Making sense of the government’s defence industry policy
6 May 2016|

I’ve been trying to understand the government’s policy on defence industry. Having read the recent Defence Industry Policy Statement (DIPS) it seemed straightforward, but then I looked closely at the Prime Minister’s recent announcement about submarines. Unless I’m missing something, it looks like we have a fundamentally new policy even as the ink dries on the old one.

The 2016 DIPS is an unsurprising document. Like most government glossies, it talks up its big-ticket ‘announcables’. Specifically, $1.6 billion over ten years to establish:

  •  a Centre for Defence Industry Capability (CDIC) ‘to drive the strategic partnership with Defence, involve industry in governance of the industry programs and provide a range of business and skilling services’;
  • a Defence Innovation Hub ‘to undertake collaborative innovation activities from initial concept, through prototyping and testing to introduction into service’; and,
  • a Next Generations Technologies Fund  ‘to invest in strategic technologies that have the potential to deliver game-changing capabilities’.

The first two initiatives will be funded entirely by redirecting $870 million from existing programs. While there’s some relabelling afoot, the joint defence industry CDIC is a new concept. The remaining $730 million for the technology fund will come from Defence’s investment program. On the scale of defence spending, $73 million a year is a significant but not over-the-top investment in new technology.

So much for feeding the technology chickens; there are two other aspects to defence industry policy that are much more important. The first is ensuring that the ADF has access to the industry capabilities it needs. To this end, the existing Priority and Strategic Industry Capability framework will be replaced by a Sovereign Industrial Capability Assessment Framework ‘to improve the identification and management of the sovereign industrial capabilities that develop and support our ADF capabilities’. In addition, industry has been recognised as a Fundamental Input to Capability with the goal of driving ‘more formal consideration of industry impacts through the early stages of the capability development life cycle’. Responsibility for doing so will fall on the Capability Managers (a.k.a the service chiefs and the Vice Chief of the Defence Force) who will be assisted by the CDIC.

The test of this new approach will come with the new Defence Industrial Capability Plan, promised for 2017, with sovereign industrial capabilities identified through a ‘collaborative process between Defence and the CDIC’. Past attempts to identify key defence industry capabilities have succumbed to special pleading by incumbents in a case of ‘we have to do what we do because it’s what we do’. The stronger role of industry in the new process can only increase the influence of existing firms.

The other critical question for defence industry policy is how much preference will be given to local suppliers. In the 1980s and 90s we had explicit programs, such as the Australian Industry Involvement scheme, that favoured local suppliers irrespective of cost. More recently, however, governments have taken a more economically rational approach that saw equipment purchased off-the-shelf from overseas while creating opportunities for local firms to bid competitively into global supply chains.

The new DIPS maintains the existing overarching approach to defence procurement. That is, apart from sovereign requirements, decisions will ‘seek to achieve the best value for money’ with consideration of ‘opportunities to maximise internationally competitive Australian industry involvement’.

Thus, in terms of what matters, the new DIPS reflects continuity. There’s no changed preference for local suppliers, and the arrangements for managing sovereign industry capabilities aren’t markedly different to the old ones for priority/strategic industry capabilities. If there has been a noteworthy change, it’s probably the extra $73 million a year to invest in ‘game-changing technologies’.

But defence industry policy is a slippery beast. It’s always possible to hide a preference for local suppliers behind a fig leaf of preserving sovereign capability. Moreover, if firms bidding for defence contracts think there’s an advantage in offering high local content, they’ll happily do so and pass on the costs. For these reasons, the government’s actual procurement decisions, and how it explains those decisions, are every bit as important as its declared policy. Which brings us to the submarine announcement.

When asked about local content in the submarine program, the Prime minister said:

‘I am determined that every dollar we spend on defence procurement as far as possible should be spent in Australia, and our commitment to that is precisely for the reasons that Marise and I and Christopher and the Vice-Admiral have spoken about. Because when we invest in Australian industry and jobs, Australian technology, we are strengthening our whole economy.’

Apart from expressing an unqualified preference for local suppliers in stark contradiction to the DIPS, the Prime Minister stressed the economic benefits of doing so. It wasn’t an isolated mention; the same point is made at three other points during the announcement. Yet, the DIPS says absolutely nothing—not a single mention—about using defence procurement to build a stronger economy.

It’s not that there’s an iron-clad strategic argument for building submarines in Australia, otherwise the government wouldn’t have asked for offshore and hybrid options from the contenders. Rather, a judgement has been made that the cost premium for local production, which the government concedes exists, is outweighed by economic and other benefits. That might be the case, but it’s not reassuring that the government refuses to disclose the cost premium or to release the economic impact report it commissioned on the submarines (at a cost of $387,000). If it’s such a good deal, why are we being kept in the dark?

There’s no denying that there were political factors behind the submarine decision, but that doesn’t mean that there hasn’t been an important change in policy; it merely explains why. Mindful of what the Prime Minister said in Adelaide, future bidders for defence contracts will be packing in as much local content as they can, with the risks borne by the ADF and the costs by taxpayers.