This chapter considers the implications of the COVID-19 pandemic for Australia’s foreign affairs, defence and trade policies.
The chapter discusses the lessons of the COVID-19 pandemic for Australia’s policy-makers and ways in which the Australian Government can respond to new realities about the global rules-based order revealed by the pandemic.
Lessons of the pandemic
The COVID-19 pandemic produced signs of a break-down in trust of the global rules-based order leading to frictions in bilateral trading relationships and rising scepticism and criticism about international institutions.
As discussed in earlier chapters of this report, international trade and the respect for international norms and agreements were disrupted by unilateral actions by a number of states. Many states arbitrarily blocked legitimate exports in response to domestic pressures, and evidence was put to the Committee (Chapter 2) that some nations took unilateral geostrategic actions against international norms and law under the cover of the pandemic. One example cited was Beijing breaching the terms of the Sino-British Joint Declaration regarding Hong Kong, lodged under the authority of the UN in 1984. There is also evidence to suggest that some nations are engaged in a sustained process to influence and change the nature of multilateral bodies including standards setting agencies to suit their unilateral approach to international relations and are challenging previously ‘universal’ values such as human rights. The Committee heard evidence (Chapter 2) of the growing concern about a bifurcation of the internet as authoritarian states push for standards that will allow greater censorship of information.
The effectiveness of international agencies was also brought into question. The WHO became a target for criticism about its handling of the COVID-19 outbreak, leading to the US government terminating its funding to the organisation. The climate of censure regarding multilateral institutions flowed through to existing criticism of the WTO and the need for reform if it is to be an effective framework for the facilitation of international trade into the future.
In Australia, as in many other countries, there has been an assumption that bilateral and multilateral trade agreements, operating within a framework of rules and institutions, could be relied upon to deliver value for money in a timely manner. The common view has been that just-in-time supply chains and single-source supply arrangements were largely protected by the support of foreign governments for these agreements and the international norms that underpin them.
These assumptions have been challenged by the pandemic and the subsequent behaviour of state actors. Even for sectors not directly affected by the pandemic, 2020 has revealed structural weaknesses in the supply chains that support critical national systems.
Evidence to the Committee demonstrated a range of possible scenarios which threaten Australia’s ability to function as a secure, prosperous first-world nation due to supply chain failure. These include cyber-attack, grey-zone or coercive actions by a state actor, regional conflict, economic crisis, natural disaster or future pandemics.
The Australian Manufacturing Workers’ Union (AMWU) noted that:
COVID-19 has been somewhat disruptive of defence supply chains … as it has across the entire manufacturing industry. Changes in geopolitics threaten to increase such disruption, either because supply lines may be cut in times of crisis (as e.g. during or in the lead up to a regional or global conflict) and/or supplies from particular counties or regions become unavailable (due to any number of foreseeable reasons – internal or regional crises, natural disasters, domestic political decisions, trade wars, etc.
In relation to defence capability, Northrop Grumman told the Committee:
Securing a degree of sovereign capability and supply chain resilience is particularly critical in the defence industry, where global disrupters like natural disasters, pandemics, cyber-attacks and conflict can significantly impact our ability to rely on our global partners and their supporting industry.
The Committee recognises that the COVID-19 pandemic has challenged the viability of assumptions about global rules and institutions, including bilateral and multilateral trade arrangements, and the capacity of the global, just-in-time market to maintain assured supply chains.
The lessons from COVID-19 are not principally about the impact of the virus itself. The lessons are broader and relate to concerns about the vulnerability of critical national systems to external risk factors. The pandemic gave rise to previously unexpected behaviour amongst some state actors that, if replicated in a more serious situation, could have grave implications for Australia.
If the spread of a virus can so rapidly and comprehensively disrupt the status quo, serious attention must also be given to dealing with the effects of possible scenarios where powerful states embark on conscious efforts to inflict loss on other states through interference in vulnerable, often opaque supply chains that support critical nation systems.
Australia must conduct a failure mode analysis of its critical systems and take positive steps to decrease the probability of failure and to minimise the consequences of disruption. Reducing the structural vulnerabilities will also require Australia to work cooperatively with allies and like-minded countries to develop mutually-supportive agreements within a framework of robust multilateralism. Specific measures are discussed in the remainder of this chapter.
How can the Australian Government respond?
The following sections examine a range of ways in which the Australian Government can respond to new realities about the nature of the global rules-based order revealed by the COVID-19 pandemic.
The Committee considered priority measures Australia can take to address concerns regarding the need for:
international support for the global rules-based order;
ensuring multilateral institutions are fit for purpose;
compliance with international obligations; and
substantive, collaborative action to increase supply chain resilience.
Commitment to the global rules-based order
Australia’s prosperity has been greatly enhanced by a liberal rules-based order that has largely underpinned a secure environment and enabled an effective global trading system and increased movement of goods, services, capital and people over recent decades. And, as highlighted by the submission from DFAT:
…Australia’s interests are best served by a multilateral system that promotes collective responses to problems that cannot be solved by countries acting alone.
It is therefore not in Australia’s interest to retreat from global engagement or to submit to what the development economist Dr Peter McCawley called the ‘siren song of protectionism’. Dr McCawley noted that ‘the economic walls that have been erected since coronavirus emerged as a threat earlier this year are remarkable’, but that ‘if Australia’s economic policies become inward-looking, and if we fall into the trap of protectionism, we will pay the price for decades to come’.
