Catherine Baldwin: A pivotal moment for Defence



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CEDA Chief Executive Catherine Baldwin gives CEDA's view of the findings from CEDA's Business of Defence report and suggests a new high-level Defence Industry Council

CEDA's Growth report The Business of Defence - Sustaining Capability comes at a pivotal time in the evolution of Australia's defence industry.

As with numerous other industry sectors defence industry operates within a competitive market and a global one at that. However there is one distinct difference between defence and, say, the car manufacturing sector - that is, there is only one buyer - the Federal Government.

The current procurement program through to 2010 involves around $56 billion and significant contracts are still to be allocated.

As such we, as taxpayers and citizens, are all stakeholders in the business of defence. It's on that basis that I hope all CEDA members and indeed the broader community will see the benefit in CEDA having addressed this particular topic. At CEDA our key stakeholder is the Australian people, our chief objective is good public policy outcomes, and our main aim is to inform the public debate.

With this defence paper we have responded to the interests of many of our members from business, government, community and academia who have asked the question: How can we best manage the interaction between suppliers of equipment, goods and services, and the requirements of the Australian Defence Organisation.

With this report CEDA provides a range of views and perspectives from experts involved in policy-setting and decision-making processes. What is clear to the reader from these papers is the complexity of stakeholder requirements and expectations.

The Minister for Defence has instigated a review of defence industry policy. Many of the CEDA authors argue for a clear, transparent and meaningful policy framework within which business can plan its response, ensure skills are developed and within which new technology and innovation is recognized and rewarded.

Key themes explored through these papers are:

  • The tension between Australia's need for domestic capability and the benefits of buying from high-volume overseas sources
  • The tension between the benefits of market competition and the need to help suppliers thrive in a single-buyer environment
  • The alignment of procurement and maintenance with national defence strategy.

Australian firms can benefit from being part of global supply chains of the major offshore primes but this new pattern of relationships poses a number of collaborative, design, technical and distance challenges for Australian firms.

Mechanisms to assist access to global supply chains for businesses whose sole or major business activity is defence products and services provides a means of spreading the risk and should be part of any new policy framework.

Government can play a key role in facilitating the development of collaborative capabilities at the firm level and in new forms of linkages with industry partners.

The whole question of maintaining local technical capabilities for maintenance and repair - the through-life support of platforms, equipment and systems - is a key theme and an important strategic decision in any consideration of the future of our defence industry.

In some instances, particular capability resides within a single enterprise, however, maintaining capability should not necessarily be directly linked to maintaining the viability of a particular enterprise. Unfortunately, these two issues sometimes get confused and result in a view that particular enterprises should be given preference in defence contracts or that there should be some kind of consolidation of enterprise based capability.

Indeed, such an approach can be seen to be in direct conflict with the notion of competition for major contracts. CEDA supports competition as the best way to ensure value for money and as a driver of innovation. What is at issue, is the way competition is managed and the point in the project cycle at which it is brought to bear.

Generally speaking CEDA's authors support the proposition that the larger, more complex and more innovative a project is, the earlier in the cycle contractors should be chosen. CEDA welcomes the implementation of this policy by DMO and encourages further development of this approach.

There is uncertainty in Australia's geopolitical outlook and yet major procurements require long term decisions. The requirements of the Australian Defence Force vary in response to global incidents whether caused by extreme acts of nature as in the Indonesian Tsunami, or by civil strife or border conflicts. To what extent does Australia's defence force operate in conjunction with major allies or semi-independently in more localized conflicts?

In the interests of national sovereignty what local capabilities need to be preserved at least sufficiently to sustain through-life support and repair in times of war?

The report contains nine papers from leading experts:

Professor Paul Dibb, AM, chairman of the Strategic and Defence Study Centre in the Research School of Pacific and Asian Studies at the ANU, calls for much closer alignment between defence strategy and defence industry, citing the recently published UK Defence Industry White Paper as a possible model for Australia. To mitigate the boom and bust nature of project-by-project acquisitions, the Government's policy was designed to ensure sustainability of key industry capabilities with open competition occurring within this framework.

