I was pleased to be invited to speak at the South Australian Government’s Defence Industry Policy Summit (PDF) earlier this week. I was invited in my role as a member of the Defence White Paper Expert Panel, and was asked to help set the scene for the discussion that followed. Here’s what I told the meeting.
Thanks for the opportunity to be here today. My topic is the Defence White Paper process, but I’m not able to say much about that as it’s still very much a work in progress. So let me give you the response I give everyone who asks me how it’s going. ‘It’s everything I expected it to be’.
In terms of this gathering, I’m not sure that the DWP is the most germane document. There are several important pieces of policy work going on in parallel, some of which will have at least as large an impact, particularly the development of a Defence Industry Policy Statement (DIPS), a shipbuilding plan and the First Principles Review of Defence’s organisation. Development of the DIPS is something that I and my Expert Panel colleague Mike Kalms were asked to take on by the Defence Minister here in Adelaide back in June.
As a result of that, we’ve been touring the country to consult with industry groups and making site visits. We’ve heard some clear and consistent messages along the way from industry, and I’ve found some of the visits to be real eye-openers. I’ve been impressed with the industry capability and capacity I’ve seen in various places. That will all help inform the DIPS.
As for the DWP, I think it’s important that the discussion that ensues today takes into account the environment in which work is proceeding. Firstly, the federal government has made it clear that it’s going to continue to make major capability decisions. It has committed something like $20 billion to acquisitions such as the F-35 Joint Strike Fighter, P-8 Poseidon maritime patrol aircraft and the Triton surveillance drones. By doing so it’s avoiding the bottleneck in projects that’s accompanied previous DWPs—sometimes as much as 18 months of deferred decisions, which has a flow-on effect to ADF capability and to industry work-flow.
Second, it’s possible that major decisions will be made about shipbuilding and submarines prior to the DWP release. It’s also possible that they won’t, and I can say with high confidence that no decisions have been made to date. I think it’s fair to say that there are inclinations, but there’s still time for the sort of submission that will come from this meeting to influence the process.
Third, there’s the budget situation. In its first budget the government made good on its promise to increase defence spending. If it sticks to its pledge to reach 2% of GDP by 2023/24, Treasury forecasts suggest that the budget that year will be around $45 billion in today’s terms. That compares to this year’s $29 billion, amounting to an additional $16 billion to invest. That’s a lot of additional capability that can be acquired, and a lot of industry support to be purchased. There should be plenty of opportunity for industry. Not so much in the first few years, as there’s a shortfall from the underfunding of the 2009 DWP that has to be made up, but in the years to come there’ll be lots of new investment.
Finally, but possibly most importantly, there’s a whole-of-government policy environment that has to be taken into account. That’s worth studying for clues about government thinking on industry and innovation. A good place to start is the new Industry Innovation and Competitiveness Agenda (PDF) released last week. It had several policy objectives of relevance here, most notably boosting competitiveness and fostering ‘excellence, not dependence’. It also identified five growth sectors, which represent areas of comparative advantage in the Australian economy. The one of most relevance to defence is ‘advanced manufacturing’,
The Agenda observes that Asian countries are increasingly reducing trade barriers, reducing inefficient public spending, reducing taxes and improving competitiveness. In that environment, Australian industry will have to be innovative, be working at world’s best practice standards, nimble and—in the defence space—provide a capability-edge for the ADF. When putting forward business cases for defence industry investment, they’ll need to be couched in terms of competitive advantage and capability edge, not just ‘net benefit’, however calculated.
Finally, let me swap hats and become an ASPI commentator for a minute. As those of you who read The Strategist—which should be required reading—would know, I was much impressed by the productivity gains I saw in local shipyards recently. The touch labour productivity on the AWD is showing a learning of about 20% between vessels one and two, with a projection of between 10 and 15% from vessels two to three. That’s close to world standard.
Similarly, the Collins availability is much improved, suggesting that the Collins story is more about lack of resources than poor industry performance. Actually, it’s probably a combination of both, but increasing resources has enabled better performance. ASC has some way to go to be world’s best practice standard, but the trend is good.
One final comment. When I read today’s press clippings, I saw the call for a competition for the design and construction of the future submarines. As I’ve said before, that’s the way to do it.