USING COMMERCIAL DISCIPLINE TO IMPROVE AUSTRALIAN DEFENCE PROCUREMENT: MISPLACED ENTHUSIASM?

Abstract

I. INTRODUCTION Defence procurement is about arrangements for linking the demand for the materiel element of military capability to the suppliers of goods and services comprising such materiel. This paper is about how military materiel is procured as opposed to what is purchased. What we call the defence procurement function includes scanning the market for potential sources of supply, soliciting supplier offers, managing tenders and source selection, drafting and executing procurement contracts, managing acquisition and logistic support projects, and providing procurement advice to Defence Organization (Defence) capability managers. In most countries, the defence procurement function is undertaken by a specialized organizational element, which we label the Defence Procurement Organization (DPO). The latter is usually an element of Defence but it may also be detached from it to operate as a quasiautonomous agency. This paper has been prompted by recent Australian government efforts to improve the. performance of the Defence Materiel Organisation (DMO), the procurement arm of the Australian Defence Organisation in discharging the defence procurement function. The DMO was formed in 2000 to consolidate responsibility for both acquisition and through-life support of materiel in a single organization. It operates as an agency of the Defence portfolio, responsible for supporting Defence capabilities through acquisition and through-life support of military equipment. However, its performance and modus operandi have raised some concerns. The latest of several external reviews of the efficiency and effectiveness with which DMO manages defence procurement concluded that improvements to procurement and sustainment could not be achieved without a greater degree of business acumen and commercial discipline being applied (Mortimer 2008, p. ix; our italics). To this end, the review recommended detaching the DMO from the Department of Defence while keeping it accountable to the defence minister--an arrangement we analyze further in Section II. To assess the effectiveness of alternative governance and ownership arrangements, in Section III we outline three stylized service delivery models: * the conventional in-house provision of procurement services by an organizational element within Defence (in-house model); * provision by an agency that is publicly owned but detached from Defence (statutory model); and * privatized provision where the procurement function is contracted out to a privately owned service provider (privatized model). The first two models draw on the Australian experience and each involve different forms of governance of a publicly owned procurement organization. The third model involves private ownership and the form of governance that is commonly assumed in the privatization literature: owner-management (King and Pitchford 2008). Each of these models involves a single service provider, the DPO, and a single for its services: Defence. (However, multiple service providers may also be considered.) We further assume that the materiel user is responsible for determining what is needed, including the approval of the deliverable and commissioning it into service, while--as already stated--the DPO is restricted to the role of intermediary between the customer and the materiel supplier. To evaluate the above options, we use an analytic framework adapted from the work of Hart, Shleifer, and Vishny (1997) which distinguishes between cost-(efficiency) and quality-related (effectiveness) aspects of service delivery under different institutional arrangements. This frame-work is introduced in Section IV to derive optimal conditions for each service delivery option and compare their relative effectiveness. However, in tailoring the framework to our specific purposes, we have sharpened the distinction between the mode of ownership and the adopted form of governance: the way ownership and management are integrated. …