Defence & Australian industry: from low trust & distant to direct partnership for delivery
Partnership between govt an dindustry

Defence industry and contracting policy is adversarial, process heavy and focused on the big primes.

Written by

Peter Jennings

“Australia’s defence industry is looking for two things: the first is an opportunity to participate in the strategic level thinking needed to bring clarity to a situation of increasing policy disorder. The Government, Parliament and Defence need to create mechanisms that allow industry to operate as a ‘fundamental input to capability’(FIC). Central to this idea is that industry is treated as a trusted partner, where genuine collaboration with Defence brings quick innovation.

Second, defence industry needs policy predictability. Industry must be confident that long-term investment in plant and workforce skills will ultimately lead to sustained returns. Without such confidence overseas industry will not come or stay here and local industry will not diversify into defence projects or remain the field.” – excerpt from full submission, text below.

Submission to the Senate Foreign Affairs, Defence and Trade Committee inquiry into the performance of the Department of Defence in supporting the capability and capacity of Australia’s defence industry.

Thank you for the opportunity to make a submission to this inquiry. Strategic Analysis Australia (SSA) does not offer corporate views on any matter, so this submission reflects my personal opinions.

Setting the scene

The impression one has in August of 2023 is that Defence is working exceptionally hard on a huge number of separate internal reviews, studies and reorganisations in response to the Defence Strategic Review and policy announcements from the current and previous government. It is not clear what will emerge from this effort. There is no obvious path forward on the future shape of the Navy’s surface fleet, nor is there yet a new design for Army after reducing the infantry fighting vehicle program. The bulk of announcements in the recently released 2023 AUSMIN communique are about US rather than Australian or joint activities in the north. We are no closer to a strategy for manufacturing missiles in-country. While the new Advanced Strategic Capability Accelerator has been launched, it’s not clear how it will surpass the lacklustre performance of previous innovation programs.

There is no clearly explained path to improve Defence’s capacity to innovate, or to fix recruitment or to measurably strengthen the organisation’s key missions to ‘shape, deter and respond’. Similarly, there’s no real signs Defence knows how to strengthen Australia’s defence industry.

Australia’s defence industry is looking for two things: the first is an opportunity to participate in the strategic level thinking needed to bring clarity to a situation of increasing policy disorder. The Government, Parliament and Defence need to create mechanisms that allow industry to operate as a ‘fundamental input to capability’(FIC). Central to this idea is that industry is treated as a trusted partner, where genuine collaboration with Defence brings quick innovation.

Second, defence industry needs policy predictability. Industry must be confident that long-term investment in plant and workforce skills will ultimately lead to sustained returns. Without such confidence overseas industry will not come or stay here and local industry will not diversify into defence projects or remain the field. Successive Australian governments keep changing defence capability goal posts. Australia is developing a reputation as an investment sovereign risk. Why would an international company plan to build defence capability here when, in five or ten years, a government announcement could undermine years of investment?

More than new policy initiatives, this Committee should consider how it can build a strengthened bipartisan approach to defence capability development – an approach founded on a deeper trusted partnership with industry.

Defence and industry should stress building trusted relationships

The Committee will have noted the multiplicity of programs and policies Defence has developed to support industry. Defence points to eight current policy programs and activities in its rather cursory submission to the inquiry. Other submissions point to a mountain of past initiatives, reviews, policy statements, programs, and grants. There is much more to come: the public report of the Defence Strategic Review (DSR) anticipates a number of future studies that will impact on industry engagement including a National Defence Strategy to be issued in 2024.

According to the DSR, even before the National Defence Strategy is released, Defence will undertake the following policy tasks, each with major impacts on defence industry:

  • Reprioritise the Integrated Investment Program;
  • Deliver an “independent analysis” of Navy’s surface combatant fleet;
  • Update the National Naval Shipbuilding Enterprise Strategy and the Naval Shipbuilding and Sustainment Plan;
  • Prioritise “in the shortest possible time” a way to develop selected critical technology areas under AUKUS Pillar II;
  • Provide Government with options on increasing guided weapons stockpiles and on “the rapid establishment of domestic manufacturing”;
  • Develop an “enterprise-wide audit to baseline Defence estate and infrastructure”;
  • Develop a “national logistics support concept” and;
  • “Change Defence’s capability acquisition system so that it meets requirements and is reflective of our current strategic circumstances.”

The deadlines for these activities are either before the end of 2023 or in 2024. Moreover, these activities are only the most noteworthy of many other new policy development or review activities set out in the DSR. The Defence submission to this inquiry also advises that a Defence Industry Development Strategy “will be released in the second half of 2023.” Add to this the delivery of current projects – Defence’s $52.559 billion dollar budget doesn’t spend itself – and the intense focus on the AUKUS nuclear-powered submarine program.

