonstrate superior cost efficiency over traditional projects ranging from
30.8% (from project inception) to 11.4% (from contractual commitment to final
outcome).
In absolute terms, the PPP cost advantage was economically and statistically
significant: On a contracted $4.9 billion of PPP projects, the net cost over-run was
$58 million (not statistically significant). For $4.5 billion of traditional procurement
projects, the net cost over-run was $673 million (statistically significant)
With respect to time over-runs on a value-weighted basis, traditionally procured
projects performed poorly. On a value weighted average traditional projects were
completed 23.5% behind time. In contrast, PPPs were completed 3.4% ahead of
time on average (This is measured from contractual commitment to project
completion).
PPPs are a proven vehicle to deliver government value for money in infrastructure
procurement. Approximately $400 billion is expected to be spent on Australias
infrastructure over the next decade. With 10-15% market share, PPPs would create
approximately $6 billion in potential cost savings (vis a vis traditional procurement)
over the decade.
Project size matters greatly in choice of procurement model. Project size and
complexity has a marked (statistically significant) negative impact on time over-runs
of traditional projects. In contrast, timeliness of completion of PPP projects were not
negatively impacted by size and complexity of the project.

 The study has uncovered the myth of sovereign risk free borrowing rate. The report
highlights the fact that the risk free borrowing rate is not actually equal to the cost
of capital. An infrastructure project always has project risk associated with it,
irrespective of the fact whether the public or the private sector undertakes it. Thus
the cost of capital is equal to the risk free borrowing rate plus the project risk.
In contrast to commonly held perceptions, PPP projects were far more transparent
than traditional projects, as measured by the availability of public data for the study.
The benefits identified in the study are conservative. Because the study was design and
construction centric, it has not captured the long term value delivered from:
whole of life asset management
long term risk transfer
young assets, full risks not adequately captured
asset quality at end of concession period.
UK Ministry of Defence experience of PPP procurement
The United Kingdom has a strong record of value for money PPP procurement. Since
2001, the UK Ministry of Defence (MoD) has reached contractual close on 23 PPPs:
Most of the capabilities procured by the UK MoD through PPP procurement in
that 6 year period have also been procured by Australias Ministry of Defence by
traditional procurement.
Capabilities procured through PPP procurement in the UK include pilot and
aircrew training systems and simulators, B and C Class vehicles, satellite
capability requirements (Skynet 5), military communications systems and base
infrastructure and office accommodation.
Independent research by the UK National Audit Office and others demonstrates the UK
MoD is securing better value for money from its PPP procurement.
Defence procurement practices and value for money
The policy principle underpinning the procurement policies of both the UK and
Commonwealth is to use the procurement method which offers better value for money.
Further, the FMA Act (Cwlth) requires agency CEOs to ensure efficient and effective
use of Commonwealth resources.
IPA contends DMO would benefit from utilising the full range of procurement models
depending on their suitability to the particular product/service to be procured. For
instance, in circumstances where Defences requirements are unclear, ill defined or
dynamic, there may be benefits from greater use of alliance contracting.
IPA is concerned that the Australian Department of Defence is not optimising PPP
procurement opportunities and so may not be securing best value for money. As Dr Ken
Henry observed, there are systemic reasons why public sector officials may choose not
to pursue best value for money:
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Opportunity costs (that is, the expected return from doing something other than what
one is currently doing) are very much undervalued If you do something that saves
the taxpayer a bucket of money, dont expect any external praise.2
To address this, IPA recommends a strategy addressing the following issues: policy,
projects, process and people.
POLICY AND POLICY APPLICATION
IPAs understanding of the barriers to PPP procurement in Defence is based principally
on anecdote. However, IPA understands that decisions have been made within
Defence not to procure a number of Defence projects through PPP.
We understand there is, however, little transparency about the processes that lead to
these decisions and little consultation with relevant industry players. Members have
reported discussions with Defence officials which have highlighted a number of policy
misconceptions and perceived barriers to PPP procurement. Some are summarised
below.
Wont PPP procurement take longer?
PPPs require government to:
1. determine the outputs/outcomes it wishes the private sector to provide and
2. plan the procurement approach thoroughly.
Progressing any project to market without proper planning and a clear understanding of
the desired outcomes is a recipe for cost overruns, poor project scoping, subsequent
delays and sub-optimal results, regardless of the procurement mechanism. Defence
projects are typically flagged years in advance and PPPs could shorten procurement
timeframes if managed appropriately
Arent Defence projects too big and complex to be PPPs?
Numerous large and complex PPPs have been successfully awarded as PPPs such as
the NSW Rollingstock PPP ($2.6bn capital cost) and several tollroads (>$2bn capital
cost). Major specialist military equipment projects have been successfully procured
through PPP in the UK.
Cant Governments borrow more cheaply than the private sector?
PPP financing is based on the risks of the project. Because financiers and contractors
are exposed to the risks and potentially extensive financial loss from mismanagement
of the risks under a PPP, it is critical that the risks are managed appropriately, so more
rigour is applied in ensuring that they are managed. Research evinces that on a whole of
2

