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Are local companies being shut out of US defence construction in Australia’s north?

Posted By and on August 13, 2021 @ 15:00

US President Joe Biden’s pivot to the Indo-Pacific region has brought announcements of big defence spending by the United States in northern Australia. The US force posture initiatives [1] in the north will involve total spending of $832.8 million. Australia will spend [2] $747 million towards the same effort of expanded defence infrastructure and joint exercises with the US. These significant financial commitments clearly indicate coordinated strategic investment in the stability of the Indo-Pacific region, central to which is the interoperability of US and Australian armed forces.

As part of the US reorientation to the Indo-Pacific, in 2014 the US and Australian governments agreed [3] to jointly fund the construction of a suite [1] of military facilities at Defence sites in the Northern Territory. The agreement, which came into force in March 2015 [4], authorises the presence of US forces and contractors on Australian land in specific situations. For contractors, this includes ‘construction [3] activities on, and mak[ing] alterations and improvements to, agreed Facilities and Areas’.

These funding commitments represent a big financial gain for the Northern Territory, providing a means for infrastructure cost-sharing with Defence and a contribution to maintaining a scalable industrial base in the territory.

Under the Pentagon’s Naval Facilities Acquisition Standards [5] (NFAS), US construction projects in foreign jurisdictions are subject to the same risk-reduction ‘bonding requirements’ that apply to projects in the US. Within a specified number of days of the awarding of a construction contract, the bidder must deposit ‘performance’ and ‘payment’ bonds [6] with the US contracting officer, each of which is equal to 100% of the original contract price.

This is different to how the risk profile of defence construction projects is reduced in Australia. In simple terms, the US assessment is based on the company’s balance sheet, technical ability and project history, whereas the Australian assessment is based on the value of assets. This means the US bonding requirements establish a competition barrier for Australian bidders because they have to provide a bond worth twice the contract price until the project is completed. Even without this requirement, Australian companies already find it challenging to raise sufficient equity for large construction projects in northern Australia because the ‘user-pays’ model doesn’t work with the comparative ease that it does in the more populous southern regions of the country.

Big construction projects are scarce in the NT, Western Australia and Queensland. And there are challenges for the NT in particular that preclude long-term socioeconomic stability for local communities. There’s a strong case for foreign construction projects to contract Australian companies and provide jobs to local communities. It would be understandable if US contractors winning bids over local companies ruffled feathers. Whatever the commercial reasoning, why should Australia accept US barriers in a jurisdiction that has so few big opportunities and such great economic need for them?

The good news is that NFAS allows the performance and payment bonds to be waived and alternative risk-mitigation options to be used if the bonding requirements are found to be ‘impracticable’—for example, if they’re inconsistent with local standard industry practices. Australia fits that case both on industry standards and because of the difficulty of raising equity for work in northern Australia.

Yet Defence has confirmed to ASPI that no requests have been made to waive the US bonding requirements by any Australian or US companies bidding for projects.

This suite of US construction [1] projects also has the added context of being critical to the security agendas of both countries, which affects what is ‘right’ and ‘fair’ in terms of where the construction funding goes.

If the US chooses to build defence facilities in Australia to serve its force posture, the Australian government has the authority, and perhaps even the responsibility, to mandate the use of Australian companies. On the other hand, Australia’s security and geopolitical influence and interests are served by a deeper alliance with the US in an Indo-Pacific increasingly threatened by a rising China, and by that alliance putting more US boots on NT defence bases and training ranges.

But this shouldn’t be an either/or situation. US investment in local companies assists Australia in maintaining the kind of industrial base needed to support a range of contingencies. Washington needs to consider that Canberra’s commitment to supporting the US force posture initiative is substantial and may outweigh domestic economic considerations.

The contracts for the first five of a total of eight projects in the agreement were awarded in 2018–2020, according to the US Department of Defense [1]. Three went to Australian companies, with a combined value of $29.3 million, and two went to US companies, with a combined value of $116.5 million. That’s an $87.2 million lean towards US contractors. Or just 20% to Australian contractors.

Or at least that was the case until recently, when a whopping $687 million contract was awarded to Australian company Lendlease for the US component of works at Royal Australian Air Force Base Tindal. This project brings Australian companies up to $716.3 million, meaning 86% of the total value of US contracts has so far been awarded to Australian companies. Suddenly, it’s a very different story.

So, was bonding a barrier to Australian companies winning these contracts or winning the higher value contracts? It’s one of several possible factors.

US companies may have a greater capacity than their Australian counterparts to meet the bonding requirements for high-value projects. Given that there was no waiving of the requirements for the first three successful Australian companies, nor was such a waiver a requested, the difficulty in raising bonds could explain why Australian companies other than Lendlease won just 3.5% of the total value of the US contracts.

If US companies were able to raise bonds and Australian companies, other than Lendlease, weren’t, then it’s reasonable and fair that the US companies won the lion’s share of the other contracts.

Other factors at play here include the extent to which Australian companies are perceived to be competitive, the competitiveness of individual bids and the extent to which contracts were awarded to support the US economy.

The Australian government could consider changing its approach to ensure agreements are contingent on using local contractors for local projects to serve the local economy. Rather than accepting US policies, the Commonwealth could reframe foreign governments’ investments in Australian public infrastructure and assets by setting the rules to benefit the Australian economy.

The US wouldn’t tolerate the Australian government dictating investment policies on US territory any more than the Chinese Communist Party would tolerate Australia leasing a major piece of China’s transport infrastructure.



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URL to article: https://www.aspistrategist.org.au/are-local-companies-being-shut-out-of-us-defence-construction-in-australias-north/

URLs in this post:

[1] US force posture initiatives: https://www.defence.gov.au/Initiatives/USFPI/Infrastructure/Default.asp

[2] Australia will spend: https://www.reuters.com/world/asia-pacific/australia-upgrade-military-bases-expand-wargames-with-us-australian-2021-04-27/

[3] agreed: http://www.austlii.edu.au/au/other/dfat/treaties/ATS/2015/1.pdf

[4] March 2015: http://www.austlii.edu.au/au/other/dfat/treaties/ATS/2015/1.html

[5] Naval Facilities Acquisition Standards: https://www.navfac.navy.mil/content/dam/navfac/Small%20Business/PDFs/Contracting_with_NAVFAC/sb_navfac_naval_facilities_acq_standard_oct_2018_change1_aug2019.pdf

[6] ‘performance’ and ‘payment’ bonds: https://www.acquisition.gov/far/52.228-15

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