DMO Overview

1.6  An overview of DMO's business is presented in the following figures and tables.

1.7  The total budget for the Department of Defence in 2010-11 was $30.9b. Of this, $9.7b152 was budgeted for planned payments to the DMO under Purchaser Provider Arrangements to support the DMO's acquisition and sustainment activities. Figure 1.1 demonstrates the significant investment made in DMO to support capability for the ADF, and when assessing the DMO budget as a whole ($10.4b in 2010-11 including service fee153), equates to 0.8% of Australia's Gross Domestic Product (GDP) in 2010-11.

Figure 1.1 - Payments to DMO as a Proportion of the Department of Defence Budget 2010-11

1.8  A Capability, defined as 'the power to achieve a desired operational effect in a nominated environment, within a specified time, and to sustain that effect for a designated period'154, is generated by a number of Fundamental Inputs to Capability (FIC) namely:

•  organisation;

•  personnel;

•  collective training;

•  materiel systems;

•  supplies;

•  facilities;

•  support;

•  command; and

•  management.

1.9  The DMO is primarily responsible for managing the procurement and ongoing sustainment of the materiel systems component of capability, comprising mission systems, designated elements of training and non- infrastructure equipment for facilities that support the operation of ADF equipment, such as simulators, trainers and unique test equipment. Defence has overarching responsibility to deliver all inputs to capability.

1.10  Capability systems have a life cycle that begins with the identification of a need, moving through to identifying the requirements, then to the acquisition of the capability, operating and sustaining it in-service, and then the final disposal phase once the equipment is no longer required.

1.11  As figure 1.2 demonstrates, the 2010-11 budget allocation between acquisition and sustainment is relatively evenly distributed. This demonstrates the strategic significance of sustainment activities and the ongoing effort required to maintain the necessary level of operational capability. The size of the sustainment budget also reflects the technically challenging nature of sustainment activities. The budget for provision of management services and policy advice is relatively small (representing approximately 9% of the DMO's total budget), to maintain the essential DMO corporate management and governance functions that support the acquisition project and sustainment product functions.

Figure 1.2 - DMO Budget Allocation to Acquisition Projects, Sustainment Products and Management Services 2010-11

1.12  As Figure 1.3 demonstrates, the DMO expended 102% ($10.6b) of its budget allocation against the 2010-11 Portfolio Additional Estimates Statements ($10.4b), which reflects the strong capital performance by DMO projects and the acceleration of some program activity.

Figure 1.3 - DMO Expenditure Allocation to Acquisition Projects, Sustainment Products and Management Services 2010-11

1.13  Approximately two thirds of acquisition projects undertaken in the DMO are considered 'Major Projects' with the remainder classified as 'Minor Projects' (see figure 1.4 below). Major capital acquisition projects are funded through the Defence Capability Plan (DCP) and generally have a budget allocation of more than $20m. Projects of lesser value may also be funded through the DCP if they are particularly complex or of strategic significance.

Figure 1.4 - Number of Major and Minor Acquisition Projects 2010-11

1.14  A Minor Capital Acquisition Project is funded through a Defence Group budget allocation under the Minor Capital Acquisition Program (generally by a Service Group - Navy, Army, or Air Force). Minor projects, although generally costing less than $20m, are not necessarily of low significance from a capability perspective as they can either include essential equipment to sustain and protect our troops or have crucial interdependency with major capability.

1.15  The 28 major DMO projects covered by this MPR are shown in table 1.1.

Table 1.1 - List of 2010-11 MPR Projects by Total Approved 155

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152  Portfolio Additional Estimates Statements 2010-11, Defence Portfolio

153  The DMO has three funding sources: Government (Appropriation Revenue), Defence (Goods and Services) and Other Revenue. Prior to 2010-11 the DMO received a service fee from Defence to fund its workforce and operating costs, but under the Mortimer Review Reforms DMO is now directly appropriated from Government for this element of DMO's budget.

154  Defence Capability Development Handbook, August 2011

155  The convention used in this report is to list projects in order of their total approved budget to deliver the project, from highest to lowest. Where the analysis requires a different order, an explanation is provided.

156  The estimated in year budget expenditure for four projects differ to the Annual Report where the budgets for these projects were calculated post 30 June 2011 as Guidance Adjustments made at the Approved Major Capital Investment Program (AMCIP) level to account for movements in the planned budgets, andas a result are not reflected in the Part 3 PDSS.

157  The total approved project budget for ten projects differ to the Annual Report. The Annual Report has included additional adjustments post 30 June 2011 resulting from exchange rate gains and losses during the 2010-11 financial year. For example, and in accordance with the Government's 'no-win / no-loss' policy; if the project made a gain, this amount was adjusted downwards against the current approved project budget. Conversely, if the project made a loss, the project budget was adjusted upwards to compensate. This calculation did not take place until 25 July 2011, and adjustments are not reflected in the Part 3 PDSS.