Dr Ken Henry, Secretary to the Commonwealth Treasury, Address to the International Project Managers
Symposium, Canberra 9 February 2007

project perspective, PPPs consistently deliver better value for money than traditional
procurement for appropriate procurement. Government borrowing rates ignore project
risks, such as the risk of delivering a project late, over-budget and short of specifications.
These risks are priced and absorbed by taxpayers latently (i.e. when the risks are
realised).
Other potential policy misconceptions and perceived barriers are as follows:
Can PPPs deliver value for money without third party revenue? In fact, third
party revenue is not required to be obtained to deliver value for money PPP
procurement. Only about 5% of Australian PPPs involve third party revenues.
Could PPPs cause Defence to lose control? IPA members report a concern
within Defence that Defence needs to own assets to control them, reflecting a
misunderstanding about PPPs and the commercial arrangements underpinning them.
In fact, under many PPPs, legal ownership rests with the Government (eg HQJOC).
Further, PPP contractual mechanisms enable Defence to ensure as much control as
required.
Should assets potentially subject to combat risk be excluded from
consideration? This is not necessarily so. While combat risk may be a
consideration in some PPP projects, it is not necessarily an impediment to value for
money
PPP
procurement.
There are well developed insurance contract mechanisms for managing use of an
asset in combat. For example, insurance policy mechanisms allow Defence to selfinsure when assets are used for uninsurable purposes.
Defence currently selfinsures most of its Specialist Military Equipment.
Are special skills are required to use PPP procurement?
requires some new skills to be harnessed by project teams.

PPP procurement

All procurement staff should be appropriately trained to ensure proper application of

Commonwealth procurement policy. These skills can be supplemented with private
sector specialists as requried.
Are PPPs less flexible? In fact, PPPs offer flexibility and transparency. All major
procurement contracts have contract variation and termination provisions and use of
liquidated damages regimes can be used to encourage performance from industry,
particularly on time critical items. Contractual changes generally occur for sound
reasons and most involve cost changes. Sometimes these costs can be less obvious
under traditional procurement contracts. PPPs are very transparent and thus price
changes are visible. However, PPP contracts are not inherently more inflexible they
can be varied or terminated for convenience.
Dont PPPs encroach on our core business?
The core business of all
organisations changes over time. Private sector contractors are now more than ever
an intimate part of Australias defence capability. In the competitive labour market,
the utilisation of scare skills and resources is being carefully evaluated by many
organisations and businesses increasingly view the risks associated with asset
ownership and management to be non-core.

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 How do PPPs impact innovation? Engaging and capturing the innovation of the
private sector is a fundamental opportunity of the PPP model because it places
responsibility for delivery of outcomes in the hands of the private sector.
How do PPPs treat whole of life costs? One of the drivers of value for money from
PPPs is the whole of life approach to procurement costs. This is a feature that
Treasury Secretary Dr Ken Henry observes is undervalued in the environment in
which Commonwealth officials operate:
The fourth lesson is that events in the short-term time horizon are overvalued
relative to events at a distance. 3
PPPs incorporate a much greater consideration of whole of life costs and can lock in
allowances for maintenance in future years so they are not subject to "budget whims"
over time, eliminating backlog maintenance or erosion of capability. This is something
otherwise
almost
impossible
to
do
in
public
sector
budgeting.
PROJECTS
Although all options should be evaluated on a case by case basis, IPA believes that the
necessary (if not sufficient) conditions for PPPs to succeed in the defence procurement
context are the following:
The size of the project in financial terms should be large enough to attract private
interest and participation;
Government, in consultation with industry, must properly scope the project before
taking it to the market then authoritatively negotiate a contract that clearly articulates
the desired outcomes and with a focus on whole-of-life operation, rather than merely
the construction phase;
For a partnership to work, risks should be placed with those best equipped to
manage the risk. Pushing inappropriate risk onto any party in the partnership is
inefficient and drives up cost;
For a partnership model to be a success, all parties to it must understand what is
sought. Bid costs should be reasonable for private parties to evince interest in the
project. The information released to market to price a project should be correct, and
there is scope for improvement in this area.
PPP candidate projects
In terms of specific potential DMO projects (or parts thereof), IPA believes the following
would be best suited to PPP procurement:
AIR9000 Ph7 Rotary Pilot Training System
AIR5428 Fixed Wing Pilot Training System
Training and simulation projects (including as sub-components of broader projects)
generally
3

