Industry policy

New Defence Industry Policy - what it really means!

1st Aug 2010


The Commonwealth Government in early July released a new Defence Industry Policy known as Building Defence Capability: A Policy for a Smarter and More Agile Defence Industry Base. It outlines an allocated $445 million towards spending on programs for assisting Australian industry to achieve access within key areas such as competitiveness, capacity for innovation, opportunity to win work locally, improve the skills of their workforce and enter the export market. Since the conclusion of the Cold War and the onset of Globalisation a significant consolidation and rationalisation of major defence suppliers has occurred.


As a consequence the global defence industry is now dominated by a small number of large defence companies mainly located within Europe and North America. The new policy views this situation as presenting both challenges and opportunities for Australian Defence Industry particularly for Small to Medium Enterprises to accommodate major investment decisions made within Europe and North America that impact domestically.


Regionally, legacy systems from the Cold War era are now largely obsolete, requiring replacement or major upgrades. Internationally, defence spending began to decline in the 1990s and was further impacted by the Asian Financial Crisis of 1997. This trend has been somewhat reversed even when taking into account the significant impacts of the Global Financial Crisis commencing at the end of 2008. Many nations over the last decade have directed significant efforts and funds towards establishing more capable and effective defence capability.


This has been clearly observed through the shift of global economic weight to the Asia-Pacific region and has established new trends in defence spending and in turn far greater advanced capabilities than ever before. This is viewed as both providing concerns and opportunities for Australia as a nation. Firstly, Australia must raise its own capabilities and the domestic industrial means to sustain and support its defence capacity. Secondly, it provides avenues for new markets, investment, partnerships and development opportunities regionally.


The Defence White Paper 2009 within Chapter 9, identifies the Australian Government’s key capability priorities for modernising and enhancing the ADF, Defence’s principal tasks and the nation’s strategic interests. The estimated cost of acquiring these new capabilities out to the year 2030 is estimated to be AS$275 billion in 2009-2010 dollars. A challenge for the delivery of Force 2030 is to ensure that procurement and acquisition arrives on schedule whilst increasing Defence’s rate of investment in new equipment over the next twenty years.


With links to the Defence White Paper 2009, the achievement of Force 2030 and the completion of the Strategic Reform Program the new policy is seeking to create a stronger and more flexible approach to defence procurement and contracting. Varying kinds and levels of risks are managed through established procurement and contractual processes.


One concern of the past was that these processes have not been clearly defined, viewed as unnecessarily cumbersome and prone to technical and contractual error. In some cases, more than capable SMEs chose not to participate in the defence procurement process due to long time frames and elongated tendering processes.
The Commonwealth Government is seeking to increase the number of opportunities for Australian Defence Industry in order to identify and secure defence business opportunities both here in Australia and overseas. In particular, the removal of barriers restricting the growth of domestic firms by providing Australian companies the opportunity to compete for and win within Australian and global procurement programs while based upon merit.


Wisely recognising that workforce skills are essential elements of any procurement and bidding process combined with a regular requirement for up skilling, encouraging innovative capacity and productivity growth of the Australian Defence Industry are key elements of the Policy. New Zealand firms will not miss out as they are considered to be part of Australia’s local defence industry based upon the long term trans-Tasman free trade agreement of Closer Economic Relations.


However, New Zealand firms will not be eligible to access all elements of the Policy. The Policy is a culmination of over two and half years of defence industry engagement and analysis of the strategic requirements that shape Australia’s Defence Policy.


The Minister for Defence Material and Science in his speech at the launch of the Policy was clear when affirming that the Commonwealth will not use offsets or local content quotas to assist with protecting Australian Defence industry from overseas competition. This is viewed as a driver to encourage sustainable international best practice by defence industry across the spectrum of Australian domestic providers.

Priority Industry Capability


The policy will be supported by new bodies and programs in order to implement the aims of the paper. One element will be the Priority Industry Capability or PIC Innovation Program which will be funded in order to encourage innovation. An amount of $44.9 million has been allocated to support this process - particularly aimed towards Small to Medium Enterprises. The PIC concept represents the broader element of industrial capability that provides the Australian Defence Force with a strategic advantage. To quote the Policy document “the PIC represents the tip of the capability sword”.


PIC participants may also be given access to a wide range of existing programs such as the Skilling Australian Defence Industry (SADI) program, Capability and Technology Demonstrator (CTD) Capability and Technology Demonstrator Extension,(CTDE) programs and the Australian Industry Capability Program. Foreign companies are able to invest and be involved in the program and establish workforces within Australia if they so chose. SMEs are encouraged to be involved in the process as the Commonwealth seeks to retain the capabilities rather than the specific company remain within Australia.