Similarly, Mr John Blackburn from the Institute for Integrated Economic Research (IIER) argued although there is a ‘need to redesign critical components of our supply chains’, this does not mean reverting to old models and approaches or reversing progress towards free trade:
We’re not talking about socialism or nationalisation of sectors of the economy. When commentators say that we’re either completely open or completely closed, that’s pretty facile.
The 2020 Strategic Update confirmed that confidence in the rules-based global order is being undermined, that major power competition has intensified and the prospect of high-intensity conflict in the Indo-Pacific, while still unlikely, is less remote than in the past.
The Committee affirms that view that Australia’s national interests are best served by a commitment to a multilateral, rules-based global system where problems are resolved collectively and through multilateral settlement of disputes.
The emergence of unilateralist trends internationally, such as subversion of international agreements, moves towards protectionism and the imposition of trade restrictions by some countries during the pandemic, present serious challenges to confidence in the future of multilateral approaches. In the event of a future emergency such as a regional confrontation, there is a real possibility that states will resort to even more aggressive unilateral actions. Such developments would seriously disadvantage a middle power like Australia and harm the welfare of all people in the Indo-Pacific region.
The Committee recommends that the Australian Government develop specific shared objectives with allies and regional partners to increase global support for the rules-based order that underpins the global system of security, international relations and trade.
Multilateral institutions: fit for purpose and internationally supported
Multilateral institutions have come under considerable pressure as a result of the pandemic, a trend that was already evident in preceding years. For example, there has been discussion about the performance of the World Health Organization (WHO) during the pandemic, while the oversight of trade standards by the World Trade Organization (WTO) has long been an area of contention for a number of nations.
Evidence to the Committee emphasised the importance of a rules-based order for a middle power such as Australia, including the role of the UN Security Council (UNSC), standards setting bodies and the WTO as mechanism to oversee trade rules and settle disputes. The submission by the Institute for International Trade (IIT) said Australia should work in cooperation with similar countries to support the WTO:
Although the future of the WTO as a system of existing rules and as a place to negotiate new rules is far from certain, it remains the only real place for a middle power like Australia to work with other middle powers in order to achieve outcomes that both strengthen a rules-based order and constrain big powers from their worst unilateralist urges. Australia has a strong interest in seeing the WTO restored to its former central role, as well as in the forging of other strong rule frameworks such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).
Australia’s political leadership and its diplomats need to be at the forefront of visibly rejecting any acts, omissions or statements by any major economy that weaken the centrality and authority of the WTO and the rule of law in international economic relations. Alliance-building with like-minded middle powers is essential and will be increasingly central to Australia’s multilateral diplomacy. Moving in alliances rather than standing alone will minimise the chances that Australia is seen by the big trading powers as picking sides against it and is rather making principle stands in support of deepening the rules-based order.
This view was echoed by the Perth USAsia Centre which argued the WTO’s Dispute Settlement Mechanism is ‘a key instrument by which Australia protects its trade interests in the global trading system’ and that:
As a medium-sized and open economy, Australia depends on a rules-based global trading system to safeguard its external relationships. With protectionism rising around the world, and both the US and China deploying coercive trade diplomacy, the need to re-invest in a rules-based trading system is higher than ever.
Regarding the UN Convention on the Law of the Sea (UNCLOS), DFAT presented both the Australian Government’s commitment to the convention as an instrument of international law, and the Government’s concern about events in the South China Sea:
Australia is a prominent advocate of adherence to international law to support peace, trade and our common prosperity. We have a substantial interest in stability in the South China Sea – a crucial international waterway – and the norms and laws that govern its use, in particular the UN Convention on the Law of the Sea (UNCLOS). The Government joined several other nations in publicly expressing concern about recent developments during the COVID-19 crisis, including reported efforts to disrupt other countries’ resource development activities, the declaration of new ‘administrative districts’ over disputed features, and the sinking of a Vietnamese fishing boat, reportedly in a collision with a Chinese coast guard vessel.
A number of other submitters also made the case that Australia, in concert with like-minded countries, should build on efforts, firstly, to strengthen the WTO and other multilateral agencies and, secondly, to bring about necessary reforms in these bodies. For instance, the Export Council took the view that:
The post-pandemic recovery period provides a unique opportunity for global cooperation to rebuild the international order, including in the field of international trade. We need Australian leadership in rebuilding the global trading system and in restoring faith in the WTO and the international rules-based order that has benefited our country for nearly eight decades.
The organisation representing Australia’s grain farmers, Grain Growers, also said:
The Australian Government should lead efforts in the WTO or other appropriate forums (eg. G20) to secure an agreement that provides certainty for producers and exporters regarding how international markets will operate as COVID continues and for future pandemics.
The Australian Government has expressed its commitment to the strengthening and reform of multilateral agencies. In its submission, DFAT told the Committee:
COVID-19 has provided another catalyst for reform. Modernising the WTO rulebook, strengthening its monitoring of trade measures and enhancing its dispute settlement system will help lift business confidence and expand commercial opportunities.
The DFAT submission added:
We are advocating for continued adherence to the principles of free and open trade, as part of the global rules-based order. This entails transparency and predictability, non-discrimination, and open, stable and competitive markets. This requires continued work with like-mindeds through mechanisms such as the WTO, APEC, and G20 to build consensus and deliver strong, consistent messages in favour of the rules-based order.