While I do not doubt the capacity of Defence officials for hard work, the sheer volume of policy redevelopment underway should lead the Committee to ask if Defence can deliver on all or many of these policy documents in the planned time.  A key Defence assumption here seems to be that this work will be done in isolation of industry even though it is defence industry and the wider Australian economy which will have to turn the policy statements and objectives into actual products.

There are several risks here, an obvious one being new policy overload. Successive governments have shown that it is much easier to announce new policy, or (more often) a plan for new policy, than it is to deliver practical outcomes. An enormous bow wave of policy promises has been built over the last few years, now all codified in the DSR. Is any of this really deliverable?

A lesson is that Defence struggles to keep up with the twists and turns of responding to policy thought bubbles tied to the three-year political cycle. How the Department deals with this gives rise to a second policy risk with industry: isolation from policy development. One Defence ‘coping’ mechanism is to push off contact with industry on any aspect of new opportunities for cooperation. Far from treating industry as a ‘fundamental input to capability’, where engagement might lead to a shared approach to innovation or delivery, Defence keeps industry at arm’s length as the department struggles to understand how it must respond to government policy changes—while avoiding giving an impression it is ‘getting ahead’ of the government.

The result is that too many new policy initiatives get in the way of delivering anything real. The promise of a new policy to be delivered at some future point often leads Defence to advise industry that contact should be delayed until the policy is endorsed by government. This has been a constant refrain of the department since before the 2016 Defence White Paper was released. It took two years to develop the 2016 White Paper during the tenure of two Prime Ministers and three Defence Ministers. While this process was underway, industry was told to wait to engage with the department until the White Paper was finalised. Once released in February of 2016 industry was told to wait while the department recalibrated around delivering the new IIP. Industry was then told to wait for the 2019 election outcome before substantive engagement could happen; then to wait for the 2020 Strategic Update; then to wait for AUKUS arrangements to be settled; then for the subsequent 2022 election; then for the DSR.

The committee may not be surprised to hear that many in industry seeking to engage with Defence are currently being told to wait for Defence to develop the raft of initiatives announced in the public DSR.

Creating opportunities for trusted and substantive engagement

The outcome is that there is no substantive discussion between industry and Defence on how to innovate, or on how to deliver changed policy requirements. Contact is typically limited to highly constrained discussions around existing contract deliverables. But a current focus on meeting historically contracted time schedules, costs and capability requirements means that ‘real-world’ strategic events have already rendered these requirements out of date. Industry refers to these engagements as ‘master-slave relationships.’ This type of engagement with industry does not allow for broader strategic level discussion about new or different ways to deliver capability.

The Committee might wish to test this proposition by asking Defence what substantive engagement the organisation has had with industry to discuss:

  • Delivering new capabilities under AUKUS Pillar II, especially relating to areas such as quantum computing, artificial Intelligence and machine learning and other technologies where industry already has insights to offer based on their own research and development activities that are well underway.
  • Delivering a new east coast naval base for nuclear powered submarines.
  • Options to deliver surface fleet maritime capability other than through currently contracted programs.
  • Options to deliver recruitment programs given that existing plans to grow the ADF are an essential prerequisite for all other capability plans and that Defence is not meeting current recruitment targets. (Note that Defence and industry have, to some extent, a shared workforce. Can the movement of people between these sectors be more cleverly managed to benefit Defence, industry and the individuals concerned?)

In each case I would argue that there is an absence of strategic engagement with industry, of a type that lets industry play its role as a fundamental input to capability. Much of what is branded as ‘consultation’ involves short meetings where Defence officials brief an invited audience but there are few meaningful exchanges of views.

This failure of genuine strategic engagement between industry and Defence breeds deep cynicism on the part of established industry players. One tends not to hear public criticism from industry because they are conscious of having one customer and worry that being seen to be critical of current policy settings will risk future work. But the lack of engagement around a shared endeavour to deliver innovative policy will kill our national capacity to reform Defence and to respond to increasingly threatening strategic change.

For many Australian SMEs looking to bring new ideas to market, the overwhelming impression is that there is no access point to engage with Defence and no pathway to put technological innovation into production and military service. An SME perspective which I regularly hear is that Defence is not interest in dealing with SMEs outside of slow grants processes, which drive companies through formulaic Defence hoops rather than seeking to share ideas to develop shared solutions. SMEs with good ideas but limited resources may conclude that the fastest path to productivity is to take their product to the United States. While not perfect, the US Defence system is faster than Australia in identifying good technology ideas and products   and in finding ways to rapidly operationalise them.