The Defence Capability Plan 2001-2010 was established to provide information about future acquisition plans but as Dibb points out this process has not been entirely successful. The question arises as to whether or not the Government has a role, and perhaps even a responsibility to articulate its future requirements and what aspects should be developed and acquired from within Australia. The dominant purchasing power of Defence can (or should) shape industry policy.

Former Chief of the Defence Force Admiral Chris Barrie, AC, supports the need for identification of essential industry capabilities and notes the savings that have accrued from increased private sector contracting. With improved cooperation between suppliers and the department it should be possible to reduce the lead times for major items of capital equipment from the present 10 to 15 years to eight years. However this would require a closer alliance relationship between defence and its suppliers.

Barrie comments on the size of national stockpiling, emerging problems with workforce shortages given the ageing of the population and recommends a complete separation of the Defence Materiel Organisation from the department. Both the Department of Defence and the ADF would have a fully fledged contract with a separate entity which would also recruit its own workforce rather than funneling expensive service personnel into DMO.

Dr Richard Brabin-Smith, AO, Visiting Fellow of the Strategic and Defence Studies Centre of the ANU, describes the role of the Defence Science and Technology Organistion and promotes the value to Defence of innovation in science and technology within Australian industry. He suggests that there needs to be greater recognition of the importance of science and willingness on the part of Defence to embrace local innovation. Brabin-Smith also calls for a new Defence capability plan to clearly articulate the government's policies and expected levels of funding.

Mark Thomson from the Australian Strategic Policy Institute reviews the role of competition in Australian defence procurement and the introduction of Australian Industry Involvement (ALL) to develop local industry capabilities and maximize local content consistent with achieving value for money. Thomson recommends sorting out the capabilities required in-country taking a strategic as well as an economic view and using open competition on global markets for the remainder. As a member of the Minister's Review Team he is well placed to pursue his call for a new defence industry policy.

Stefan Markowski is Associate Professor in Economics and Management in the School of Business, the University of New South Wales at the Australian Defence Force Academy, Canberra and Peter Hall is Professor in the School of Business at ADFA. They outline an economic framework for assessing the benefits of in-country defence industries. In determining the value of the end product of defence i.e. national security provision and defence capability, judgment is unavoidable as the true social value of defence cannot be assessed in peacetime. Markowski & Hall discuss the distinctive nature of the defence industry suggesting that to be internationally competitive Australia needs to specialise in niche products. They are critical of justification for protectionism of Australian defence industry and say that transparency in decision making and accountability throughout the procurement process is essential. Support for a domestic defence industry should be driven by strategic defence considerations.

Bob Wylie, visiting Fellow at the Australian Defence Force Academy, focuses on six procurement areas to illustrate the links between local firms, their business activities and the military capabilities they supply and support. In each of these areas he reviews current and prospective workload, the major suppliers and the links between local and international firms. Wylie notes the need for local defence industry to keep pace with the increasingly complex and knowledge intensive systems requirements and notes the value of close geographic and functional proximity between the customer and supplier as a rationale for supporting and fostering local industry capability.

Christopher Wright, recently Managing Director of BAE Systems in Australia, provides a case study with an examination of the procurement process of the Joint Strike Fighter Program, and the impact this new approach could have if applied broadly across future defence acquisitions. Favoring a market mechanism rather than government intervention this approach will complicate any alignment between defence strategy and industry capability. Clearly, especially amongst SME's there are potential benefits in such a project enabling access to global markets, however, there are also risks associated with increased dependence on decisions being made by US companies further up the value chain.

Derek Woolner, Visiting Fellow at the Strategic and Defence Studies Centre at ANU, in a second case study examines procurement of the Air Warfare Destroyer Project, the most complex naval surface vessel ever attempted in Australia. He notes that problems with past acquisitions, e.g. the Collins submarines mostly reflect decisions made or not made early in the project well before the contractual phase.