The Australian Government commissioned an audit of Australia’s engagement with the UN and other international organisations in October 2019. DFAT explained that the audit:
…affirmed that UN agencies, especially international standard-setting bodies, are vital to Australia’s interests, values and prosperity. When working effectively, multilateral institutions underpin global rules and norms, ensure a level playing field and support international cooperation. The audit also found that multilateral institutions are under unprecedented strain, including from shifts in global power and emerging challenges. On occasion, these institutions’ performance has been mixed. Reform is needed to ensure they remain relevant and continue to support our values and strategic objectives.
The Committee supports the view that many multilateral agencies such as the UNSC, standards setting bodies, WHO and WTO are a crucial part of the architecture of the rules-based order and critical to the health, prosperity and security of the global community.
The reputation of multilateral organisations has suffered in recent years, with their operational effectiveness and efficiency coming under criticism and the very rationale for their existence coming into question. This trend has been exacerbated by the impact of the COVID-19 pandemic. The global health crisis exposed the WHO to especially sharp criticism.
The Committee considers that Australia should have a clear-headed view of those multilateral organisations that are of the greatest significance for Australia’s interests, and assess the weaknesses and reform needed by these institutions.
The Committee commends the Australian Government for undertaking the audit of Australia’s engagement with the UN and other international organisations. The Committee supports the audit’s conclusion that there is scope for reform amongst multilateral agencies in order to improve the effectiveness of their operations and ensure adherence to the universal values that have underpinned the global order since World War Two.
Australia should play a leading role, in coalition with like-minded countries, to support constructive change and improvement in multilateral bodies that is consistent with a liberal, democratic world order.
The Committee recommends that the Australian Government use the recent DFAT audit of Australia’s engagement with UN and other international organisations to identify those that are a priority for Australia’s national interest.
The Committee recommends that the Australian Government develop a detailed agenda of the reforms necessary in priority international organisations and an implementation plan to lead the case for change, working cooperatively with like-minded countries to restore confidence and investment in priority multilateral institutions.
Chapter Three discussed the ‘crew change crisis’ caused by restrictions on the movement of seafarers on and off ships and its impact on their personal well-being and human rights.
The Committee received evidence that this issue was manifesting itself in Australia because of a lack of uniformity in the rules being applied by different Australian governments, thus putting Australia’s compliance with its international obligations at risk.
Ports Australia’s submission reported that:
…in response to COVID-19, the states and territories placed varied restrictions on shore leave and crew changes. This included some jurisdictions prohibiting all shore leave and crew changes, whilst others have allowed shore leave and crew changes under certain circumstances.
The Australian Institute of Marine and Power Engineers & Australian Maritime Officers Union (AIMPE/AMOU) submission noted that even though maritime personnel were recognised as critical personnel by National Cabinet, border restrictions by state and territory governments caused difficulty for workers in the maritime industry:
WA insisted on a hard border closure from early April and required 14-day quarantine for those who were permitted to enter the State. In addition, other States required quarantining for international seafarers flying into Australia to join their vessels. Subsequently, the second wave of contagion in Victoria has caused more restrictions to be imposed. International flight availability has been drastically reduced to stop the spread of the virus which has compounded the problems for international seafarers.
The Maritime Union of Australia (MUA) argued that the situation violated seafarers’ ‘rights as provided in International Conventions of the International Labour Organization (ILO) and International Maritime Organisation’.
The Ports Australia submission indicated, however, that the actions of the Queensland Government showed it was possible to deal with the situation in a manner that protected both the Australian public and the rights of the seafarers involved, thus upholding Australia’s international obligations:
…in Queensland crew changes are allowed to occur and for this to occur in a safe manner, Maritime Safety Queensland with Queensland Health developed and implemented a strict step by step protocol on how to conduct crew changeovers in the State and a number of crew changeovers have now successfully occurred in Queensland.
Ports Australia elaborated on this point during a public hearing:
I respect the states around the country taking a policy protocol that protects their people, but it is making it incredibly difficult to have consistency in relation to crews. The Queensland model is quite commendable, in fact. The crew flying into the country—provided they can get a spot on the plane coming in, because the caps make it very difficult—arrive in Brisbane and they’re immediately picked up in a sanitised bus and are taken from the airport of Brisbane to the port, and from there they jump onto the ship and leave. … There’s no model anywhere else in the country like that. We have a real difference in models right around the country. It makes it very difficult.
The Committee notes with concern that COVID-19 related measures by some states and territories are preventing the timely change-over of international maritime crews, forcing seafarers to spend unreasonable lengths of time working on board (up to 17 months without a break in some instances). This puts mariners and consequently the safety of Australia’s ports at risk due to fatigue and poor mental health. It also leaves the Commonwealth Government in the position of not complying with international obligations to seafarers under ILO and IMO conventions.
The arrangements put in place by the Queensland Government demonstrate that the issue can be managed in a way that protects the Australian community, the workplace conditions of seafarers and which complies with international conventions. This approach can form the basis of a national standard.
The Committee takes the view that the National Cabinet is an appropriate mechanism through which the states and territories can develop an agreed uniform approach to managing crew changes in a way that is both COVID-safe and compliant with Australia’s obligations under ILO conventions. This would then provide a mechanism through which states and territories can comply with Australia’s international obligations in the future.