Moreover, in a country with a relatively limited industrial base such as Australia, it is vital to draw on all industrial sectors to deliver greater military capability and national resilience. There is huge latent capability in companies supporting the resource, energy, finance, IT, transport, and agricultural sectors. But why would those companies seek to diversify their world-leading capabilities into the defence market when they would have to take on the risk of dealing with such a slow-moving, opaque, risk-averse and, at times, capricious customer?

Four key recommendations

The committee might like to consider adopting the following recommendations to address the broader strategic problems I have discussed. These are designed to strengthen relationships between Government, Parliament, industry and Defence and to foster a genuine spirit of collaboration around the idea of a national defence effort identified in the public version of the DSR.

  1. The Committee should recommend that the Prime Minister establish a Defence and Industry Advisory Board. The board would comprise individuals from senior private sector, union and other non-public service areas, able to provide government with advice on the industry aspects of national security. Membership should encompass a much broader range of industry participants than just defence industry. The board would supplement advice from Defence, but bring wider perspectives, designed to strengthen Australia’s national capacity at times of heightened strategic risk.Such a board needs to report to the Prime Minister because of its ‘whole-of-nation’ focus, accepting as the DSR states that “These are not strategic circumstances for Defence to grapple with alone. We need both a unifying national strategic approach and a new approach to our nation’s defence.” (p. 31)The board should play a central role in the Government’s announced development of a National Defence strategy in 2024. The board needs ‘top-cover’ to provide independent advice. As such its work should not be managed by, or moderated through, Defence. The Chair of the board needs a direct relationship with the Prime Minister and as such needs to be the PM’s selection and able to make representations at the top levels of government. The Committee should note that the Defence and Industry Advisory Board could play a vital role in addressing one term of reference put to the Smith and Houston Defence Strategic Review, which was: “The Review must outline the investments required to support Defence preparedness, and mobilisation needs to 2032-33.” Smith and Houston’s findings on this term of reference were not reported in the publicly released DSR.
  • The Committee should consider a subsequent inquiry into ways of strengthening Parliament’s engagement with Australian Defence Industry
  • In my view this should be thought of as a task completely separate to the question of the Defence Department’s support to industry.
  • Terms of reference for a review of this nature might include:
    • What means should Parliament use to engage with Defence industry to understand sector wide issues?
    • How can Parliament most effectively promote the role of Industry as a fundamental input to defence capability?
    • What role can Parliament play in strengthening national industrial resilience in the face of increasing strategic risks?
    • How can Parliament best help to position Australian industry to benefit from, and contribute to, the success of AUKUS and the QUAD?
  • The Committee should consider recommending that the National Defence strategy anticipated in the public DSR is not produced in the Defence Department. Rather a mechanism is established to bring the public and private sector into a joint policy development effort led by the Department of Prime Minister and Ca binet.If writing a national defence strategy is left to Defence, the Committee can be assured that what will emerge is a statement designed around Defence’s corporate priorities. While Defence will obviously be centrally involved in the development of the national defence strategy, locating the task in the Department of Prime Minister and Cabinet is intended to strengthen the unique role of PM&C in driving whole-of-nation strategic policy.
  • The Committee should consider recommending that the Minister for Defence establishes an advisory mechanism with Defence industry, widely defined.
    • As I have indicated in my submission, there is no mechanism which creates an opportunity for Ministers, Defence and industry to exchange candid views. In my view this will only happen if a specific mechanism is created to ‘force’ such a discussion. This should involve company CEO’s, relevant top Unions and SMEs. It should be noted that such a discussion would not focus on specific contracts or programs but broader, sector wide issues, such as assessing industry’s capacity to bring innovative ideas to Defence, managing workforce matters, and skilling.
    • The committee could be used to tackle sector-wide problems currently hampering closer cooperation – one example being an unmanageable backlog of security clearances required in industry. Creative solutions need to be found of a type that will not emerge from a Defence organisation overwhelmed with its current ‘business-as-usual’ workload.
    • Such a mechanism would act to ‘clear the air’ for Defence and industry in a relationship which has become rather fraught and unable to discuss matters outside of contracts guided by ‘master-slave relationships.’

All of this should be pursued with urgency given our strategic situation. That means maintaining a focus on rapid delivery and practical implementation, where ever possible avoiding commitments to officials producing more strategies, policies, reviews and documents.

I would be pleased to discuss this submission with the Committee as required.

Peter Jennings AO PSM

Director, Strategic Analysis Australia

18 August 2023