There are 12 listed PICs which include areas such as acoustic technologies and systems, electronic warfare, in-service support of the Collins Class submarine etc which Defence will be closely monitoring to ensure that industry capacity remains at a sufficient level to support Australia’s defence capability needs.


A number of identified potential PICs known as Strategic Industry Capabilities or SICs that will be monitored by the Government. These SICs are capabilities which provide the nation with ADF operational means, longer term procurement certainty and enhanced defence self reliance. Examples of identified SICs include composite and exotic materials, guided weapons, naval shipbuilding, secure test facilities and test ranges - amongst others.

PIC programs will be regularly reviewed and updated as the nation’s strategic defence needs will constantly change. This will occur via the annual classified Defence Planning Guidance process.


Under the PIC Innovation Program, companies will be encouraged to submit to Defence innovative proposals, relating to one or more PICs, to Defence for direct funding. In order to attract funding an industry proposal must clearly support one or more PICs and have solid prospects for delivering additional work within Australian industry or alternatively provide cost savings for future Defence contracts. Funding under the PIC Innovation program will be purely contractual between the company and the Government whilst limited to AS$3-4 million in any one instance.


Defence will develop a set of guidelines for the operation of this program in time for the first annual funding round in late 2010.


The newly established Defence Industry Innovation Board will oversee the PIC Innovation Program and advise Defence and the Government on appropriate resource allocation under the program.


The policy identifies $445 million of Government programs that industry can access to improve their competitiveness, their capacity for innovation, their ability to enter export markets, their opportunity to win work locally and enhance the skills of their workforce.


The policy is based on four key principles to guide defence industry policy which are: Setting clear investment priorities, Establishing a stronger Defence – industry relationship, Seeking opportunities for growth and Building skills, innovation and productivity.


Defence Innovations Centre


The Defence Innovations Centre role is to assist SMEs to break into the global supply chains providing mentoring whilst working towards achieving international benchmarks and best practice. This also includes facilitating access to State and Federal Government programs.


Once SMEs are able to demonstrate that they have the resources, capability and capacity to compete internationally they will be judged as competent to enter the global supply chain or GSC program. The natural order of business is such that Primes are not able to meet the requirements of customers without reliance upon SMEs. Approximately one third of all of Defence spending on acquisition and sustainment goes to SMEs.


It is estimated that there are over 3,000 SMEs engaged within Australia’s defence industry with most subcontracted to Primes. Within Australia the manufacturing industry of which the defence industry is an essential element comprises of 10 % of the total national economy. The Australian Defence manufacturing sector is concentrated around five main areas which consist of: ship building and repair, vehicles, clothing, aircraft assembly, modification and repair and electronics and computing.


Almost every platform within the ADFs inventory is repaired or maintained within Australia. Over the last decade many of the more advanced platforms have undertaken major upgrades with support from local firms demonstrating that ability and capability is in place.


The Government will also establish the Defence Industry Innovation Board which will consist of representatives of Defence and industry. This is aimed at better coordinating innovative programs as they are made available to industry and to improve communication. This board will also oversee the PIC innovation program and advise Defence and Government on appropriate resource allocation under the program guidelines.


The Commonwealth established the Global Supply Chain program in 2009. This $59.9 program under the Defence Material Organisation established GSC Deeds with selected multinational Primes to facilitate opportunities for Australian Defence Industry to compete in the defence Primes GSC. On this premise Australian companies should be able to win and secure work globally.


Over the next five years, the Government plans to invest $292.8 million in innovation, boosting productivity and skills development in the Australian defence industry sector.


This is expected to be achieved by creating more than 7,500 training opportunities under programs such as the Skilling Australia's Defence Industry, Defence Technical Scholarships, Master of Systems Integration, Masters of Systems Support Engineering and other programs. Furthermore provide up to $188.8 million in funding towards defence innovation.


Capability and Technology Program


The Capability and Technology Program (CTD) has been funded to $51 million until 2013 and is designed to allow industry to demonstrate firstly how advanced technologies can enhance capability for the ADF. Other requirements for the CTD program include productivity, innovation and competitiveness within local industry. Selected projects are to be funded on an annual basis - particularly those that seek to enhance the ADF in a previously unexplored manner.


The CTD program is a collaboration between the DMO and led by the DSTO is seen to bridge the gap between technology development and the uptake for commercialisation and industry.


Sadly, far too many fantastic and innovative ideals have withered on the vine in the past with no clear guidelines on how to achieve backing, enter markets, discover specific ADF needs and undertake supportive development and user trails. The CTD program also provides assistance for industry via the retention and skilling of essential technical specialist staff.