The Committee recommends that the Prime Minister lead deliberations in the National Cabinet to produce an agreed national framework to ensure that COVID-19 related measures imposed by states and territories do not prevent the timely change-over of international maritime crews, a situation which has led to unsafe and unreasonable workplace conditions which breach Australia’s ILO obligations.
The Committee recommends that National Cabinet develop the processes agreed as an outcome of Recommendation 6 such that Australia has an agreed framework to ensure all states and territories remain compliant with national obligations in the event of future crises that require responses falling under the authority of sub-national governments.
Support supply chain resilience initiatives
Chapter Four outlined the case for the development of a national resilience framework to analyse the risks to the supply chains in particular sectors of the Australian economy. The framework would provide a methodology to define critical national systems and to categorise sectors which are exposed to risk.
Chapter Four also detailed the evidence in support of the view that supply chain risks for critical national systems can be placed into three main categories, as described by the IIER:
where market solutions are sufficient and ‘open global supply chains should be maintained and encouraged’,
where ‘supply chains which must be trusted, i.e. transparent and verifiable’, and
where ‘sovereign capabilities, knowledge and skills’ are required in times of crisis to guarantee domestic supply.
In the case of the first category where the goods and services concerned are not essential – fashion shoes, for example – international markets can be relied upon to meet demand at the lowest price for consumers and there is no national consequence of note if retailers are exposed to supply disruption.
The following section discusses the latter two categories where measures need to be considered to ameliorate exposure to supply chain risk and ensure resilient capability. The discussion also highlights that there are opportunities for Australia to develop new areas of production and, in the process, to develop broader economic and strategic relationships with trusted partners internationally.
Trusted supply chains
In the case of category two, where trusted supply chains are needed, examples include:
High value, low volume sophisticated manufactured goods where Australia does not have the scale or business case to create and sustain a manufacturing capability; and
Essential components imported as an input to an item produced in Australia.
As well as production for domestic use, Chapter Four also outlined the areas where Australian exporters are dependent on the import of critical items in their supply chains.
For a supply chain to be trusted and transparent, it is essential that Australian producers have international suppliers operating within a framework where transparency and the rule of law is respected by the relevant government, as discussed in Chapter Four.
Importantly, evidence to the Committee was that Australia does not merely seek to be an importer from trusted foreign suppliers – it is itself a trusted supplier in overseas export markets. Australia has a reputation as a stable, reliable and high-quality supplier, as it has been proved in major long-standing markets such as Europe, Japan and South Korea.
There are prospects for further developing Australian capacity to become a trusted supplier to other export markets and to use expanded economic interchange with countries to enhance strategic relationships.
The Committee received evidence of prominent examples of such opportunities in the area of critical minerals. The Perth USAsia Centre made the point that:
Critical minerals – such as lithium, rare earths and cobalt – are a major new economic opportunity for Australia. These minerals are essential for the digital, clean energy, battery and defence sectors, but value chains currently face several security and sustainability challenges. Australia’s strong geological endowment and trusted investment environment make it an ideal new supplier across many critical mineral subsectors. Its technological capabilities also offer opportunities for developing ‘mid-stream’ processing industries in the fast-growing battery sector. Japan and Korea are ideal partners for these efforts, given their position as major world producers of technology products containing critical minerals. Australia’s longstanding and trusted economic partnerships with Japan and Korea provide a political and institutional foundation to jointly develop these new industries.
In the case of the critical mineral titanium, the Committee was informed that major openings are available for Australia. Titanium is essential in high technology manufacturing, including the production of pigments, carbides, specialty engineering, medical devices and defence applications. Australia has amongst the world’s largest reserves of the mineral, with one estimate calculating that Australia has 19 per cent of the world’s commercially exploitable resources.
Apart from possessing such a large share of exploitable resources of titanium, ‘Australia’s value proposition as a critical minerals supplier extends well beyond it in-ground resources’ because of its crucial advantages of world-class technical capacity, stable political environment, legal certainty and a reputation as a reliable supplier. This is in contrast to other potential supplies of titanium, much of which are located in ‘corrupt or fragile’ states.
As one of a number of Australian companies seeking to develop this market, Amaero International, an additive manufacturing equipment producer, told the Committee that:
The current titanium alloy market is dominated by China and Russia. Strategically, this dominance gives these countries increasing leverage over the defence and aerospace industries around the world.
Already, Boeing has been forced to set up manufacturing facilities in Russia to guarantee its supply of titanium. Therefore, it is not inconceivable that countries such as Australia and the US could see their titanium supply – and their additive manufacturing capacity - compromised in times of conflict or diplomatic tension.
Defence companies, including Amaero clients in the US defence industry, reluctantly purchase from these non-allied sources because there is little production of titanium alloy feedstocks within the allied or ‘Five Eyes’ nations for many large format applications.
In these circumstances, Amaero International concluded that Australia ‘has an opportunity to make itself the supply base for titanium alloy and titanium alloy powder’. The company recommended that Australia move to ‘establish and secure a sovereign facility to process titanium alloy powder and supply the local additive manufacturing sector’.