Dr Ken Henry, Secretary to the Commonwealth Treasury, Address to the International Project Managers
Symposium, Canberra 9 February 2007

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 AIR6000 New Aerospace Combat Capability (Pilot Training Components)

AIR7000: Multi-mission Unmanned Aerial Vehicle (MUAV) and Maritime
Patrol Aircraft (Pilot Training Components at least)
AIR8000: Battle-lifter (might be superseded by c-17 acquisition?)
JP126 Ph 2: Joint Theatre Distribution System
JP2060: ADF Deployable Health Capability
JP2064: Geospatial Information Infrastructure and Services
JP2072 Ph 2-4: Battlespace Communications System (Land)
JP2085: Explosive Ordnance Warstock
SEA1654: Maritime Operational Support Capability - SUCCESS Replacement
For example, features of AIR9000 Ph 7 and AIR 5428 Pilot Training System projects
making them highly suitable PPP candidates include:
Adequate project size: AUD600-750m each, including new built infrastructure with
an estimated cost between $50m and $100m each. PPPs require greater due
diligence than traditional procurement, and bid costs are correspondingly higher.
Larger complex projects are most suited to PPP procurement.
System duration of 25 years: most PPPs are between 25-30 years.
Project requirements and precedent: UK demonstrates similar simulation and
training PPPs deliver VFM
Efficiency: capacity to manage the procurement & integration risks of aircraft,
simulators, training systems and land infrastructure under one procurement process
Output based: Defences objective is to deliver trained pilots ready for operational
role/type conversion and PPPs optimise output-based procurement
Flexibility over time: the UKMFTS procurement structure will provide valuable
insights
Independent financing: independent third party finance will help drive VFM
PROCESS
The current Commonwealth policy requires all major projects to be considered for PPP
procurement. Over the past 7 years, the private sector has had little insight into the
application of the policy by DMO. IPA suggests trialling a different approach involving
changing the PPP consideration process from passive consideration to active selection.
IPA considers that initially the best approach is to narrow the appropriate categories of
potential projects and also ensure that all relevant projects falling in those categories are
thoroughly and independently assessed for PPP suitability and a business case
prepared.
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A part of this business case development should involve consultation with industry
through a PPP market sounding, which is typically the process used by state
governments. Any additional costs of this new process would need to be budgeted.
IPA is of the view that DMO would also benefit from placing greater emphasis on
outcome over process in its procurement and sustainment management and decision
making. For instance, DMO could benefit from greater emphasis on producing project
briefs of high quality. Poor briefs and poor definition will most often lead to poor
outcomes.
IPA suggests giving consideration to establishing a team of industry experts, including
experienced personnel from the building construction industry, to conduct a review and
audit of the DMOs processes, systems and organisational culture. The objective could
be to streamline processes and achieve a greater outcome focus with the team to report
to the CEO after a period of several months.
To follow up, DMO might also consider using a small team of industry experts to work
with a hand-picked DMO team on running a pilot procurement that follows a streamlined
process recommended as part of the above audit.
PEOPLE
There are a range of organisational and human resource issues which offer DMO
opportunity for further reform:
Other jurisdictions have overcome internal institutional barriers to the PPP
procurement approach when the political and departmental leadership actively drove
the optimal use of PPP procurement. This has also been true in Defence where
HQJOC and Single LEAP Phase 2 would probably not have employed PPP
procurement but for Ministerial support.
Without clear and consistent support of Defence leadership, PPPs are likely to remain
under-utilised.
IPA is of the view that employing a larger number of experienced project management
and procurement professionals from the private sector within the DMO could achieve
greater breadth and depth of change agents within the organisation. Individuals from
the building construction industry, in particular, would bring certain rigours and
disciplines of benefit. We acknowledge the difficulty this may pose in the current
market conditions, which leads us to the next point.
The DMO could benefit from greater flexibility to hire, fire and remunerate
appropriately. From the outside, the public service rules in particular, appear to
stymie a high performance environment. With respect to remuneration, we would
suggest a comparative study be conducted comparing the remuneration of DMO
staff, particularly project directors, with their equivalents in the private sector.
IPA contends that greater autonomy of decision making within DMO would facilitate
greater strategic agility and reduce pressure on procurement timelines. Schedule is
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all important, and anything that can be done to help maintain schedule should be
done.
Greater continuity of staff is also vital to ensure project momentum, consistency, and
generally retain project knowledge. Some projects have been known to have six or
more project directors.
Relevant Defence staff also require education about PPPs to encourage an
understanding of the sophisticated nature of PPP procurement which both underpins
its benefits and also attracts criticisms:
As a general rule, the more complex the subject, the easier it is to criticise, and
the more difficult it is to defend. 4
While PPPs transfer many risks to the private sector, the risk of negative public
perception is not one of them. The level of media interest in PPPs can be a political
deterrent. Proactive media management is potentially an important part of successful
adoption of PPP procurement.
Finally, although Defence has had experience with two PPPs, there is no mechanism
for capturing and building the corporate skills base obtained from the experience of
these projects. This is sometimes acknowledged as an institutional weakness in
Defence procurement generally and should be addressed.
Conclusion
IPA believes the adoption of PPP for suitable projects will deliver significant benefits to
the DMO. In the appropriate circumstances, the PPP model identifies and allocates
whole of life project costs ensuring transparency for Government and Defence and using
the PPP model can ensure Defence does not pay for a project until it is successfully
delivered and meets Defences accommodation or services standards. We also believe
that use of the PPP model could be a means which further commercial experience and
skills can be introduced into the DMO organisation.
IPA is of the view that successful use of PPP procurement by Defence will require
Ministerial and bureaucratic leadership, industry engagement, education and specialist
advice.
We believe a level of leadership commitment to the use of PPP procurement is needed
to overcome residual reservations within the ranks of DMO staff to using PPP
procurement because it is 'different'. This is despite Commonwealth policy requiring that
it be used when it may offer better value for money.
IPA believes that greater appreciation by DMO staff of the potential costs attributable to
project risks (if they are realised) would highlight the benefits of PPP procurement and
go some way to overcoming residual internal resistance to the use of the PPP model in

