This month marks the first anniversary of the release of the government’s 2024 Defence Industry Development Strategy. At that time, the Strategy attracted little attention besides some pretty critical reviews. Not much has changed since—despite the document dealing with issues fundamental to our national security.

Foremost among those issues are defining the industrial capabilities needed in-country to adequately defend the nation and monitoring their availability given defence markets display most, if not all, of the ‘pathologies’ that prevent efficient outcomes.

Yet, what stands out from the Strategy and the events of the past year is not what’s revealed about either of those tasks but what remains obscured. 

To begin with, the Strategy assigns sovereign status to any company with an Australian Business Number—basically all of defence industry. Presumably, that’s a way of confirming foreign-owned companies located here will continue to make a significant, positive contribution to the defence effort.

More importantly, the form of materiel Defence will buy and its assembly in Australia has now been largely decided through a series of separate policy initiatives including those for naval shipbuilding and explosive ordnance.

As a result, the Strategy’s focus has shifted. It now centres on determining the level of Australian content for Defence’s major materiel acquisition projects above and beyond what assembly provides.

That shift is significant. As domestic industry content extends much beyond the 25%-30% of project costs assembly typically absorbs, the price premium for preferring domestic over foreign supply can rise sharply. There might be a big difference in the premium—and the overall cost of a project—between 30% domestic content and the 70% plus often sought by advocates for Australian construction.

To determine where within that range domestic content should lie, the Strategy goes on to indicate that some of the industrial capabilities with sovereign status are also ‘priorities’—with each priority ideally being divided further according to whether it yields a higher or lower ‘sovereign benefit’.  What emerges is a multi-tiered system for categorising industrial capabilities, ostensibly on the basis of their military importance.

Nonetheless, the criteria for selecting Sovereign Defence Industrial Priorities (SIDPs) are not disclosed. And, rather than higher or lower sovereign benefit, each Priority is detailed solely in terms of their prospects for development over the short and long terms. For most Priorities the long-term covers many more industrial capabilities than the short-term, well above what assembly delivers.  

Using time rather than sovereign benefit to differentiate one industrial capability from another raises the prospect of the SIDPs having more to do with what lies within the technical reach of Australia’s defence industry than value for money. It suggests some, possibly many, of those Priorities are being pursued more for their perceived economic advantages than any military contribution.

However, what those advantages might be remains unclear given Defence no longer assesses the economic impact of its major materiel acquisition projects. As a result, the populist notion that every investment in the domestic production of materiel is a win-win for Australia—by boosting defence self-reliance and economic growth—seems likely to remain untested.

A lack of testing is a problem for two reasons.

One is that, although the Strategy provides no indication of what proportion of defence industry is covered at each level of priority, the SIDPs cover industrial capabilities set to absorb most of Defence’s planned materiel acquisition budget. That includes future investment in submarines, naval surface combatants, military vehicles and missiles. It’s therefore likely the Priorities will cover most of defence industry, especially in the long-term—more than initially indicated.

The other reason is that, as Marcus Hellyer has recently pointed out for AUKUS submarines, a wealth of Australian and overseas data indicates defence materiel acquisition projects attracting a significant price premium tend to deliver poor economic outcomes—making a comprehensive analysis of military benefit against economic cost essential, if value for money is the objective.

Economic costs begin with having to pay for materiel projects through higher taxes, a reduction in other forms of government expenditure or increased government borrowing. Each payment option detracts from activity in areas of the economy it affects. Such costs also extend to projects absorbing scarce resource inputs—like skilled labour—that other projects and industries could have used to generate benefits of their own including tax revenue for government.

Not widely appreciated is that if a person is educated enough, experienced enough, motivated enough and fit enough to build complex weapons platforms and systems, chances are they won’t ‘sit in trees eating nuts’ (page 23) if a Defence project doesn’t proceed to plan. Instead, they’ll seek—and in all probability find—alternative work. The types of people involved share few, if any, of the characteristics of the long-term unemployed.

With those costs in mind, advocates for high Australian content often shift their focus to spillovers. A spillover is a new skill or technology created by a project that then moves to other projects and industries to improve productivity. However, what’s rarely mentioned is that spillovers tend to be ‘minimal’ (page 199) when construction is based on a foreign design. Almost all the new materiel currently earmarked by Defence for sourcing in-country will be designed abroad.   

With all those points in mind, the Strategy appears open to committing Defence to paying a lot to protect a little when it comes to acquiring new materiel, at a time when the department’s budget can least afford it. That taxpayers and others are being called upon to support an increase in that budget to 3% plus of GDP, when the department’s industry policy may lack sufficient safeguards to ensure any additional money will be used prudently, warrants closer public scrutiny.

Thus far, concerns the Strategy might encourage a form of protectionism that places local forms of job creation above all else in Defence procurement decision-making have focussed on the Hunter class frigates. Those concerns are serious enough. But if the Strategy was to be used to extend protection across the procurement spectrum, the problem escalates to an entirely different level.

Finally, the Strategy emphasises (pages 12, 43 and 99) that ‘access to analytical tools, market research and industry engagement’ is ‘key to delivering capability at speed.’  It goes on to indicate Defence will establish a ‘centre of knowledge of industry capability and capacity, markets and supply chains, equipped with enhanced analytical skills and tools.’ But no mention is made of how the department proposes to translate those objectives into tangible outcomes.

Complicating the situation is the document making no mention of two earlier—but unsuccessful—attempts by the department to monitor the health of important defence industrial capabilities extending back to 2009. It seems few of the hard-won lessons on what methods for monitoring to adopt, and what to avoid, have found their way into current thinking.

So, roughly two years since work on the current Strategy began and four years since Defence last released an analysis of the health of any of the most militarily important areas of Australian industry  we still have little idea how the department will assess and sustain key areas of the industry—against the backdrop of Australia’s increasingly precarious strategic outlook.

Unfortunately, two developments since the Strategy was released make remedying that situation more difficult.

A proposed Australian National Audit Office evaluation of Defence’s performance in managing the department’s previous Industry Capability Plan would have been invaluable as a guide for future attempts at monitoring but was cancelled.

And, in an unusual departure from normal practice, a parliamentary inquiry into the performance of the department in supporting the capability and capacity of Australia’s defence industry ended abruptly just a few months ago before reaching the all-important public hearing stage. It simply concluded that ‘given the short time that has elapsed since the publication of the new Defence Industry Development Strategy, the Committee considers that it is too early to meaningfully assess its impact.’ That left the root causes of a poor past performance on monitoring untouched.

From a monitoring perspective, the Strategy shows all the signs of having been released before first considering whether what’s promised can also be delivered. That might have been understandable for a first attempt more a decade ago but it’s more difficult to accept third time around.

As this year progresses, let’s hope we get more clarity around how the Strategy will unfold—and why. As one US commentator has recently remarked, implementation might be the ‘sleepy backwater’ of policies for defence industry development but could turn out to be among the most important.

Rob Bourke is a former Economic Advisor in Defence’s Capability Acquisition and Sustainment Group.