Beyond its immediate economic benefit, the implications of such an initiative would extend to the strengthening of Australia’s international security arrangements. Amaero International emphasised the role it could play in the ‘Five Eyes’ intelligence-sharing agreement with the US, UK, Canada and New Zealand:
With this capacity, Australia could reliably supply not only local defence suppliers but also our defence partners within the Five Eyes network. … Amaero has identified key partners in the local supply chain and locally developed world-leading technology to enable the production of alloy from Australian titanium ore and the subsequent transformation into rod, wire and powder to facilitate a ‘Five Eyes’ supply of Ti alloy. … the US defence industry would be highly attracted to the prospect of securing a guaranteed supply of titanium alloy powder to satisfy its burgeoning additive manufacturing capacity.
Such a proposal would be in accord with the partnership agreement between Australia and the US on developing both nations’ critical mineral assets. The partnership between Geoscience Australia and the US Geological Survey, signed in November 2019:
…paves the way for both nations to work more closely on understanding each country’s geological resource potential for critical minerals, including rare earth elements, and developing a pathway to supply arrangements.
The Department of Industry, Science, Energy and Resources (DISER) explained:
The knowledge gained from this collaboration will:
Improve both countries’ understanding of their geological resource potential for critical minerals, including rare earth elements, and contribute to a robust evidence base for global supply potential;
Better identify and close critical minerals knowledge gaps in Australia’s critical minerals understanding;
Help Australia understand future trends and match resource potential to international demand; and
Fast track innovation in the critical minerals sector, including development of online decision support tools with full data and decision process transparency.
The Committee notes that COVID-19 has highlighted that elements of Australia’s critical national systems are exposed to supply chain disruption.
The pandemic has shown that the assumptions made in recent decades regarding adherence by nations to global norms as it pertains to supply chain risk must now be placed under greater scrutiny. The unilateral nationalistic responses by states during health or security crises along with increasing coercive measures must be factored into the assessment of supply chain risks.
The Committee observes that the pandemic has seen a growing trend for states to use formal and informal restrictions on trade as an instrument of coercive diplomacy. Along with a number of other nations, Australia has experienced such political sanctioning by Beijing with some intensity during 2020 since Australia called for an international inquiry into the origins of the COVID-19 pandemic.
Vulnerability is especially acute where related supply chains for a critical national system are concentrated in whole or large part on companies which are exposed to extrajudicial and coercive actions by another nation state. There is a need for Australia to develop plans to move elements of critical national systems away from such sources of risk.
Australia as an open trade-exposed middle power, however, is not in a position to develop responses in isolation. We must identify like-minded countries with transparent systems of governance based on the rule of law with whom Australia can develop mutually supportive arrangements to establish and strengthen assured lines of supply.
Many vulnerabilities should be viewed as opportunities as much as problems. There are prospects for Australia to develop new economic relationships that would contribute to secure supply chains for Australia, while strengthening the country’s role as a trusted global supplier of critical inputs.
Evidence to the committee highlighted that Government to Government agreements are beneficial to enabling commercial arrangements to be effective. Examples include the intense intervention by Australian diplomatic missions during the pandemic to effect the delivery of critical materials from other nations. These were essential inputs to manufacturing that had been legitimately contracted by Australian firms during the pandemic but were then subject to export bans by foreign governments.
The committee supports the view that early negotiation of agreements with like-minded countries characterised by transparency and the rule of law can provide for the mutual surety of supply for critical products. The Australia-US agreement on critical minerals provides an example of this approach.
There are countries where Australia has existing trade agreements which could provide a framework for such agreements, while in others it would be necessary to negotiate individual agreements for specific products or services.
A prerequisite for successful initiatives to develop international partnerships for Australia is improved knowledge of Australia’s strengths in the potential supply of strategically important resources, elaborately transformed manufactures and services. This includes identifying the potential challenges that Australian companies face in developing productive capacity of specific products or services at a sufficient scale to be commercially viable in domestic and export markets.
The Committee is of the view that there is a strong case for Government support for some industry sectors involved in the supply of critical national systems. This could take the form of a process whereby Australian companies in a sector of strategic importance compete for targeted assistance to assist them to commercialise or scale a capability.
The Committee recommends that within 12 months the Australian Government identify those elements of Australia’s critical national systems where supply chains are entirely or significantly dependent on companies which are likely to be subject to extrajudicial directions or coercive interference from a foreign government that place continuity of supply at risk of failure.
To prevent failure of critical nationals systems, the Committee recommends the Government, in consultation with industry, develop plans and a timeframe to move ‘at risk’ supply chains for critical national systems to sovereign Australian suppliers or where appropriate, to other trusted, transparent arrangements with companies in nations having a strong record of adherence to the rule of law.
The Committee recommends that the Australian Government initiate parallel Track-1 (Government to Government) dialogue to place an assurance framework around the establishment of commercial arrangements pertaining to supply chains for critical national systems. Where appropriate, this should include reciprocal assurances of supply by Australia to our partners’ critical national systems.
The Committee recommends that within 6 months the Australian Government identify an initial tranche of Australia’s key national strengths in the potential supply of resources, elaborately transformed manufactures and services in critical areas and assess any barriers to the scaling up and commercial sustainability of such industries that would prevent Australia becoming a trusted and transparent partner of choice for like-minded nations.
The Committee recommends that within 12 months the Australian Government conduct a cross portfolio review and where it supports Australia’s strategic interests, develop and implement competitive processes to provide targeted support for Australian industry sectors, enabling them to become trusted suppliers to overseas consumers of critical resources, elaborately transformed manufactures and services.