Difficult and troublesome projects of the past with large budget and timeframe overruns – such as Collins and Wedgetail - have provided significant negative material for both politicians and the media. In the majority of cases the end result has actually provided a significant long term capability for the ADF.


A decade ago review and action commenced with the Macintosh Prescott Report. However, more recently the Mortimer Review recommendations have resulted with what is now known as the Strategic Defence Review. One such recommendation of the Mortimer Review and adopted by the Strategic Defence Review has been that of acquiring many future systems and platforms as Military Off the Shelf.

Military Off the Shelf


Military Off the Shelf, whilst largely reducing risk, does not provide all the answers to the challenges facing modernising ADF. Maintaining, modifying and upgrading a platform in country is often as important as operating it as an understanding is achieved how to produce the best operational outcomes is often only realised by this option.


During the period 2001-2007 Australia was listed as the eighth largest arms importer. This made the nation a valuable market for Primes and to some degree for domestic SMEs. A strong element of the Policy is affirming that the Government will not apply conditions such as the implementation of offsets or impose local content quotas. Citing previous instances where offset and local content conditions have been applied within Australia Government views this as costly and not providing sustainable outcomes or building indigenous capabilities.


This issue aside not every platform or system can be acquired from overseas services sources and if necessary modified for Australian service requirements and conditions. Project SEA 1000 the Collins Class Submarine replacement project appears not yet to have located a foreign platform capable of meeting Australia’s strategic needs. Given the logic behind the initial construction of the Collins Class has not changed however risk adverse any Australian Government, Defence Department, Royal Australian Navy or local shipbuilding industry may be.


It appears there are few alternatives on the horizon in the future and particularly within the limited strategic and capability replacement parameters. Extensive international collaboration and local construction will most likely provide the key in order not to water down necessary and potential capability of these future boats for the RAN. The challenge of MOTS is to find a realistic outcome that will not result in extensive limitations to capability and sustainment.


Australian – US Treaty on Defence Trade Cooperation


Benefiting from the delivery of the Policy of Building Defence Capability is the Australian – US Treaty on Defence Trade Cooperation. The Australian – US Treaty on Defence Trade Cooperation was signed into Law by President Obama in May 2010. This Act should provide opportunities for the Australian Government to acquire greater access to US technologies.


Greater access to technology is viewed as a key enabler for building and sustaining Defence Capability. This will include increased access and sharing of defence equipment, technology, information and services between the two nations. An improved community of US and Australian Government and private defence companies will be formed while required to comply with security and regulatory requirements. In exchange for compliance with the security and regulatory requirements a licence free export of specified defence goods and services will be permitted within the bounds of the approved defence community.


Expectations include improved timeframes and delivery of defence projects, improved whole of life sustainment of ADF equipment. Australian industry will be offered increased opportunity to participate in US defence programs and bid for support work of defence equipment Australia acquired via the Foreign Military Sales program.

The Building Defence Capability Policy should work to assist with the fundamental frameworks for Primes and SMEs to take advantage of the new access provided by this Treaty.


Defence Industry regularly finds itself between a rock and a hard place – political decisions, Globalisation, protectionism, state subsidies, aggressive and already well established foreign Primes and SMEs regularly impact upon their ability to compete and sustain their abilities. In a domestic environment of peaks and troughs Primes tend to slowly ramp up and then quickly draw down and SMEs are required to diversify in order to spread the risk of fickle defence spending and at times defence project decisions.


The reality is that as a nation Australia requires quality suitable and sustainable relationships with Primes and domestic SMEs that are able to support the ADF from its teeth to its tail. However, the benefits often outweigh the costs when it comes to the achievement of intellectual property creation, technology transfer, employment and research and development. Maintaining a capable defence force that is able to respond to a variety of threats particularly within unique operational requirements and the Asymmetrical war fighting environments of the 21st Century is expensive and time consuming. However, it has national strategic importance whether it is creating a strategic edge and providing employment and credible spin offs into the civilian manufacturing sector.


The so named Building Defence Capability Policy seeks in many ways to provide tough love for both Primes and SMEs within Australia. The underlying logic is to take Australian ideas and innovations to the world, become more efficient, savvy and sustainable at home to a large degree independent of the State. This is however not the Commonwealth abandoning Primes or SMEs but rather building upon previous policy successes, providing greater forums for ideas, avenues for communication and support via State and Federal Governments when required.


Regardless of whether the outlook of the Australian Government does change after the August national election the requirement for supportive, sustainable best practice, clear obtainable pathways and a larger slice of the defence global market is a must for Australia and its ability to meet its defence obligations. Hopefully this policy will work towards the smooth delivering of realistic, quality, high end tangible outcomes for the ADF, Australia as a nation and SMEs and the Primes they support.
 

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