A Principal's Council has been established for the AWD project to assess and respond to potential risks and problems during the course of this project. Woolner concludes that this role should be extended to form a new type of supervisory agency.

Geoffrey Barker is a leading journalist on defence and policy for the Australian Financial Review.Defence is undoubtedly the most politicized of all industries and Geoffrey, the final author, looks at this interplay of economics and politics in major procurement decisions. Barker notes that while the profitability of defence industry is broadly in line with the general manufacturing and services industries, the industry overall is not particularly robust in terms of its ability to meet future defence needs. He also agrees that the Defence Capability Plan covering four current sectors - aerospace, electronics, shipbuilding and land is inadequate. Barker reviews acquisition arrangements since the 2003 Kinnaird review. The establishment of the DMO and the "two pass" system as recommended by Kinnaird have been important developments. However, Barker comments on breaches in this practice and concludes that politics is unavoidable especially in terms of Australia's alliance relations with the US.

Together these papers provide a comprehensive overview of the circumstances that confront Australia's defence industry.

The factors that seem to be primary in developing a policy framework are:

  • The government's geo-political strategy and the likely scenarios that will dictate defence requirements be they local, regional or alliance responsibilities.
  • Identification of specific strategic capabilities that need to be developed in local industry to ensure through life support for equipment and repair of critical components in times of conflict.
  • The capacity of local suppliers to successfully enter supply chains of global primes and the facilitating role government can play in building these alliances.

It's clear that Australian-based businesses have a vital contribution to make in sustaining Australia's defence forces.

Businesses supplying goods and services to the Defence Force need to have more clarity and certainty about what Defence intends to do and buy.

This is a tough challenge in a world where Defence is being asked to take on various roles in places from Afghanistan to the Solomon Islands. There is also the challenge of retention and recruitment of defence personnel in adequate numbers and with sufficient skills and training to meet the demands placed on them.

In summary

The business of defence is large and complex with changing strategic needs and technologies, making long term planning difficult for both defence and industry

This leads to a requirement for open dialogue between defence and industry through capability plans and policy frameworks.

Long lead times for major projects require clear strategic direction and early engagement with contractors, especially in the design and concept stages.

Certain industry capabilities within Australia are essential for supporting Australia's strategic and security needs and these must be identified.

Integration with global supply chains reduces risk for businesses largely or solely reliant on defence business - but this has challenges.

Research and innovation need to be encouraged to enable ongoing competitive advantage for Australia's defence force.

The report acknowledges the tensions that exist between sustaining military capability in a cost-effective way and ensuring the private sector delivers the investment and innovation required.

CEDA believes it is imperative that the tensions be recognised by all parties and that maximum effort be put into managing them to ensure the best overall outcome.

Communication between business and defence should be transparent and non-adversarial. It should be built around mutual trust and a joint recognition of the need for co-operation and collaboration to provide the best outcomes for both parties.

CEDA suggests that a high-level Defence Industry Council, similar to that outlined in the UK's 2005 Defence Industry White Paper, could play an important role in delivering this close yet transparent relationship at a strategic level. Perhaps the Australian Minister for Defence could chair such a body comprising the highest levels of defence planning, defence science and technology, DMO and top level industry representatives. Its purpose would be to provide an open exchange of views and issues, new developments and innovations and to foster effective relationships between business and defence.

A Defence Industry Council would build on the strong progress being made by DMO especially through improved schedule management, and the valuable monitoring undertaken by General David Hurley's Capability Development Group.A high level strategic exchange between Defence and Industry would facilitate many of the outcomes sought by the authors of these papers and indeed by many of CEDA's member organisations.

This paper is the beginning of the process to generate open discussion between policy and decision makers and stakeholders - the government, defence force, industry and the Australian people.