In relation to sovereign capability, the 2016 Defence Industry Policy Statement (DIPS) observed that:
There are some capabilities that are so important to Australian Defence missions that they must be developed or supported by Australian industry because overseas sources do not provide the required security or assurances we need. As such, it is critical that the industry base associated with these capabilities is maintained and supported by Defence as sovereign industrial capabilities.
A similar view was expressed by the South Australian Government:
The equipment required by the ADF must be capable against the contemporary threat, available when required, sustainable during a time of crisis and affordable over the equipment’s lifetime. Sovereign industry capability is that which must exist in Australia to meet this intent, including design expertise, rights to technical data as well as production capability with the ability to increase capacity in times of a crisis.
In the case of critical medical supplies, Arrotex Pharmaceuticals observed the ‘alarming shortages of vital medicines in Australia’ at the onset of the pandemic and said:
All of these key medicines are currently fully imported from off-shore manufacturers. As a wealthy first-world nation, we can do better. Australian patients and their families need us to ensure uninterrupted access in all circumstances. To reduce our over-reliance on China and India for our medicines; Australia needs to now build our own sovereign medicine development and manufacturing capability.
A similar argument was put to the Committee by pharmaceutical manufacturer IDT Australia:
The recent disruption to pharmaceutical supply chains highlights a fundamental sovereign risk associated with the outsourcing of Australia’s drug manufacturing to other countries. In the same way a country needs to be able to defend its borders and feed its people, IDT believes that access to medicine is of sovereign importance.
The CEO of IDT Australia added that Australia needs ‘sovereign manufacturing capability in key medicines, not only the finished dosage forms but also the key starting materials and the active pharmaceutical ingredients from which those medicines are made.’
Dr Andrew Dowse made the point that entire production processes do not necessarily need to be sovereign because ‘there may be just small elements that need to be sovereign or some sort of oversight that needs to be sovereign’.
The Committee received evidence about methods by which the development of sovereign capability can be encouraged by governments. The method traditionally favoured by the Australian Government has been one-off grants (normally relatively small, with a range of conditions) to encourage innovation or to develop particular capability. These are normally effective for a specific period of time and are limited to particular products or processes.
Procurement contracts, on the other hand, provide cashflow and confidence for the business to make ongoing investments in research, staff and capacity. These measures are crucial for sovereign products to be globally competitive with respect to quality, effectiveness and cost – both acquisition and sustainment.
The Committee saw evidence that without a deliberate shift in policy, the crisis investments by the Australian Government during the pandemic are likely to be wasted capital as international supply chains resume ‘business as usual’ and Government departments return to their established supply arrangements, citing ‘value for money’.
Australian industry gave evidence, however, that with scale and certainty, they can match imported products in many cases with respect to both price and quality. The Committee was given extensive evidence of the importance of offtake agreements, providing an assured level of demand, as an enabler of developing and sustaining a competitive sovereign industry capability in priority areas.
With offtake agreements that protect the taxpayers’ legitimate value for money interests, Australian industry sectors can supply part, or all, of the current market demand and can sustain a level of capability and capacity that can be up-scaled when demand spikes in circumstances such as an emergency. This was affirmed by Aspen Medical who said that support from an Australian government:
…would ensure that local capabilities are maintained during stable periods, with the ability to quickly scale up if needed in the future in response to another pandemic or other external factors. This policy would also support Australian businesses to be perceived as credible exporters in the international arena.
The Advanced Manufacturing Growth Centre explained how important offtake agreements can be in providing the necessary demand for long-term sustained capability that exists after the immediate needs of an emergency have passed:
Without that demand, there will be no ongoing supply. The fund spent on the crisis were for a crisis. ... But if we have something that will be viable to have in the future, the demand needs to be declared. The best thing for a country to have is a vibrant manufacturing capability, because … We don’t know whether the next crisis is the virus, a bacteria, a fire, a storm or a flood. The best thing is to have a manufacturing industry that is larger and to scale. That is better for any crisis there will be.
The Department of Health mentioned that, in order to ensure that Australia has ‘ongoing domestic production of [medical] masks’ in the post-pandemic environment, the Department had:
…entered into agreements with a number of local producers, including an offtake agreement for some years with one producer. Assuming that requirements for masks will be more like they have been in previous years, as opposed to this year, most of that expected consumption and purchase will be covered by the local production of those products into the future.
The Committee heard from the Detmold Group – a paper and board product manufacturer – about agreements with the Government of South Australia and other Australian governments that have enabled the company to invest in capability for the manufacture of medical masks:
…we were asked by SA Health to start a mask project. … We currently have two major contracts: one with the Commonwealth for 100 million masks, and one for SA Health for 45 million masks. We’re also in discussions with Queensland, Tasmania, the ACT and Victoria. SA Health originally committed $1.5 million of capital to the Detmold Group. The group has committed in excess of $20 million to commercialise the facility. As of today, we have two products that have TGA approval, we’ve commissioned our own in-house testing facility and we’ve also been instrumental in setting up two testing facilities with the University of South Australia and Flinders University for independent testing. We have also worked very closely with CSIRO in various aspects.
The Committee also received instructive insight from an example of an Australian enterprise that is unable to be launched because of the absence of an offtake agreement. A deposit of rare earths in central west New South Wales has been left unexploited:
Because of the low prices for the rare earths on the world market, they have not actually built the mine. So, if there were an order tomorrow for rare earths from an Australian purchaser, they wouldn’t be able to supply it. But my understanding is that if there was a guaranteed offtake agreement from an Australian purchaser then they would then be in a position to construct the mine, operate it and provide product. The problem has been that these guaranteed offtake arrangements have not been in place.