Dr Ken Henry, Secretary to the Commonwealth Treasury, Address to the International Project Managers
Symposium, Canberra 9 February 2007

14

Defence. For example, no payments would have been made by Defence if the Super
Seasprite Helicopters had been contracted through PPP procurement.
IPA is also of the view that Defence should re-examine the adequacy and timeliness of
DMOs processes for considering PPP procurement.
A preliminary decision to use PPP procurement, endorsed by the relevant Minister in
respect of appropriate Defence Capability Plan projects (or a part of a project, such as
training components of aircraft acquisitions) should be made following thorough
consultation with industry well in advance of 1st pass approval to allow industry and
Defence to prepare for the procurement process appropriately. It should be noted that
PPP procurement process can always be changed to traditional process at any point up
until the time of contractual close.
The issues surrounding defence procurement and sustainment are complex and this
submission provides only rudimentary suggestions on the enormous infrastructure and
equipment procurement task being delivered by DMO. We would be very happy if this in
any way contributes to the DMO and Governments review of procurement and
sustainment. We hope that our submission is useful to the Review and demonstrates our
support of this important initiative.
Should you have any enquiries or queries regarding this submission please do not
hesitate to contact Joanne McCafferty, National Manager, Policy, on (02) 9240 2005.

th

Infrastructure Partnerships Australia

8 Floor, 8-10 Loftus Street, Sydney NSW 2000

www.infrastructure.org.au

T 02 9240 2005
F 02 9240 2055
E contact@infrastructure.org.au

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