A final, pivotal aspect of resilience sovereign capability is the capacity to ensure compliance with Australia’s regulatory standards. Evidence to the Committee was that in some circumstances, Australia has lost the capability to test and certify compliance with its own standards, whether products are locally made or imported. There is no point making something in Australia if the nation cannot ensure that products meet our requirements and specifications for quality and function.
Detmold Holdings gave the Committee an example from their experience during the pandemic where finding an Australian organisation able and accredited to certify a P2 respirator was problematic. Commonwealth and State Departments rightly required certification before they would purchase and use the product, but the process also raised concerns with evidence that some imported PPE did not actually meet the standard for the intended purpose:
I think one of the challenges we’ve got around product that’s being imported is that our current system in Australia through the TGA is a self-certification process—there is no independent testing done on any products that are coming into Australia—and it relies solely on the importer making a declaration that the product is compliant against a particular standard. …but there is no laboratory within Australia that is certified to test against those standards. We can do some testing and get some indicative results, but we actually don’t have laboratories that are completely NATA approved or independently approved to provide certification of products.
In the area of cybersecurity, Sapien Cyber suggested that:
Government needs to give clear identification of the minimum cyber security standards and/or legislation that critical infrastructure operators must comply with. Additionally, Government needs to be clear as to which aspects of national infrastructure are most important to our society and economy, and what it will do if those systems are affected. Finally, there needs to be clear parameters under which fines/penalties, of sufficient level, are enforced to act as an incentive to comply.
The Committee considers that to support some critical national systems, Australia must develop and maintain the sovereign capability to design, manufacture and certify enabling components of the system. This may take the form of an industry sector providing all of Australia’s requirements in a particular element of a critical national system, or the standing capability to provide an agreed level of supply that can be scaled up if demand increases due to special circumstances such as a health or security emergency or natural disaster.
The Committee is struck by the non sequitur around Government procurement and the notion of value for money. Using PPE as an example, despite chasing marginal cost savings during ‘normal’ times, the structural weaknesses in the supply chain for surgical masks and P2 respirators led to large amounts of tax payer funds being outlaid to rapidly establish sovereign capability in the middle of the pandemic and the willingness to pay well above ‘business as usual’ prices for what product was still available in the global market. In net terms, the Australian taxpayer has almost certainly not had value for money and our health workforce was unnecessarily placed at risk for periods due to shortages of respirators that were correctly sized for the workforce.
This lack of capital productivity will continue if Commonwealth and state procurement of surgical masks and respirators reverts to international suppliers when circumstances return to a pre-pandemic normal. It is therefore important that the Australian Government adopt whole-of-government measures to assist the establishment or sustainment of critical sovereign capability. These measures largely deal with how the Commonwealth assesses value for money in procurement and will require changes to the Commonwealth Procurement Rules discussed in the remainder of this chapter.
The Committee considers that the maintenance of an independent capability to test and certify products for supply of critical national systems is an essential element of the protection of Australia’s resilient capability.
The Committee recommends that within 24 months the Australian Government ensure that where necessary, Australia regenerates and sustains the test and certification capability to provide assurance that Australian sourced supplies and elaborately transformed manufactures for critical national systems, meet the relevant Australian/New Zealand standards (or international equivalents where applicable). This same capability must be able to verify to a suitable level of confidence that imported enablers to critical national systems are fit for purpose.
Paragraph 2.6 of the Commonwealth Procurement Rules (CPR) provides options for Government entities to choose not to comply with the rules for reasons such as the protection of essential security interests. In practice, the circumstances in which domestic suppliers can be favoured in Commonwealth purchases are quite limited, which restricts the ability to use procurement to generate and sustain sovereign capability – despite policies such as the 2016 Defence Industry Policy Statement specifically mandating that approach.
COVID-19 has highlighted the need for reform of the CPR and the Accountable Authority Instructions that flow from them and are used by Government entities to guide procurement officials.
Paragraph 4.5 of the CPRs states that ‘price is not the sole factor when assessing value for money’. Paragraph 4.7 says:
In addition to the value for money considerations … for procurements above $4 million (or $7.5 million for construction services) … officials are required to consider the economic benefit of the procurement to the Australian economy.
The submission from the Department of Finance informed the Committee that:
The Commonwealth Procurement Framework provides significant flexibility for Accountable Authorities to conduct procurement in a manner that meets their obligations under the Public Governance, Performance and Accountability Act 2013 (PGPA Act), delivers on their business objectives, and balances a broad range of policy objectives, including broader benefits to the Australian economy and environmental sustainability.
The Commonwealth Procurement Rules (CPRs) allow entities to consider issues including those relating to strategic alliances, human rights, quality, security of supply chains and regional security, including in those circumstances where an entity has a need to urgently acquire goods and services, for example due to unforeseen events such as those experienced due to the COVID-19 pandemic.
The Department of Finance explained that the CPRs ‘incorporate procurement commitment from Australia’s Free Trade Agreements’ which ‘provide access for Australian suppliers to the government procurement markets of other countries, while also placing obligations on the Australian Government to open up access to its procurement market’.
The Department went on to emphasise that ‘these commitments limit the extent to which the Australian Government can preference local suppliers’.
Questions about the practical effect of the current CPRs in actually providing opportunities for the development of Australian industry capability have been the subject of attention for some time.
The issue was examined by the 2017 inquiry by the Joint Select Committee on Government Procurement. The Committee noted that value for money was the principal objective of the CPRs, but that the rules allowed purchasing authorities to also give consideration to special cases where opting for a domestic rather than a foreign supplier would bring ‘economic benefit to Australia’. But the inquiry found that, in practice, the guidelines for the implementation of the rules designed to support Australian capability ‘have the potential to undermine the intent’ of the CPRs by lack of clarity in implementation. The Committee recommended a series of changes to existing Department of Finance guidelines, such as to ‘explicitly define what constitutes economic benefit’:
The Committee feels strongly that any guidelines introduced should define economic benefit as broadly as possible without contravening Australia’s international trade agreements. At a minimum, the Committee believes economic benefits should encompass: social benefits; regional, state and the national economic impact; potential tax revenue; employment and innovation opportunities; workforce training; and building Australian industry capability.
The practical effectiveness of the CPRs’ provisions to allow exceptions to purely value of money considerations was also questioned by the submission from the Australian Fair Trade and Investment Network (AFTINET), who contended:
One of the barriers to this happening in practice is that these exceptions are not implemented by Commonwealth departments.
AFTINET argued that the government should:
…give greater weighting to the criteria of Economic Benefit to Australia in the Commonwealth Procurement Rules so that the benefits of local employment can be fully valued and used to improve opportunities for local firms, and that Commonwealth purchasing officers’ training and procedures reflect this priority.
In the case of defence industry procurement, the conundrum is highlighted by the contradiction between the 2016 DIPS and the 2019 Policy for Industry Participation. The 2016 policy highlights that there are some capabilities that are so important to Australian Defence missions that they must be developed or supported by Australian industry and that the industry base associated with these capabilities is maintained and supported by Defence as sovereign industrial capabilities. The 2019 policy however, in attempting to comply with the CPR, implements this by describing the circumstances under which benefits to the Australian economy might result from a particular defence procurement but then specifies that:
Defence will not preference Australian industry at a local or national level. The focus is on maximising opportunity to compete for work.
Evidence to the Committee about the impacts of COVID has highlighted that essential security for the nation relies on more than just military systems. It has highlighted that for procurement officials to act differently, the CPR requires a specific recognition that Australia’s essential security depends on a sovereign industry base to support elements of a range of critical national systems. The CPR must clearly articulate the link between long-term value for money and the role that procurement plays in generating and sustaining this sovereign industry base.
The Committee considers that procurement systems can be an effective mechanism to provide support for the resilience of Australia’s critical national systems by ensuring the level of demand necessary to establish or sustain an Australian producer in areas where sovereign capability is required.
The requirements of individual Commonwealth agencies may be limited at times, but if whole-of-government procurement decisions are made, the Commonwealth can act as a major source of demand. Coordinated purchases for state and territory purposes can increase this still further. Using PPE as an example, the Commonwealth demand includes the Health Department (National Stockpile), Defence, DFAT (foreign aid) and others. State Health departments running major hospitals are major users of PPE. Aggregation of demand across Commonwealth departments and where agreed, state departments, would provide potential for offtake agreements that would sustain the sovereign industry base for PPE.
Evidence to the committee in the 2015 inquiry into defence procurement and exports highlighted that there are contracting models (as used by the UK for the Complex Weapons and surface shipbuilding programs) that protect the taxpayers interests by driving innovation, productivity, lower costs and higher quality.
The Commonwealth can also phase a procurement over a given contract period such that the timeframe for delivery can be optimised to meet operational requirements while maximising Australian industry’s capacity to provide at a competitive price.
The Committee considers that the existing CPRs are inadequate as a mechanism to provide support for the resilience of Australia’s critical national systems. Although the CPRs do contain provisions to allow purchasing authorities to consider the economic benefit of Australia from a particular purchase, the circumstances in which the provisions can apply are limited and thus the incentive to apply the provisions is weak. In practice, the rules do not link the concept of the long-term value of sovereign industry supporting critical national systems and have had little practical effect on procurement behaviour or on the creation of sovereign capability.
There is currently no provision in the CPRs for a purchasing authority to consider whether a particular purchase would contribute to the generation or sustainment of an Australian sovereign capability to supply a critical national system.
The Committee recommends that Australian Government support for Australian industry sectors supporting identified critical national systems move away from purely grant-based assistance to the intentional use of procurement to build and sustain sovereign capability.
The Committee recommends that the CPRs and Accountable Authority instructions be modified to reflect Recommendation 14 by explicitly requiring procurement authorities to consider how the generation and sustainment of sovereign industry sectors that supply to critical national systems could be facilitated by:
Aggregation of demand across Commonwealth departments and where agreed, state government requirements; and
Phasing of procurement where the timeframe for delivery can be optimised to meet operational requirements and Australian industry capacity.
The Committee recommends that a new sub-paragraph should be added to paragraph 4.5 of the CPRs dealing with assessing value for money. The sub-paragraph should have the effect that:
officials must give a priority weighting to the extent to which a proposed project or individual procurement contributes to the generation or sustainment of a sovereign Australian industry capability which is providing nominated supplies to a critical national system.
Senator the Hon David Fawcett
Joint Standing Committee on Foreign Affairs, Defence and Trade